The morality of walking away from debt

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IrvineRenter_IHB

IrvineRenter_IHB

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Spread over a number of threads is the recurring theme of morality pertaining to the decision to walk away from a property and not pay off the debt. I think this topic deserves its own thread.





There is a "strictly business" aspect to the decision that most often points to walking away, and there is a moral aspect that never points to walking away. This is a complex dilemma, and it is easy to moralize when one is not in the dire financial straits a massive home debt can bring about. However, people often find it far too easy to just walk away and justify their immorality. I don't know what the right answer is, and if this thread gets going, the right answer will likely not emerge, but I think it is an interesting point of discussion.





IMO, walking away and declaring bankruptcy probably go together. There is probably not much distinction between the two as it impacts one's credit score (perhaps some, I don't know, but they are both bad.) Bankruptcy law was put in place to give people a fresh start when life's circumstances create a debt that could not be repaid in any reasonable amount of time (7-10 years.) We can debate whether or not these circumstances were self created, and we can debate the morality of bankruptcy law, but these laws are on the books because debtor's prisons were not serving the greater good (we can debate that too if you want.) Therefore, it can be argued that society has determined it is desirable -- and thereby moral -- to wipe the slate clean and give people a second chance. Lenders knew what the bankruptcy laws were when they chose to make the loan. If they chose to extend the credit, do they bear any moral responsibility to the outcome?





IMO, when faced with a debt that cannot reasonably be paid off in 7-10 years (which will be very common in the aftermath of the housing crash,) it is the right financial decision to walk away from the debts. It is in society's best interest to have a productive citizen whose income is going toward restrained (due to lack of credit) consumer spending rather than unrelenting debt service. Is this moral? You tell me.
 
<p>There are always reasons to "walk" away. And there are always justifications for this.</p>

<p>IMHO, there are many whom knew what they were getting into. They knew of taking the chances with 100% financing. They knew that they can be wrong in timing the real estate market. And guess what? Bad timing. They're underwater. So they cry foul. They blame the lenders, the brokers, and everyone else but themselves. </p>

<p>So now, we hear, "Oh, I was taken advantage of."....."Oh, I didn't know my rates would reset."......"Oh, no. I bet I will have equity with this loan. Now, I don't."........Ohhh....nooo....I am going to "walk" now. Sorry, I took the loans. Now, I will have to give it back for less because.....uhhh...</p>

<p>But like you say IR. Everyone will have a different take on this. And it's a never ending debate. </p>
 
<p>I mentioned this in another thread:</p>

<p>A college student takes out a student loan. He attend college for several years. Finds out he's not cut out for college. So he's going to "walk" away and tell the lender. Sorry, I just can't hack it. So here's my student loan minus what I have spent in the last 2 years.</p>

<p>Or what about a car loan. You buy the car with a bank loan. Then 3 months later. Can you turn around and say. "Hmm, I really didnt' think this car would have such a bumpy ride. Mr. Banker, I am going to give back the car and the loan now."</p>
 
<p>I'd have to agree. At the point where you have unsecured debt or debt worth more than value, in excess of one year gross income or where your debt service climbs to 60-70% of your gross income, it is in the best interest of society to wipe clean and limit your ability to recur debt until you prove yourself. </p>

<p>One year is pretty small, two years may be more appropriate, but I think one year is good. If you make $40,000 and you're $20,000 in debt on a credit card, carry a car note and facing and upside down house, you're surely hurting. The car note is hopefully near zero'd out on LTV. Take a typically OC family, say they make $100,000. Getting upside down a $100,000 on their house isn't the end of the world, however, it is the end of their housing options. Realizing the loss would be near catastrophic for many.</p>

<p>Walking away would likely be moral, provided they did it in a manner that attempts to minimize the losses for *ALL*. Yes, All. Their neighbors, the investors, the county and themselves. That's were I draw the moral line. Neogtiate a short sale. Do a deed in lieu. Squating and waiting for eviction is gaming the system and maximizing your benefit at MY and your neighbors expense. Yes my expense, Irvine Renter's expense and every other Californian's expense. We hold the debt. Either though CalPers and the underlying taxes needed to support it, the County courtesy of our treasurer buying the structured investments.</p>

<p>So yes, it's moral to say you made a mistake, wipe the slate clean and walk away. It is not moral to walk away and do so in manner that increases the losses experienced by society for your gain. </p>

<p> </p>
 
For me, it is plain and simple: as long as you don't have the intent to default the lender when you take out the loan, walking away is a pure business decision. Lenders already priced that risk along with other risked into the financial product they are selling.
 
