Do you think this is ethical?

[Guest mormonmusic]

I have two friend-families who are temple-recommending holding dedicated Mormons. They are both capable of meeting their mortgage payments. However, they are under-water like many of the homeowners of today. Both are walking away from their houses because they don't want to be in debt for the rest of their lives with no equity in their home to pay off the debt . One is leaving the country for a new job and a new life. The other is getting into a new home at current prices using his stellar credit, and then, intends to give his existing home back to the bank, entering foreclosure, leaving the bank with the loss on the house.

Do you think this is ethical, or honest?

Edited May 25, 2010 by mormonmusic

[miztrniceguy]

Who are we to judge unless we are their designated Judge in Israel?

[Traveler]

I have two friend-families who are temple-recommending holding dedicated Mormons. They are both capable of meeting their mortgage payments. However, they are under-water like many of the homeowners of today. Both are walking away from their houses because they don't want to be in debt for the rest of their lives with no equity in their home to pay off the debt . One is leaving the country for a new job and a new life. The other is getting into a new home at current prices using his stellar credit, and then, intends to give his existing home back to the bank, entering foreclosure, leaving the bank with the loss on the house.

Do you think this is ethical, or honest?

The time will come when everyone will stand before G-d and make an accounting for all things they have done in this life. There is opportunity to repent and repentance is a part of our accountability.

I would say that if the Holy Ghost is directing someone in what to do they are safe and do not need to concern themselves with repentance. As will all things in this life – if we think we can repent of something far into the future we are most likely going to have a more difficult time of it than if we do in sooner.

The Traveler

[Wingnut]

I think it's their business, no one else's, and if that's what's best for their family, then that's what they should do.

By the way, are you their accountant or lawyer?

[Moksha]

Who are we to judge unless we are their designated Judge in Israel?

Considering Israel would not even let MIT Professor Noam Chomsky cross the border to give an address at a university, such a judgship seems unlikely.

[JThimm88]

To the OP, I don't know a lick about home-ownership (considering my husband and I will be floating around apartments around the country for a few years), nor do I know too much about foreclosure, so I don't understand what is wrong with the situation? Could you please explain it for me so that I could better understand? I'm interested in knowing. :)

[Hemidakota]

Who are we to judge unless we are their designated Judge in Israel?

Agreed. We simply do not know the complete circumstances and the why.

[hordak]

Nope. It is the opposite of ethical and honest.

[Guest mormonmusic]

Everyone, please focus on discussing whether this is ethical or not, and stop preaching about being judgmental. That wasn't the intent of my question. Sorry if it wasn't clear; if it wasn't I take responsibility.

I'm in the same position on one house (underwater) as these temple recommend-holding Mormons who believe in being honest, and I'm thinking of walking away like these two families I've noted above. But I'd like to hear what others think about the ethical morality of the situation as I make my decision.

One one hand, I feel that I have made a commitment to pay my mortgage, and entered freely into the contract at inflated house prices. I can also afford to pay the inflated mortgage payment if I choose; it's not as if I got myself into a situation I couldn't afford.

On the other hand, the prospect of being over a hundred thousand dollars in debt on this house for the rest of my life, with no asset to show for it, and the number of years of working and paying to clear off that debt is daunting. Those funds could be used for greater good, such as a fully paid-for education for two of my children, or a more self-reliant retirement, or even a senior's mission someday.

So, I put the question forward as an ethical question for discussion not to justify some pre-position I've formed about these people in the opening post.

Edited May 25, 2010 by mormonmusic

[Guest mormonmusic]

To the OP, I don't know a lick about home-ownership (considering my husband and I will be floating around apartments around the country for a few years), nor do I know too much about foreclosure, so I don't understand what is wrong with the situation? Could you please explain it for me so that I could better understand? I'm interested in knowing. :)

This is how it works.

