Morally Wrong....OR...Financially Sound?

Real Estate Broker/Owner with Tutas Towne Realty, Inc and Garden Views Realty, LLC BK607690

Dillemma?Richard Zaretsky’s recent post..........


got me thinking. His post is talking about the amount of people who are making the "Strategic” decision to default on their mortgages. site had this  to say about the topic.

“A new survey conducted by the Kellogg School of Management in Chicago suggests that more than a quarter of mortgage defaults are strategic, especially when negative equity exceeds 15 percent.”

Some of the comments on Richard’s post were calling this a moral issue. As in “It is morally wrong to strategically default on your mortgage”.

So…….my question is“Is deciding to default on your mortgage, or not, a moral issue?”

Here are my thoughts: "Strategic Defaults" are rampant in my area. People are living in their houses as long as they can for free and saving their mortgage payments so they can move on with their lives and have a little bit of a nest egg.

These are people with families that have mortgage balances over $200,000 on homes that are now worth $60,000. Foreclosures and short Sales make up 90% of the market in Poinciana Florida and are still dragging prices down.

There is no chance in hell of these properties EVER being worth $200,000 again. At least not in the next 10-15 years..

These borrowers are so far underwater they will NEVER be back on top again. So…. whether they make payments or not, at some point they will have to sell, due to life circumstances i.e. job relocation, divorce, marriage, makes sense to take the hit now and start rebuilding.

To compound the issue....folks see all of the "bailouts" for the banks and start thinking "Where's mine?" So they create their own bailout.

Is this a moral issue? I don't think so. As much as I hate to say it…I think it’s a sound financial decision. What say you?


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Comments (214)


Thought say the least.  I myself am facing this dilema.  I bought my FL home in 2000 for 92K.  I refinanced and had an interest rate of 5%.  Needing to update the home a bit  i refinanced again and pulled out some equity in 2006.  Home appraised at that time for 245K so didn't feel a 150K mortage on it was to bad.  Because i was in the midst of a business start up my good friend (haha) at Countrywide reccomended a 9% arm that is now at 9.75%.  I was to refinance that arm in two years time but now can't with the mortgage industry/real estate situation.  On top of that with the hurricanes of 2004 my homeowners insurance went from 900/yr to 5000/yr now at 4000/yr.  Property taxes have remained stable.  So what i have is a mortgage payment that went from $850/mo piti to $1880/mo piti.  A comp in my neighborhood sold recently for 110K smaller sf but has a pool.  In order to sell my house, in a good market, i would still need to put another 15k into it.  (new ac and roof) My AC just went out, this will be the second unit i've persoanlly installed since purchasing the home and is going to cost me 8K.

So do i continue to drop good money after bad?  I did not buy my home as an investment but rather as my home!  But i feel that the forclosure is just biting at my heels.  The economy is not going to get better any time soon.  I am over 50 and have nothing saved for retirement.  Is it really morally wrong?

Jul 08, 2009 02:56 AM
Lisa Bosques
Burien, WA

When banks make "morally wrong" decisions such as stringing a short sale along, pretending to review offers when all the while the investor knows he'd be insured if it forecloses; when their Home Retention department keeps you on the phone for hours and tells you they won't be able to help you modify your loan, give you a forbearance until you can find a job, or offer any other meaningful help; when they constantly throw up roadblocks and frustrate customers;

then what is the right way to combat a morally corrupt system? Perhaps when the "Golden Rule" goes out the window, an "Eye for an Eye" flies in.

Jul 08, 2009 04:24 AM
Greg Peterson
Favor Real Estate - Moore, OK
Broker/Property Manager Oklahoma City Metro Area

This is a great discussion, but I believe it boils down to this....What's YOUR word worth?

Granted, there are times when you have to break promises to meet the needs of your family, but I don't believe breaking a legal, moral contract for convience is ever proper.

Jul 08, 2009 05:26 AM
Lyn Sims
RE/MAX Suburban - Schaumburg, IL
Schaumburg Real Estate

Great post BB, and I think that each person has to make their own call. I can see how you growing up with certain morals instilled in you could cause guilt over the whole thing/issue. I say do what you have to do to make your family whole and get on with it.  Either now or 5 years from now, the house & situation is not going to change. This is a tough call.

Jul 08, 2009 07:45 AM
Maria Morton
Platinum Realty - Kansas City, MO
Kansas City Real Estate 816-560-3758

Wow! This is the most comments I have ever read on AR and I didn't even read all 199 of them! I believe that if you make a promise and then break it, that is morally wrong.

Walking away may be a good financial decision - doesn't make it moral.

