Ethics and mortgages

Christian teachers know a lot about morality and ethics, but not so much about economics and related matters such as contractual obligations. Many secular writers are strong on the ins and out of current economic entanglements, but weak on matters of morality and ethics. For now it is up to us lay people to do what we can to sort through these issues for ourselves, both to be ready to help a brother who is even more in the dark than we are, and to keep our own blood pressure under control.

Most articles I’ve seen about the ethics of defaulting on a mortgage only mention the issue in passing, but just now I’ve run across two short ones that address it directly. The first one points out that the ability to walk away from a non-recourse mortgage is not some sort of obscure technicality, but a feature that was deliberately built into the system for a reason.

A bank that doesn’t want to get bogged down in a two year long morass has little option but to take back the keys, accept a huge loss, and call it even. Is this an "abuse" of the system? I don’t see how. The loss was something that lenders could have anticipated at least as easily as borrowers. The reality is that ordinary people are lousy at figuring out the ins and outs of real estate transactions. Relying on the one act rule to get out of a mortgage is not to abuse the system–it is to use the system in precisely the way it was intended to be used.

The reason that the one act rule exists is that lenders and developers have through the years shown a great deal of ability to maneuver unsophisticated buyers into crummy real estate deals. The reason that the one act rule exists is to put the risk of these deals on the lender, not the buyer. The purpose is to discourage bad underwriting, dishonest marketing, and unjustified price inflation by making it very, very hard for a lender to get back the money if they lent more on a mortgage than a house was worth.

The system is designed to let people walk away. California has a system that puts a higher premium on keeping people out of debt slavery than avoiding bank losses. I see nothing wrong with that legislative choice.

In the second one Felix Salmon responds to a complaint about a recent article in the San Francisco Chronicle where the writer advised her readers that deliberately falling behind on their payments would put them in a better position to avail themselves of the mortgage bailout funds that the government is making available.

An excerpt from the original article:

To qualify, you must be at least 90 days delinquent and live in the home as your primary residence. You must owe at least 90 percent of the home’s value. It’s fine if you owe more than it’s worth. Your mortgage must be owned or guaranteed by Fannie Mae and Freddie Mac or held by one of the participating loan companies. If you meet these requirements and can document your income, your servicer will reduce your monthly mortgage payment – including property taxes, insurance and association dues – to 38 percent of your gross income. […]

The streamlined process looks only at income, not assets. If you refinanced your home to buy a Mercedes or own another home, you won’t be expected to sell them to pay your mortgage.

Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.

"This is a once-in-a-lifetime opportunity," Schiff says. "People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn’t afford."

The government is offering loan servicers $800 for every homeowner they get into the plan. Schiff predicts that loan agents "will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan."

An excerpt from the complaint:

In today’s "You’ve Got to be Kidding Me" moment, the San Francisco Chronicle advocated that folks who owe more on their mortgages than their homes are worth should stop making payments so they can qualify for a government bailout.

I’m not kidding.

Disgustingly titled "Are You an Idiot to Keep Paying Your Mortgage," the article actually instructed readers upside-down in their real estate the ins and outs of how they can transfer responsibility for their own investment mistakes to others.

Felix Salmon responds to the complaint:

If the government passed a bill giving $1,000 to anybody who asked, then it would be entirely responsible for every personal finance columnist in the land to give advice on exactly how to get that money. And the situation here is similar: The government is passing a bill which essentially gives money, in the form of greatly reduced liabilities, to people who default on their upside-down mortgages. Incentives matter: If you reward default in this manner, then people will be more likely to default, and quite rightly too. […]

If you can get your principal reduced by hundreds of thousands of dollars just by quitting your job for a few months, that’s a deal which makes a certain amount of sense. It’s a pretty perverse incentive for the government to give you, but that’s the hand that millions of Americans are now being dealt. And it’s entirely the fault of the people who dreamed this scheme up.

Remember that it’s not a crime to default on your mortgage. The banks are perfectly happy scraping around in the fine print of credit-card agreements to screw their customers; the customers should be perfectly happy similarly to optimize their own situation with respect to the banks. It’s an unfortunate situation all around, but it’s not something you can blame the financial press for.

No comment from me at this point on how a Christian ought to approach this situation. But I do think that a Christian who expresses moral outrage at the folks who walk down this path need to be explicit about what exactly such people are doing wrong.

