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It’s Okay To Skip Out On Your Mortgage

From Yahoo! Finance:

Yes, It’s Okay To Walk Away From Your Mortgage

Posted Jan 14, 2010 by Henry Blodget

As many Americans begin to realize that it will be many years (if not decades) before their houses are worth what they owe on them, the idea of walking away from your mortgage is going mainstream.

Not surprisingly, the mortgage industry is doing everything it can to prevent this, including telling homeowners that they have a "moral obligation" to pay.

But do they?

Is it okay to walk away from your mortgage for no other reason that it doesn’t make financial sense to keep throwing your hard-earned money away?

There’s no universal answer here, but in most cases, the answer is "Yes, it’s okay to walk away."

Importantly, the reason is not that "Wall Street deserves it" or "We’ve got to teach the banks a lesson" or any of the other retribution logic being thrown around these days.  The reason is that you and your lender engaged in an arms-length transaction in which both parties balanced competing interests and spelled out their obligations in a clear, signed contract. And unless that contract states that you have a "moral obligation to pay," you don’t have a moral obligation to pay.

Specifically, when you borrowed money to buy your house, you engaged in a business transaction. The bank or mortgage-lender evaluated the risk of the transaction and concluded that it would was a risk worth taking. To protect its money, the lender also required that you pledge the house as collateral, and it required you to have some equity in the house as an additional cushion. In the event that you didn’t pay, the lender retained the right to seize the house, sell it, and pay itself off before you got your equity. The lender loaned you the money because it concluded that this was a smart business decision.

You, meanwhile, also made a business decision. You decided to borrow money to buy your house even though it meant risking your equity, home, and credit rating.

And now it turns out that both of you made a bad decision.

Fortunately, you don’t have to fight about what happens next. The contract between you spells everything out: If you stop paying, the lender gets the house. That’s it. Unless the contract specifically differentiates between a failure to pay based on hardship (involuntary) and a failure to pay based on a collapse in the value of the house (voluntary), there’s no difference. If the lender thought at the beginning that you had a "moral obligation to pay," it would have specified that in the contract.

Now, compare this to a situation in which you DO have a moral obligation to pay: When you borrow money from a friend at no interest, for example, and you promise that friend that you will give him or her every penny back. THAT is a moral obligation to pay. In this case, your friend did not lend you money to make a profit. Your friend loaned you money to help you out–with no collateral or contract other than your promise to pay.

Just because you don’t have a moral obligation to pay your mortgage, of course, this doesn’t mean it’s smart to walk away. That depends on the state in which you live (some states are "recourse" states, in which lenders can go after other assets), as well as many other considerations about your personal situation

So, by this logic, there is no moral obligation to fulfill any contract unless it is spelled out explicitly in the contract.

But isn’t that laughable? If it is spelled out that the customer has a moral contract, will the banks take them to ‘church court’? Where do you go to get a ruling on moral obligations?

No, this is simply another step in the full court onslaught on capitalism.

Lest we forget, capitalism itself, as we think of it today is a relatively recent invention.

And it only became a widespread practice in the twelfth century with the rise of the Hanseatic League in Northern Europe and other similar merchant associations which valued honoring contracts above all else.

Contract law is based on the principle expressed in the Latin phrase pacta sunt servanda — agreements must be kept.

Without a respect for contracts and the idea that you are morally obligated to fulfill them, business transactions are impossible and capitalism will simply collapse.

Indeed, capitalism has only ever succeeded around the world where contracts are considered a moral obligation.

This article was posted by Steve on Friday, January 15th, 2010. Comments are currently closed.

29 Responses to “It’s Okay To Skip Out On Your Mortgage”

  1. U NO HOO says:

    I haven’t run the numbers but it seems senseless to me to walk away from a mortgage that you can afford to pay.

    If you have just started the mortgage, say in the last five years, you still have 20-25 years to pay and by then your house value will have recovered. Don’t jump ship when the bilge pump is keeping up with the leak. Fix the leak.

    And, where are you going to live? Don’t you like your house, the house you chose, and went to all that trouble to get a mortgage to buy?

    Nothing moral about a contract…just words on paper. You don’t pay, the bank takes the house.

