The Ethics of Taking the Foreclosure Route

[Guest mormonmusic]

Some time ago I asked whether you all thought it was ethical to walk away from your house after the value has fallen so low you're underwater.

The majority of the people on this site thought it was unethical.

I'm having my doubts. Many of them are echoed in the article below:

its okay to walk away lets end the morality doublestandard on mortgage defaults: Tech Ticker, Yahoo! Finance

[CopenKagan]

It's unethical if you simply walk away from it because it was a bad financial decision. It's another thing if you are trying to make ends meet and it's simply not working.

A lot of people bit off a lot more than they could chew and this is where we have landed.

[Guest]

That it actually turned out to be a lousy business decision is not the homeowner's fault. It's the lender's fault.

Disagree. Vehemently. It has become ingrained in American culture to not take responsibility for your own decisions.

Walking away from a mortgage is unethical. But when you have a choice between ethics and survival, you don't have the luxury for morals. And that's why debt reduces your agency and the First Presidency always advices to stay clear of it - yes, they do say having a mortgage is fine, but they also advice not to bite bigger than you can chew.

As far as corporations going into foreclosure goes - a corporation is not human. It doesn't follow the same moral backlash. The stockholders/board of directors are human and I will guarantee you, they get scarlet lettered when their businesses go haywire. If you don't believe me look at Mark Brunell.

All in all a bad article.

[Tarnished]

We are currently in the situation where we will have to either go with a Short Sale or a Deed in Lieu. We need to move because my husband's job moved him two hours from where we currently live and the commute is killing him and our finances. When we looked into selling our house we discovered that it is now not worth the amount we owe for our mortgage. This is more than a little discouraging because if we had sold it right after we bought it we could have made a profit on the house.

When we found out that our house was worth less than we had bought it for I called up the bank to discuss our options. They told me that I could either do a Short Sale (where you sell the house for what it is worth and the bank forgives the amount of the mortgage that is not covered by the sale), or a Deed in Lieu (where the bank takes the house in lieu of the mortgage). Problem is both options would kill our credit score, so we are currently trying to get into a house in the town that we need to move to, and then go through the short sale or deed in lieu option. Problem is, for both options you have to stop paying your mortgage payments on the house. I don't like the whole situation, but it is what the bank is advising us to do.

When it comes to the foreclosure route I do wonder if there are other options out there. Can the person do a short sale or deed in lieu instead? From what I have heard, the bank is often willing to work with people as long as the people come and talk to them first about the whole thing.

[Faded]

Ultimately, the worst possible outcome from the bank's point of view is foreclosure. It can be a long and messy process. They have to pay lawyer's fees and court costs. And very often, the homeowner they foreclose on sabotages the house, damaging it in some way. Leaving the water running is a popular choice from what I've seen while house shopping. This means they take a substantial loss on the resale. There's a very good reason that Realtors helping people buy homes are very cautious when it comes to foreclosure homes.

The bank most generally would rather not "let nature take its course" and go through the whole foreclosure process. It's bad for everyone involved.

[Just_A_Guy]

Sorry to resurrect an old-ish thread, but I just came across this article regarding a poll asking people whether they thought walking away from a mortgage was acceptable. Thought I'd share.

By the way, the original discussion MormonMusic mentions in the OP to this thread is here.

[talisyn]

Well, you can't get blood from a stone...if it comes down to paying your mortgage or feeding your kids I think you have to do the right thing.

[hordak]

That's bunk. An individual mortgage is no different than a corporate mortgage. If corporations are allowed to walk away from mortgage obligations without feeling shame and guilt, then individuals should be able to do so, too.

Sounds like the conversation i had with my 5 year old the other day. I heard his sister crying so i rushed up stairs to see what was wrong and discovered that he had hit her. I asked him why, his response, "She did it too"

[Guest mormonmusic]

In our Ward, we have three families now that hung onto their underwater mortgages even though the houses weren't worth the debt. Then, their situation changed and they had to move -- either they had a baby and their house was too small for them, or their jobs took them into a new state so their house wasn't necessary anymore in the existing city they lived.

