This is not legal advice. For legal advice, consult an attorney not a blog.
I came across this interesting article in the Wall Street Journal, that bastion of conservatism. The article goes into some detail encouraging homeowners to just “walk away” from houses that are deeply under water (not literally, of course; rather, the owner owes much more on the property than what the property is worth). For the record, I agree 100% with the sentiment expressed by the author. Any successful business — or business person, for that matter — would not think twice about breaching a contractual obligation if fulfilling that obligation made no business sense whatsoever. In this regard, and as noted by the author, the economy is fundamentally amoral. It is high time that “regular” people take the same approach as the wealthy and Big Business.
That said, is it really a good idea? I’ve discussed the issue previously (in two parts). Here, I’ll only say that Washington is generally a non-recourse state, but that the situation is much more complicated if you have a second mortgage. Whether you decide to walk away or not, though, that decision needs to be based on what is in your (and your family’s) best financial interests. “Morality” should not factor into the equation.
I have mixed feelings about this. As a lender, I used to believe that consumers have an obligation to satisfy their debts. However, as a consumer as well and witnessing how banks have treated many people, I also feel like the banks brought it on themselves. It is hard to have sympathy for the Too Big To Fail banks when they are arbitrarily jacking up credit card rates, throwing hidden fees in the mix, and being out right shady.
On the other hand, our society functions because people honor their contracts and the law. If we start allowing people to just strategic default because things aren’t going there way, it means all of us who don’t throw in the towel are going to wind up paying more for credit to pay for the increased risk to the lenders.
There are obviously some people who are so far underwater that there is no way in hell they are ever going to get their equity back. We really need to figure out how to get all these underwater loans off the books of banks, people out of houses they can’t afford, and ultimately stabilize the housing market across the board with the least amount of pain.
If I have learned one thing from this market it is that everyone doesn’t deserve or is prepared to be a home owner. There were a lot of home built that shouldn’t have been. Going forward, I think it is a good idea that financing to own a home is something that is hard to get with larger down payments as it will prevent the easy credit that allowed supply and demand to get out of whack. In addition, it allowed too many people who are a check away from disaster to own homes who now can’t afford them due to one mishap in their life.
Russ — I agree that people must honor their contracts as required by law. But if the law allows them to avoid their contractual obligations to their benefit, then they should avoid their contractual obligations. My concern is when people think they have a moral obligation, regardless of their legal obligation or the legal repercussions of their actions. Heck, a corporation exists only to make money. It does not have any sense of morality. So what’s good for the (too big to fail) goose is also good for the gander. Otherwise it simply is not fair.
This is a difficult problem.
Morality does play a role. Without some valuing system or morals you have total chaos, no order, no true law abiding citizenry and ultimately a breakdown of society.
Another difficult question: What responsibility do we in real estate shoulder for building back the trust that is lost? Should lenders and loan officers who sold garbage products that are putting homeowners at risk of losing their own homes or agents who sold them the property at absurdly elevated prices, refinance their homes for free or sell their homes for no commission today? Is this an unfair question to ask?
Or, how about the morality of intermediary 3rd parties who “negotiate short sales” or “negotiate loan mod’s” by making a profit on the demise of the homeowner’s financial situation?
Morality? It depends upon one’s valuing system. If we just all walk away because it is merely a “business decision” that is best for me because I didn’t make the money I thought I would, then you set up a new standard of societal rules that says, “if I make a financial decision that could potentially cause my family problems, I’ll just socialize the loss, let the bank and government and my next door neighbor take the hit.”
I think if “walk- aways” gain more traction, you have a self-feeding problem that could ultimately be almost impossible to stop. This is one of the reasons the government intervention has to stop the devaluing of property values. One way to stop it is to just stop foreclosing and force lenders through legislation to permanently modify loans voluntarily. This alone is fraught with issues.
Tim — you weave “morals” in with “law”, and I’m trying to separate the two. Admittedly, there can be overlap (e.g. stealing is wrong AND a crime) but not always. The reality of our modern, impersonal economy is that we only have legal rights and obligations, not moral or ethical obligations, in regards to business transactions. Those are the rules by which the lenders, developers, and other “big boys” play. It is unfair to pass moral judgment on a homeowner for an “immoral” economic act but not the big boys.
