Angel!
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Post by Angel! on Feb 11, 2011 10:19:10 GMT -5
Did grandma put a non-payment clause in the contract? Did the loan have collateral? DH lent some money to someone with them signing a contract putting their car up as collateral. Guy didn't pay & DH took the car. They are still friends today & both parties were ok with the way things went because they both followed the terms of the contract.
That is fine, but you have to understand that not everyone has the same code of conduct as you. Many people wouldn't view this as moral issue & don't see it as breaking their own personal code of conduct.
The OP signed a contract that said she will pay $X a month for 30 years & if she pays late the consequence is Y & if she stops paying the consequence is Z. The contract doesn't specify different consequences or different outcomes for various reasons of non-payment, so I don't see why the reason for non-payment matters. All that matters is she is deciding to take the 3rd option & give the house back.
A few people keep saying they would never do this because it is immoral, but somehow I bet in the right circumstances they would suddenly make an exception.
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Firebird
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Post by Firebird on Feb 11, 2011 11:08:47 GMT -5
I base my actions on what I believe to be right or wrong, not what someone else may or may not do.Let me reiterate, that's the way it SHOULD be. I have zero respect for people with a "flexible" moral code which is based on what other people do. Screw what other people do. Do you believe this is wrong? If so, you have no business doing it. If I believe it's wrong to get an abortion, the fact that it is legal is 100% irrelevant to me. The fact that all my friends have had one is 100% irrelevant to me. It would still be wrong for me to get one. I am not saying that walking away from a house isn't wrong. I'm just pointing out that there are other ways to look at it, and not everyone believes it's wrong-- and not believing it to be wrong can be a viable belief under the current law, depending on how you see contracts (just as believing that abortion is okay can be a viable belief under the current law, depending on how you see fetal life). Do you do the right thing only when it is easy, profitable financially and if the other party does the right thing?Personally, I try to make sure that the right thing and the profitable thing line up in my own life as often as possible. Sometimes that's not possible, and I usually defer to the right thing. My boyfriend borrowed money from his aunt in an emergency situation and was not in a position to repay her immediately. I, however, was. The "profitable" thing would be to let my boyfriend pay her back when he had the money. The RIGHT thing was for me to pay her back immediately. DBF and I are a team, and his aunt is a good person who helped one member of the team out in an emergency. As the other half of that team, I was very grateful to her-- and more than willing to get her repaid expediently even if it wasn't the most profitable thing for me personally. I'm not made of stone. But this situation is a lot less clear-cut morally than some of you would like to think. Did grandma put a non-payment clause in the contract? Did the loan have collateral? DH lent some money to someone with them signing a contract putting their car up as collateral. Guy didn't pay & DH took the car. They are still friends today & both parties were ok with the way things went because they both followed the terms of the contract.Angel, I adore coming on here and seeing your responses written out so clearly Saves me having to write them out myself! *exalts*
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Firebird
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Post by Firebird on Feb 11, 2011 11:25:23 GMT -5
My problem with some of these scenarios, like the OP, is "strategic default" is not always about inability to pay the mortgage. For people who have to walk away, I feel nothing but sympathy even if the situation is partially (or entirely) a consequence of their own choices. But having to walk away and choosing to walk away because you've done some mathematical calculations that computes profit and loss . . . well, that's where I think people's own honor comes in.
I feel the opposite, personally. Remember LexLuthor's story? The only reason he was able to make the default work out in his favor (and his family's favor) was because he bought well below his means in the first place. As a result of that planning, he was able to finance a new property to move into after defaulting on the old one. He had another option when he found himself underwater, whereas a lot of people simply drowned.
You would seriously rather he had bought much more than he could afford, default on the same mortgage because he couldn't pay, and then have to sponge off taxpayers just to put a roof over his head? That's pretty much what you're saying here.
Between A) someone who plans ahead enough to take advantage of a current law that works in their favor and B) someone who didn't bother analyzing their mortgage in comparison to their income before buying a house they should have known they couldn't afford and then losing that house, thereby needing a lot of help to get back to a viable financial position, I'll go with A every time.