What should you do? Whatever you can and must. Who can say what they would do in any given situation?

Should the banks be more compassionate or fair? Should they make morally responsible business decisions? I don't think that what I would like them to do has any affect on their decisions.

Jul 08, 2009 03:38 PM
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

I wonder how many of those who are strategically walking away lied about their income and assets when they bought the home? There are situations where it is definitely the right decision and only decision to sell/walk away. There isn't one blanket answer but there are people who are doing it for all the wrong reasons, just like the people who bought for all the wrong reasons.


Jul 08, 2009 05:44 PM
Tere Rottink
CoastalVa Realty Inc - Virginia Beach, VA

Wish I had time to read all the comments.  Great post.  I think It is a financial decision at this point.  Feed your family or keep the house.  Easy decision for families in that situation.

Jul 08, 2009 11:34 PM
Ron Pineda
Coldwell Banker/NRT - Glendale, CA

Great post Bryant!  I agree. 

I simply call it a financial maneuver. Such a move made to hopefully better an individual's financial position at the present or the future (we all know it's not sometimes the case).  Fortunately in this country, laws are available to protect such financial maneuvering by individuals and corporations.   It's a jungle out there - survival is keen.

Jul 09, 2009 04:04 AM
Pamela Seley
West Coast Realty Division - Murrieta, CA
Residential Real Estate Agent serving SW RivCo CA

This problem was not created just by the Banks.  Remember our government wanted homeownership for everyone!  The banks just came up with creative ways to get people into mortgage loans who really couldn't afford them.  Law of supply and demand, and then we had more people who could buy than homes available to buy, which drove home prices up.  Setting that aside, are strategic mortgage defaults moral?  Is it any less moral than giving an individual an owner-occupied option 4 mortgage who can afford to pay only the neg am payment?   When it comes to strategic mortgage defaults, the moral question comes into play because a promise was made to pay back the loan. Morality is to do the right thing, which is to keep the promise and pay back the loan. Good business is to do what is right for financial gain. The mortgage meltdown has shown us that good business and doing the right thing are not in alignment.

Jul 10, 2009 05:00 PM
Daniel J. Hunter
REALTOR® - New Port Richey, FL

Pamela I would just add that while your make a good point it should also be pointed out that they have been out of alignment for quite a while

Jul 11, 2009 08:55 AM
Michael Loeb
TGC Financial - Port St Lucie, FL


It took over 200 posts for someone to say that it was government initiatives that forced the banks hands to "get creative", thank you.   One thing though, approval on Option ARMs was not based on the neg am option or lowest payment, it was based on the full payment.  Of course if the borrower "stated" his or her income to qualify, then what do we have.  A situation where we expect people to be morally bound to a contract they lied to get into?  The horse has left the barn.

One thing we also need to realize "good business" is when all parties benefit.  Not when one party gets taken advantage of in order to maximize the profits of another.  If you sell something retail that you purchase wholesale you make a profit.  People buying your product realize that but are only concerned with value of goods purchased vs. the cost of the goods.  If you were a monopoly you could set a extremely high price and people would have to pay it, not getting fair value.  (bad business)  In an open market of many suppliers and options the market would decide what a fair price and good value was.  You would still be able to make a profit but not as much as if you were a monopoly (good business)  So you see that maximized profits is not good business.

Another thing people need to realize is that banks lend depositors money.  So a write down of principal needs to come from somewhere.  Banks (portfolio lenders) will have severe problems with their required ratios on their balance sheets.  More banks will fail.  The FDIC will be required to pay out more to insured depositors.  The FDIC is really the taxpayers.  So when we talk about banks holding on to inventory instead of flooding the market (dropping values more) they are protecting their businesses as well as protecting us. 

Banks earn money each month through interest payments paid by the 'majority of Americans who actually do pay their mortgages', and through other means.  This figure tells them how much they can afford to write off each month, after their overhead.  They just can't write it all down at once, they can't operate at deficits the way the Federal Govt can.  (read the other day that 92% of mortgage holders pay on time.  I was shocked, from the news you would expect to read that 92% of American's don't.  I guess it depends on where you're living.  The problem is segregated into pockets, and not widespread.)

This was a great post.  Hit a nerve with the number of responses.  Although it went from strategic defaults to being able to feed your family, which at that point it is no longer strategic.

Jul 13, 2009 03:04 AM
Mark Velasco
Sharpstone Commercial - Whittier, CA
Top Producing COMMERCIAL Team 30+ years experience

I am not sure if it is a moral issue or not. However, many people saw this coming and did nothing but profit from sky high prices that were unrealistic...that is morally wrong.

