Some Advice on Foreclosures

July 19, 2009    By: Geoff J @ 5:24 pm   Category: Life

In a career twist I would not have predicted, I have somehow become somewhat of an expert on the subject of mortgage refinances, loan modifications, and foreclosures over the last two years. Anyhow, odds are that you or one of your family members or friends is facing foreclosure on their home right now. I figured I could write some general advice about this subject in the hopes it might help someone.

Here is a scenario:

An LDS family in California is facing foreclosure. They bought their home at the height of the market in 2005 and now the home has dropped in value by more that $200,000. So between their first and second mortgage they owe $200,000+ more on the home than it could sell for right now. In the meantime the income of this good family has significantly decreased with the contracting U.S. economy. The upshot is that this family has no chance of being able to make their current mortgage payments over the long run. They made the full payments as long as they could, draining most of their savings in the process but now are up against the wall.

This is a fairly common situation these days. My advice to this family would be as follows:

1. Stop paying the second mortgage immediately. The second mortgage holder will never foreclose on this family. The reason for this is that when a house forecloses the proceeds from the sale of the home must pay off the first mortgage in full first and anything that is left over pays off the second mortgage. When a house is deeply upside-down/underwater (worth less than the mortgages) the second mortgage holder has no incentive to foreclose. Foreclosing costs the bank/servicer thousands of dollars in legal fees to begin with so a second lien holder would get nothing from foreclosing but a legal bill. Of course missing the mortgage payments on the second loan will hammer the credit score of the borrower for a while but there are a lot worse things than a lowered credit score. If the income situation improves over time the family could get back on track with the second mortgage if they manage to stay in the home.

2. Seek a loan modification on the first mortgage. A mortgage is simply a contract between a borrower and a bank. The bank gives the borrower a loan against some collateral (the home in this case) and if the borrower doesn’t pay the loan the bank takes the collateral. But the bank can change the terms of the agreement if it chooses to. As I mentioned, foreclosing is a costly venture for banks and even the first lien holders aren’t always anxious for the 6-12 month legal process a foreclosure requires. Further, if the lender can keep the borrower in the home long enough for housing prices to bounce back it might make more sense to foreclose later rather than sooner — particularly when the first mortgage is underwater. For those reasons banks sometimes will modify the payment terms for borrowers and give them something like a 5-year interest only payment at 3-4%. In such cases the bank buys time for the market to recover and the borrower avoids getting evicted for at least 5 years. (Note: Contact your lender/servicer directly for a loan modification. It rarely makes sense to pay thousands of dollars to a third party company to help you secure a loan modification with your own bank.)

Of course if a borrower still has equity in the home the bank has much less incentive to modify the loans. If the bank can foreclose and get all of their money back now they often choose that route. If the home is worth more than the mortgages against it the borrower is usually better off selling and downsizing. Also, banks are far more apt to entertain loan modification requests when they know the applicant is not bluffing so it is not uncommon for people who are several months late on their mortgages to get more attention from the bank than someone who is on time.

3. Don’t be intimated by the barking banks. Banks are pretty good at barking loudly and scaring borrowers. In many cases it takes a bank 6-12 months to actually foreclose and evict a family from a home. In cases where there have been income losses that often can provide 6-12 months for the borrower to seek a loan modification. Further, it can give the family 6-12 months of rent-free housing while this process is happening. If things go well with the loan modification efforts the family need not move at all. If the loan modification does not happen the family can still remain in the home for some time even after the bank officially puts the home on the auction block. Basically when the Sheriff gives a family 72 hours to vacate is the official deadline. Dealing with a barking bank can be very uncomfortable but if it saves a family thousands per month while they prepare to rent a place that can make a big difference when it comes to getting back on one’s feet.

Of course every state is different so in some situations declaring bankruptcy may be needed as well. Seeking competent legal advice is always best when dealing with bankruptcy questions.

The Big Picture

Remember, there are much worse things than dealing with a foreclosure. One of those is not having enough money to buy food or gas. The truth is that if you do go through a foreclosure the first goal should be to get back on your feet financially afterward. Yes you will have to rent for a few years but renting has some real advantages too. If all the bills get paid going forward one can become eligible for a mortgage in 3-4 years so a foreclosure is certainly not a life sentence when it comes to home ownership.