Maybe that makes me a harsh person, but I really don't think so. Leaving aside the moral implications-- the fact that Lex had the option of strategically defaulting as opposed to defaulting because he was out of options speaks volumes about his ability to plan ahead. If everyone had played their hand the way Lex did, we wouldn't be in this godawful mortgage mess in the first place.
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Angel!
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Post by Angel! on Feb 11, 2011 12:55:14 GMT -5
Angel, I adore coming on here and seeing your responses written out so clearly Saves me having to write them out myself! *exalts* Aw...Thanks I enjoy your posts as well, we seem to think much alike on this topic. Here is some karma right back atcha
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Firebird
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Post by Firebird on Feb 11, 2011 13:05:00 GMT -5
How do you give karma, anyhow? Still learning to negotiate these new boards.
We're both going to need as much as we can get, seeing as how we are going to hell with the other moral relativists ;D
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Angel!
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Post by Angel! on Feb 11, 2011 13:08:45 GMT -5
Clicking the exalt button gives the karma.
I'm comfortable with the fact that many people believe I'm going to hell. Of course it really helps that I don't believe in hell, LOL.
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Firebird
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Post by Firebird on Feb 11, 2011 13:12:52 GMT -5
Clicking the exalt button gives the karma. I'm comfortable with the fact that many people believe I'm going to hell. Of course it really helps that I don't believe in hell, LOL. Me either. By the way, it was your posts on Lex's original thread that initially got me to see this whole thing another way. Initially, I was in the morally outraged "this is SO wrong, why can't people live up to their friggin' word?!" camp.
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Angel!
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Post by Angel! on Feb 11, 2011 13:43:27 GMT -5
I feel so special I like your comparison with people's views on abortion. I can see why people might view walking as an immoral decision, but we don't necessarily have the same moral viewpoint. You have to respect others might see it differently. Although, I sincerely believe that for many there would be a point at which they walk. They may not walk for a $50K savings or $100K savings. But, would you walk for a $300K savings? Would you walk if your current neighborhood had become unsafe? Suppose the crashing market & empty homes meant the neighborhood was getting filled up with meth labs & drug dealers? Suppose the school district that was once good is now showing failing academic standings & is unsafe? All extreme examples I suppose, but if people really feel it is immoral to walk when you can afford the house, then there shouldn't be exceptions. Even if it means costing you an extra $1500/month & having no option but to send you child to an underperforming, dangerous school & living next door to a meth lab.
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Firebird
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Post by Firebird on Feb 11, 2011 14:06:03 GMT -5
All extreme examples I suppose, but if people really feel it is immoral to walk when you can afford the house, then there shouldn't be exceptions. Even if it means costing you an extra $1500/month & having no option but to send you child to an underperforming, dangerous school & living next door to a meth lab.
Exactly. And you can continue the abortion analogy-- if you believe it's wrong, it should always be wrong and you should never do it regardless of how crappy circumstances are for you. Even if your baby's daddy is a crack addict and you yourself are going to be on welfare if you don't give the kid up for adoption, you still shouldn't be going near abortion because you believe it's wrong.
ETA: I'm a full member! I feel so speshul.
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achelois
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Post by achelois on Feb 11, 2011 16:45:42 GMT -5
So, the thinking is that there are no ethics/morals involved in financial decisions, therefore:
It is ok to do just about anything if it is profitable to the person doing it, it is legal, and if the person doing it is able to avoid serious consequences to himself/herself.
Does that sum it up?
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Firebird
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Post by Firebird on Feb 11, 2011 16:54:38 GMT -5
So, the thinking is that there are no ethics/morals involved in financial decisions, therefore: It is ok to do just about anything if it is profitable to the person doing it, it is legal, and if the person doing it is able to avoid serious consequences to himself/herself. Does that sum it up? Um, no. Did you miss all the posts where I said that financial decisions SHOULD have an ethical component? It's not okay to do "just about anything" if it's profitable. In most cases, I think the right thing is preferable to the profitable thing.
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Lex Luthor
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Post by Lex Luthor on Feb 11, 2011 18:29:16 GMT -5
Achelois -
I will be the first person to tell you that what I did was unethical and that I definitely feel like I lost *honor* points because of it. I can remember sitting across the table from my spouse about 6-months before we made the final decision to walk and shaking my head and saying “We’re good people, we just don’t do things like this”. And I will also tell you that if I had borrowed the money from my grandmother to purchase the home, I would absolutely not have chosen to default. But no one is keeping an honor scoreboard and I didn’t borrow the money from my grandmother.
