Ethical considerations (none) for defaulting on non-recourse loan.

[analyst]

For those of you who are tired of hearing moralists replay the same tune over and over again (as I am), feel free to copy the following words to whatever place they may have the effect of informing the ignorant.

Just for the record, I have owned my home without debt from the early 1980’s to the present, so this is not a case of a person defending his own difficult position. I easily recognized the bubble for the Ponzi scheme that it was, and had no trouble resisting any urge to refinance and/or buy more.

—–

Increasingly, I see references to the ethical considerations with respect to defaulting on a home purchase loan as a response to declining home values. In a few words, there are no ethical considerations with respect to defaulting on a home purchase loan as a response to declining values in jurisdictions where explicit “non-recourse” laws are on the books.

In various jurisdictions, California being one of them, the lawmakers thought about it for a while and came to the conclusion that the multi-way negotiation between a home buyer, home seller, real estate broker, and mortgage lender was not a negotiation between parties of equal sophistication in financial matters, and that there was risk that the home buyer would be taken advantage of by the other parties, who were (accurately) thought to have greater knowledge, experience, and resources, in most cases.

The lawmakers then wrote laws which said, in effect, that the home buyer had rights which could not be signed away, because they are protections of the law, superior to any words in the contract. The “non-recourse” laws hold that a lender who makes a loan to a home buyer, the entire proceeds of which are used exclusively for the acquisition of the home, bears the entire burden of insuring that the home-as-collateral has a true value that protects the lenders interest in the event of default by the borrower.

The clear intent of such laws is to expect the lender to have good knowledge of property values and to require down payments and/or mortgage insurance in a proper combination to adequately protect themselves in the event of borrower default. Substantial down payments are clearly the best case, creating the greatest incentive for the borrower to hold up his end of the bargain.

If a wealthy person, or a retirement/investment fund, or a foreign country turns money over to a lender to make home-purchase loans in non-recourse jurisdictions, they inherit the burden of protecting themselves, by insuring that the lenders are lending on a sound basis.

NON-RECOURSE LAWS ARE NOT IN THE CATEGORY OF LOOPHOLES OR UNINTENDED CONSEQUENCES. They are clear statements by lawmakers that lenders are responsible for their own welfare as to property valuations, and that home buyers will have some government-provided protection against overpaying due to the actions of more influential market participants.

The story plays out, with the investors, lenders, and government participants trying to figure out how to prevent home prices from receding to their natural levels. Perhaps government will figure out some action to stall further declines, allowing inflation to (eventually) establish a natural equilibrium, no longer requiring government intervention. Or perhaps home prices will continue declining. I predict the latter.

But don’t try to make the owner-occupant-borrower the villain in this story. The non-recourse laws were clear instructions to lenders (and to investors supplying lenders with funds) to keep lending on a rational basis – instructions that went unheeded. Upside-down owner-occupant-borrowers have an option that was intentionally provided to them as a countermeasure to the actions of others (who were the ones acting unethically).

[moneymaker]

A lot of verbage,but the main point of most posters is that just because it’s legal does not make it right. I can go out and legally cheat on my wife, but that doesn’t make it ethical. Another big question for me is who really owns the house?Homebuyer is required to get banks approval to sell,so do you really own the house?If you really owned the house you could sell it at any price and just be held liable for the difference,but I don’t think it works that way because the powers that be recognize that the system could then be manipulated to find debtor scapegoats to defraud people,well isn’t that what ended up happening anyway.

[moneymaker]

A lot of verbage,but the main point of most posters is that just because it’s legal does not make it right. I can go out and legally cheat on my wife, but that doesn’t make it ethical. Another big question for me is who really owns the house?Homebuyer is required to get banks approval to sell,so do you really own the house?If you really owned the house you could sell it at any price and just be held liable for the difference,but I don’t think it works that way because the powers that be recognize that the system could then be manipulated to find debtor scapegoats to defraud people,well isn’t that what ended up happening anyway.

[moneymaker]

A lot of verbage,but the main point of most posters is that just because it’s legal does not make it right. I can go out and legally cheat on my wife, but that doesn’t make it ethical. Another big question for me is who really owns the house?Homebuyer is required to get banks approval to sell,so do you really own the house?If you really owned the house you could sell it at any price and just be held liable for the difference,but I don’t think it works that way because the powers that be recognize that the system could then be manipulated to find debtor scapegoats to defraud people,well isn’t that what ended up happening anyway.

[moneymaker]

A lot of verbage,but the main point of most posters is that just because it’s legal does not make it right. I can go out and legally cheat on my wife, but that doesn’t make it ethical. Another big question for me is who really owns the house?Homebuyer is required to get banks approval to sell,so do you really own the house?If you really owned the house you could sell it at any price and just be held liable for the difference,but I don’t think it works that way because the powers that be recognize that the system could then be manipulated to find debtor scapegoats to defraud people,well isn’t that what ended up happening anyway.

[moneymaker]

A lot of verbage,but the main point of most posters is that just because it’s legal does not make it right. I can go out and legally cheat on my wife, but that doesn’t make it ethical. Another big question for me is who really owns the house?Homebuyer is required to get banks approval to sell,so do you really own the house?If you really owned the house you could sell it at any price and just be held liable for the difference,but I don’t think it works that way because the powers that be recognize that the system could then be manipulated to find debtor scapegoats to defraud people,well isn’t that what ended up happening anyway.

[SK in CV]

Great post analyst.

When homebuyers and lenders enter into mortgage contracts, each side takes on risks. Included in the risk that the lender assumes, is that the collateral will maintain value in excess of the loan amount. When that doesn’t happen and a homeowner continues to make payments, for whatever reason, they are performing above and beyond the implied expectations of the contract.