Job losses and foreclosures are abounding in 2009 and will probably continue to mount over the next year. May you avoid these kinds of troubles. But if you are among the millions of people facing these issues I hope this general advice helps and I will be happy to answer any other questions that come up in the comments.

115 Comments »

  1. Wow Geoff! I must admit I am very surprised by this posting. You are actually advocating that an LDS member break their covenants and walk away from an obligation they incurred?

    The borrower took someone’s money and now they are justified in not paying it back? The big bad bank is lending someone’s savings and the borrower has a moral duty to pay it back. The fact that they borrowed more than they can afford or that the value of the property has declined does not justify stealing someone else’s money and then walking away.

    Respectfully, I must admit the reputation you have presented in your other posts and comments (especially those related to gay rights) has been permanently damaged.

    Let me ask you this – should they also stop paying their tithing during this whole process?

    Note: I have been a banker for 28 years and have a great amount of experience in the foreclosure process. I still believe that Latter-day Saints need to remember their Temple covenants.

    Comment by Michael — July 19, 2009 @ 7:24 pm

  2. Hehe. Great over-the-top comment to kick us off here Michael.

    Yes, if someone has nearly no money and has to choose between paying for food or paying a mortgage I absolutely recommend choosing food. The “covenant” that is a mortgage has built in protections for the bank. The bank gets the asset/collateral if the borrower can’t pay according to the terms. Your moral obligations argument might be a little stronger in cases with unsecured debts.

    Let me ask you this – should they also stop paying their tithing during this whole process?

    Nope, not if they want the blessings associated with tithing. And of course tithing is not a lien against property.

    Comment by Geoff J — July 19, 2009 @ 7:33 pm

  3. Granted I have not been attending as often as possible, but where did I make a covenant with my bank in the temple. I did do a session last week and I totally missed that part. I even stayed attentive this time.

    Geoff, thanks for the post. I am working with some people in my quorum that could benefit from this info.

    Comment by Chris H. — July 19, 2009 @ 7:50 pm

  4. Michael,

    Good to hear from a banker on this one. Don’t worry, your reputation hasn’t suffered from your comments.

    Comment by Kent (MC) — July 19, 2009 @ 8:20 pm

  5. lol

    Comment by Geoff J — July 19, 2009 @ 8:24 pm

  6. I’ve also heard that in these sorts of situations (job loss, low income) it is best to pay utilities as a priority over mortgage, as utilities get shut off more quickly (60-90 days), and also that medical debts should be the lowest on the priority of what gets paid, as their is little or no repercussions for paying these types of debts. Dunno how much of that is true, just adding my two cents.

    My wife’s family was foreclosed on when she was young. It was hard on them, but it wasn’t the end of the world, and in some ways, may have actually been good for them, in that it brought them together as a family.

    Comment by Matt W. — July 19, 2009 @ 8:52 pm

  7. That’s right Matt. If the money is almost gone then things like food and gasoline (for job hunting if nothing else) and utilities become the priority over luxuries, credit cards, and other bills like medical or even the mortgage.

    As I mentioned, if the house is worth more than is owed on it is a good idea to look at selling if foreclosure is approaching. There plenty of reasons for a bank to foreclose if there is equity in the house since they will get all that is owed to them plus a bunch more in inflated fees. Better to sell than give all the equity away in that situation.

    Comment by Geoff J — July 19, 2009 @ 9:01 pm

  8. We could just send people to debtor’s prison, but what good would that do? Would it make the bank whole again? Promote the common good? I don’t think so.

    Of course, if I was a bank, the first thing I would do would be to refer to a nice chart of historical housing prices, and flat out refuse to lend more than 10% above the long term trend. That ought to stop a housing bubble in its tracks.

    Better yet, we should have a law requiring appraisers to deliver two estimated values – one a short term market value, and the other a long term trend value.

    And of course, any prospective home buyer should perform the same calculation, given that the banks and the appraisers do not appear either competent or responsible enough to do it themselves.

    Comment by Mark D. — July 19, 2009 @ 9:56 pm

  9. Careful Geoff: apparently the banks are watching not only your credit score, but also your blogger reputation.

    (btw: Based on your involvement with Copper Rocket, I think you’re a crazy animal, and this post does nothing to alter that reputation.)