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18 thoughts on “Ethics and mortgages

  1. Rick,
    I was recently talking to a lady from church who lost everything. I don’t know if they lost their house specifically but she mentioned that Dave Ramsey was telling people in bad situations to walk away. I haven’t actually listened to Dave Ramsey so this might not be true.

    I am thinking about someone in Michigan who loses his job and can’t sell his house. How does he get out of that without walking away? He has to go where he can work to provide and he has to live in something or other. In that situation it is not the borrowers fault nor the lenders, it is the fallout of a collapse.

  2. If I was upside down, I would walk away. (not speaking for Greg here….we debate this a lot) You are exercising the option in your contract.

    My irritation is aimed at the government who is taking my money and providing incentives for people to capitalize on it. The brunt of the pain is placed solely on the taxpayer and not on the homeowner, the bank, or anyone who created the mess in the first place. (A ding on your credit is not pain.)

    I’m not so worked up, even if it seems that way, that I won’t consider my position in light of a new angle or information. Hopefully, these sort of articles will begin the dialogue.

  3. What happened to ‘let your yes be yes…’ ? Shouldn’t our integrity as Christians override even a contract that allows you to walk away in the eyes of the government, culture, or banking system? Shouldn’t I be obligated to pay what I said that I would, even if I didn’t even sign a contract?

  4. If we have unconditionally taught and preached against any slavery for 150+ years, fought a war against it, passed the 13th amendment against it, and now are debating restitution for current decedents of slave ancestors, then how does telling current borrowing slaves to walk away from their slave masters or giving them money differ. If then “the borrower is the slave of the lender” Prov. 22:7 why shouldn’t they be told to walk away from the lender or why shouldn’t they be given all their interest money back?

    Either the Christian teachers DON”T know a lot about morality and ethics or they have failed to teach the clear Biblical morality and ethics against either taking interest or paying interest.

    If we teach there is not a time for everything including…time to be a slave and a time not to be a slave, then it seems kind of a double standard to expect a person to be morally “obligated” to be a slave.

    From a different angle…I don’t see anything written about the seller in all this. Where is the seller after all this? All of these transactions involve three parties unless you pay cash for the home. The buyer of the house doesn’t own the house, he doesn’t receive the deed until the loan is payed off, he doesn’t pay the property taxes the bank does for the life of the loan. The bank (the true owner) bought the house from the seller and gave all the money to the seller. Why isn’t the seller held responsible through the end of the loan since he has all the money. If the seller would be held responsible for the value of the house through the life of the loan then he would have to refund for any devalued home and also would receive any profits from any increase in its value when it was sold. It would cure the crisis we have now with a devaluating market and would also cure the greed of buyers flipping houses with “someone” else’s money in an inflating market until they fully owned the house.

  5. Milton, what you’re describing is a “contract for deed.” It also goes by other names. The real estate is sold in installment payments, and the seller retains title to the land until the last installment is paid in full.

    This works to the detriment of the buyer. Let’s say all but the final year of a 30 year contract has been paid. 29 years after the sale, the house is worth 300,000 instead of 100,000. All but 10,000 of the 100,000 contract has been paid.

    In a contract for deed case (and like what you describe), the seller could foreclose and resell the house to another party, pocketing 29 years worth of payments and the full new sales price.

    That’s why contracts for deed are frowned upon and it is not legal in all states.

    In a mortgage note, the bank is not actually the legal owner of the property. Banks often pay the taxes out of escrow accounts to make sure the taxman doesn’t grab the property due to a negligent homeowner’s failure to pay taxes. Banks don’t own the property. They have a secured interest in it. IOW, they have secondary ownership rights after the homeowner that exist solely to protect their right to collect the mortgage balance.

    While this does create room for greed to operate, so does the scenario you describe. As you could see from the example I gave, in a rising market, a seller in a contract for deed scenario has no incentive to work with a struggling borrower. He profits more if he forecloses. Even in a down market, he has an incentive to foreclose because, although the new sale price after foreclosure will be lower than the old one, he can pocket the payments he’s receive in the meantime.

    Bottom line– no matter what the contract, there will be an opportunity for greed.

