Mortgage Poll: Are strategic defaults ethical?

June 23, 2011

I know a guy — let’s call him Fred — who has a plan for walking away from his home and the $400,000 mortgage on it.

Fred lives in Phoenix, one of those particularly hard hit real estate markets in a state that prohibits banks from coming after borrowers for additional money once a home has gone into foreclosure. The home he bought for more than $400,000 is now worth about $225,000, by his estimates. He’s saved up quite a bit of money and can keep making the payments. But he’s nearing retirement, and figures that, the way he’s going, he’ll never have home equity.

So he’s buying another house; similar to the house he has now, for about half the price he paid the first time. Once that loan and settlement is done, he’s going to stop making payments on his existing house, sending it into foreclosure.

“That’s going to really slam your credit score,” I said, ever the personal finance geek.

“What do I care? I’m going to be 70, and I’ll already have my low-rate mortgage and my credit cards,” said Fred.

So, what do you think? So-called strategic defaults make up 17 percent of defaults and may even be spreading, according to a new study by Experian. That study found that the folks who voluntarily cast off their mortgage burdens are wealthier than average, have high credit scores and are very savvy about the way they manage their money.

It’s hard to argue with the logic of Fred’s plan. On pro-foreclosure blogs and websites like You Walk Away and the Strategic Default Monitor, the argument is made that voluntary foreclosure is strictly a business decision — nothing the banks wouldn’t do themselves. But some argue that it’s a moral dilemma: borrowers  may not have understood that whole sheaf of mortgage documents, but on some level, they knew it involved a promise to pay it back.

So, what do you think? Take our poll.

[poll id=”21″]

 

29 comments

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I’ve seen a lot written recently on a program called the Responsible Homeowner Reward (www.RHReward.com) which pays the borrower for staying in their home and staying current on their mortgage. The typical “reward” size is an amount that bridges a significant amount of the negative equity gap – which in “Fred’s” case is nearly $100K. The money is provided by the bank, and can be applyed to the mortgage in a refi or a sale; but can also be in the form of pure equity to shorten the mortgage term. Might that change Fred’s mind, if Fred were 20years younger?

Posted by SCCG | Report as abusive

[…] asked this very question in a poll released today, and the results are so far skewed in favor of homeowners who choose strategic […]

Posted by Reuters Mortgage Poll: “Are Strategic Defaults Ethical?” | Big Mortgage Leads | Report as abusive

Ethical doesn’t really apply to banks does it?
So long as it’s within the law (most of the time), banks will do exactly what they want regardless of ethics, whilst making a show of “treating customers fairly” – bo**ocks. They make money hand over fist with no regard for others, and having worked for several major blue chip financial companies I have to say, it’s the same everywhere.
If he wants to rip the bank off, then “It’s only business not personal” seems fitting enough.

Posted by MattyMoo | Report as abusive

In the roaring 20’s there was a song:

EVERYBODY’S DO’N IT, DO’N IT DO’N IT

In a free enterprise/capitalist system every citizen has a duty to protect his/her wealth. Capitalism and all forms of government are at odds, regardless of the form that government may take. Capitalism is individualistic whereas government is collective. The two are in conflict.
At best, we had hoped–and for a time– struck a balance between capitalism and government. We are not out of balance to the point of falling on our face.

Ironically, Fred is caught between the two systems of capitalism and government–be damned it you do, be damned if you don’t. If Fred looks out for his capital Fred is a good capitalist, whereas if Fred hangs tough Fred will “go down” in that Fred is assured all of Fred’s bills will rise to compensate the government for all the other Freds who lost capital. Fred’s property taxes will rise, as will his water, sewer, trash and muni bond debt to local authorities.

Capitalism requires Fred to be ethically loyal to himself, whereas government requires him to be ethically loyal to the state and all others. Fred looks around and sees all the other Fred’s missing from the mix. The Fred’s are “gett’n it.” no matter which way they turn.

Truth be told: as the United States of America gets pulled apart by these two system–capitalism and “government”– it truly is “every man for himself”. Fred is simply reading the writing on the wall and realizing Fred must look out for Fred because nobody else is looking out for Fred.

Posted by buddyboy | Report as abusive

Wow! 73% think it’s just a business decision, while only 27% think it’s unethical?