    Comment by BrianJ — July 19, 2009 @ 11:24 pm

  10. You guys still surprise me. Where is the personal responsibility and moral agency in all of your comments?

    Comment by Michael — July 20, 2009 @ 2:50 am

  11. Mormon parents decide that to look righteous and blessed they need to buy a big house. Because nothing says righteousness like financial blessings and financial excess. Ever seen a poor GA?

    The mortgage has a big balloon payment so that the monthly payments are reasonable. Then when the balloon payment comes due, they cry and moan about how life isn’t fair.

    Contrast that to the family that lives within it’s means. Lives a humble life style, but there is no flash, no bling. This second family ends up paying fast offerings to indirectly support the first family in their lifestyle.

    I’m with Brother Nibley, the saints need to quit being so materialistic. I was amazed at the families that requested church assistance, but had cable, high-speed internet, dined out, etc., and refused to budget. Why budget when the church will make the mortgage payments for us? How about changing #1 in your list to “cut out the luxuries and get on a budget”.

    Comment by Mo bigga, mo betta — July 20, 2009 @ 4:01 am

  12. You guys still surprise me. Where is the personal responsibility and moral agency in all of your comments?

    Right here ->

    Comment by Peter LLC — July 20, 2009 @ 4:10 am

  13. Michael,

    Where is the personal responsibility and moral agency in all of your comments?

    It’s priced into the mortgage. Or, at least, if bankers had been pricing the mortgages correctly, the risk of default (or let’s call it lack of personal responsibility) would have been priced into the mortgages.
    What, you priced your mortgages wrong? Oops.

    Comment by Sam B. — July 20, 2009 @ 5:50 am

  14. It’s probably also pointing out (especially re: 11) that certainly some people borrowed more than they could afford, and are certainly not blameless. (Of course, others consumed at perfectly reasonable levels, but faced catastrophic illness or unexpected job loss. On a personal level, such thins are unpredictable, but on the systemic level, banks can and should expect a reasonable number of defaults and price loans accordingly.) But Geoff’s not talking to people who are taking out mortgages—that horse is long gone. He’s talking to people who are facing foreclosure. And they entered into a business transaction where their eventual default was one of the potential (and very predictable) outcomes. There are plenty of pressures on people to pay, from wanting to stay in their homes to not wanting to be embarrassed to wanting to be able to borrow money again in the next 7 years. But where those incentives are outweighed by inability to pay, well, that’s the risk the bank took in making the loan originally. There’s nothing immoral (generally) about banks lending money to people, and there’s nothing immoral (generally) about people defaulting on those loans.

    Comment by Sam B. — July 20, 2009 @ 6:52 am

  15. “…there’s nothing immoral (generally) about people defaulting on those loans”

    I am sorry Sam B. but this is the most outrageous statement I have seen on the bloggernacle. Do we belong to the same faith? It most certainly is immoral. A Latter-day Saint gave their word to take the monies of someone else to purchase a home and to pay it back. How is this any different than stealing from a corner food store or from a Ponzi scheme run by Bernie Madoff? A loan was made based upon a promise to repay. The borrower reneged on their obligation and leave the banks depositors holding the bag.

    Have we fallen that far off the wagon that we can justify the ways of Babylon in the context of the Gospel?

    Comment by Michael — July 20, 2009 @ 7:02 am

  16. Michael,

    The banks are Babylon.

    Comment by Chris H. — July 20, 2009 @ 7:22 am

  17. “How is this any different than stealing from a corner food store or from a Ponzi scheme run by Bernie Madoff?”

    Well, one major difference is that the bank gets the house. The also keep any equity or payments that have been already made.

    Comment by Chris H. — July 20, 2009 @ 7:32 am

  18. Chris,

    The banks don’t want the house. The banks have no interest in the house. The banks provided a loan. The house only serves as collateral (a secondary source of repayment not the primary source of repayment). The house belongs to the homeowner.

    Why don’t we do that with car loans? As soon as you drive the new car off the lot it loses 25% of its value. Should the borrower be able to immediately wipe 25% off the loan amount for the new car and claim they are justified in doing it?

    I’m sorry but the thought process is messed up here. If someone borrows $150,000 to purchase a house, they have a moral obligation to pay back $150,000 plus the interest agreed upon. If they borrowed the money from their parents instead of a bank, should they also be able to walk away and leave their parents stranded with the house.