  6. Angela,
    I agree generally with your attitude, but I think the difference here is what you gave your word to do. For example, if I agree to a contract to x, then I agree to fulfill my end of the contract. If that contract is essentially legally modified, then what? I think it makes it much murkier.
    [warning, sports analogy coming]
    As a sports fan that listens to radio shows I always here about college football coaches “breaking their contract”. Well, if part of my contract is that I can get out of it early by paying the other party x amount, then whatever I might be doing, I am certainly NOT breaking my contract. I’m exercising a provising expressly provided for.
    Again, I see where you’re coming from and agree generally with your sentiment.

    -Mike

  7. Amy,
    I absolutely agree that the chips should fall where they may without government intervention. There are families losing their homes who aren’t asking for intervention. This, I believe, is why big is bad. It is also why I am asking a real question that Christians in states like Michigan are facing.

    Angela,
    If a family leaves their home after having been paying the real value of the home over many years, the bank still owns the home. The bank can still sell the home. If a family cannot make a living where the home is because of unforeseen economic downturns, for instance in the auto industry, and they must leave their home in a market overloaded with homes, are you saying they must leave their home to the bank while continuing to pay for it? The family is taking the real loss at that point. The bank having made back at least some of their money still owns the home. It seems to me the deal always was that the house is collateral for the loan.
    If you do not think the family can morally leave the home and God does not provide for them in some other way which is sometimes how He works, what do you suggest they do? Obviously, you wouldn’t suggest bankruptcy if you feel this way.

    I am saying all this because if the economy really does collapse in a tangible way, we are going to see many Christian families losing their homes. They need real answers. I know of several families in my church who are suffering job loses and home foreclosures.

    Spiritually speaking, can’t God work through failures as well as successes?

  8. If it was just about walking away then it would be simpler in my mind. If you can pay, pay. And what I mean by “can” is – considering the economic crisis on hand, will you be able to pay the mortgage *and* provide for your family’s needs? If you can’t do both, walk. It’s a priority to provide for your family. Granted, it may not be the highest ethical standard to default on your promise to pay, but it would be downright immoral to pay the mortgage company instead of providing for your wife & children. You can call me crazy, but especially considering the meltdown that we are currently experiencing, the attempt to cling to all ethical standards without some order of ethical priority (i.e. taking care of your children first, etc.) is suicidal – and immoral, imo.

    This particular case isn’t so simple though. Should those who may otherwise be able to pay their mortgage manipulate their circumstances in order to qualify for free money? On one hand, it seems like an awful temptation. On the other hand, these big companies are doing all they can to get their hands in the “bailout” till, while executives of failing companies are still collecting bonuses. We don’t operate in a fair or moral system. Should we be expected to apply christian financial principles in a system that is devoid of christian principles? I’m not advocating violating moral principles, but you just can’t apply a weld to water. Our economic system operates devoid of christian principles. Our principles simply don’t apply.

    So, in conclusion, I have no idea what the right thing to do is. That you can take to the bank.

  9. Walking away from a mortgage in order to avoid repayment is, clear and simple, a violation of the Eight Commandment. Paul wrote that we are to pay our bills:

    ‘Pay to all what is owed to them: taxes to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed. Owe no one anything, except to love each other, for the one who loves another has fulfilled the law’ (Romans 13:7, 8).

  10. Friends, Ps. 15 rebukes both sides of this transaction; the money lender and the naive borrower: The psalm begins with the question, ‘who shall sojourn in your tent? who shall dwell on your holy hill?’ and part of the answer is:

    the one ‘who swears to HIS OWN HURT and DOES NOT change’.

    and also, the one ‘who DOES NOT put out his money at interest’.

    Here’s a thought: maybe our whole reprobate economy is built on these two sins: institutionalized, ‘legal’ ways of not keeping your word, and lending upon usury, which the church has condemned as sinful for at least the first 1,500 years of her existence. Maybe the whole rotten structure ought to collapse and be swept away so we can start again on a biblical foundation. Maybe the bible is true, and God will not be mocked after all. Radical, huh?

  11. Doesn’t anybody understand the concept of integrity and ethics? You do what you said you would do, even when it hurts. (Psalm 15:4)

    Each party is responsible to keep their end of the bargain. The buyer said he will pay back the loan, and he is morally responsible to do so. If the bank tricked them into doing it, shame on both of them — but the buyer is still morally responsible to pay what he said he would. For a biblical example, read about the Gibeonite deception (Joshua 9). They tricked Israel into signing a treaty on false pretenses — but God still held Israel accountable to keep the treaty (2 Sam 21).

