Is it immoral to stop paying your mortgage?

[irvinehomeowner]

One of the more interesting posts in a while on the IHB (which also has a high comment count):
http://www.irvinehousingblog.com/bl...-a-mortgage-to-secure-their-childrens-future/

It's interesting as awgee gets into a discussion about the moral obligations of paying your loan with IrvineRenter:

Borrowers are under no moral obligation to repay. They have a contractual obligation, and if they fail to meet their obligations, they have financial consequences (repossession, limits on future borrowings, and so on).

Other posters chime in and IR talks about ethics vs. morality:

Perhaps we need to parse the distinction between ethics and morality. It is not ethical to make representations and fail to follow through when you have the capacity to do so. The people walking away from their mortgages that have capacity to pay are behaving unethically. The price they will pay is limited access to credit via a lower FICO score.

It follows from your argument that if borrowers lack the capacity to repay and they have to default, then they are relieved of the ethical obligation as well.

Morality is something different than ethics. Morality is about right and wrong and duty to one?s family. Financial transactions made at arm?s length live in the world of ethics, not morality. And as your example points out, the ethics shift with circumstances.

And this was the kicker:

?My morality tells me that if I agree to do something, I need to do it.?

I argue that is your sense of ethics, not your sense of morality. Morality tends to be black and white whereas ethics is a continuum of shades of gray.

As a society, when we pass laws, we make moral statements. We prohibit certain behaviors and permit others. Often we draw lines somewhere in the ethical shades of gray. There are a great many unethical behaviors that are not illegal or immoral. IMO, all consumer lending is inherently unethical, but society has stated is it not immoral or illegal, so it goes on.

?What if the friend makes a business decision based on the interest you promise to pay?  Why is it immoral to welch on a friend, but not on a business or bank??

Friends loan money because they are friends, not because it is a considered arm?s length business transaction. The friend is not motivated by profit, and they are not carefully considering the risks involved. They are relying on the borrowers moral duty to repay, and the borrower is appealing to that moral duty. The friendship is the basis for the loan and the moral obligation. (This is also why you should never loan friends money.)

Banks and businesses loan money to make a profit. They are supposed to consider the risks and set the interest rate to obtain an appropriate level of profit. Lenders are also aware of their contractual fallback positions or legal action, repossession and so on. If a borrower fails to pay back a loan, lenders will exercise their legal, contractual rights and try to get repaid and warn other lenders of the borrower behavior through credit reporting. Morality does not enter into the equation.

It is probably easier to conceive the difference if you look at this in terms of ethics. FICO scores are the standardized measure of ethics among active borrowers. Those borrowers that pay their bills on time and in full have very high FICO scores. Those borrowers that do not pay on time have very low FICO scores. Repayment of debt is an ethical choice that concerns lenders greatly, so they developed an intricate system of measurement. FICO scores have nothing to do with morality.

Very, very interesting discussion.

 

[sgip]

Quite a grey area. I believe it depends on the situation. Underemployed - time to short sale. Same with unemployed. For everyone who HELOC'd their way to prosperity, no. It's immoral to walk just as it was immoral to overleverage.  If you can still make your payment yet believe that your funding a losing investment, no also. It may be a loser now, but you don't have the foresight to know with certainty what the future will bring. Case in point - March 2009 it looked like all investments were going to -0-. Should you have bailed? Nope. You should have doubled your investment in any number of companies (AAPL then $70... today nearly $300. Citi then $1.00.... today $3.50) and made out like a bandit.

The documents signed in escrow are called promissary notes - a promise to repay. For anyone who said "It's a business decision to walk, not a moral one" did not read the papers they signed at closing and perhaps should not be given rights of homeownership again until they pass some kind of college level ethics and economics classes.

My .02c

Soylent Green Is People.

 

[qwerty]

It is unclear to me why homeowners are held to a higher standard than businesses. Paul Allen, one of the richest men in the world, had an LLC that built the Rose Garden, where his basketball team plays (portland trailblazers), the team started doing badly, revenues went down and he started losing money on the deal. His LLC ended up filing for bankruptcy - clearly he could afford to pay for it, but it wasnt good for his wealth to do so.  If its in the best interest of the home borrower to default they should, the contract spells out exactly what will happen if they dont pay. 

If you really want to stop put an end to bubbles and cash out refinancings they should make home mortgages that can not be discharged through bankruptcies, just like student loans. If you know you are going to have to pay something back one way or another then people will be less inclined to take out monster home loans and HELOCs.

 

[usctrojancpa]

Immoral, hell no.  Unethical?  Maybe.  It all depends on what causes the home owner to stop paying their mortgage.  For example, if they loss their job and they'd have to use up all of their savings then I would say that is not unethical.  If it is a strategic default that I would say it is unethical.  At the end of the day, it is a business decision and not a moral one.

 

[jvna]

I tend to think more in line with the statements from IR from the IHB.  I also have to ask the same question as qwerty - why are homeowners held to a higher standard than businesses?  I don't see businesses thinking in terms of morality.  The bottom line is what drives them.