And 17% of defaults are strategic ones? Sure, I agree that the banks, mortgage lenders and some RE professionals share the blame in causing the RE bubble and financial crisis, but in my eyes, that is not a get-out-of-jail-free-card allowing one to walk away from his mortgage.

Stealing one of my 93-yo mother’s phrases, I gotta say, “What is this world coming to?” I’d like to know how many of those strategic defaulters are self-righteous, right-wingers, proclaiming themselves morally superior because they are “individually responsible”? I bet it’s 75%. Hypocrisy is not in their vocabulary.

Posted by yogahelps2 | Report as abusive

Bringing up questions of ethics in a trade dominated by manipulation and chicanery by mortgage lenders and realtors – is presumptuous at a minimum.

Posted by Eideard | Report as abusive

You know for all of you that think you should stay in an upside down home your crazy. The banks caused this mess and there is no way it makes sense to stay in that house. I did a short sale on mine that value dropped 50% since purchase in 2003 and i didn’t take extra money out during that time. I also put 20% down and I was upside down $150,000. I calculated it out that if the housing market went up 4% a year it would take 25 years for me to break even and get to what i paid for the house. I would be 75 years old Are you kidding me. there is no way that made sense.

Now if the bank would have offer principle reduction to what the market value was i might have stayed.

Here is what no one is thinking about I have a wife and 3 young kids. What if i dead an or got very ill, lost my job and had to sell the house at that point. i would be upside down at that point. I would put my whole family at risk becaues the banks may not work with my wife at that point of time of need.

All i can say if you are staying in your house because of moral reason you are crazy. Becuase the bank has no moral’s they don’t care about people. They should have done a nationwide priniciple reduction 2 years ago and that would have stop this. Don’t blame the people that are walking about now they didn’t cause this they are protecting themselves and there familys. Good for them. While bank exectives are taking millions in bonus what a joke.

Posted by timims | Report as abusive

“nothing the banks wouldn’t do themselves” – says it all. Why in the world should it ever be an ethically or morally wrong thing to do. Was it not ethically or morally wrong for the banks and rating agencies to screw over the country and hence put people in the position where this type of idea had the need to be thought up? It certainly seems like this country is all about the individual and until government leaders act any differently and stop doing everything for themselves and start doing what’s right for the country – nothing will change. If it’s good for them then it’s good for me.

Posted by mutt3003 | Report as abusive

Down the road, I wonder how many of the ‘defaulters’ will see lawsuits and leans placed on their new homes or even garnishment of their earnings. In the fine print, many mortgages give the lenders the right to sue for difference in the value of what the home sells for after repossession and what the mortgage was currently valued at.

Posted by zzguardian | Report as abusive

If you had loaned the money from an individual then yes I think it would be immoral to walk away while you still have the ability to make payments. If on the other hand the money was loaned from a corporation whose sole purpose is to maximize profits then I don’t see any problem with playing the same game they play and doing what is in your financial best interest.

Posted by calvinbama | Report as abusive

Ask the CEOs of serial bankruptcy filers such as airlines about ethics. As the CEOs of banks that submit fraudulent foreclosure documents about ethics.

Posted by Gaius_Baltar | Report as abusive

So when is a contract a contract? When it’s convenient? A mortgage is a contract. This cynical disregard of a legal promise has far reaching consequences. It can boomerang on those in other areas of commerce. Not so good when you are on the losing end.

Posted by schmendric | Report as abusive

@ yogahelps

You don’t get out of jail free, you take a significant ding to your credit and ability to borrow for many years. But it is absolutely a business decision and if the situation dictates that it is best to default and move on, I don’t see how that is unethical.

Staying in a home when your best startegy is to default is not ethical, it’s idiotic.

Posted by jaham | Report as abusive

Willful default is evidence of the sad but true public perception that corporations – in particular banks – never have the individual’s best interest at heart and are, therefore, an enemy to society rather than a productive member of it.

Why wouldn’t a finance savvy individual seek the “lowest common denominator” option of default when the companies from which they borrow use bankruptcy and federal bail outs to let them out of their poor choices?