Every single one of them have walked away.

We can debate the ethics of this situation, but when you have such grand foreclosure rates across the entire nation, you have to acknowledge that the government -- whose job is partly to create economic stability through fiscal and monetary policy, as well as regulation to the extent possible -- let us down structurally. This to me, partly mitigates the negative opinions people have about walking away.

I don't blame people for walking away given how long it takes to recoup $100,000 after tax. Try paying your tithing, funding missions, building fund, fast offerings, saving a years' supply of money and food, kids schooling, retirement etcetera while paying back $100,000 in vapor debt.

So, looking at this on an individual basis, I no longer disagree with people who walk away (after standing in their shoes empathetically).

Edited September 18, 2010 by mormonmusic

[ozzy]

I agree with many people here that if it comes between ethics and survival, you have to live. But considering it, I do like Faded's point that absolutely no one benefits from a foreclosed home. I personally would think that the prospect of this would open options for the homeowner in trouble. But I don't own a home so I wouldn't know. At the end of the day, I would have thought that if someone was really strapped for cash, selling and erasing at least a large portion of the mortgage would be an alright idea. Again though, I haven't a home, haven't a mortgage, and hope to never find myself in such a position as many seem to have.

[Tarnished]

We have been house shopping lately and have had the chance to look at a lot of foreclosed properties. What you see is sad, often the people who are walking away from the house are upset, which is understandable. You have put so much time and effort into a house and now you are having to walk away from it without it helping you at all. The problem is, they tend to destroy the house before they go. They take all the appliances, they sometimes leave the house with the water running, some will break down walls, make holes in walls. Basically they try to "stick it to the bank" when the bank isn't really the one who got them into their mess. Often the bank isn't even the same bank they bought the house with originally.

If you find yourself in a situation where you have to walk away from your house, no other choice, then it is what you have to do, but the way I see it, don't be a jerk about it.

[skippy740]

Here's some of the issues that I've seen:

1) People who see that they are having problems have been making their mortgage payments. In order to receive the "help" that they are promised, they are told to STOP making payments?

The "squeaky wheel gets the grease". How ethical is that?

2) People are afraid to make good decisions in the fear that it will affect the 'almighty credit score'. While a good credit score may be considered an "asset", I've never seen it on a balance sheet. The only way to spend a credit score, is to acquire and go into more debt. This does more harm than good for a person's balance sheet. I wouldn't intentionally damage your credit score, but it really is a secondary consideration. Most people can rebuild their credit score after bankruptcy very easily and quickly.

3) To be "honest in your dealings with your fellow man" can also mean that you may need to use THEIR system in order to achieve the results you are looking for. As long as you are communicating what it is that you are doing, then you are being completely honest.

4) This would be the best you can do: if you are foreclosed on, try to leave the house AS CLEAN AS POSSIBLE. Just as notated above, a lot of people want to "stick it to the bank", but it simply doesn't help anybody. In fact, you should leave a note saying something like "Thank you for giving us the opportunity to get out of this house and mortgage. We have left this house as clean and secure as possible."

5) Remember that OUR ethics are different than "corporate banking ethics". We will usually take the higher road, but you've got to do what you've got to do.

6) If you're considering this ONLY because it became a bad financial decision, I'd keep paying on your mortgage. If you are struggling with your payments, employment, income or your mortgage terms were misrepresented to you, then you may want to consider "using the system" that's been laid out for you (ie. missing payments on purpose).

[Dravin]

1) People who see that they are having problems have been making their mortgage payments. In order to receive the "help" that they are promised, they are told to STOP making payments?

I think the idea is that if you are making your payments then you can quite demonstrably make your payments.

3) To be "honest in your dealings with your fellow man" can also mean that you may need to use THEIR system in order to achieve the results you are looking for. As long as you are communicating what it is that you are doing, then you are being completely honest.