You asked “what makes it okay?”. Well, what makes it okay to me is not the clause in the contract that outlines what happens in the case of default. I don’t lose any sleep at night because I understand exactly how that home ended up being 45% underwater. It’s not like I personally set the place on fire, or the entire area was suddenly a prime zone for a terrorist attack, or my neighbors mutated into crazy zombies that nobody wanted to live near. No…the crazy bankers who lent me the money essentially set the house on fire. It’s like if Grandma loaned me that money and then walked around the backside of the house when I wasn’t looking, poured gasoline all over the porch and lit the flame herself, and then had the audacity to come back around to the front of the house and ask me for her payment while the backside was erupting in flames.
There was significant financial gain to me, it was a lawful action, and I felt “justified” in that action. I’m at a place where I’m “okay” with what I did. Believe me, if Grandma set your house on fire, you might suddenly feel like your moral code was a little more flexible.
Staying in that house was a bad financial choice, but ethically correct. Leaving that house was a great financial choice, but ethically wrong. I wish the two were not mutually exclusive decisions, but they were. I put myself and my family above the "greater good" and I don't regret that choice.
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Firebird
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Post by Firebird on Feb 11, 2011 18:51:09 GMT -5
Good post, Lex. I came late to your other thread and ended up reading it many times. I never got a chance to thank you for posting it-- I'm really glad you did. It made me think hard about a lot of things, and you were so honest about your situation. I'd be willing to give you back a couple of honor points for telling your story-- because to me, everything comes back to personal responsibility, and you demonstrate a lot of that by not shying away from what you did.
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Lex Luthor
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Post by Lex Luthor on Feb 11, 2011 19:06:19 GMT -5
Thank you Firebird. I really appreciate that.
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Plain Old Petunia
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Post by Plain Old Petunia on Feb 11, 2011 19:28:55 GMT -5
I remember your thread too, LexLuthor. I appreciate your input on this topic.
I think you're right that I'm not upside down enough to make it worth while. The difference between what I owe (183k) and what I would likely spend (150k) isn't a huge sum. It's not nothing, but it's not enough to really make a difference in my bottom line. If I chose, I could pay down my mortgage today by tapping into my IRA and reduce my monthly mortgage payment that way (via a re-cast). But I don't, because that's not a good use of my IRA money.
I'm going to just keep watching prices. If prices take another steep tumble, then I will have to look at the possibility again.
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seriousthistime
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Post by seriousthistime on Feb 13, 2011 11:04:09 GMT -5
I'm reading this thread for the first time. I keep hoping that someone else will raise the issues I'm thinking about and for the most part they do. And then I read this and can't wait patiently to see if someone else has commented:
This is incorrect. The mortgage contract does not allow you to stop paying the mortgage in exchange for allowing the bank to foreclose. Sorry to get all legal here, but what the mortgage does is spell out the consequences of a breach, IF you breach the contract. Breach of contract is a violation of a contractual obligation by failing to perform one's own promise. (Black's Law Dictionary)
This is vastly different than exercising a buyout provision in a cell phone contract. First off, it costs so little for the cell phone company to provide you, incrementally, with service, they make back the value of the "free" phone the first month you pay your bill. With foreclosure, the mortgage holder will take a huge hit if the OP walks, and the hit is tied directly to her mortgage; it's not a hit in general. And if I exercise my early termination rights, other cell phone users are not impacted. (Don't say other users are impacted because the cell phone co. will raise rates to compensate; they find new ways to charge more, all the time.) If the OP walks, she contributes one more foreclosed property to her neighborhood. Her neighbors are directly impacted by one more foreclosure in the neighborhood and it will make it even more difficult for them to recover from the housing mess.
Houses used to be places to live. In the boom years, people expected houses to make them rich. Does it say anywhere in the mortgage contract that you can walk if the house doesn't make you rich? The OP says she likes the house. So, stay in it. There are plenty of people who can no longer afford their houses. Be grateful that YOU CAN. If you want to buy another property to capitalize on the upswing, buy a rental that doesn't come with a negative cash flow.