    That is the reason I hate hate crimes legislation, we don’t read minds in this country, the psychic friends network is “For Entertainment Purposes Only.”

    • Rusty Shackleford says:

      Even psychics look both ways before they cross the street.

      Honestly, let’s look at it the other way. You buy a house at 4.7% interest. Two years later the prime interest lending rate goes to 6.2%. Do you contact your mortgage company and say, “Hey, raise my interest rate, cuz, I need to pay you more”.

      Of course not.

      But somehow people have it in their heads that what they are paying isn’t “fair” anymore.

      Well boo-hoo-hoo.

      If possible, maybe you can re-finance. Most likely not…especially not right now. But, the deal is the deal. Honorable people, though they may not like it….are stuck with the payment they have.

      Yes, there is a lot of blame to go around, but as I see it, mostly it goes to the shakedown artists in the liberal congress who thought it was a good idea to make lenders give houses away. And for a brief time, everybody prospered…then, as expected….it collapsed under its own bad credit risk. I always wondered about people buying houses who were only employed occasionally, who had no real background, etc…yet lived in a house that was beyond their means entirely.

      The past few years has been very enlightening.

      But, for the homeowner who’s paying big for a house that’s not worth what they paid…I have to say….”You buy a house to live in…not to make a profit off of”. If you are one of those who buys houses to “roll over” and make money, you have put your eggs in the wrong basket and now the basket has been dropped. That’s how it works. You knew the day would come, unless you are so naive that you think the Moon is also made of cheese. I’m sure there are those out there who believed housing prices would always be a lucrative gig.

      I always figured that at the rate at which they were being built, it was unsustainable.

      Perhaps the liberals were being nostalgic for the days when they were young and their WWII parents could get a new house in Levittown, and they missed seeing all these new planned communities springing up. Well, they forgot that the US was on a huge up-cycle, that jobs were being created and that everyone bought from the US.

      Thanks to their meddling….almost nobody buys from us anymore…our own manufacturing has largely moved overseas and building houses like that…especially the way they did it…was definitely unsustainable.

  2. proreason says:

    Well, looks like it’s ok for the bank to evict someone from his home if it goes up in value. That way, the bank can sell it and make a bigger profit than they would on the interest.

    Assuming, of course, there is some tiny violation of the contract, such as the payment not reaching the bank on time (wink wink) or not maintaining the property as dictated in the contract (eaves not painted according to city code).

    What’s good for the goose is good for the gander, eh?

  3. BannedbytheTaliban says:

    If I don’t have to pay the debts I am contractually bound to pay, why should I pay those in which I signed no contract? Debts such as taxes that I never consented to pay in the first place.

  4. jobeth says:

    “What’s good for the goose is good for the gander”

    Using those very same words my very lib cousin sent me a story…out of the NYT…debating this subject with the end result coming down in the favor of the abdicating home owner…because…after all, the banks do it all the time!

    If the banks get in over their heads in a bad shopping mall deal, they just walk away…soooo, individuals should be able to do the same thing. After all ‘whats good for the goose….’

    I replied…speaking about moral behavior etc. No response as yet…LOL.

    Seems we can just change the rules as we see fit….Doesn’t that lead to anarchy? Who will be squealing the loudest when the more powerful take away their possessions as the more powerful change the rules to suit themselves?

    Ahhhh, the wonder of the liberal mind!

    (sorry I don’t have a link to the NYT story. I deleted the email…but I believe it appeared sometime last week)

    • proreason says:

      What do the banks do all the time?

      If they violate the terms contracts, they will be sued and driven out of business very quickly.

      The pillars of capitalism and free enterprise are:
      – contract law
      – predicable regulatory policy
      – intellectual property rights

      So far, the Moron’s administration has flagrantly violate the first two. I have no doubt that they are undermining the 3rd as we speak.

      The article Steve posted, and the one you mention from the Slimes, Jobeth, are designed pointedly to undermine contract law, which is the greatest of the three pillars.

      It is very very deliberate.

    • jobeth says:

      Totally agree with you Pro.