Too many business are indeed all about the individual(s) – particularly the few at the top. So when an individual is confronted with a no-win mortgage situation due to bad timing and an ailing economy, why should they be considered unethical simply because they didn’t take the “moral high-ground” and eat the currently existing public debt that banks and other market trading corporations created?

Posted by austingjohns | Report as abusive

If we had a US banking law that stated a person could hold at most one mortgage on a non-commercial/residential single family house then that would have stopped the leverage in the market, and, it would have stopped Fred from financing his second house while he had a mortgage on his first house. He would have had to walk away from the first house, ruin his credit, and then try to get a mortgage on the second house – which probably would not have been approved.

Posted by berkeley_dude | Report as abusive

Why is morality applied to the individual, but not the corporation? The corporate entities played fast and loose with peoples’ lives, but none of them were held accountable in the end. No investigations, no prosecutions, no jail time.

I say let the individual play the same game. If he can get away with it, more power to him.

Posted by IntoTheTardis | Report as abusive

If everyone jumped off a cliff, would that be just a good business decision too? Everyone who thinks they can default because the banks are greedy are casting this country down the socialist trashbin. YOU, sign your papers for most, the biggest investment in your life and now you want me to pay for it. I signed my papers knowing I could handle the worst case scenario. The separation of the wealthy and the middle class disappearance is almost complete, between hoarding all your money, spending on healthcare to live a few more weeks and now passing your debts onto the next generation the older upperclass crowd is delivering its final blow… I hope you enjoyed the good times and thanks for nothing. (Of course the opinion question was flawed… it should have read,”Ethical or unethical”, not ethical or business decision… I am horrified to read the responses justifying doing exactly what people are vilifying the financial industry for, how can anyone read this and think we are anywhere near a financial recovery? This thinking and our majority ethics are an express ride to the dark side. I can’t wait to explain this to my children.

Posted by Straightener | Report as abusive

Wow, the media and government have done a great job of vilifying the banks. Of course it is unethical. You made an agreement and now that it is inconvenient you will not hold up your end of the bargain. It was not the banks fault that you made a bad investment. We are not talking about people who cannot pay (job loss etc…stuff happens)

Posted by DavidS95 | Report as abusive

What goes around comes around. Business treat consumers without ethics (“rip their face off” was the business position; “maximize profits”; etc). Now consumers have learned. The whole cycle is bad for America because without morals and ethics a capitalistic democracy can not be sustained.

Posted by CRF | Report as abusive

How can an individual be held to a higher ethical standard when coporations constantly make decisions based on shareholder value. In this case the homeowner is the sole shareholder and he is making a prudent financil decision. My hope is that coprorate bankrupcy protection will be extended to individuals and families

Posted by DunaDad | Report as abusive

That first sentence should end with a question mark. Writer’s error.

Posted by DunaDad | Report as abusive

In response to Yogahelps2; Real Estate agents are always lumped in with the bankers an loan officers that helped create this enormous mess. Nobody ever points a finger at the developers that were raising prices by astronomical amounts for each new phase of their project. I was actually told by an analyst at one of the builders that “the price increases aren’t ‘rocket science’, we just push to see what the market will bear.”

Posted by Tipsymcstaggers | Report as abusive

[…] Mortgage Poll: Are Strategic Defaults Ethical?June 23, 2011, Reuters […]

Posted by Foreclosed Homes Wait In 'Shadows' To Go On Sale – Foreclosure community blog resource powered by RealtyTrac | Report as abusive

yogahelps2
WoW! elect a liberal. I hear alot about the banks. The banks follow laws made by Frank & Dodd, the only blame is theirs. The government has yet to allow principle reduction which is the only way to stop the freefall.
Wake up US.

Posted by 10_Tomas | Report as abusive

I think that it is ethical to break a contract. As far as I know, a mortgage is just a contract whereas I get the house as long as I pay a set amount. If I don’t pay, I let the bank repossess. End of story. it’s fine if it is within the rules.