Also, when an owner walks away, he is NOT “socializing the loss.” The loss is assumed by the lender, who made a business decision to fund the loan originally, knowing that it was assuming the risk of a depreciating market, and trading the right to collect on the debt in full for the advantages of using a deed in trust. Now, when that lender fails due to a whole bunch of bad business decisions? THAT is the point when the loss is socialized, and whether socialization of these losses is appropriate is another point for debate.
Hi Craig,
Slight correction needed here: “Heck, a corporation exists only to make money. It does not have any sense of morality.”
I submit the following:
A corporation exists only to make money…within the bounds of the law. It’s minimum morality is law.
For more light, bedtime reading, google Milton Freidman’s Stockholder Theory of Corporate Social Responsibility.
Jillayne — no dispute there. Again, as I noted to Tim, there may be overlap between morals and the law, but ultimately they are two different schemes, both of which regulate behavior in society.
Morality has nothing to do with it. People do NOT pay many bills for many reasons. Take care of yourself and your family first. Nobody else will. If you can no longer pay on your Mtg or find yourself upside down in your Mtg then doing whats in the BEST INTERESTS of your family will ALWAYS lead you in the right direction.
http://www.youwalkaway.com/output24/InterectiveFlashCalculator.html
Ray mentioned: “morality has nothing to do with it.”
Thus, precisely why we are where we are. The absence of morals and virtues (which gives us the principles of right and wrong) leads people down destructive paths. What did our founding fathers formulate law based upon?
Craig, If I understand you correctly it’s time for every Joe Q. Citizen to become amoral. Eat or be eaten. Take the big guy down before he takes you down. Act like corporate america in everything we do. If you can find a way out of the contract, do it. Maybe get some vitamin D into your life or leave the legal profession, you might have a happier outlook on life. I always like to preface my arguements with a personal assault of the opposing position’s persona. I find it makes for a more lively discussion.
If you assume everyone is amoral, I guess it makes it easier to understand people and their underlying motivations….neighbor wants to borrow the lawn mower…he’s amoral…he’ll never return it…forget about it! I guess neighborhood parties are out, I’ve always been suspicious about those get togethers anyway. What do they want? Do they really like me or are they working some scheme to take my fabulous set of pink flamingos from my front lawn? Ah ha, that probably explains the missing silverware from the last party I hosted – amoral citizenry
I’ll take the contrariun view. What happened to personal responsibility which I feel is closely tied to morality? Sign a contract, live up to the terms of the contract – even if the once beneficial terms of the contract become not so beneficial.
One might say “what about the poor folks who were swindled by unscrupulous real estate agents, lenders etc. It’s unfair!” I do feel sorry for those who were truly screwed and it is incredibly unfortunate, but life isn’t fair. Stuff happens, but if everytime things get difficult we “walk away” or look to others to bail us out, we become a state of people who are waiting for the next hand out (not quite to that extreme, but you get my point).
If you don’t understand the contract, get help and quit blaming others because you’re inexperienced, afraid to ask questions, or the market is moving to fast etc. Get educated (ie. read the Rain City Guide etc) then make a decision you can honor. Many people are underwater and are working diligently to make their way through.
Who do you think is bailing out all the people who “walked away?” Me, you everyone else who isn’t looking to walk away. As one can tell, I’m tired of people blaming others for their own mess. And worse, they are looking to others to bail them out. I think I speak for more than myself when I write that I’m tired of bailing people out. Am I willing to help? Yes, but strategic walk aways and all that goes with them, no.
Lastly, these views are my own and are not endorsed by the National Republican Committee (sarcasm added!)
Tim,
Here are a few methods a person might reach for when trying to decide whether or not to walk away:
Values/virtues: What kind of person do I wish to be in my life? What do I value?
Consequences: What are the consequenses of my actions? What act can maximize good for the most number of people and minimize bad outcomes for the most number of people?
Duty: What duties do I have in making this choice.