When you buy a house, the bank appraises its market value, and then requires you to put a certain percent of the market value down toward the price the seller agreed to. By "down" I mean your own money. The bank pays the rest of the purchase price to the seller of the home you're buying from and you own the house, with the bank as a creditor who you pay mortgage payments to until the mortgage is paid off.

Unfortunately, the banks appraised homes purchased from about 2004 to 2007 say too high, and lent people more money than the houses were actually worth. The banks also failed to qualify people properly for loans, letting peole walk into fancy mortgage terms that deferred repayment until a few years later. When these additional payments kicked in a few years later, people couldn't afford them and had to give the house back to the bank. This has happened on a really wide scale, caused an oversupply of homes, and has triggered a fall in house prices.

Due to the decline in house prices, people are now "underwater" meaning they owe the bank $400000 and their house is only worth $250000, for example. This means if they sold their house, they would get $250000 to give to the bank to pay off part of the $400,000 debt, and would be left paying the remaining $150000 to the bank with not benefit to themselves, because they lost the house.

So people who can still afford their houses are just walking away from their homes saying "I'm not going to pay all that money for nothing, let the bank absorb the loss". The bank lent $400000 to these homeowners, and the bank will $250000 for the home when the bank sells it. This way, says the underwater homeowner, the bank's investors who put up the money for the home will take a loss on the investment, not the underwater home owner.

In fact, some people are using their good credit to do this: They buy a second, different home at the current low prices, and THEN are giving their first house back to the bank. This way they qualify for a home at a reasonable price, and then leave the bank holding the bag on their original home they bought at inflated prices. The homeowner loses their excellent credit rating by defaulting on the mortgage on the original house, but at least they have a house that's cheaper with an easier mortgage payment, and they don't have that debt with no backing assets anymore.

Others are defaulting on their mortgage, forming a corporation, and then buying their house back from the bank at an auction at a reasonable price!

So, do you think this is ethical or honest? Whose interests should be considered, and is this dishonest in your view?

Thanks Hordak for weighing in, but I'd like to know your reasons too.

Edited May 25, 2010 by mormonmusic

[Guest mormonmusic]

By the way, are you their accountant or lawyer?

No, I'm not.

[Hemidakota]

Everyone, please focus on discussing whether this is ethical or not, and stop preaching about being judgmental. That wasn't the intent of my question. Sorry if it wasn't clear; if it wasn't I take responsibility.

I'm in the same position on one house (underwater) as these temple recommend-holding Mormons who believe in being honest, and I'm thinking of walking away like these two families I've noted above. But I'd like to hear what others think about the ethical morality of the situation as I make my decision.

One one hand, I feel that I have made a commitment to pay my mortgage, and entered freely into the contract at inflated house prices. I can also afford to pay the inflated mortgage payment if I choose; it's not as if I got myself into a situation I couldn't afford.

On the other hand, the prospect of being over a hundred thousand dollars in debt on this house for the rest of my life, with no asset to show for it, and the number of years of working and paying to clear off that debt is daunting. Those funds could be used for greater good, such as a fully paid-for education for two of my children, or a more self-reliant retirement, or even a senior's mission someday.

So, I put the question forward as an ethical question for discussion not to justify some pre-position I've formed about these people in the opening post.

Then, for what purpose is the posting?

Business venture is purely that. Do not construe business venture with the gospel principles. I have found bankruptcy attorneys are telling people to walk away from their homes versus salvage what they can. Members may not make a right decision based on listening to a B. attorney. You simply seek to make a right choice and the right choice will be to dump their homes when banks failed to help.

What I mean about not to mix business venture and the gospel, a great example here to use is the case of Jacob. Jacob was scruples in his business venture with his father in-law. There is no way to state it otherwise. Did any of his business dealings affect his standing before the Lord? No! Where is Jacob at this time concerning his eternal welfare? His begun his own world or galaxy [being blunt now], along with his father Isaac, and grandfather, Abraham.

You have to make the decision what is ‘good for your family.’

If I don’t carry a temple recommend but still worthy, would this prevent me from entering into the Celestial Kingdom?

