Someone asked me if I am losing sleep over the ethics of the situation. I think there are two separate issues:
Ethically. I'm ok. This is because a mortgage has pre-arranged clauses in the contract that outline what the exit criteria are for the bank and the borrower. It's a contract with a pre-negotiated process around a divorce. A prenuptual if you will. In this case, we are just choosing to execute one of the clauses in the contract, as any business has the right to do. So, there is nothing unethical about adhering to the contract.
Morally. There are concerns about short sales and foreclosures bringing down property values in the neighborhood. And that is an overall market affect. And there is a concern that this action brings down the overall market. It's the same as what happens when the stock market has a sell off - every time a stock is sold in repeating fashion, the overall value of the market declines as there is more cash on the side. Morally, I am personally ok, because the expectation with me and my fellow neighborhood residents was that we were all seeking asset appreciation, and when that didn't occur, there was an understanding that we may all have to pursue options to rectify the situation. I was open with my peer group about that 5 years ago when first buying the property. If I had lied about my intentions, it would be a different story.
Also, and I forgot to mention this. In both of our cases, we have changed our job situation such that it is not profitable on a monthly basis to continue paying our mortage and there is no refinancing situation that makes it profitable. And we both explored conversion to rentals. We'd be in a situation where monthly, we were expending nearly 3K / month in losses if they were both rentals.
In this case, we are just choosing to execute one of the clauses in the contract, as any business has the right to do. So, there is nothing unethical about adhering to the contract.
Agreed. The only thing I'm not fully on board with is staying in the house rent free for 12 months while waiting for the foreclosure process to complete. I can't quite explain why, but taking advantage of the slowness of the legal system seems different and less respectable than exercising the default option in the mortgage contract.
There are concerns about short sales and foreclosures bringing down property values in the neighborhood.
I wouldn't even worry about that. I've yet to hear any compelling explanation as to why high home prices are on balance a good thing. If car prices were to double because of a shortage of steel or something, we'd correctly realize that's a bad thing, even though everybody who owns a car would be richer on paper.
The only thing I'm not fully on board with is staying in the house rent free for 12 months while waiting for the foreclosure process to complete. I can't quite explain why, but taking advantage of the slowness of the legal system seems different and less respectable than exercising the default option in the mortgage contract.
I sympathize with your concerns, but one justification for staying rent free in the house is that it is a hedge against malicious bank activity. For example, in some cities, banks have initiated foreclosure proceedings against people who then dutifully move out, but the bank never takes possession of the property and never notifies the previous owners. As a result, ownership rebounds back to them, and they end up on the hook for tens of thousands of dollars of back taxes and fines. Make no mistake, if you abandon your home for a few years, you will eventually have to pay a lot of money.
Now, if your bank was one of the banks that engaged in this behavior, you might be justified sitting in the home rent free: after all, you have no way of knowing if the bank is about to force you to incur costs that accrue by vacating the house. At least if you're sitting in the house, you can keep vagrants from moving in, perform basic maintenance like leak protection and do other things that will minimize the penalty you'll take if the bank ends up refusing to take ownership after initiating foreclosure.
This is why I think it is wrong to live rent free in the house. It is acting in bad faith to sign a mortgage on a house knowing full well that you do not intend to pay back a cent and live in it for a year.
On the other hand, maybe we could just label it strategic renting and blame the mortgage broker for signing the contract :P.
Ethically. I'm ok. This is because a mortgage has pre-arranged clauses in the contract that outline what the exit criteria are for the bank and the borrower. It's a contract with a pre-negotiated process around a divorce. A prenuptual if you will. In this case, we are just choosing to execute one of the clauses in the contract, as any business has the right to do. So, there is nothing unethical about adhering to the contract.
This is one of the arguments I've seen that doesn't sit well with me. How is this different from saying that it's ethical to steal money from a convenience store, because I'm willing to go to prison for it? After all, jail time is the pre-negotiated outcome for thieves, and I might decide I'd rather have the money and do the jail time rather than refraining from stealing in the first place.
Apart from one being in the criminal realm and the other in the civil, what's the difference? Or is that the difference that justifies the one and not the other? (Why?)
There are social and religious experts much more qualified than me to address your question.
However, I've heard stories from social experts that indicate it is ethical to conduct crime, organized or otherwise, because the consequences are defined. In your scenario, though, stealing's punishment is jail and repayment of the amount stolen. So, the trade off is a bit different.
That's not my position on the matter, but it's thought provoking.
It seems if one were to listen to those social experts, all of society would become a game of incentives and disincentives where the goal is finding the mismatched pairs (i.e. action where incentive outweighs disincentive, regardless of what the action is - whether it be walking away from a mortgage or robbing a store). In that scheme ethics (and morality - I don't think there's a difference) become purely relative, because value is an inherently relative concept.
Not being a moral relativist, I naturally disagree with the idea that such a society is desirable or that ethics in that case are even meaningful at all. :) Which is one of the things that disturbs me about the idea of an action being ethical just because it's defined in a contract.
The store owner did not consent to the robbery, by definition. The bank consented to the contract and agreed that the home would be sufficient collateral for the loan.
I thought of this. However, I think in the abstract that's not a material difference, because (at least in theory), the "punishment should fit the crime"...society agrees that X punishment is sufficient tradeoff for Y crime. Granted, the store owner doesn't individually make an agreement with the thief, but over time that societal agreement was made nevertheless.
True, which I originally pointed out. Although I don't have my mortgage contract in front of me (and am open to correction here), my recollection is that a foreclosure is the defined consequence of me breaking the contract I agreed to - that is, to repay my debt at a rate of $X per month. "Exercising a clause" is a euphemism for "breach of contract" in that case, isn't it? If so, I think the analogy to crime is applicable. If not, then admittedly the analogy is indeed broken.
"Exercising a clause" is by definition NOT breaching the contract -- it IS part of the contract.
Home loans are based on collateral. You borrow money to take ownership of the collateral, and if you pay back the loan, you get to keep it. If you do NOT pay back the loan, the lending institution reclaims ownership of that collateral according to the contract.
This is mutual protection because things can change for the worse as well as for the better in the future.
Crime isn't breach of contract. It's breaking the law. The law isn't a contract, it's a codified set of rules put forth by a legislative body. Contracts are subordinate to the law in America.
Ethically. I'm ok. This is because a mortgage has pre-arranged clauses in the contract that outline what the exit criteria are for the bank and the borrower. It's a contract with a pre-negotiated process around a divorce. A prenuptual if you will. In this case, we are just choosing to execute one of the clauses in the contract, as any business has the right to do. So, there is nothing unethical about adhering to the contract.
Morally. There are concerns about short sales and foreclosures bringing down property values in the neighborhood. And that is an overall market affect. And there is a concern that this action brings down the overall market. It's the same as what happens when the stock market has a sell off - every time a stock is sold in repeating fashion, the overall value of the market declines as there is more cash on the side. Morally, I am personally ok, because the expectation with me and my fellow neighborhood residents was that we were all seeking asset appreciation, and when that didn't occur, there was an understanding that we may all have to pursue options to rectify the situation. I was open with my peer group about that 5 years ago when first buying the property. If I had lied about my intentions, it would be a different story.
Also, and I forgot to mention this. In both of our cases, we have changed our job situation such that it is not profitable on a monthly basis to continue paying our mortage and there is no refinancing situation that makes it profitable. And we both explored conversion to rentals. We'd be in a situation where monthly, we were expending nearly 3K / month in losses if they were both rentals.