In 2010, record numbers of Americans are defaulting on their mortgages. For most of them, it is because they simply cannot afford the mortgage payments any longer. But for a growing number of Americans, the decision to stop paying on a mortgage is not because of financial hardship. Rather, after taking a hard look at the numbers, many Americans are simply deciding to walk away rather than continuing to make monthly payments on a home that has dramatically declined in value. It is called a "strategic default", and it is a phenomenon that is sweeping the nation. So why have strategic defaults increased so dramatically? Well, in some areas of the United States, homes are only worth about half of what they were going for at the height of the market. So what is the morally right thing to do in that situation? Should someone "honor the contract" that they signed and continue making payments no matter how hard it hurts, or is the morally right thing to stop making payments on the mortgage in order to put your family in a better financial position?
The truth is that the answers to these questions are not easy.
In the past year it is estimated that at least a million Americans who can afford to stay in their homes simply walked away.
Take a moment and think about that.
A million Americans that have simply walked away from their homes.
This is something that is absolutely unprecedented in American history.
In fact, 31 percent of all foreclosures in March were deemed to be "strategic defaults" by researchers at the University of Chicago and Northwestern University. That is up from just 22 percent in March 2009.
So the strategic default trend is accelerating.
And with more than 24% of all homes with mortgages in the United States underwater as of the end of 2009, it is likely that we are going to see a whole lot more strategic defaults.
This is particularly true in areas that were hurt the worst by the real estate crash. In Arizona for example, it is estimated that 50 percent of all homes are underwater, and in Nevada it is estimated that a whopping 65 percent of all homes are underwater.
That is a whole lot of families that have some very hard decisions to make.
But it just isn't families that are making these kinds of decisions. Even the biggest financial institutions in the United States have committed strategic defaults. For example, Morgan Stanley walked away from five San Francisco office buildings they bought at the height of the real estate boom.
But is it the right thing to do?
Well, let's look at both sides of the issue.
Why many would say that strategic defaults are morally acceptable....
Many Americans have no problem at all walking away from their mortgages. After all, they would argue, they never agreed to pay twice what a house is worth.
If they signed up for a $400,000 mortgage, they would argue that they expect to be making payments on a house that is worth somewhere around $400,000.
So is that unreasonable?
After all, if a $400,000 house goes down to $200,000, there are many that would argue that it represents an unforeseen circumstance that negates the deal.
Others would argue that bankers tricked millions of Americans into accepting mortgages that they could not possibly afford, and therefore nobody should be crying for the bankers when people quit paying on those mortgages.
In essence, the argument is that the bankers created this mess so the bankers should be the ones to pay the penalty.
Still other Americans are choosing strategic defaults because it enables them to provide for their families during these hard economic times.
For many Americans, often the choice is between paying the mortgage and putting food on the table.
And because of the massive delays in processing foreclosures these days, many people are finding that they can live in their homes "rent free" for months on end after they stop making payments.
In fact, Bank of America's credit loss mitigation executive, Jack Schakett, has even acknowledged that many home owners have a huge financial incentive to walk away: "there is a huge incentive for customers to walk away because getting free rent and waiting out foreclosure can be very appealing to customers."
So how much "free rent" are those who have walked away from their mortgages getting?
According to LPS Applied Analytics, the average home owner in foreclosure has been delinquent for 438 days before actually being evicted. That is up from 251 days in January 2008.
The truth is that especially in states where the foreclosure process must go through the courts, the systems are simply being overloaded.
For example, in Pinellas and Pasco counties, which include St. Petersburg, Florida and the suburbs to the north, there are 34,000 open foreclosure cases. Ten years ago, there were only about 4,000.
But there are others that would argue that strategic defaults are 100 percent morally wrong.
Why many would say that strategic defaults are morally wrong....
Those who would say that strategic defaults are wrong would argue that no one put a gun to the head of anyone signing up for a mortgage.
They would argue that "a contract is a contract" and that Americans should fulfill their obligations, no matter how hard it hurts.
The truth is that once upon a time in America, a "strategic default" would have been unimaginable to most people.
Back then, a man was only as good as his word.
Even today, to purposely break a contact is on the same level as purposely telling a lie to many people.
Not only that, but the reality is that a strategic default will ruin your credit for years to come. Many would argue that it is immoral to ruin your family credit for the simple convenience of getting out of a bad mortgage.
In addition, many would argue that it is wrong to take advantage of the banks by exploiting the delay in foreclosure processing - no matter how evil the banks have been.
After all, do two wrongs make a right?
Plus, in some states there may be additional financial penalties even after you walk away.
Kyle Lundstedt, the managing director of Lender Processing Service’s analytics group says that those who do willingly walk away from their homes are playing a very dangerous financial game....
"These people are playing a dangerous game. There are processes in many states to go after folks who have substantial assets postforeclosure."
Plus, those who do commit strategic defaults raise borrowing costs on the rest of us. In the future, banks are going to have to charge all of us higher interest rates on our mortgages in order to factor in the risk that many Americans will simply walk away from their mortgages if their house values go down.
So is it right for everyone else to suffer in the future so that some can get out of bad mortgages right now?
The truth is that it is not the purpose of this article to answer these questions.
The purpose of this article is simply to raise these questions.
We live in unprecedented economic times, and we are all going to be faced with very hard decisions as we move into a very uncertain future.
Strategic defaults pose some very interesting moral dilemmas, and if you ask 10 different people about strategic defaults you are likely to get 10 different opinions.
So what do you think about strategic defaults?
Is it morally right to decide to simply stop paying your mortgage?
Feel free to leave a comment with your opinion....
