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Bankruptcy, Foreclosures, Loan Modifications and Ethics

By Andrew

It has been a surprise to see the number of comments on this blog that have revolved around the issue of ethics in mortgages and loan modifications. A pleasant surprise, but a surprise nonetheless. It is the single most popular controversy.

Are easy roll-over Bankruptcies morally wrong?

When should someone default on their mortgage payments if he is unemployed and with an underwater mortgage but still has cash in his bank account?

How easy should banks make it for clients to get loan modifications, or how ?troubled? should homeowners be before they ?deserve? them?

And, finally, what is probably the queen of controversy in the mortgage world. Should the government bailout homeowners that can?t afford their mortgage or simply let the natural market forces do their job?

I doubt any two people would agree on all those issues which is what makes ethics and mortgages such a controversial issue. What makes it even closer to the heart of all of us is that mortgages deal with homes, a basic need for our families and symbol of our identity.

Benjamin, from the http://thephoenixrealestateguide.com for example, commented that mortgages are simple contracts and that much of the ethical issues built around mortgages and bankruptcy exist only in our minds. The comment was a reply to a rather angry man that disagreed with the advice another reader was offering to underwater borrowers to call it a day and strategically foreclose and declare bankruptcy to get a fresh start. This is his comment with some very gentle editing:

It?s hard to argue the ethics of making such a decision.  The fact is that when someone buys a home, they enter into a contract.  If they pay the mortgage, they get to stay in the nice home.  If they don?t pay the mortgage, they lose the house.  Those are the rules.  The bank agreed to them and the homeowner agreed to them.  If everybody agreed to them at the time of purchase, then a strategic foreclosure or default is still playing within the established rules.

Morals have nothing to do with it in my opinion. It is black and white. Imagine you rent a movie a movie from redbox. You spend $1 and enter into a contract to rent the movie for a night.

You decide to keep it for a week instead.  Redbox will charge you for every night you keep it.  It was in the contract that you originally agreed to. Walking away is simply a tool in the tool box.

I am not sure about the Redbox illustration, it would seem to me that those that are strategically foreclosing a mortgage and then declaring bankruptcy would be more like someone who rents a movie with Redbox never takes it back and cancels the credit card they used, when asked to pay for the rental sells the DVD on the second market and gives whatever he gets to Redbox.

Nevertheless the point is in my opinion well made. If foreclosure is an agreed consequence to not paying your mortgage then there is no moral issue. The bank knew it was a possibility when it agreed to provide the loan. I think most people would agree with that.

However the issue, as I see it is more to do with the effects of bankruptcies caused by foreclosures on unprotected (i.e. with no collateral) loans, and if this is fair. Our view of bankruptcies has changed through the years. In the middle ages up to the 18^th century prisons were mainly for criminals waiting to be banished or executed and for people who couldn?t pay their debts.

Today we generally don?t feel debtors deserve prison unless they commit fraud. However bankruptcy has kept much of its stigma, associated with dishonest and untrustworthy people. This has changed with time, bankruptcy becoming in many cases a logical financial tool to be used when things go wrong. Some would argue that it has become too easy to ?get out? of debt while yet others would point out that current bankruptcy rules are stringent enough to make it a final resort few are happy to enter.

Related posts:

1. How To Avoid Bankruptcy With Smart Debt Management
2. Loan Modifications Scrutinized, 1340 Loan Modifications Investigated in California
3. Loan Modifications No Match For Rising US Foreclosures.

Related posts:

1. How To Avoid Bankruptcy With Smart Debt Management
2. Loan Modifications Scrutinized, 1340 Loan Modifications Investigated in California
3. Loan Modifications No Match For Rising US Foreclosures.

Full post as published by Blown Mortgage on November 27, 2009 (boomark / email).