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TMFBane (29.87)

Has America Lost Its Moral Compass?

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April 26, 2010 – Comments (13)

In 2005, Josh Bartlett bought a home in Florida for $210,000, which is now worth $45,000. But don’t be too sad for Josh.

Back in December 2007, Bartlett unilaterally decided to no longer pay his mortgage, while continuing to live in the house. Surprisingly, Bartlett can afford the payments on the mortgage, but he says, “when it's only worth $45,000, I would much rather flush my money down the toilet.”

Apparently, many other Americans are doing the same thing. It’s known as a ‘strategic default,’ a practice that was highlighted recently on the Newshour. With a strategic default, an owner who can pay the mortgage on an underwater house decides not to. Strategic defaults, ‘now account for a third of all foreclosures in the U.S., a significant increase from just a year ago.’

In many ways the practice of strategic default is similar to that of creating CDO’s that are intended to fail. Both practices appear somewhat unethical to outside observers. And yet, in both cases the folks responsible are able to convince themselves that it is ok. It’s just business they say. Or they argue, ‘everyone else is doing it.’

There’s another similarity as well. Both the individual who walks away from his mortgage and the bank that designs a highly suspect financial product fail to consider the larger consequences of their actions.

And that level of disregard for one’s fellow citizens is unlikely to be changed as a result of new regulations or legislation. It’s usually stuff you learn in elementary school.

13 Comments – Post Your Own

#1) On April 26, 2010 at 12:04 PM, starbucks4ever (95.23) wrote:

Morality talk is hypocritical. First give us moral prices of homes and then we can talk about moral behavior.

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#2) On April 26, 2010 at 12:06 PM, jdlech (< 20) wrote:

Please look up the criticisms of homo economicus.  Rationality has little to do with morality.  Even illegal activity is a purely rational endeavor when the benefits exceed the risk and cost of getting caught.  Despite what you're taught as a child, morality is purely a numbers game as far as economics is concerned.  Sure, there are a lot of people who conduct their business morally, but irrationally.  They are usually the ones who lose their money to more rational people.

So a mortgage or any business transaction is purely a rational numbers game.  If you are better off breaking a contract, then you rationally should.  This is not something I whipped up - it's the very basis of economics.  You are expected to act purely rationally or you can expect to get fleeced.

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#3) On April 26, 2010 at 12:11 PM, TMFBane (29.87) wrote:

Yeah, I'm not a big fan of morality talk either. But I figure someone should ask unpleasant questions every once in awhile.

Is one obligated to pay the immoral price? Were people bailing on their contracts when their homes were going up at record rates?

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#4) On April 26, 2010 at 12:22 PM, leohaas (29.43) wrote:

Is anyone on CAPS in the know if this works? My understanding is as follows (let me know where I go wrong).

1) Mr Bartlett decides to stop paying his mortgage.

2) The bank forecloses on the house.

3) Mr Bartlett is homeless.

4) Mr Bartlett still owes the bank $210K plus foreclosure cost minus the price at which the house gets sold.

5) Mr Bartlett will not pay what he owes, but the demands for payment do not stop, so he needs to file for bankruptcy protection.

6) Mr Bartlett is declared bankrupt and receives a 1099 for the debt he now no longer needs to pay.

7) Mr Bartlett cannot get any kind of loan approved for the 10 years following his bankruptcy. Many rental companies will not rent to him either.

Bottom line: Mr Bartlett is scr3wed for at least a decade, rightfully so!

PS Note for zloj: please elaborate on the "moral" prices of homes you refer to. I don't think that can be done without significant government interference. Do we really want that?

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#5) On April 26, 2010 at 12:30 PM, catoismymotor (< 20) wrote:

When he decided to not pay the mortgage he should have turned the property over to the lender and found a different place to live. The fact he did not makes him, in my eyes, a bum. He should have been evicted months ago.

 

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#6) On April 26, 2010 at 12:38 PM, brickcityman (< 20) wrote:

Seems to me that the only thing new here is who is strategically defaulting....  Corporations and connected individuals (I'm looking at you Mr. Trump) have been using strategic defaults as tools for quite some time now.

 

I guess the difference is now the chief practioners (and beneficiaries) are now getting hurt so we are all supposed to be upset about this.

 

As for whether this will have big implications for Mr. Bartlett (if that is his real name), seems to me that the deed in lieu of foreclosure process now being trumpetted by banks who don't want to realize losses associated with going forward with a foreclosure might offer a bigger moral peril.  And Mr. Bartlett will be just fine if he plays along.

 

For people like me, 'homeowners' who still consider our homes a "rent to own" deal rather than outright ownership until the last mortgage check is written, the question of whether or not to pay the mortgage is never in doubt.  It's only people who want to emulate the "rich and powerful" that will consider it a strategic default, and this is where all our moral angst should be focussed.

 

 

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#7) On April 26, 2010 at 1:00 PM, starbucks4ever (95.23) wrote:

#3,

One is offered a choice to pay an immoral price or remain homeless. Often one chooses to capitulate before the housing mafia and pay the immoral price. But don't imagine this fellow feels grateful to the housing mafia for making a $45K home cost $210K, and will not get out of the contract at the first opportunity.

 

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#8) On April 26, 2010 at 1:23 PM, Schmacko (85.65) wrote:

#4 leohaas,

what you wrote is my understanding of the process as well.

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#9) On April 26, 2010 at 7:23 PM, Imperial1964 (96.25) wrote:

There is a difference.  Stragetic default is not fraud.  I have not heard anything about this guy committing fraud.  Nor do I believe there is anything illegal about what he is doing.

Creating a derivative that is designed to fail and selling it to customers as a good investment while not disclosing the conflict of interest is fraud and is illegal.

You can argue whether or not the guy should pay his mortgage, but I don't consider it a moral issue.  Do you think the banks are willing to lose money every month out for the sake of morality or the "goodness of their heart?"

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#10) On April 26, 2010 at 9:47 PM, ralphmachio (23.70) wrote:

Strategic default is not immoral, it is self-preservation. There is nothing wrong with screwing the devil, as he screws us every chance he can. You will not be screwed because your credit is not important, unless you have to live beyond your means. Credit with whores is not worth slaving over, or much of anything for that matter. If your landlord does a credit check, skip him, he's too uptight. There will be competition, plenty of buyers-turned-renters who will come with cash, which only an idiot would turn down in favor of credit. The rental market is only getting better for the tenant. They convinced people houses were worth much more than they were, and left us holding the hot potato. 

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#11) On April 26, 2010 at 10:01 PM, ETFsRule (99.89) wrote:

I just want to say that everything in ralphmachio's post is completely wrong.

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#12) On April 26, 2010 at 10:25 PM, Sleddawg63 (< 20) wrote:

Through all this I wonder who made off with the $210,000 that he bought the house for.  Builders, land speculators, providers of raw materials, real estate companies, municipal governments etc.

Lack of morality casts it's long shadow on everyone in times like these. 

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#13) On April 27, 2010 at 8:40 AM, TMFBane (29.87) wrote:

Thanks for all the comments everyone! I feel this is an important discussion. I was thinking this morning how my grandparents and parents would never have dreamed of walking away from a mortgage, regardless of the terms. So something has changed in our society, I think.

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