      Got to thinking…This cousin lives in a very nice semi-rural area in NE Maryland. Wonder what he will do if/when they use imminent domain to take his property for some fancy hotel chain (who are big donors to the libs) to build a hotel…in order to increase the area’s tax base?

      In an era of changing the rules as it suits the more powerful, it can/will ;happen.

      Don’t you wonder about these people who enrich themselves via the capitalist system and then try to kill it? Makes no sense.

  5. jobeth says:

    So, as I read this story…I suppose the only time I have to pay a debt is if the provider does not make money off the loan.

    Mind boggling. Why would he even bother if he can’t make dime?

    Oh yeah,…goes with the grand plan…

  6. mr_bill says:

    So…when the going gets tough, quit? No thanks, I think I’ll succeed instead. Of course, making smart decisions in the first place helps a heck of a lot.

  7. MinnesotaRush says:

    “.. that they have a “moral obligation” to pay.”

    “But do they?”

    “Is it okay to walk away from your mortgage for no other reason that it doesn’t make financial sense to keep throwing your hard-earned money away?”

    “There’s no universal answer here, but in most cases, the answer is “Yes, it’s okay to walk away.”

    What shallow and irresponsible thinking and behavior by Yahoo, Yahoo Finance and this reporter; however, isn’t it sad that these attitudes are welcomed and practiced so often.

    So .. a man’s word .. handshake .. may or may not be worth anything(???).

    Benjamin Franklin said, “Only a virtuous people are capable of freedom.”

    • “What shallow.. .. ”

      Exactly right MR… I cannot for the life of me, imagine allowing such drivel to be even slightly considered, much less promoting it on the pages of a popular portal.

      God help me in my own business if this ever becomes the norm versus the contemptible lie it now is. I carry 4 times my annual salary in paper owed to my business monthly.. If they decide that our agreement is not morally binding, I am screwed.

    • proreason says:

      “I carry 4 times my annual salary in paper owed to my business monthly.. If they decide that our agreement is not morally binding, I am screwed”

      All joking aside, Jason, one of the lower key transformations that is happening through the Moron and his co-conspirators is a breakdown in morality and the law:
      – Centuries old bankruptcy law overruled by fiat for GM and Chrysler
      – Black Panthers released after intimidating voters
      – fascists dictating salaries
      – administration illegally sends terrorists to a UK country without prior notification
      – multiple schemes in progress to limit free speech
      – tax cheats in high offices
      – California sends IOU’s instead of tax rebates
      – 3 or 4 blatantly unconstitutional provisions in the corrupt Health Care bill
      – Administration makes up fantasy “jobs saved or created” stat, and when called on, doubles down
      – Crystal clear voter fraud in Minnesotta.
      – Acorn continues operating after revelations of multiple (dozens) of criminal activites
      – the president on tape pointing out “flaws” in the Constitution
      – the president flaunting his victory and running roughshod over normal legistative due process
      – thugs intimidating and injuring senior citizens and handicapped people at Tea Parties
      – the president intimidating or attempting to intimidate a host of business leaders
      – rampant mortgage fraud
      – businesses created like flies to help people default on their bills
      – and more

      If the economy doesn’t turn around on its own, lots of otherwise ethical people will say to themselves….”Why should I suffer when I’m surrounded by cheats and crooks, led by the government itself”.

      Ladle on the crushing taxes and inflation to come and it’s a recipe for a breakdown in societal norms, paritcularly paying what you owe.

      You should consider mitigating your float practices. Your business could expire in a flash.

    • jobeth says:

      Pro..as usual, right on target.

      And the cherry on top?…Total anarchy…perfect for Obama and friends.

      He wins, we lose and America…all that has stood in the way of evil world denominators…is out of the way. Never to rise another moral defense against their goals

      But he underestimates the American spirit and resolve!

  8. Right of the People says:

    I’ve got a question that nobody seems to be asking.

    If you walk away from your mortgage you’re going to take a hit on your credit rating big time, where do you move to?

    I’ve rented before and every time I had to have a credit check before they would rent to me. If you’ve just fubared your credit, how do you obtain another place?

    And are there that many rentals out there?

