By Jeffrey Seglin
Tribune Media • Sunday January 31, 2010 7:02 AM
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One of the byproducts of the recent financial turmoil has been a precipitous drop in home values in the United States.
As a result, some home owners are finding that the value of their houses is less than the amount they owe on their mortgages.
A reader from West Virginia writes inquiring about the ethics of homeowners who default on mortgages that they can still afford to pay but choose not to, because the underlying property values have dropped so precipitously that it is financially preferable simply to walk away.
"Is this kind of 'strategic default' blameworthy be cause it constitutes a failure to keep a promise?" my reader asks.
"Or, since the borrower is willing to accept the contractually mandated consequences of defaulting, is it simply a reasonable economic response to the invisible hand of the marketplace?"
The practice the reader describes is legal. The question is, is something ethical simply because it's legal?
If a homeowner cannot afford to make payments on her mortgage and cannot sell her house at a price that will yield enough cash to pay off the mortgage so that she can move on, she might be left with no choice but to default on the mortgage and turn over the house to the bank. There's obviously nothing wrong with this from an ethical standpoint.
A key component of my reader's question, however, is that he's talking about homeowners who "can still afford to pay but choose not to."
It might be a reasonable economic decision to walk away from the property, but is it ethically acceptable?
I think not. A mortgage agreement is not a promise to do one of two things, either to make the payments or to give up the house. It's a promise to make the payments, period. Giving up the house to the bank is a penalty for not keeping the promise, not one option within the promise.
In this regard, the situation is comparable to the law: The fact that the law imposes a penalty for, say, stealing someone's car doesn't mean that a person can ethically choose to steal the car if he is prepared to accept the penalty. The requirement of the law is not to steal the car, and the implied promise of citizen ship is to obey the law, not to weigh the costs and benefits of breaking it.
Every mortgage comes with the risk that the value of the home might go down during the course of the mortgage, and the homeowner knows that going in.
The homeowner promised to make the payments, in return for which the bank advanced the purchase price of the house. The bank has lived up to its share of the agreement, and the right thing for the homeowner to do, if he can afford to make the payments, is to live up to his end.
He should honor the commitment as long as he is financially able to do so.
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