[Wingnut]

By the way, are you their accountant or lawyer?

No, I'm not.

Then how can you definitively state this:

They are both capable of meeting their mortgage payments.

If you aren't in a position to have intimate knowledge of their finances, then there's typically always more to the story. I know you're not currently a bishop, so that narrowed it down pretty much to accountant or lawyer. I don't say this to be judgmental of you, but rather to point out that there may be more going on that you don't know about.

Other than that, like I said before, it's not for me to say if it's ethical or not. It's for them to determine what's best for their family.

Upon more thought, in fact, I might suggest that there's nothing unethical about it. People don't buy houses anymore with the intent of living in them forever. People buy them with the intent of selling again in 10 years or so (give or take, depending on circumstances). If I were in a similar situation where I owned ("owned") a home whose payments were killing me each month, I'd be looking for someway to get out from under it. Maybe my husband my look for a second job, or I'd seek out-of-the-home employment (despite my two-year-old daughter at home). Would either of those be the best thing for my family? Who knows? What if, in addition to the crippling mortgage, after living in this area for awhile, I'd learned that the cost of living was higher than I wanted to deal with, so my husband started looking for work in another state? Part of the reasoning would be to get out from under the inflated mortgage. Say he gets the job and we move. We haven't foreclosed, but only barely. Is there anything unethical about this?

Furthermore, we've been repeatedly counseled over decades by our church leaders to avoid debt. The disclaimer has always been that debt is generally acceptable for education, a necessary second car, or a modest home. I don't see why it would be unethical to get out from debt, considering that counsel. Part of the problem is that I've known (or known of) far too many faithful LDS that buy homes that are beyond their "modest" needs. That traps them.

If these people were just filing bankruptcy for the purpose of absolving their debts, thereby not taking responsibility for their choices, I'd have to say that was unethical. Again, though, I wouldn't know all the circumstances. I have a personally jaded view of bankruptcy, though. My family went through it when I was younger because my dad had a dirty boss. I don't look kindly on people who do it casually.

[Guest mormonmusic]

Now, finally, you're discussing the question on the basis of the information provided, and providing some reasons and perspectives... I'm listening...I'm listening.....

Edited May 25, 2010 by mormonmusic

[mnn727]

Ethical? No, but then it was not ethical for banks and finance companies to loan more than a person could afford or more than a house is worth or have 'teaser rates' or any other of the practices that got us into this mess.

My mortgage is about 10% more than my current value even though I put 20% down at the time I purchased it) due to the fact I bought at the highest point in the real estate market (had to move due to job).

So what? I like the house, its in the area I want to live and I can easily afford it (ie I didn't buy more than I could afford even though the banks kept telling me I could afford much much more).

You don't actually lose any money until you sell the property. I'll be here long enough that perhaps the value will increase to what I paid for it or maybe not. In the meantime its still better than paying rent.

Edited May 25, 2010 by mnn727

[nbblood]

I'll answer the question with the scenario you have portrayed in mind. Regardless of what the others' situations may be, I think you've clearly outlined the circumstances and scenario to which you're looking for an answer.

So, No, I don't think it is ethical to walk out on a mortgage. This is a contract that is freely entered into with obligations that are binding. I don't know of any clause in any loan paperwork that says, "feel free to default if the situation benefits you more to do so." One interview question rings loudly in my head when I consider this situation. "Are you fair in your dealings with your fellow man?" Ok, I paraphrase the question, I can't remember the exact wording, but you get the idea.

To me this is willfully and knowingly defaulting, leaving another party paying the price of your obligations. Oh, don't worry about the banks, they'll get their money back......from other homeowners, investors, and banking customers. They'll simply pass their loss on by raising interest rates on their loans and lowering interest rates on their savings, money market, cd's, etc. and raising fees. Or the government will bail them out and the taxpayer will be left with the burden. Either way, the people that ultimately pay for people taking this option are people that did not enter into this agreement. To me this is not being fair with your fellow man.