I agree, if you approach your lender and explain that you cannot (note that is cannot, not don't want to) currently make your full payment and still feed your kids or even cannot make your payment at all and they suggest you stop making payments then the situation is different then just thinking, "Forget this crap, I'm just not gonna pay. It's not like they can throw me in prison."

4) This would be the best you can do: if you are foreclosed on, try to leave the house AS CLEAN AS POSSIBLE. Just as notated above, a lot of people want to "stick it to the bank", but it simply doesn't help anybody. In fact, you should leave a note saying something like "Thank you for giving us the opportunity to get out of this house and mortgage. We have left this house as clean and secure as possible."

Indeed. I don't quite get the whole, "The bank is screwing me over!" attitude, you agreed to pay them back for the money you borrowed or give them the property you purchased with their borrowed money to them, when that happens they are somehow the bad guy? Of course I suppose people get angry when the cop pulls them over and gives them a ticket even when they are guilty so I suppose I shouldn't be surprised.

[Just_A_Guy]

Here's some of the issues that I've seen:

1) People who see that they are having problems have been making their mortgage payments. In order to receive the "help" that they are promised, they are told to STOP making payments?

I'm not familiar with the rules and regulations for each of the programs that are out there. I know I've had a couple of bankruptcy clients whose mortgage brokers told them what you've said above--that government help would be available for those who were actually behind on their mortgages--and, on the strength of that advice, quit making payments--only to see the bank begin foreclosure proceedings and find out that, since they were in default, they were actually ineligible for whatever government programs might apply.

[Guest mormonmusic]

I'm not familiar with the rules and regulations for each of the programs that are out there. I know I've had a couple of bankruptcy clients whose mortgage brokers told them what you've said above--that government help would be available for those who were actually behind on their mortgages--and, on the strength of that advice, quit making payments--only to see the bank begin foreclosure proceedings and find out that, since they were in default, they were actually ineligible for whatever government programs might apply.

I've heard the same thing -- that you have to stop making payments for the banks to consider a loan modification or other concession. It's a fine line between helping people in need and just helping people mitigage a bad investment decision.

I also agree that you have to leave the place clean though to be ethical. I've been through foreclosed homes where the air conditioner and all fixtures doors, or anything saleable has been removed before the people moved out. One family in our Ward told me the bank paid them to leave the place in good condition. There was a dollar value attached to leaving the place intact, which they forefeited if there was damage and such.

[TheActualLiz]

I say this because my sister in law worked in the sub-prime mortgage industry for years. The regulations on lending had drastically changed and this was not explained to the consumer who was trying to rebuild their life. Lenders were told by their supervisors to try to sell clients on loans they could not afford and not tell the clients that within a couple years their payments and interest rates would jump without warning. She had some ethical problems with this but people in management would push her to get her sales up to the level that those without ethics were obtaining. On more than one occasion she saw clients being declined (even with the loose lending laws) and managers would override the decline by going into the computer system and changing the information the client had given so the loan would be approved. This action was done in secret without the lender's or the client's or the investor's knowledge. As a result, people on both sides of the deal (the home buyer and the stock holder) suffered a financial disaster. Meanwhile the bank itself was relatively safe since it was not actually loaning the money. The bank was collecting as many loan requests as it could, bundling all these loans into a giant pool of mortgage backed securities, then chopping up this debt into portions that investors could buy and aggressively selling them on the stock market. Sometimes the investors did not even know they were buying these securities since many were purchased by mutual funds and other group investments.

So in other words... most did not even understand the system and those that did either shut their mouths or blatantly lied. The whole system is corrupt and at fault and everybody associated with it (including those individuals who were naive or innocent) are going to suffer terrible, long term consequences.

Sorry for the rant but this happens to be a hot button issue for me.

