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.