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seriousthistime
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Post by seriousthistime on Feb 13, 2011 11:28:39 GMT -5
When your DH repossessed the car, was it in essentially the same condition as when he sold it to the friend? Could he turn around and sell the car to someone else for the same money as when he sold it to his friend, minus the amount of the payments the friend made before he defaulted? Would they be friends today if the friend ran the car into the ground and your DH took a bath on the deal?
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achelois
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Post by achelois on Feb 13, 2011 16:57:17 GMT -5
Lex,
I really am not attacking you personally and I hope you will not take it so. There just seems to be this widespread trend in thinking that people are entitled to have everything they do turn out profitably. And if it doesnt, just walk away and leave someone else holding the bag.
My Ethics would probably not be much more flexible in personal life. I once wrote a check for $100,000 to cover a debt incurred by my husband despite my not being legally obligated to pay it.
I dont come from money and work for every penny I have and it took me several years of working parttime jobs in addition to my regular fulltime job to recovr that money. I would do it over again though if need be.
I absolutely would not expect anyone to do something I am not willing to do myself.
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cheapgenes
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Post by cheapgenes on Feb 13, 2011 18:52:44 GMT -5
We bought a 2nd home and had to put more money down on our first home before they would approve the loan. The banks aren't stupid. They will make you get the first house out from underwater first, then put money into the 2nd home, and then they will loan you money. If you walk you will lose money. Lots of people have done what petunia wants to do, the banks are on to it now.
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Firebird
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Post by Firebird on Feb 14, 2011 9:33:31 GMT -5
I'm reading this thread for the first time. I keep hoping that someone else will raise the issues I'm thinking about and for the most part they do. And then I read this and can't wait patiently to see if someone else has commented: This is incorrect. The mortgage contract does not allow you to stop paying the mortgage in exchange for allowing the bank to foreclose. Sorry to get all legal here, but what the mortgage does is spell out the consequences of a breach, IF you breach the contract. Breach of contract is a violation of a contractual obligation by failing to perform one's own promise. (Black's Law Dictionary)This is vastly different than exercising a buyout provision in a cell phone contract. First off, it costs so little for the cell phone company to provide you, incrementally, with service, they make back the value of the "free" phone the first month you pay your bill. With foreclosure, the mortgage holder will take a huge hit if the OP walks, and the hit is tied directly to her mortgage; it's not a hit in general. And if I exercise my early termination rights, other cell phone users are not impacted. (Don't say other users are impacted because the cell phone co. will raise rates to compensate; they find new ways to charge more, all the time.) If the OP walks, she contributes one more foreclosed property to her neighborhood. Her neighbors are directly impacted by one more foreclosure in the neighborhood and it will make it even more difficult for them to recover from the housing mess. Serious-- good post and excellent points. I need to think about this some more.
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Plain Old Petunia
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Post by Plain Old Petunia on Feb 14, 2011 11:39:20 GMT -5
We bought a 2nd home and had to put more money down on our first home before they would approve the loan. The banks aren't stupid. They will make you get the first house out from underwater first, then put money into the 2nd home, and then they will loan you money. If you walk you will lose money. Lots of people have done what petunia wants to do, the banks are on to it now. Again, I have already spoken with my current lender and been approved for a 100k mortgage. That was the number I picked, not the number they picked. There is no requirement that I pay down my current mortgage.
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Plain Old Petunia
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Post by Plain Old Petunia on Feb 14, 2011 11:44:14 GMT -5
Serious - I can understand your POV that my mortgage is a contract between me and my lender, but don't see how it is now including my neighbors. Could you please explain this POV? Thank you.