<p>Blogger, Qwerty, did make a good point in another thread. And that is due to 100% financing. These borrowers have nothing to lose. It's not like they'd put 20% down. </p>

<p>Surely, we've had other real estate cycles whereby borrowers had their equity evaporated. But they hung in there due to the fact they had committed a down payment on their purchase.</p>
 
The question of when people should walk and when they should pay isn't easy. All societies wrestle with this. The ancient Hebrews had regular debt forgiveness. Medieval Europe had debtors' prison. Our society takes a path in the middle and I think it's a pretty reasonable one. We impose serious consequences for walking from most debt - it's not free. Bankruptcy is very complex and requires a judge's approval. Walking from a secured loan surrenders the collateral.



All in all, the system works pretty well. Let's face it, enforcing "morality" on a nation of 300 million people is an impossible task. The way we've done it, people are reluctant to walk from debt because of the consequences, and we can count on that rather than a fuzzy, unmeasureable, person-specific sense of morality. We don't need additional moral sanctions because they're built into the system.



The responsible party for the mess we're in is the bank and the financiers. People who want nice houses are hardly a new phenomenom! Bogus credit insurance and multiple layers of reselling debt *are* a new phenomenom. So if you want to punish the responsible parties, you should be encouraging people to walk because the longer they stay at outrageous payments the less those responsible will lose.
 
<p>I remember back in high school I had to read a rather odd short story (can't remember title or author). The gist of it was there was a beautiful lower class woman who was going to a ball with her husband who asked a rich friend if she could borrow her string of pearls. The rich woman agreed and lent her the pearls. All went well at the ball and the lower class woman had a wonderful time. Then on the way back, the string breaks and all the pearls are lost. Unable to face her rich friend and tell her the truth, she and her husband run away and slave at menial jobs, saving every penny. Finally after ten long years, her looks gone due to hard labor as a washer woman, she returns to the rich friend and apologizes and gives her all the saved money to pay for the pearls. The appalled rich friend then exclaims "But they were paste!"</p>

<p>Didn't really get that story then, still don't get it now, but I think the author had some point to make about morals and debt, just not sure what it was.</p>
 
IR,



Great idea for a thread. You are correct - this discussion (dilema for some) is the center point for a lot of discussion on this blog.



After reading all of the posts on the IHB over the last few months I'm surprised at how many people can pass stern judgement on some individuals and yet become totally amoral with others. For me its simple. There is a key trait in all of the people I admire - integrity. They show up when they say they will. They do the job they say they will. They support you when they say they will. And they accept their responsibilities when they say they will. This includes paying back money that they borrowed. Not a whole lot more but definitely not less.



We can qualify and rationalize all we want but when someone agrees to take a loan on a house, they obligate themselves to paying it back. If they have the means, they should continue to make the payments or pay what they owe to get out of the deal. If they really can't afford to make the payments, then they should work with the lender to develop the best remedy for the situation - whatever that is. To suggest that they should scorn the lender and milk the situation for short term gain is really poor. Just because their value went down doesn't mean that they're free to walk.



Is personal responsibility really dead in this country?



FH
 
<em>"Is personal responsibility really dead in this country?"</em>





It may not be dead, but we are becoming expert at avoiding responsibility whenever possible.
 
Am I right in assuming housing market peaked in most of the country in 2005 ? and is it a coincidence that the new bankruptcy law went into effect in Oct 2005 ? Obviously someone saw this coming and failed to apply the brakes before the Train crashed...



If you Guys are talking about morality then this whole thread seems a bit one sided, how about the morality of RE Agents that told Buyers that they should buy now, prices will never come down, what about the morality of everyone involved in the Banking/Mortgage and investment industry that fueled this situation with easy money? They rode into Town, sold a whole bunch of Snake Oil, made a ton of money then rode out of town the next Day leaving the poor working Man holding a flaming Bag of s**t....as usual.



To me this all looks like an attempt to return to the old "You owe your soul to the Company Store Days"



Turn the working/middle class into debt slaves and they'll do anything you tell them to.
 