I find it no more immoral for borrowers to stop paying in these circumstances than for the lender to foreclose. (Actually, I don’t think ethics or morals should even be a consideration. Lender corporations, despite the courts treatment of them as a “person”, rarely act out of ethical or moral considerations. They act based of legal considerations.)

Things get a little bit dicier for recourse loans, risks are greater for the borrrower, more options exist for the lender. But morals and ethics still don’t come into play in any greater degree. Risks are still taken by the lender. And the legal consequences of failing to pay are spelled out in the contract. Both borrower and lender have to live with those consequences.

[SK in CV]

Great post analyst.

When homebuyers and lenders enter into mortgage contracts, each side takes on risks. Included in the risk that the lender assumes, is that the collateral will maintain value in excess of the loan amount. When that doesn’t happen and a homeowner continues to make payments, for whatever reason, they are performing above and beyond the implied expectations of the contract.

I find it no more immoral for borrowers to stop paying in these circumstances than for the lender to foreclose. (Actually, I don’t think ethics or morals should even be a consideration. Lender corporations, despite the courts treatment of them as a “person”, rarely act out of ethical or moral considerations. They act based of legal considerations.)

Things get a little bit dicier for recourse loans, risks are greater for the borrrower, more options exist for the lender. But morals and ethics still don’t come into play in any greater degree. Risks are still taken by the lender. And the legal consequences of failing to pay are spelled out in the contract. Both borrower and lender have to live with those consequences.

[SK in CV]

Great post analyst.

When homebuyers and lenders enter into mortgage contracts, each side takes on risks. Included in the risk that the lender assumes, is that the collateral will maintain value in excess of the loan amount. When that doesn’t happen and a homeowner continues to make payments, for whatever reason, they are performing above and beyond the implied expectations of the contract.

I find it no more immoral for borrowers to stop paying in these circumstances than for the lender to foreclose. (Actually, I don’t think ethics or morals should even be a consideration. Lender corporations, despite the courts treatment of them as a “person”, rarely act out of ethical or moral considerations. They act based of legal considerations.)

Things get a little bit dicier for recourse loans, risks are greater for the borrrower, more options exist for the lender. But morals and ethics still don’t come into play in any greater degree. Risks are still taken by the lender. And the legal consequences of failing to pay are spelled out in the contract. Both borrower and lender have to live with those consequences.

[SK in CV]

Great post analyst.

When homebuyers and lenders enter into mortgage contracts, each side takes on risks. Included in the risk that the lender assumes, is that the collateral will maintain value in excess of the loan amount. When that doesn’t happen and a homeowner continues to make payments, for whatever reason, they are performing above and beyond the implied expectations of the contract.

I find it no more immoral for borrowers to stop paying in these circumstances than for the lender to foreclose. (Actually, I don’t think ethics or morals should even be a consideration. Lender corporations, despite the courts treatment of them as a “person”, rarely act out of ethical or moral considerations. They act based of legal considerations.)

Things get a little bit dicier for recourse loans, risks are greater for the borrrower, more options exist for the lender. But morals and ethics still don’t come into play in any greater degree. Risks are still taken by the lender. And the legal consequences of failing to pay are spelled out in the contract. Both borrower and lender have to live with those consequences.

[SK in CV]

Great post analyst.

When homebuyers and lenders enter into mortgage contracts, each side takes on risks. Included in the risk that the lender assumes, is that the collateral will maintain value in excess of the loan amount. When that doesn’t happen and a homeowner continues to make payments, for whatever reason, they are performing above and beyond the implied expectations of the contract.

I find it no more immoral for borrowers to stop paying in these circumstances than for the lender to foreclose. (Actually, I don’t think ethics or morals should even be a consideration. Lender corporations, despite the courts treatment of them as a “person”, rarely act out of ethical or moral considerations. They act based of legal considerations.)

Things get a little bit dicier for recourse loans, risks are greater for the borrrower, more options exist for the lender. But morals and ethics still don’t come into play in any greater degree. Risks are still taken by the lender. And the legal consequences of failing to pay are spelled out in the contract. Both borrower and lender have to live with those consequences.

[kev374]

walking away from your home when you can afford it is VERY UNETHICAL, but only because the taxpayers are now bailing out the banks because of it.

IF taxpayers were not involved in any way and the system was 100% freemarket, i.e. banks would take losses and shut down then I see absolutely no problem with walking away…it is between the borrower and the bank.

But because of the bailouts this is affecting everyone now so yes it is unethical.

[kev374]

walking away from your home when you can afford it is VERY UNETHICAL, but only because the taxpayers are now bailing out the banks because of it.

IF taxpayers were not involved in any way and the system was 100% freemarket, i.e. banks would take losses and shut down then I see absolutely no problem with walking away…it is between the borrower and the bank.

But because of the bailouts this is affecting everyone now so yes it is unethical.

[kev374]

walking away from your home when you can afford it is VERY UNETHICAL, but only because the taxpayers are now bailing out the banks because of it.

IF taxpayers were not involved in any way and the system was 100% freemarket, i.e. banks would take losses and shut down then I see absolutely no problem with walking away…it is between the borrower and the bank.

But because of the bailouts this is affecting everyone now so yes it is unethical.

[kev374]

walking away from your home when you can afford it is VERY UNETHICAL, but only because the taxpayers are now bailing out the banks because of it.

IF taxpayers were not involved in any way and the system was 100% freemarket, i.e. banks would take losses and shut down then I see absolutely no problem with walking away…it is between the borrower and the bank.

But because of the bailouts this is affecting everyone now so yes it is unethical.

[Author]

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