Jul 14, 2009 05:35 PM
Russel Ray, San Diego Business & Marketing Consultant & Photographer
Russel Ray - San Diego State University, CA

I don't find it to be a moral issue, especially when Sunstone Hotel Investors can walk away from the W San Diego hotel because the "once high-priced property is so devalued it's no longer worth the $65 million that is owed" and "has become a financial drag on its owner's portfolio of 43 hotel properties." If it's good enough for the big boys, surely it's good enough for individuals, too.

Jul 15, 2009 04:47 AM
Jim Frimmer
HomeSmart Realty West - San Diego, CA
Realtor & CDPE, Mission Valley specialist

I need to start reading my comments. Comment #212 is actually by me. Russel left to go to a home inspection and left his computer logged in to ActiveRain. We always try to save electricity by not using both computers if it's not necessary.

Jul 15, 2009 05:04 AM
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Awesome comment thread!! Thank you so much!!

Jim that's funny!!! That would NEVER happen with TLW and I. If I even get close to her computer she will shoot me!!!

Jul 17, 2009 01:17 PM
Amanda Evans
DFW Living - Fort Worth, TX
Real Estate Broker - Fort Worth Texas

Lenn said Poppycock. 


Jul 17, 2009 04:17 PM
Brian Brumpton
Keller Williams Boise - Boise, ID
Boise Idaho Real Estate


My head is spinning after reading all the comments.  I have to go digest all this.

Jul 21, 2009 12:38 PM
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

From a moral standpoint it is sad that homeowners with negative home equity who can still afford to pay their mortgages would choose to voluntarily default. However their decision is no less morally reprehensible that the decision of some CEO’s of major mortgage lenders to lend their stockholders’ money to mortgage borrowers without first documenting borrowers income or assets, or applying sound underwriting principles to other mortgage applications. Those CEO’s put their greed for bonuses ahead of their fiduciary duty to their stockholders. Those who would condemn these homeowners for their moral failings are hypocrites if they do not also condemn the aforementioned CEO’s for theirs.


From a practical standpoint homeowners who walk away from a mortgage with high negative equity are similar to a small business owner who decides not to put anymore of his or her personal savings into their small failing corporation. The small business owners recognize that that the will need  those savings for their retirement, children’s education, etc., and any ding on their credit from declaring bankruptcy will be erased long before the business can be restored to profitability. At that point bankruptcy is a logical choice.  Bankruptcy is in the lenders interest as well in many cases. If the bankruptcy judge determines that the lender would be better off, he may reduce the company’s loan balance and/or interest rate to a level that would enable the small business to remain viable rather than ordering the liquidation of the company’s assets.


Personal bankruptcy laws currently do not apply to homeowners’ mortgage debts. Many of the homeowners described in this article are no doubt rapidly drawing down personal savings to keep up with their mortgages, and mortgage lenders would be smart to support the reform current bankruptcy laws to apply them to personal mortgages. Many of those homeowners who are currently walking away from their mortgages would be less likely to do so if the balance mortgage was reduced, and in many cases the mortgage lender would net more from a performing mortgage at a lower balance than if they had to sell the home in the current market.


Bruce Hahn


American Homeowners Grassroots Alliance and

the American Homeowners Foundation

Nov 25, 2009 02:51 AM
Tiffany Torgan
Harcourts Prestige Properties of La Jolla - La Jolla, CA
Featured on HGTV's New Show! How Close Can I Beach

The banks change the rules and default on deals they put together all the time to come out better financially....who says we cannot change the rules too. Check out my B of A page that is on my blog page regarding the horrific stories regarding these big banks. Thank you for your refreshing honesty! Tiffany

Jun 04, 2010 06:41 PM
Allen Shipman
Shipman Partners - Austin, TX

Bryant, I'm glad I'm not in your market.  90% foreclosures and short sales?  WOW!!!  That is just crazy.  And $200K homes selling for $60K, that is a 70% decline.  Are things really that bad, or is this just a snowball effect to an over reaction? I have to think that at some point, people will start looking at the communities with such beaten down prices and say, "I can buy one of those $60K homes with cash and be living debt free".  Sure looks attractive for someone getting ready to retire.  or maybe just the ticket for someone to retire early.  Heck, you can't find a home in my market within 30 minutes of downtown Austin for under $100k.  I love my market and I'm not going anywhere, but at $60k, Poinciana, FL looks mighty enticing.  Hold on to your hats, because the next wave of baby boomers just might be headed your way.  Good luck BB and TLW! 

Jun 04, 2010 07:28 PM

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