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Updated almost 13 years ago on . Most recent reply
Strategic Default or Efficient Breach?
I read the following article tonight:
Strategic Default or Efficient Breach?
that speaks about the supposed "moral obligation" to continue making payments on an underwater mortgage. The article generally jives with my thought process, especially as it relates to non-recourse mortgages. Specifically:
1. "The risk that the lender would be left with the home instead of the stream of payments if the borrower defaulted, for any reason, is one that is allocated to the lender under such a contract
and
2. "...and is presumably reflected in the price (i.e., the interest rate and other costs) that the lender charged for the loan."
and
3. "The lender loses nothing when it gets exactly what it bargained to receive in relation to a risk that it was paid to voluntarily assume."
and
4. "After all, a deal’s a deal."
How is this unsound logic? I know many (most?) think that defaulting on a loan where the terms are clearly spelled out is somehow immoral. Many institutional borrowers are currently doing this without the same media attention and scrutiny.
Can someone please explain how this is unethical to me? I realize that I will likely be in the minority and I am prepared to take a beating if need-be. Please keep the thread civil though. I would really like to try to understand this.
Most Popular Reply
I too used to think it was somehow "unethical" to "not pay your obligations". But in the case of a mortgage, I was swayed by the argument that defaulting on a mortgage is not "breaking the contract".
A mortgage and note form a "complete" agreement. I agree to either do this or do that. I agree to either pay the note as agreed or I will give the property back. It doesn't say I guarantee to pay the full amount no matter what. It says I will do one or the other. And the borrower agrees to that deal.
So as long as you give the house back when you cannot pay, (imo deed in lieu is the most moral way to do this) there is no breaking of any contract or any moral obligation.
It is only when you take steps to hold continue living in the house longer than the normal FC process would take or you damage the house or you stop paying assessments or taxes or other things that any moral obligation is broken.
If you pocket rent while not paying your mortgage, I think that is wrong too.
However, I do think asking for a loan mod and even a short sale is morally suspect. That is breaking your original deal and attempting to put the burden of the market decline or your job loss on someone else. Of course, it is their choice to accept the mod, so if they do, then fine. But people somehow have gotten this idea that a mod should be granted easily and they are entitled to a mod (or short sale or any other type of debt forgiveness).