Thursday, September 27, 2012

Walking away from a Mortgage: Why is it Okay?

I was talking with my wife last night about the financial state of our great nation when I was struck by a thought.

Why is it that should a person who gets up at a restaurant and walk away from their $50 meal without paying -- even if that meal is significantly overpriced and no contract agreement was entered into regarding payment -- would likely be arrested for theft?  Meanwhile, people can walk away from a one hundred, two hundred, three hundred thousand dollar or more mortgage with little more repercussion to their financial life than damaged credit and of course loss of the home and associated equity in that home.  There's no scene made by loan officers or bank officials chasing them down in their home's driveway as they try to leave as a restaurant server might.  There's no detention or arrest made...or at least not that I've heard about.

If I tried walking out of the local convenience store with several $1 candy bars crammed in my pocket, I'd likely be arrested if caught.  Walk out on a $150,000 mortgage though, and more than likely, I'd be walking away a free man.

Now I'm not debating the rights or wrongs of walking away from a mortgage or whether the banks deserve to have these loans dumped upon them; however, I kind of find the comparison akin to getting jail time for smacking a person in the face but walking away with probation for shooting someone.

Just a few of my early morning thoughts on the matter.  Our accepted national and societal norms have been confounding me -- and frankly, concerning me -- more and more lately.  Don't even get me started on texting and driving!   

4 comments:

  1. I'm neither an attorney nor an ethicist, but I think the answer to your question might revolve around the differences between the two exchanges. In the case of a restaurant (and in most cases, with a store), the company owns the goods and only sells them. If I steal candy or a meal, I a guilty of removing the company's goods without remuneration. My obligation/contract to the company is implied and is binding(eg. once I order a meal).

    By contrast, when I take out a loan to buy a house, the bank retains possession (at some level) of the deed of trust. In a way, the bank buys the home and gives it to me on a lease to own type of deal. The bank regains possession of the home (assuming all of the proper paperwork, etc.) if I fail to make payments. Ergo, the house loan is a slightly different type of contract than the ones that occur when person eats a meal.

    Looking at it from another perspective, banks wouldn't be able to procure enough interest in their home loans if laws punished debtors (who reneged on their loan payments) with jail time. Stores and restaurants do not have this problem. Hence, it is in society's best interests to punish shoplifters (to maintain the primacy of contracts) but not homeowners who default on loans.

    As a final thought, I am not sure that every store will prosecute petty shoplifters. If not (no way for me to verify one way or the other). If that is the case, it creates more thought provoking issues...

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  2. Good and valid points, Anthony. I appreciate a well thought out response to the situation, and in a way, as I'm not a lawyer or ethicist either, I agree with you on the legal standpoint, I guess just not on the ethical standpoint.

    When someone sits down and orders a meal at a restaurant, I would tend to agree that there is certainly something that borders on an implied/verbal (once ordered) contract that the patron will be paying for the food upon completion of the meal.

    Going a step further though, jail time for walking away from a home doesn't necessarily have to be the only solution to the issue. There are regulations governing student loans that keep such debt from being written off in a bankrupty, yet students continue to undertake college eduacations and the associated debt that comes with them in apparently increasing amounts. Given, there is no hard asset exchanged in the process other than a diploma, which the university can't take back due to insufficient payment on debt, but the ramification of that debt always being there doesn't seem to be stopping students from taking on that debt though whether or not they can get a job to pay for it later. So why not do the same with homes? You can walk away, but that debt will remain until paid, just like a $100,000 student loan. I'm sure it has something to do with the banks retaining the original asset (i.e. the home), and having the option to attempt to sell it again to recoup lost profit.

    I know, that's getting into a whole different can of worms, it just seems like accountability on all levels in this nation is sorely lacking these days and no one seems to care much about it anymore.

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  3. I 100% agree. This nations housIng crisis is not just because of greedy loan officers and mbo underwriters, but people who greedily borrowed with no intention of paying their mortgage. I've written many yahoo articles on the topic, which have been unpopular. Yahoo prefers articles that proclaim how people who have walked away would do it again.

    Of course conscientious homeowners have to pay for all this.

    The key is whether the state is a recourse state or not. Because if they are, banks will come after borrowers who default and force banks to foreclose. The IRS also gives them the gift of income taxes due on the "gains".

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