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seriousthistime
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Post by seriousthistime on Feb 14, 2011 21:33:24 GMT -5
As Chef241 says, the value of your property determined by the foreclosure value affects the value of their property. Whenever you get an appraisal, the appraiser gets the 3 most recent comparable sales. They adjust up or down for the things your house has that the others don't, or things the other houses have that yours doesn't. If you have something they don't, it's an add to your price and a subtraction to theirs. If they have something you don't, it's a reduction to your price. So if, for example, their house sold for X and your house is comparable in all respects except that instead of 1 1/2 baths like theirs your house had 2 full baths, that's an add-on for your house. The more foreclosures or short sales in the neighborhood, the base price will be lower. So if your bank foreclosed and sold the place for $100K, an identical place next door is worth no more than $100K. Doesn't matter what you paid, or what they paid. Your place represents the current value. If the neighbors have the two full baths and you had 1 1/2, the bank will start with $100K and add on a few thousand to their value, and that's the value of theirs. That's why houses depreciate in some areas -- more foreclosures, so prices go down, and then people actually pay a lower price to buy into the neighborhood. Because the value of the place they are buying is lower because your place, the comparable, was a lower price due to foreclosure. Liz Weston says, "The idea that bankruptcy costs the rest of us is a little off the beam as well. Lenders price the possibility of default into their interest rates. In fact, if you have good credit scores (get a free credit-score estimate here), you have access these days to some of the cheapest loans in memory. It's hard to argue that you're paying much, if anything, for other people's defaults. Foreclosure is a different story, because there is a huge ripple effect. Foreclosures drive down the prices of neighboring homes, reduce tax revenue to local governments and may be associated with upticks in crime. But most foreclosures don't happen because people can pay their mortgages and choose not to. Even lenders that publicly fret about so-called strategic defaults will concede that most people don't voluntarily walk away from homes they can afford." money.msn.com/debt-management/are-you-foolish-to-pay-your-bills-weston.aspx?page=2
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Plain Old Petunia
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Post by Plain Old Petunia on Feb 14, 2011 22:25:52 GMT -5
Right. My question is, how did my neighbors become part of the contract? Am I misunderstanding your comment? What do my neighbors and the value of their homes have to do with my contract with my lender? At what point did I enter into a contract with my neighbors? Thanks.
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gooddecisions
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Post by gooddecisions on Feb 15, 2011 0:51:53 GMT -5
From what I read, the poster was specifying the following statement as what is in the contract:
This is incorrect. The mortgage contract does not allow you to stop paying the mortgage in exchange for allowing the bank to foreclose. Sorry to get all legal here, but what the mortgage does is spell out the consequences of a breach, IF you breach the contract. Breach of contract is a violation of a contractual obligation by failing to perform one's own promise. (Black's Law Dictionary)
The devaluing of the neighboring homes is obviously not in the contract between you and the mortgage company. It is just another potential consequence of foreclosure.
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seriousthistime
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Post by seriousthistime on Feb 15, 2011 8:27:19 GMT -5
Petunia, yes, you did misunderstand my original post. I tried to make two points: 1. You are not exercising a right in the contract; you are breaching the contract. 2. Analogies to early termination fees in cell phone contracts are misplaced. If I break the cell phone contract, it doesn't have wider ramifications for other cell phone users. If I default strategically on my mortgage, it does have serious ramifications for my neighbors.
When you ask how you have a contract with your neighbors, the simple answer is that you don't. I never said you did. Don't combine the two points.
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Lex Luthor
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Post by Lex Luthor on Feb 15, 2011 12:35:46 GMT -5
The original analogy I used in my post from the old boards was a comparison of “promises” made, not of contract language. It served as a comparison of people’s moral outrage being influenced by the amount of money being discussed. The moral angle is that by signing a contract, you make a “promise”, which is a sacred vow you should never break. You make a “promise” to the cell phone carrier that you will pay them a certain rate for 2-years if they give you a discounted phone. You make a “promise” to pay your satellite provider, your landlord, your car lease, your car loan, your apartment lease, etc. You make a “promise” to the mortgage holder. Each breach of contract has a consequence; the value of that consequence is what drives the moral outrage, not the fact that someone broke their “promise”. Brent T. White, a law professor, has written extensively on the issue of strategic default. Here’s part of what he had to say on this: A mortgage contract, like any other contract, is purely a legal document, not a sacred promise. Think of it this way: when you got your cell phone, you likely signed a contract with the carrier in which you “promised” to make a standard monthly payment—say, $100—for two years. Let’s suppose, though, that two months after you signed, the price of cell-phone service dropped by half—meaning that you could get the same service for $50 a month with another carrier. You realize that it would make financial sense to pay the one-time early-termination fee of $300 and switch to the $50-per-month carrier, rather than to keep paying $100 a month for almost two more years. Would it be immoral for you to break your contractual “promise” with your original carrier? Of course not. That option is part of the contract, as is the consequence of breach—a $300 early-termination fee. There is absolutely nothing immoral about exercising this option, and you’d be financially wise to do so.