[talisyn]

I say this because my sister in law worked in the sub-prime mortgage industry for years. The regulations on lending had drastically changed and this was not explained to the consumer who was trying to rebuild their life. Lenders were told by their supervisors to try to sell clients on loans they could not afford and not tell the clients that within a couple years their payments and interest rates would jump without warning. She had some ethical problems with this but people in management would push her to get her sales up to the level that those without ethics were obtaining. On more than one occasion she saw clients being declined (even with the loose lending laws) and managers would override the decline by going into the computer system and changing the information the client had given so the loan would be approved. This action was done in secret without the lender's or the client's or the investor's knowledge. As a result, people on both sides of the deal (the home buyer and the stock holder) suffered a financial disaster. Meanwhile the bank itself was relatively safe since it was not actually loaning the money. The bank was collecting as many loan requests as it could, bundling all these loans into a giant pool of mortgage backed securities, then chopping up this debt into portions that investors could buy and aggressively selling them on the stock market. Sometimes the investors did not even know they were buying these securities since many were purchased by mutual funds and other group investments.

So in other words... most did not even understand the system and those that did either shut their mouths or blatantly lied. The whole system is corrupt and at fault and everybody associated with it (including those individuals who were naive or innocent) are going to suffer terrible, long term consequences.

Sorry for the rant but this happens to be a hot button issue for me.

People relied too much on banks, and didn't read the fine print. After all, no one is gonna give you a loan you can't afford to pay, right? Weren't the sub-prime mortgages fine for the most part until the huge balloon payments and high interest rates kicked in? In other words, if most people hadn't got the sub-prime loans they would still be making payments and the economy wouldn't have tanked?

Alas, for the greed of the money-lenders and the ignorance of many.

[Iggy]

My husband and I are in a similar situation. He bought this home nearly 5 years before we were married. We have been married 6 years now.

He refinanced it once to get money to repair the roof (completely new 50 yr roof), put in new heat/AC pump, new carpet throughout and vinyl in kitchen, new range and refrigerator and repair head sized holes in sheet rock that was done by his youngest brother when he was living here rent free.

Then a year or two later he refinanced again to take advantage of lower interest rates.

We owe approximately $58K.

He is retiring in November of this year, we have bought a home on the Oregon coast - got a sweet, sweet deal on that one- and we want to sell our home and 1.5 acres here in Arizona.

Our problem is the market has taken a dump! One mile from use is a new development of 2009 3 bd 2 bath/4 bd 3 bath manufactured homes sitting on 3/4 & 1 acres that are going for $30K. This is what the banks are selling these foreclosed homes for.

We want to sell for $75K- every Realtor we have talked to told us we would be lucky to realize $20K!!

My solution is to rent it out for $550 a month and the renter pays all utilities. Husband wants to walk away from it. By moving out of state, Arizona won't chase us for the money.

I have expressed my feelings to husband about walking away from a debt. We did not obtain a mortgage loan that was more than we could afford. Actually we can pay the mortgage. We don't want to have an empty home in AZ and living in OR.

We want to sell the home and pay off the mortgage, closing costs and Realtors fees.

Last week a good friend and ex-coworker of husbands called to say hello. Long story short, his grown daughter may be needing a bigger home to live in. She is paying $600 a month for a 1 bd/1bath apartment now, and has her washer and dryer in storage - goes to the Laundromat. Her average electric bill is $500 a month!! She is getting screwed on that- her Dad is checking with the power company to see if she is paying for two apartments worth of electricity. The most our elect bill has been is $228 a month during the hottest months of the year.

She has been here to look at the house- and she seemed interested. We have a two bedroom, one bath home. Plus we have two added on rooms that do NOT have heat or AC to them, but they are great for storage &/or plants. I use one for the kitty litter room, the other for storage.

I am hoping that this gal will rent our home. We will rent to her for $500 a month and we will pay the water and garbage bill. Both combined will be approximately $58.00 a month!! We also won't ask for a deposit or last months rent- she will need to clean the place before she moves in, and be available for our handyman so he can put in a new bathroom door and bedroom door and install a fan/light in the living room.

Soooo- if we don't rent to this gal, then we are just going to walk away from the mortgage.

[threepercent]

I think if you desire to walk away from a loan you should understand how the loan originates. Try reading the creature from Jekyll island or watching it on youtube.

[Guest mormonmusic]

Soooo- if we don't rent to this gal, then we are just going to walk away from the mortgage.

