The Ethical Dilemma of Strategic Walk-Aways

Owners that can actually make their loan payments, but choose to walk away, accounted for 1 in 4, or 25% of all foreclosures as of June 2009.   That was over six months ago, and the numbers have probably gone up since the initial studies (these data can be easily verified via a quick Google search).  Strategic default is an ethical dilemma, and the discussion is burning up cyberspace.

On one hand, there is a moral obligation to honor your contract.  If you owe more than your house is worth, one way or other you gambled on your equity and came up short.  Maybe you bought at the top of the market, or took out an equity line of credit and bought some stuff; a car or TV, or maybe even another house.  Regardless, it’s not your lender’s fault that your property value went down.  After all, if your property went up in value you wouldn’t turn around and give the bank extra, right?  If you buy gold, and it loses value, you don’t get your money back, you wait it out. If you loan money to a friend, and he loses it all, you would still expect him to pay you back, especially if he can afford it.  The value of a promise doesn’t flex due to circumstances, or whether you are the giver or the receiver.  If you can make your house payments, it’s the right thing to do. 

On the other hand, are the banks responsible for some of this mess?  Should they share the burden?  Didn’t they sort of tease us into all these high-risk loans and credit cards?  In the first few years of the Y2K decade, the FED, major lenders, and real estate professionals convinced us that everybody in America could buy a home. They made you feel foolish if you didn’t.  It was like manifest destiny, your birthright, your duty.  You could get a home loan if you had a pulse.  You could qualify just because you said so, no matter if you could actually afford one.  Lenders didn’t seem to care if you were truthful in your loan application.  Certainly they knew they were making questionable loans, gambling on equity just like us.  Aren’t the financial institutions culpable, too?  Didn’t they practically beg us into this?

The survival of our economy depends on everybody doing the right thing.  Imagine the consequences if all borrowers that owe more than their house is worth but can afford the payments choose to walk away, or if all the lenders call in all the notes on properties that won’t appraise for the full amount.  

 

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So, who gets the free morality pass?  Who gets to choose what’s fair?  Is personal credibility negotiable?   Is the golden rule irrelevant?  Do we just step off when times get tough?  Is this the new American paradigm?

Not surprisingly, real estate professionals are leading the charge in advising people to walk away.   Not ironically, real estate professionals were leading the charge 4-6 years ago advising people take on these same loans.  Whatever it takes to earn a fee.  Maybe it’s time for an industry gut check.

 

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• The Way We Live Now: Walk Away From Your Mortgage!  nytimes.com)