Now, I'm not about to condemn those that choose this option. But I would certainly not consider taking or using this option myself, for the reason stated. I've entered into poor, unfavorable terms before. I've made my mistakes. But I've never defaulted, purposefully or otherwise, and I feel like I can look myself in the mirror and say that I've been fair in my dealings. That's what I think it comes down to. Can you feel good about it yourself? If you were standing before Christ and God and explaining what you had done could you feel good about it? That's what matters. Not what I think. I get the feeling that your answer to that is "no".

[Just_A_Guy]

My sense of ethics was destroyed in law school, but I do want to respond to one point here:

So people who can still afford their houses are just walking away from their homes saying "I'm not going to pay all that money for nothing, let the bank absorb the loss". The bank lent $400000 to these homeowners, and the bank will $250000 for the home when the bank sells it. This way, says the underwater homeowner, the bank's investors who put up the money for the home will take a loss on the investment, not the underwater home owner.

Mormonmusic, mortgages do run with the land, but any lender worth its salt is going to set it up as a recourse loan--meaning the mortgage also assigns personal liability to the borrower. The borrower doesn't get out of that by simply leaving the house.

What's going to happen is the bank's going to sell the house at foreclosure auction--probably for well below fair market value, say about $200K--and then the bank is going to sue the borrower for the remaining $200,000. Unless the borrower is willing to a) leave the country or b) go through a bankruptcy, just walking away from the house isn't going to benefit him at all.

If the borrower is willing to go through a Chapter 13 bankruptcy, and has more than one mortgage on the house, then a good attorney may be able to make the second mortgage go away entirely through a process called "lien-stripping". Also, the White House has also been making noise about allowing "cramdowns" in Chapter 7 bankruptcies, which would mean that your mortgage would basically get re-written for the fair market value of the house (rather than the original loan amount).

Talk to a bankruptcy lawyer in your jurisdiction before doing anything rash; but if you're looking to reduce your house payment--the best thing to do may be to sit tight for the next few months, keep making your payments, and see if Congress comes up with legislation allowing cramdown in a Chapter 7. If it does--ethical considerations aside--you may want to seriously consider bankruptcy.

Edited May 25, 2010 by Just_A_Guy

[hordak]

I offer to pay you $2000 to play my wedding. You load up your gear, get the band together, cancel other plans, come set up etc. A quarter of the way through my buddy shows up and tells me he has his DJ equipment in the car and would have done it for $100. I realize the money i would have saved with him would be great for my honeymoon so i pull the plug, give you $500 for the time i used and have him take care of the entertainment.

Is it ethical?

I payed for what i got, I canceled the contract so i could better use the money and you get "your product" back.

What if the bank decided to cancel the contract because they could make better use of the money?

"Mr Mormon music, we know we agree to sell you this home for $100,000 and you have been making your payments on time but we have a family who will buy it for $175,000 so here is your $10,000 back that you made in payments and you have 30 days to vacate the premises."

Now i'm not talking about walking away when you have to. My father recently lost the family homestead because he had to quit his job to take care of my blind and dying mother and couldn't catch up on the bills. We are talking about $1500 behind on a 30 year fixed $40,000 loan, not some, "I want a new car let's get a second mortgage" mismanagement of funds.

But walking away from a contract for your own convenience(not need) is absolutely unethical.

[carlimac]

Just an observation. It's probably better to pose this question in hypothetical form if you want straight answers than to start it with "I have these two friend-families..."

Aside from that, honesty is always the best policy. One of the temple recommend questions is " Are you totally honest in your dealings with your fellow men." Hopefully being totally honest means being totally honest with ourselves, too. Perhaps they think they are being honest and ethical. MY opinion is that I don't think it's honest or ethical to walk away from a debt with no intention of ever paying it back. But I don't understand the financial world at all. So my approach to situations like this will be pretty simplistic.

Edited May 25, 2010 by carlimac

[Hemidakota]

:lo:

The point is made.