Many people mix all three methods and make their decision only after carefully weighing all the options.
I read a column this morning by Brad Inman in which he said it’s not a good idea to listen to only the voice in your head, that committe of one when making decisions involving strategy. We need to talk to lots of different people.
Ray likes to oversimplify. 🙂 That’s okay. sometimes that method works. Morality is way more complex than merely considering self interest.
In closing: walking away may be the chosen path for some but not for others.
Most important: Seek the advice of an attorney before making that decision because the consequences, as Craig outlines are more than just moral. There are also legal consequences to consider.
Dave — the problem with your “abide by the contract” morality is that it applies ONLY to each individual consumer. Do you think that a business operates on that principle? Absolutely not. If the contract will incur a loss, and if the loss can be mitigated by breaching the contract, a business will breach the contract (and as a shareholder, that’s exactly what I would want). So my complaint is that this sense of “morality” is applied only to the borrowers, not the lenders. And that’s not fair. Honoring a contract should be determined by analysis of the legal consequences; morality has no place in the equation, unless and until banks and other businesses are held to the SAME standard.
Also, I am NOT asking anyone to bail anyone out. The homeowner considering abandoning the property is not looking for a bailout. He has “crunched the numbers” and determined it is in his economic self interest to walk away AND ACCEPT THE CONSEQUENCES for doing so. Those consequences are better than honoring the terms of the contract. Now when this happens en masse, should we bail out the bank? I’m not so sure.
“The homeowner considering abandoning the property is not looking for a bailout. He has “crunched the numbers
Nice!
Real Estate is a business. family home, or shopping mall; there is no difference.
Banks asked for, and got, laws passed for quick foreclosure. It’s in the contract as the recourse.
If you don’t pay, the bank forecloses.
Everything in the contract is based on good faith.
I never agreed to banking and financial institutions collapsing the global economy for short term profits.
Had the global economy continued to expand our situation would be different.
I think it’s immoral to continue to give these thugs money. God to forgive us for every mortgage payment we make. This only continues the pain and suffer of people in the world.
In my opinion, we need to take morality into consideration. You can’t disregard it as not applicable just because it’s “business”.
If you’ve made a commitment to someone, in this case to pay a debt, you need to uphold that promise in anyway you can.
Of course, there comes a point where some can’t uphold it and different steps need to be taken as the law provides. But up until that point, if you have the means to uphold the promise you made, you need to do it and not simply walk away because it benefits you more to do so.
Morality is part of the equation, without a doubt.
Josh Sanders
Founder, Shiloh Street
Shiloh, Dave, Tim: I continue to mull this issue over, and I’ve got a few additional thoughts.
First, we need to distinguish “business dealings” from other sorts of human interaction. Dave references a neighbor borrowing a lawn mower. That is not a business dealing, as the property is being borrowed, not rented. Under those circumstances, morality is the bedrock of our interaction. Obvously society would not work very well if everyone, at all times, considered ONLY their legal obligations and the potential harm (and potential self benefit) that flows from ignoring those obligations. Clearly it is important to act “morally” in a non-business dealing.
As for business dealings, the importance of morality is directly related to the level of HUMAN interaction. If I have a close personal relationship with another person, then it is very important that I act morally in my dealings with that person. So, if I were to rent my neighbor’s lawn mower, that rental would NOT relieve me of my obligation to act morally. The moral obligation has far more weight, I think, than the obligation to pay the agreed rent for the mower.
Morality has the smallest role to play when dealing with businesses, and the larger the business the lesser the role to be played by morals. As I noted above, Citi (or BofA, or any other large bank or other business) will do EXACTLY what is in its best interests under the law. Citi does not say, “Well, we’re getting hammered on this contract, but it would be immoral to do something other than what we promised, so we’ll have to take a loss.” Corporations exist to make money. Different rules apply. My point is that those same rules should apply to the people who are doing business with those corporations. Morality must be a two way street, and it never will be.
This is a very complex issue and one I wrestle with as well.