  12. You do what you said you would do, even when it hurts.

    No offense – honestly I mean none, because I agree with this statement. But I also think, as Americans, this is a very easy thing to say. We don’t know poverty. If we begin to experience what our grandparents experienced in the form of a depression, and we are wondering where our childrens’ next meal is going to come from, I wonder how many of us will still be writing a check to the mortgage company.

  13. In considering this all, and watching this discussion, I think maybe I was a bit hasty in my conclusion… in answer to Cindy, I don’t think it would be a breach of your integrity to walk away from your mortgage if in all honesty you had to make a choice between feeding your family and paying for your house, because its true , the bank does keep the house. Its the lack of honesty in making that descision that I have an issue with. We as a people are so rich here, its a very few and far between that are at that point. We have a tendency to think much more things are needed for “feeding my family” than is in reality. Hopefully, that makes sense.

  14. Steve,

    I hear what you’re saying, no offense taken. Nevertheless, the very back-bone of a civilized economy is to do as you promised to do when you signed the contract. I have lots and lots of problems with mortgages as they are written today, that’s why I don’t have one, but no one is holding a gun to your head when you sign it. And while it’s true that we all need a place to live, there is no shame in renting. The ‘american dream’ has become a night-mare precisely because people are trying to keep up with and then surpass their neighbors. The Bible calls this folly:

    “Then I saw that all toil and all skill in work come from a man’s envy of his neighbor. This also is VANITY and a STRIVING AFTER WIND.” Ecclesiastes 4:4

    We christians have the Holy Spirit. A key fruit of the Spirit is self-control. Learn to say ‘I HAVE ENOUGH’ in a country that worships more, more, more. Live below your means, so you have plenty to share in these hard times. Who knows, you might generate more opportunities to witness to your neighbor, when he realizes you’re not trying to keep up with him; yet you are still generous, even in your relative poverty.

  15. RE: The other Alan

    You make some good points. How you answer this question depends on how you frame it. In a mortgage, what am I promising? There are (at least) two ways to look at it.

    (1) I agree (among other things) to make my payments on time until the loan is paid in full.
    (2) I agree to make payments on time until the loan is paid in full, BUT if I fail to do so for any reason, we agree ahead of time that the note holder has the following remedies: foreclose on the house, sell it, charge me additional interest/specified penalties/attorney fees to be paid from the sale, profit from the sale (after paying back my principal), notify credit agencies, and sue me to collect any difference owed.

    My nonpayment on the mortgage note under American law is a foreseeable event that was planned as a contingency. Compare:

    (1) I agree to pick you up from the airport tomorrow at 2:00pm.
    (2) I agree to pick you up from the airport tomorrow at 2:00pm, or to pay you $20 if I do not.

    I would say someone who says (1) but doesn’t come to the airport has broken his agreement. But do I break (2) by not coming to the airport? (2) is an either/or. Either I come or I pay. I don’t break (2) by not coming to the airport, because you knew ahead of time that could happen, for whatever reason, and I have provided for how that should be handled.

    If you disagree with my analysis, let’s flip the statement around:

    I agree to pay you $20, or come to the airport tomorrow to pick you up.

    What if I show up at the airport? Have I broken my agreement to pay you $20? I think most of us would say no– I’ve just chosen one of two paths specified by my agreement.

    Thus it’s open to question at least whether signing a mortgage note and then defaulting is a violation of “swears to his hurt and does not change” within the meaning of Psalm 15:4, because the remedy you give the note holder in case of default is part of the oath you swear.

  16. Alan,
    Thank you for your example. This is exactly what I was trying to say in an earlier comment, only your example is much better stated.

    We may debate whether we should make such agreements in the first place. But if you choose one of two options provided you in your contract, you have not broken your word.
    -Mike

  17. Alan,

    Your example does clarify the matter. Perhaps it is not correct to apply Ps. 15:4 to contracts written as you have described. I still wonder if we should be writing them the way you have described, however, in light of our Lord’s injunction to ‘let your yes be yes, and your no be no.’ I interpret that as an unqualified yes or an unqualified no. No waffling allowed.

    So, perhaps the real problem is all the ways we waffle and fudge and create loop-holes so we can essentially keep our agreements without really keeping them. No wonder Jesus had such nice, encouraging things to say about lawyers and money-changers.

  18. Now see, that’s what I wanted to say too, but I did a very poor job of it. I need to apply the principle of “even a fool is thought to be wise when he is silent” to my computer usage too.

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