But I have agree on great points made here. If there are members who can receive help from the bank and are capble in retaining their home, walking away is not the real solution to resolve any debt issues.

[Guest mormonmusic]

The idea that you should keep your word rings with me on this one. Imagine the confidence you'll have before the Lord when you tell him you shouldered a huge debt out of a sheer desire to maintain your integrity -- when so many others had figured out ways of avoiding the obligation.

I'm think I'm going to try to get the money back through less questionable (read, honest) means. One, pay down the mortgage and get part of the lost equity back in guaranteed interest I no longer have to pay (Haven't had much success picking stocks, unfortunately). This obeys the commandment of getting out of debt while maintaining honesty.

Also, there are a ton of real estate deals now -- get the lost equity back by buying real estate low and renting them out. I did it with one property so far and its working. The prices are so low they cashflow much more easily than they used to.

Also, go down to one car and save on insurance and capital expense for a few years.

Just-A-Guy -- I knew that homeowners who walk away from their home are being chased for the unpaid portion of the mortgage. At first, I was going to escalate the discussion by asking about a couple techniques people have been claiming they are going to use to avoid passing any means tests, even though they are fully capable based on their income and debt obligations right now (before foreclosure or bankruptcy).

However, based on what I'm seeing from everyone else's comments, they would definitely think this was unethical.

[baver3]

It doesnt SEEM honest but I think if you pray and ask HF what you should do he will direct you to whether or not you should walk away from that house. He will lead you to a different path, whatever that may be.

After that answer is received, I think it is not then useful to decided what the judgment on that decision would be. I think it would be best in all situations to do what you think it right. You mentioned the temple recommend. One of the questions is are you honest with your dealings? If these people HONESTLY cannot afford their payments (and unless you are their accountant how would you really know?) then they have probably contacted their bank and notified them that they cant afford it and are trying to 'afford' a home that is better within their means (like the one family that is re-buying a house).

I am currently short selling my house. My husband can pay the mortgage but has chosen not to. I dont feel like I have a choice but I cannot but in 100% of my resources JUST to fufill the mortgage payment. Perhaps these famlies you are talking about have taken all of their family needs into consideration and it is just the best decision for THEIR family. That doesnt mean it would be okay for you but honestly if I were in your shoes, I wouldnt want to be stuck with that much debt and no asset to show for it either.

It might be honest but not ethical and it may be ethical but not honest. The difference between the two is INTENT.

[marshac]

IMO, it's awesome how the mortgage industry has made it seem 'ethical' to uphold the terms of a mortgage to the point of financial hardship to the borrower. Some of the very banks that hold your mortgages have walked away from CRE that they hold simply because the asset is no longer worth the outstanding note.... they looked at the scenario with an objective eye and made a rational business decision.

The possibility of default is one of the reasons why a mortgage requires interest payments (and PMI)- the higher the likelihood of default, the higher the rate. In the mortgage contract, it spells out what the terms are, and what happens in the case of default- namely foreclosure and repossession... for the borrower, it's a simple decision; continue to pay and keep the asset, or default and allow the true owner of the asset recover their property. Both buyer and lender went into the transaction understanding that either outcome was possible.

It's a business relationship- not a friendship. You're working within the framework of a contract both parties agreed to.

[bl8tant]

It's a business relationship- not a friendship. You're working within the framework of a contract both parties agreed to.

I agree that it is ethical and honest to honor your agreements. However, your mortgage contract specifies what happens if you stop making payments. It's not like a temple sealing, where there's no explicit exit clause.

Mish Shedlock, for whom I have a great deal of respect, has a great series of posts on this topic (one of which is Mish's Global Economic Trend Analysis: The Business of Walking Away) on his blog. If you're interested in secular ethical analysis of this topic, you might enjoy reading his thoughts.

[marshac]

I read Mish's blog daily, along with calculatedrisk and a handfull of others... on the weekend I listen to FSN while scrubbing my toilet bowls. :)