If people have genuine problems that lead to losing a home due to catastrophic illness or other issues that can wipe you out financially, I certainly have empathy for the situation. On the other hand, people who do not plan for rainy days and are wreckless with their debt load and choose to walk away because they had little discernment, I have little sympathy for. Walking away in that regard seems to be a symptom of the erosion of valuing systems much of which has a foundation of morals or lack therof.
How Corporations and their operations and business decisions are made either legally, ethically and morally are a result of how their management and boards govern within their own principles or lack therof.
Tim, why are you so down on the deadbeat borrower you describe above? Doesn’t the lender have culpability as well? Didn’t the lender assess the risks associated with this borrower (including other assets on hand to satisfy the obligation) and determine that this borrower was a good risk? The bank decided that it could make money with this borrower. The bank was mistaken. That is the bank’s problem, not the borrower’s. Besides, I certainly am NOT asking for sympathy for the deadbeat borrower. I am simply asking that you not CONDEMN the borrower as “immoral” where the borrower made a rational decision and decided that it was in his best interests to not repay the debt and to accept the legal consequences of that action.
Also, I think you mischaracterize the obligations of a corporation. The board has a legal obligation to its shareholders to maximize shareholder value. Under your definition of “morality” (and Dave’s, and Shiloh’s) it is wrong to borrow money and then not pay it back (absent extraordinary circumstances). It is not hard to imagine a business signing a contract that, due to a change in circumstances, turns out to be a major money loser where breaching the contract will save the business money. Under those circumstances, I think the board has a legal obligation to breach the contract, regardless of whether those board members believe it is “immoral” to do so.
Craig, I’m starting to like you more and more. You just may get a 500 Realty shirt in the mail someday soon.
I agree 100% with everything YOU stated.
Thanks, Ray! I could use a new dusting rag! 😉 We are, after all, competitors, Ray…
Never viewed you as a competitor. Just another person hoping to change an industry that surely needs it. The more Craig’s, Chris Nye’s, and the bigger Red Fin gets the sooner change will come.
A few months back I walked into a friends garage and I noticed his 500 shirt loaded with oil all over it..I said what the HELL! He was very embarrassed but at least he was using it.
Great conversation Craig. Truly a tough issue.
I’m not as sympathetic to the borrower/owner because he put himself or herself into a completely avoidable pickle. Morality has everything to do with how you govern yourself or your company. I’ve never governed my personal decision-making or business by “what’s the law” say about it. I don’t drink and drive because the law says its going to result in some loss for me. I don’t drink and drive because I may actually kill someone, which is far more of a severe deterrent to me personally. The Law may let me drink and drive over and over even after hurting myself or property prior to severe consequences.
You can certainly place a heavy burden upon the lenders as much as you can certainly blame the growers/drug lords of Poppy in Afghanistan for the spread of Heroin into the streets of society across the globe.
I have a lease. I start with the worst case scenario. Can I afford the lease if I don’t generate any revenue from day one? If the answer is yes, I sign the lease. If I can’t, I don’t sign the lease. Likewise, if a borrower refinanced and used the house as a piggy bank to finance a lifestyle that cannot be supported by earned income, then they put themselves into the possibility of losing a home, disrupting their family (with the potential for divorce) or moving (strategic default) out because it may be the easier short term “legal” solution.
This isn’t to say I don’t care about people, I really do. But, it is tiresome to continually read about people who want to remove personal responsibility. On the other hand, I had a short sale client a while back and he looked me straight in the eye with his wife beside him and flat out said he was “completely responsible for this mess.”
Tim — I agree wholeheartedly that an owner who walks away is NOT a victim and should NOT avoid personal responsibility for his prior decisions. It is unfortunate that the family’s life has been disrupted, but that is one consequence of the owner’s decision.
I am simply arguing that such an owner is no more immoral than a business that intentionally fails to abide by its own contractual obligations. When a business engages in such conduct, people rarely make a moral judgment. It is, simply, business. The homeowner should be judged the same way. The problem is that we expect people to act “morally” at all times, even when that is an unfairly high standard applied unilaterally.
Anybody who is remotely familiar with your work here at RCG knows full well that you care about people. I in no way meant to imply otherwise.