    I think that you all are justifying your positions by making the bank the bad guy and assuming they can and should be screwed over. But the bank is just lending out the savings of all its depositors. If the bank does not get paid back then eventually the taxpayers have to pay through FDIC insurance and a government bailout.

    It is still stealing.

    Comment by Michael — July 20, 2009 @ 7:42 am

  19. Chris H: “The banks are Babylon.” True. Except for Zion’s Bank, of course.

    Michael: “A Latter-day Saint gave their word to …pay it back….” …and to give up the home if he chose not to pay (for any reason), and the bank gave its word that it would take possession of the home if the borrower didn’t pay. Sounds like everyone is keeping their word.

    PS. The earlier comparison of mortgages to covenants got me wondering: Wouldn’t it be weird to get a notice from Jesus that he had auctioned off your atonement to another god? “Your salvation will now be handled by….” (Not that I want this to happen to me, but if it ever did, I’d hope the new agency offered free online worshiping.)

    Comment by BrianJ — July 20, 2009 @ 7:45 am

  20. Michael,
    Forgive me if I call into question your credentials as a banker (actually, scratch that—you called into question my cred as a member of the church) but . . . you’re a banker? See, the reason you make a profit is that you assume some risk of default by the people and institutions that borrow from you. You borrow presumably at LIBOR; you lend out at LIBOR plus some amount. For the most creditworthy borrowers, the spread between LIBOR and the LIBOR plus amount is small, and probably represents mostly the time value of the money you lent. For less creditworthy borrowers, that spread is bigger. Why is it bigger? Because the risk that the borrower will not repay the amount borrowed is bigger, and, in order to compensate you for that risk, you require a larger payment. Provided the risky borrowers do pay you, you turn a nice profit. If they fail to pay you, you have bet on the fact that higher interest payments have compensated you for that risk. If there were zero risk of default, there’s no reason why you should be able to lend at a higher rate of interest than you borrow at.

    Don’t get me wrong—I sincerely like bankers. Some of (as they say) my best friends are bankers. Banks serve a very important purpose. But so does bankruptcy and the ability to walk away from debt if it become so burdensome. People smarter than I, whose opinions I respect strongly, have indicated that one of the reasons the U.S. economy is (was?) significantly more innovative than European economies was that entrepreneurs could afford to fail because, if they failed, they could walk away from the debt. If they were obligated to pay back every penny they borrowed, they would be much less likely to take chances that can pay off, but that can also go horribly south.

    I don’t have a dog in this fight. I have never made or received a mortgage loan; I’ve been a renter for a long time now. And, Chris to the contrary, banks are not horrible immoral Babylonian institutions. For better or worse (better I’d say, but you could disagree), banks are necessary to our economic survival. But when you make a loan, you’re not entering into a moral transaction, you’re entering into an economic transaction. As the bank, you are responsible for acting in your economic interest. As a borrower, the people who borrow from you are responsible for acting in their economic interest. The same as any contractual relationship—any well-written contract has a clause that allocates risk of default. Because default is always a possibility.

    Comment by Sam B. — July 20, 2009 @ 7:49 am

  21. (Chris, btw, I recognize that Michael, not you, introduced the Babylon reference. And he was clearly wrong, of course, unless your vision of an economic system requires allocation of assets as they are needed. Which, if I am interpreting what I’ve read from you right, you do, which means that banks really would be Babylonian institutions. But in the context of modern capitalism, they’re necessary and not inherently evil.)

    Comment by Sam B. — July 20, 2009 @ 7:52 am

  22. Michael,

    Car loans and mortgages are quite a different thing. The reality is that the house does belong to the bank, at least early on in the mortgage. I realize they do not want to repo the house, but you asked the difference between this and Madoff or robbing the corner store.