Posted by Sylvain2821 | Report as abusive

[…] of 2010, the most recent …Mortgage-skippers may have second home lined up: studyReutersMortgage Poll: Are strategic defaults ethical?Reuters Blogs (blog)Overall strategic default on the declineHousing WireLoanRateUpdate (press […]

Posted by 17% of Defaults Called Deliberate – NASDAQ | Mortgage Credit Services | Report as abusive

Holy Cow – this poll is disheartening. While it may be a business decision and better for one’s bottom dollar; it’s unethical. A lot of posts here seem to want to justify it as ethical but it’s not. Banks are evil and I can’t say I wouldn’t do it, but I wouldn’t pretend I was being ethical.

Posted by BakoD | Report as abusive

Unethical, but a business decision none the less. We have been forced to play by the same rules as big business; looking out for number 1. No one else is going to do it for you.

Posted by wordz | Report as abusive

Its unethical? Our government borrows money from us by selling us government bonds. If sometime in the future the Gov. owes so much that payments will be slightly hard to make, the solution is inflation (called debasing the currency). Just print more money which steals from everyone. Ours has done just that to me, in my lifetime, several times.

Posted by mornmoos | Report as abusive

In the real world, ethics always takes a backseat to survival. The rest is lip service and posturing.

Posted by Glennn | Report as abusive

The misguided notion that it is unethical for a “natural Person” to walkaway from a mortgage but good business for a corporate entity or other “artificial person” to do the same has unnecessarily prolonged the US mortgage crisis. Extending natural persons the same right as corporations would permit the principals of first mortgages to be crammed down by bankruptcy judges. Individualized judicial settlements of underwater mortgages would solve two critical problems: First, the stigma of bankruptcy would negate the “moral hazard” issue. Second, the time it takes to hear cases would allow for an orderly entry of the shadow inventory into the market, preventing further price decreases.

Posted by JimInNevada | Report as abusive

In 2007, the Mortgage Bankers Association of America bought an office building in Washington, DC for 79 million USD. They put 4 million USD down and took out a mortgage for 75 million USD.

In early 2008, they did a short sale to Costar for 41.3 million USD, far short of the 75 million USD they owed.

At that time, most Americans didn’t even know what a short sale was. The MBAA is the same group who lobbied Congress to change the laws that were instituted after the Great Depression to keep a widespread banking failure from ever happening again.

I don’t want to hear anything about morality until those bastards are imprisoned.

Posted by breezinthru | Report as abusive

[…] Foreclosures of homes valued at more than $1 million increased by 90 percent between 2007 and 2010, a RealtyTrac analysis found. Banks had been reluctant to foreclose on higher-end properties due to the limited number of potential buyers, but Sharga says he expects more higher-end foreclosures in the future. […]

Posted by Luxury real estate: How to snag a deal on a foreclosure or short sale | Reuters Wealth | Report as abusive

[…] Foreclosures of homes valued at more than $1 million increased by 90 percent between 2007 and 2010, a RealtyTrac analysis found. Banks had been reluctant to foreclose on higher-end properties due to the limited number of potential buyers, but Sharga says he expects more higher-end foreclosures in the future. […]

Posted by Luxury real estate: How to snag a deal on a foreclosure or short sale | Report as abusive

[…] Foreclosures of homes valued at more than $1 million increased by 90 percent between 2007 and 2010, a RealtyTrac analysis found. Banks had been reluctant to foreclose on higher-end properties due to the limited number of potential buyers, but Sharga says he expects more higher-end foreclosures in the future. […]

Posted by Luxury real estate: How to snag a deal on a foreclosure or short sale | HouseMaster in the News | Report as abusive

[…] Foreclosures of homes valued at more than $1 million increased by 90 percent between 2007 and 2010, a RealtyTrac analysis found. Banks had been reluctant to foreclose on higher-end properties due to the limited number of potential buyers, but Sharga says he expects more higher-end foreclosures in the future. […]

Posted by Luxury real estate: How to snag a deal on a foreclosure or short sale – California Home Previews : California Home Previews | Report as abusive

[…] Foreclosures of homes valued at more than $1 million increased by 90 percent between 2007 and 2010, a RealtyTrac analysis found. Banks had been reluctant to foreclose on higher-end properties due to the limited number of potential buyers, but Sharga says he expects more higher-end foreclosures in the future. […]

Posted by Luxury real estate: How to snag a deal on a foreclosure or short sale – Reuters Wealth, July 5 2011 | North Coast San Diego Real Estate | Report as abusive