  9. Liberals Demise says:

    God……..I work two jobs to stay afloat …..for what?
    I’m not a quitter……I have just begun to fight!!

    “Improvise, Overcome and Adapt”

  10. Confucius says:

    The author, Henry Blodget, is the disgraced securities analyst who became the poster-boy for the rampant fraud surrounding the dot-com bubble.

    Mr. Blodget was accused of pushing stocks when he knew they were worthless. E-mails showing Mr. Blodget’s duplicity were uncovered and made public.

    For his actions, Mr. Blodget was charged with securities fraud and fined millions of dollars. He was also banned from Wall Street.

    In short, Mr. Blodget wouldn’t know morality or obligation if they stood there and smacked him on forehead.

  11. RickCaird@CairdConsulting.com says:

    Not that I am in favor of it, but the standard mortgage contract says if I don’t pay, the lender takes back the property. So, isn’t walking away simply exercising a different part of the contract?


    • Confucius says:

      You can walk away, towards and around the house if you want. Hell, you can even skip.

      But if you don’t pay, you lose the house for breach of contract.

    • proreason says:

      Sure, and if you don’t paint your eaves, you aren’t maintaining the property and the bank can evict you for that reason. Another breach of contract.

    • The Redneck says:

      So because your bank might do something immoral, you better get the jump on them?

  12. David says:

    Seems like there used to be at least some concern for your neighbors. Walking away probably won’t hurt your bank’s feelings but what how about when your house sells cheap to someone who treats it like it’s cheap. Or sits vacant for a year.
    I mentioned this before, but why isn’t there talk about letting people who are struggling not pay property taxes for a while. Seems like that kind of reduction could make monthly payments more manageable.

  13. jwoo says:

    I disagree with the writer’s point that defaults on mortgage payments pose a threat to capitalism. What the article doesn’t mention is that the same contract which contains the promise of payment also calls out the penalty for non payment – surrendering the property. A contract is an agreement between two parties which is enforceable by law. The borrower WILL fulfill the contract either by continuing to pay or by suffering the penalty (i.e. “penalty”) for default on the promissory clause. Either way, the agreement is kept (pacta sunt servanda is regarding the contract agreement, not the promise to pay clause). Whether a default is a voluntary business decision or involuntary, is irrelevant. The fact that the agreement IS enforceable by law is the foundation of capitalism not what the actions of the parties within the confines of the agreement are. That said, I personally don’t take a promise to pay lightly, and the article doesn’t mention that in some states lenders have recourse to the borrowers’ unmortgaged assets (that would also be in the contract agreement as well). I do agree 100% that contracts must be enforceable by law. That IS the foundation of capitalism. But to default on payment is still part of the contract, just a different part.

    Now, I really DO think the foundations of capitalism are in danger, but not from mortgage defaults. Defaults are a market mechanism that is only helping the price correction. One quarter of homeowners are upside down, and ten percent of mortgages are delinquent on payments. The fact that capitalism is in danger is evidenced by the bank CEO’s being in bed with the government. The treasury has been giving lip service to urging banks to restructure loans to keep people from defaulting. Meanwhile Obama urges homeowners to the “responsible” thing, and Paulson used the shame factor as well – calling those who voluntarily default “speculators, not honoring his obligation” The irony is that the only way the banks are going to volunteer loan modifications is if they fear defaults. Our leaders are REALLY working for the banks, not for the people. Why not urge the people to read their contracts and do the right thing for their families? What a mess the government has gotten us into by messing with free markets in the first place. That is the threat to capitalism.

  14. The Redneck says:

    I wonder….

    If I don’t have any moral obligation to pay my mortgage because the value’s gone down, then what happens if it goes up–and the bank decides they can get more for that house? It seems if I don’t have a moral obligation to keep my word, then they don’t have a moral obligation to keep theirs–which means that regardless of whether I kept up my end of the bargain, they don’t have to give me the house no matter what I paid for it, right?

    It’s real simple. You gave your word to pay. If you can’t, nobody will call you immoral for it (although you better not be scoffing good booze in front of a 60-inch). If you can, and you decide not to, you are simply a liar, a man or woman whose word is no good and who cannot be trusted.

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