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The Jewish Ethicist: Mortgage Default

The Jewish Ethicist: Mortgage Default

Sometimes walking away from your mortgage makes economic and ethical sense.

by

Dear Jewish Ethicist readers,

Recently I published a column on the topic of "strategic default" in states which explicitly forbid lenders to pursue borrowers who abandon the property.

After receiving a large number of very thoughtful and reasoned responses from readers, I have reached the conclusion that this is a highly complex topic which is far beyond my expertise. I have asked the editors to remove the column from the site. For those of you who already read it, I ask that you view it as the starting point for an informed ethical discussion on this involved topic.

This is not the first time that I have retracted a column and if I maintain my intellectual honesty I imagine it will not be the last. My occasional retractions demonstrate an important ethical principle: that just as my readers have the weekly opportunity to learn from me, so do I have the weekly opportunity to learn from my readers, to be informed by their wide knowledge and be inspired by their demanding ethical standards.

My column is a weekly and popular column, and it is self-evident that I cannot be an expert on every topic. That is OK as long as I don't begin to imagine that I am an expert in everything. This experience will teach me to avoid "Wizard of Oz syndrome": the tendency to think that just because everyone views me as an expert in ethics that I do in fact have expertise in every ethical issue. The most recent column reminds me that this is not the case.

I am grateful for the many readers who wrote to express their point of view.

Published: February 20, 2010


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Visitor Comments: 6

(6) marc, February 25, 2010 3:08 AM

If your lender is an actual person

It would be interesting to discuss how this analysis might change if the lender were not an institution, but rather a person. What if you borrowed money from a friend or family member? Typically, loans on homes are NOT non-recourse, but rather are the personal obligation of the borrower, who is obligated to pay the mortgage even if the value has declined. With all due respect to R. Meir (whose work I admire and follow), it seems to me that the analysis above is extremely limited and doesn't directly address the reality faced by most "underwater" homeowners On a related point, while a "strategic default" might be beneficial for the borrower to avoid continuing to service a debt that now bears no reasonable relationship to the value of the collateral, what about the situation where the borrower can still "afford" (based on the standard 30% of income) to make the payments. The borrower is still getting the "benefit of the bargain" made with the lender (occupancy of the house and, after the amortization is complete, ownership). The only thing that has changed is that the equity invested by the borrower has disappeared.

(5) Tom, February 24, 2010 4:00 AM

Where is the banks' responsibility for being irresponsible?

Where is the banks' responsibility for being irresponsible? The banks were instrumental in putting people in houses they couldn’t afford. They were responsible for skyrocketing values. While I plan on staying and paying the mortgage, the bank’s behavior was instrumental of me being ripped off. Had the banks behaved conservatively, which was their original mandate, I would have paid much less. If you answer I had a choice, my response is, I have to live somewhere and I submit I was blind-sided, not that I had a real choice. When I made the purchase either the rent was high or the price was high. I was going to get ripped off either way. Again, where is the banks' responsibility for being irresponsible?

(4) Jim Salomon, February 24, 2010 2:15 AM

People have an ethical responsibility to manage their money

Many people make the mistake of spending more for their homes then they can safely afford. It is unethical to blame others for your own greed. In my view the only legitimate reason to default on an obligation is when economic forces, such as unemployment, illness or unexpected disaster make it impossible to fulfill your obligation. Torah says that preserving life is an overarching principle. It's more important to feed your kids, care for your parents and buy medication for your family then pay your mortgage. Otherwise defaulting on your agreed obligations is committing theft.

(3) joe, February 23, 2010 4:30 PM

Lawrence's logic

Lawrence: Your logic is completely wrong. If Chase bought Wamu for 1% of its assets, they also inherited their debt. In your case, it would be analogous to paying $5000 for your equity, but they would still be on the hook for your debt, a fact you conveniently overlook. Thus, they still have a debt of $500,000 which they inherited. What you paid is irrelevant to the bank; they werent the seller. Say your house is now worth $500,000. If you repay the whole mortgae, the bank losses $5000. If you only repay $400,000, the bank loses $105,000.

(2) SusanE, February 23, 2010 3:09 AM

No One ever Truly Owns a Home - Do They?

Your name might be on a piece of paper called a deed, but if you can't afford the upkeep, the mortgage, the taxes, the insurance and the utilities, then you will soon know who really owns your home. ------------ A mortgage is simply rent on a piece of G-d ground, the actual house has no huge value. It's sticks and stones and glass. If you bought a property ten years ago and sold it for double the money a few years later, you did well. -- Your buyer did not do well. ------------------------ I don't think it is unethical to walk away from an inflated mortgage. The lending institution took a risk on you, the banks did horrible stuff, the market dropped like lead, and you walked. No sense to continue throwing money away. However, If you bought a house you could afford then began spending way above your means and couldn't pay the mortgage, then that is unethical because you are at fault. In that case you owe your mortgage holder. At least I think that's what I believe.

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