Jct: Known as “bank-fighter extraordinaire” I used Christ’s Parable of the Talents to defend victims of foreclosure in the 1980s. See the press from those days at my site.
Like the rebel servant, they too offered to return the principal but repudiated the usury. Yes it is immoral to loanshark money causing a mort-gage death-gamble among borrowers for more than was printed. But interest-free community and social database currencies are on the rise and banking will soon be done on Earth as it is in Heaven.
There is absolutely nothing wrong with
walking away from a bank loan or evading
taxes when the government no longer
represents you. It a business decision to
default on a loan. Corporations do it every
day. There is no moral obligation involved
unless it’s a loan from an individual.
Remember a bank doesn’t loan you money. It
extends you credit that it creates out of
thin air. The credit costs the bank nothing.
It’s creates the credit and sets an interest
rate. All new money that enters the economy
does so as loans at interest. The entire
system is a ponzi scheme and a fraud. A bank
loan is a tool for you to use to leverage
property or assets. You should never loose
a moments sleep if you screw a bank, I can assure you they don’t loose any sleep when they screw you. The same goes for the government..
Gee! A question in my field!
The question –whether to enter unto jingle mail — concerns one’s ideology, that paradigm of values that governs one’s social behaviour. Now, without wishing to spark counterproductive emotional feelings, I must say that the average American’s knowledge of ‘communist’ or ’socialist’ theory is shockingly lopsided. Authoritarian communism was a disaster (no surprise there for anyone with a background in human psychology). However, libertarian communist theory (which is a ’step out’ from classical anarchism) would provide a clear answer to your question. H o w e v e r, I advocate a different model, ‘tenurism’: tenurism straddles classical ‘non-communal property’ and ‘communal property’ relations. (These are two technical terms from communist theory. Capitalism is non-communal. All forms of socialism are ultimately communal.) So, my ’straddle position’ is as follows: land and water – tenure. Whether you own or rent or whatever, stop paying, and start devolving your world. No government agency can defeat (evict) ANYONE from the house they occupy if there is any amount of solidarity in resisting the evictions.
I look forward to your comments.
Mark Blair, Rocky Gully, W.A., Australia
They created a system designed to take advantage of you financially and then when it failed, they made you pay for in increased taxes, lowered property values, crashed stock prices/retirements and inflation. Ever get bit by a dog four times and still say, “he’s a cute puppy?”
Wake up.
Right now banks and mortgage companies are getting federal tax dollars from selling mortgages at 100 cents on the dollar to the taxpayers. Every home that goes into foreclosure nets them a market-high profit. In clearer terms, they are selling you the inflated priced home mortgages from before the crash while driving down listed property values so they can buy in dirt cheap and profit from the market reversal. TARP is allowing the same people to get rich coming and going. The real questions are “What are morals?” and “Does America have any?”
Do the people want an economic system that adheres to rigid structures? Anything that impedes the free flow of money in any direction will stifle economic expansion. Maybe we need a new concept of money and what money should be used for?
I haven’t seen ONE comment that mentions the MERS secret. MERS is an invention of the financial industry, designed to facilitate the sale and transfer of commercial paper(mortgages) by avoiding the legal requirement of recording said transfers in the jurisdiction in which the property is located.
Mortgages are bundled, sliced-and-diced and sold as investments. These investments circulate worldwide; possession of the note does not mean possession of the document of title(deed).
The legal result of this is two-fold.
1. Assuming the mortgage is paid off, the putative new owner is unable to record his ownership since he doesn’t receive the original of the mortgage. (S)he will never have clear title.
2. In many jurisdictions nationwide, courts are holding that entities initiating foreclosure actions must produce the mortgage, without which they have NO STANDING. Deutsch Bank ran into this in Ohio.
This is called the “Produce the Note” defense. Since the title is not clear, some courts have awarded title to the originator of the mortgage(buyer of the house).
A good start is at: http://chinkinthearmor.net/
All this is easily found via search; try “MERS” and “produce the note.”
For those who debate morality, consider the payment of money to the originator of the loan who has sold the mortgage into the worldwide market for commercial paper. After you’ve finished making payments to the bank or whatever, the originator has been paid twice but the note is still circulating as a legal claim against you.
The question of the title of the article is wrong. You can not mix moral and business in the same sentence. You do whatever is better for your interests, such as breaking a contract, while it is legal. It’s the way companies and banks proceed.
From a pragmatic perspective, I think if somebody is considering a strategic default, then he ought to do it sooner than later.
At some point, the federal government may bow to special interests and try to make it illegal to default — and hold you liable for any and all losses even after you’ve vacated.
-SJ
Reading these comments and articles about what is happening to everyday people in the USA is heartbreaking! The housing market here in Australia hasn’t reached the USA’s extremes, infact real estate prices here keep going up to the point we wonder how any of our children will ever afford to own one! However to say we are immune to foreclosures (we refer to them as repossessions)is out of the question. The Federal Reserve here keeps putting interest rates up, which makes is harder and harder for people who own their homes to keep them. But unlike in the USA, if our homes are repossessed by the bank, they fire sale them for whatever price they can get and the difference between what they sell it for and what the loan is for, that bank will follow you to the ends of the earth, for the rest of your life, until you pay them what you owe them!! That’s well and fine when real estate prices are generally up, the gap isn’t too bad, but say real estate prices begin to fall (which they are predicted to) there is where the problem is…owing 10’s of thousands of dollars on a house you no longer own, and then you have buckleys of ever getting another loan until that one is cleared! Seems wherever in the world you live, banksters and the government have you screwed!
Well if you bought a house and you can pay for it, you should pay what you owe. It’s human nature to take advantage of any situation so it don’t surprise me that so many do.