Consumer Law

Is It Wrong To Walk Away From A Mortgage?

By M. Stan Herring

Business and banks and mortgage companies are quick to condemn Americans who decide that they are so upside down (owe more than the house is worth) that they will just walk away from the house and allow the mortgage company to foreclose.

This raises two issues.

First, is it right to walk away?

Second, are mortgage companies and banks being hypocritical for condemning homeowners who do this but not themselves when they do it?

On the first issue the answer is there is nothing morally wrong with walking away. That was contemplated in the contract - if the homeowner does not pay the mortgage company gets to foreclose. Consequences flow from this - credit report damage, perhaps being sued for any deficiency, etc. But a choice can be made and it is not unexpected given that lenders made outrageous loans to people who are so upside down it may take decades to get back to even.

On the second issue - the hypocrisy is amazing and disturbing. A recent article in the New York Times by Robert Lowenstein explores this issue. Read the whole article but here are a few fascinating quotes from the article:

Businesses ? in particular Wall Street banks ? make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral ? perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that ?any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator ? and one who is not honoring his obligation.? (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

Think of private-equity firms that close a factory ? essentially deciding that the company is worth more dead than alive. Or the New York Yankees and their World Series M.V.P. Hideki Matsui, who parted company as soon as the cheering stopped. Or money-losing hedge-fund managers: rather than try to earn back their investors? lost capital, they start new funds so they can rake in fresh incentives. Sam Zell, a billionaire, let the Tribune Company, which he had previously acquired, file for bankruptcy. Indeed, the owners of any company that defaults on bonds and chooses to let the company fail rather than invest more capital in it are practicing ?strategic default.? Banks signal their complicity with this ethos when they send new credit cards to people who failed to stay current on old ones.

Foreclosures are proceeding at a brisk pace in Alabama and throughout the country. I have not yet met a client that voluntarily allowed the three stages of foreclosure to occur but it is hard to fault someone if they do and certainly we don't need the hypocrisy of Wall Street banks who say "Do as we say, not as we do"......

If you have questions about wrongful foreclosures in Alabama, feel free to contact us through our website or you can call us at 205-879-2447.

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Full post as published by Alabama Consumer Blog on January 12, 2010 (boomark / email).