Though a mortgage contract is more substantial than a cell-phone contract, it’s no different in principle. Like a cell-phone contract, a mortgage contract explicitly sets out the consequences of breach. In other words, the lender has contemplated in advance that the mortgagor may be unable or unwilling to continue making payments at some point and has decided in advance what fair compensation in that event would be. The lender then wrote that compensation into the contract. Specifically, the lender probably included clauses providing for foreclosing on the property and keeping any payments that have already been made. In most states, the lender may also opt to pursue a deficiency judgment—a court order that the borrower pay the difference between the funds received by the lender from a foreclosure sale and the balance remaining on a debt. By writing these penalties into the contract, the lender has agreed to accept the property, and (if state law so allows) the option to pursue a deficiency judgment, in lieu of payment. Of course, lenders don’t often pursue borrowers for deficiency judgments, even in states where they can do so, because it’s usually not economically worthwhile.
Nevertheless, that’s the agreement. No one forced the lender to sign—or write—that contract, and the lender wouldn’t hesitate to exercise the right to take a defaulter’s house if it was financially advantageous to do so. Concerns of morality or social responsibility wouldn’t be part of the equation. The borrower, for his part, has to be just as willing to accept the consequences—again, foreclosure and usually the risk of a deficiency judgment.Here is the link to the article it was used in: www.city-journal.org/2010/forum0427.html . The article actually has Professor White’s rebuttal (to his original paper from a couple years ago) and a follow-up rebuttal from the original rebuttal. I think they are both fair assessments.
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Lex Luthor
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Post by Lex Luthor on Feb 15, 2011 12:50:53 GMT -5
Regarding all the comments about devaluing neighboring properties if your house forecloses. They are correct. However, your neighbors are more likely to understand and empathize with your predicament. I still regularly meet with my old neighbors who haven't defaulted, and have in fact even become better friends with some of them after the default (not because of it, just saying that they don't seem to hold it against me the way some posters on this board think they might). The new area I live in (which is only 300 yards from the old house) also has neighbors that did not default and are farther underwater than I was, but they too still come over to our house and talk to us on a regular basis.
We also commisserate and offer guidance to neighbors going through a foreclosure or short sale, whether by choice or through circumstance.
My point is that where I live and where Petunia lives are such overwhelming areas of foreclosure and short sales that there is no other comparable type of sale. Essentially a short sale or foreclosure is the "societal norm" and will be for the foreseeable future (within a 5-sq mile area of where I live there are about 500 such listings right now). The neighbors understand. And while it may not be their personal choice to default, they are more likely to view you as someone in the same boat as them...as someone to confide in or ask guidance of, rather than some a-hole that let their house be foreclosed on. In fact, we were able to successfully guide two neighbors through modification/refinancing when that was not an option for us personally.
And just as a side-note - tax revenue does not go down with de-valued properties. The city/town still needs the same revenue to operate, so they just raise the rates to make up for the de-valued properties, but the $$ amount is about the same.
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Lex Luthor
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Post by Lex Luthor on Feb 15, 2011 13:06:09 GMT -5
No. The taxes are not higher. They are the same $$ amount.
It works like this...
Previously the tax rate was 1.5% on my 200k house and I paid $3k in taxes.
Now the tax rate is 3% on my 100k house and I pay $3k in taxes.
The tax revenue to the city/school, etc is the same either way.
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Lex Luthor
Initiate Member
Joined: Feb 10, 2011 12:43:26 GMT -5
Posts: 68
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Post by Lex Luthor on Feb 15, 2011 13:24:53 GMT -5
Ignoring the fact that home prices would have to increase by 15% per year for 5 years straight for that to happen....I would say that we each have a voice with our votes and it is up to us to make the changes we want. And in fact, several proposed school overrides have been voted down two-years in a row.
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