When the financial realities of a losing home hit the forefront, I think a lot of people see the "wisdom" of walking away...I think many people in your situation see it as the best choice to unload the property. If you're secure in your home, and you need a place to live anyway, and your job/family/circumstances make your existing underwater home an acceptable place to live, its a lot easier to tell people it's unethical to walk away from your home.....

If the financial community were in our shoes, they would walk away because it makes economic sense to them. I think ethics would be a secondary consideration for them.

[TheActualLiz]

People relied too much on banks, and didn't read the fine print. After all, no one is gonna give you a loan you can't afford to pay, right? Weren't the sub-prime mortgages fine for the most part until the huge balloon payments and high interest rates kicked in? In other words, if most people hadn't got the sub-prime loans they would still be making payments and the economy wouldn't have tanked?

Alas, for the greed of the money-lenders and the ignorance of many.

That's just part of the story. There are other factors involved and the real estate bubble was due to crash. The size of the crash was magnified by corruption in the sub prime market but it was also inflated by some shady real estate investments. I can give two examples of investors and you can judge the ethics of each.

1. The Zepp family wants to make extra income on the housing market. They have good credit and take out the biggest loan they can to buy a big house in a good neighborhood that has fallen into disrepair. Over the next couple years the Zepps live in the house and make payments while repairing the electricity, plumbing, tile, etc... until they have a house that is worth much more because the market has gone up and the quality of the home has gone up. The Zepps put that house on the market and use the money they have earned to pay back the bank and invest in an even bigger house that needs repair.

2. The Stark family also wants to make money on the housing market. They see a new neighborhood under construction and think those homes will go up in value. The Starks use their good credit to buy three or four of these new homes, start looking for families who want to rent, and use the rent money they collect to pay down the mortgages. The Starks have several friends who see how profitable this investment was and decide to buy three or four houses of their own to rent. As a result of all these purchases the value of all these homes, and the homes in the entire neighborhood, go up due to increased demand.

As a result of the increased demand for homes construction companies start building more houses. The increased need for labor to build these homes brings lots of well paid workers to the area. Those workers rent homes and go out to dinner and shop for clothing in that area (giving lots of people lots of good jobs) until houses stop selling so quickly. Suddenly these construction jobs start to go away and workers have to make budget cuts. People stop going out to dinner and nightclubs so hospitality jobs vanish... this makes people make even deeper budget cuts... clothing is bought less often.... retail jobs are lost.... budgets get tighter and people get more and more afraid as this destructive cycle climbs up the economic ranks into the middle and upper middle class.

Now the investment class is starting to make budget cuts... including putting a little less into their stock portfolio or mutual fund so the stock market starts to slow down... until one day... CRASH!

Now the Stark family has trouble finding reliable renters to fill their many homes. Without that rent money they cannot pay the mortgages on all these properties. Some of their friends who had also invested decide to sell those homes at cost or even just the outstanding balance on their homes. This makes the value of the surrounding homes go down for seemingly no reason. This leaves the Starks in a position where they cannot keep their homes or sell them and recover the loss. The Starks cannot make payments

and ALL the homes are repossessed.

This is very bad news for the Starks, but it is even worse news for Mr Jones who HAD been making rent payments on time every month. One day Officer Friendly comes to Mr Jones's door and serves an eviction notice. Mr Jones is very confused by this until Officer Friendly explains the plight of the Stark family to Mr. Jones then tells Mr Jones he has 2 hours to collect all his belongings and leave.... oh, and if it's not too much trouble Mr Jones should try to clean up the place and make sure the AC is off.

Meanwhile the Zepp family has kept their nice big home on the market and trying to survive off credit cards and unemployment checks and part time jobs that do not pay the bills. The Zepp family is forced to walk away with massive debt, impending bankruptcy, no job in sight, and the nice lady at the welfare office ahead of them.

Why did I bother to wright this novella of a post? Because I personally have known the Zepps, and the Starks, and the Joneses. All of them have suffered terribly and none of us has the right to judge any of them.