Yes, it’s moral and honorable to ditch (some) mortgages
- April 4, 2010
- 0 comments
- Posted in Latest Posts, Real Estate
You’re hearing a lot about “strategic default.” That means walking away from your mortgage, even though you can afford the payments. The house is worth so much less than the loan against it that making payments feels like throwing money down a rat hole. It could be a decade or more before you actually have equity again. In the meantime, you’re effectively renting the place, and at a much higher rent than you’d pay if you moved somewhere else.
Financially, defaulting might make a lot of sense. But what about the moral question? You signed the loan. You owe the money. Will you roast in hell if you don’t pay it off?
I got an interesting answer from Jack Reed, my real estate guru and author of many sensible books about real estate investing. He asks, do you have a “recourse” loan or a “non-recourse loan?”
With a recourse loan, you promised to repay the full amount. If you can afford it, you’re ethically obliged to do so. Legally, you’re also required to pay. If you walk away from the house and it sells for less than the money owed, the lender can come after you for the remaining amount plus fees.
But a non-recourse loan is different. In that case, you never promised to pay in full. The contract says that you either repay or give the house to the lender for whatever it’s worth at the time. Because you have this choice, the lenders charge you a higher interest rate. If you want to move on and don’t take advantage of the walk-away option you paid for, “you’re an idiot,” Jack so sweetly says. There’s nothing dishonorable in abandoning a non-recourse loan.
Lenders normally don’t give these loans voluntarily. Many states, however, require non-recourse for first mortgages (I found two lists of states, here and here, but they’re different, so check to see what you have).
In most cases, however, refinancing and home equity loans are all recourse. Morally, you’re stuck with repaying them. I see two moral outs. One is deception on the part of the lender (true deception–not that you simply didn’t pay attention to what you were signing). The other is the moral duty to your family. If you’re losing your job and can find one only in another city or state, and can’t sell your house, your duty as a provider ranks higher than your duty to the bank.
The bank might come after you for the money, but that’s another story.
Tags: mortage, mortgage default