<p>Sure the RE agents along with lenders tried to sell me "snake oil". But ultimately, I decided if I should believe in their sales pitch and buy the "snake oil". </p>

<p>And for those borrowers whom believed in the hypes. They don't have any responsibility to their decisions? Weren't they grown adults when they signed those loan docs? </p>

<p>These borrowers couldn't figure out the numbers? For example, the borrower makes 50k/yr. Yet, thinks he can handle the payments on a 800k purchase? And sure, some of you will say, "But the Lenders told me the market will keep going up. And you, Mr. Borrower, can refi. to a lower payment later." You gambled on that statement. And if you as a borrower fell for that. Who's fault is that? Come on. </p>

<p> I am not defending any parties here. I just want individuals to own up to their decisions and stop making excuses.</p>
 
<p>And I don't want to come off as a heartless bast*rd here. Some of us, God forbid, will encounter unforseenable financial hardships in our life time. Such events as the loss of a job, divorce, medical expenses, etc. Of which will put our home in jeopardy. And in these circumstances, I can see the justification to "walk" away from your obligations.</p>

<p>What I have a bone to pick with is: Someone has the audacity to ask in another thread if he should "walk" away. Yet, he has rental properties, 170k income, and 200k in the bank. Give me a break.</p>

<p> </p>

<p> </p>
 
My appologies to IR, I need learn to quit speed reading through posts...I completely missed the part where he said

" Lenders knew what the bankruptcy laws were when they chose to make the loan. If they chose to extend the credit, do they bear any moral responsibility to the outcome"?



Of course my answer is yes!
 
<p>I have a co-worker who is a single mother with 2 kids and who had comfortably been living in an apartment for many years. One random day in 2005, she decides that she is going to join the housing boom and buys a small starter house in SD. Of course, all of us try to talk her out of it but her mind is set. Now the interesting part. 6 months into this house, she realizes how bad her quality of life is as every extra dollar is going into the house and she can't afford any of the things she used to do for fun like movies and concerts. So she decides to sell it. After listing with an agent for 4 months, its clear that the SD market has already started to tank so she ends up doing a short sale.</p>

<p>My problem with this is that she had the means to continue living in that house but simply decided she didn't want to because her quality of life changed and the bank ends up losing money. You might say that its a business decision and nothing about morals, ethics, or character. In this particular case, I can tell you that her co-workers including myself view her very differently now. How can we trust her with a big project when she might just decide that she is putting too many hours in it and quit? Or trust her to cover for us while on vacation? Or pretty much trust her at all in the work place?</p>

<p>Every decision you make in life adds to your character and to some people, that might not be important. If you take on a loan and have the ability to pay, you should meet your obligations. </p>
 
<p>Anonymous - you got the entire story wrong. The lower class women takes loans to buy a real necklace to replace the rich women's fake necklace rather than telling her that she lost it. The story is about telling the truth.</p>

<p><a href="http://www.eastoftheweb.com/short-stories/UBooks/Neck.shtml">http://www.eastoftheweb.com/short-stories/UBooks/Neck.shtml</a> </p>
 
First, perhaps some definitions are in order:





Morality - concern with the distinction between good and evil or right and wrong; right or good conduct.


Responsibility - duty: the social force that binds you to the courses of action demanded by that force.


Calamity - a state of deep distress or misery caused by major misfortune or loss.


Integrity - firm adherence to a code of especially moral or artistic values.


Seems to me the purpose of leniency in our society is to help when events out of a person's control result in major misfortune. Is losing 20% of your market value a calamity? Let's go back in time to answer the question: Is buying an asset priced 100% over reasonable value a good idea? Seems to me moral dilemmas arrive when one is forced to act upon a mistake that has already been made.





Walking away is shirking your responsibility and burdening the rest of us, not directly, but as a whole. We're all connected whether we like it or not. Who pays the court to handle bankruptcy proceedings? Who loses home value as neighborhoods go REO and Forclosure? Who experiences reductions in local and municipal services as property taxes decline?





Like Fishhead, I ask myself "Is personal responsibility really dead in this country?" Unfortunately, I believe it is.





I don't mean to seem alarmist, but if people look at walking away from an obligation in the light of unfavorable circumstances as a smart business decision, what actions are justified under more trying circumstances? If we are heading into a depression, can one later rationalize embezzling, stealing, and mugging as risky but justified behavior in the light of extreme economic hardship?
 
<em>"can one later rationalize embezzling, stealing, and mugging as risky but justified behavior in the light of extreme economic hardship?"</em>





If your family is starving, it is immoral to steal bread?





It is an age old question with no easy answer. Life is not always black and white.
 
Is morality in this situation only one sided? Do lenders have a moral responsibility to prevent these situations from occurring by adhering to sensible, sustainable lending practices? Predatory lending laws are on the books because immoral lenders would intentionally overextend borrowers in order to foreclose and obtain large fees, back interest, etc. in a foreclosure sale. Society has said this is immoral. The lending in the bubble seems just as predatory, only this time, it is going to backfire on the lenders. My point is, if the lenders would not have enabled this problem, we would not have so many borrowers in this moral dilemma. What responsibility do the banks have in this matter?
 
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