    Brian,

    That is why I bank with Zions (really).

    sam,

    I was just playing with the babylon rhetoric

    Comment by Chris H. — July 20, 2009 @ 8:11 am

  23. Chris,
    I know (and it was legitimately funny, so I don’t even know why I brought it up).

    Comment by Sam B. — July 20, 2009 @ 8:13 am

  24. “It is my humble judgment that economics and morals are both parts of one inseparable body of truth and these must be in harmony. We must square our actions and our policies with eternal principles if this nation is to be preserved and not go the way of Rome and other dead civilizations. In no other way may we enjoy the continuing blessings of peace, prosperity, and freedom.” President Ezra Taft Benson

    Comment by Michael — July 20, 2009 @ 8:18 am

  25. Michael,
    One quick question: huh?

    Comment by Sam B. — July 20, 2009 @ 8:22 am

  26. I am not succumbing to the easy route and just quoting a Church President to end discussion. But I am finding myself in a continuing state of disbelief as to when the younger generation separated their personal economic transactions from their moral obligations? Is that like separating pure sex from making love? Maybe it is like separating marijuana for pleasure from marijuana for medicinal purposes. Or perhaps like separating divorce from the need to protect the children from harm.

    Have we gone that far down the road already?

    Comment by Michael — July 20, 2009 @ 8:26 am

  27. Michael,

    I join Sam B in seriously questioning your “banker” credentials. You are displaying an appalling ignorance of the banking industry in your comments.

    The banks don’t want the house. The banks have no interest in the house.

    If the banks don’t want the asset/collateral they should not have purchased it and agreed to sell it back to the borrower with interest. That is basically all a mortgage is. Except the banks get to avoid paying property taxes for the most part.

    If they borrowed the money from their parents instead of a bank, should they also be able to walk away and leave their parents stranded with the house.

    If I bought a house for one of my children on the agreement they would pay me back I would modify that child’s loan when a job loss occurred to tide them over while the economy is bad. I would also fully realize that I was taking some real risks by owning that asset.

    Comment by Geoff J — July 20, 2009 @ 8:30 am

  28. Sam,

    If I may, let me clarify my thoughts.

    1) In #20, you stated that banks BORROW money at LIBOR and then LEND it out at LIBOR plus. Not really correct. Banks accumulate the savings of individual people and pay them a certain amount for those savings. That is the money they lend out. Some Wall Street firms use “hot money” or other borrowings but most banks just use the savings of depositors.

    2) In #20 you state that when you take out a loan you are not entering into a moral transaction but an economic transaction. The quote from President Benson is to show there is no difference between these two things.

    Comment by Michael — July 20, 2009 @ 8:32 am

  29. I believe that morality and economics are very much related. That is why I am a socialist.

    However, I would argue that the issue of Geoff’s post is personal and family finance. In this case, morality would dictate: family first. I do not think anyone is arguing that foreclosure is a desirable path, but it is sometimes the best option, though a crappy and difficult one. Geoff is showing compassion in the tone of this post. That is the morality that I defend.

    Comment by Chris H. — July 20, 2009 @ 8:32 am

  30. Chris,

    You are mistaken. The bank does not OWN the house. They have a lien (a mortgage) on the house. The house will always remain titled in the name of the owner (borrower) UNLESS the worst case scenario happens and the bank must foreclose on it. The name on the deed and on the tax records is the name of the borrower.

    Comment by Michael — July 20, 2009 @ 8:34 am

  31. Gentlemen,

    I can see that you have a unique perspective on the financial world that values the borrower over the lender. We seem to be talking past each other. I am sorry if you question my credentials. That is your loss. I will now go back to work as a commercial loan officer. Good day.

    Comment by Michael — July 20, 2009 @ 8:37 am

  32. Michael,
    I sure as heck wouldn’t have pure sex or make love with my banker. But that’s just me.

    As for this younger generation: I worked as a tax attorney, and the income tax came into existence in the early 20th century. And at least since then, people have been breaking contracts when it was economically advantageous to do so. If I remember my long-ago contracts classes from law school, they’ve been doing it a whole lot longer than the last 100 years.

    And you are not succumbing to the easy route of quoting a Church president in any context. My quick Google search indicates that Apostle Benson said that in an address at BYU in 1954. Moreover, since when is it dishonest to break a contract? Like I said, that’s why contracts have risk-allocation provisions: because the parties want to allocate the risk of default to the party most willing to bear that risk.

    And, like I’ve forgotten in my comments, but Geoff and Chris have both pointed out, the bank has taken collateral, collateral that, at the time of the contract, it considered a fair substitute for damages caused by the borrower’s default.

    I hope none of this is new for you; if it is, you’ve clearly been pricing your mortgages wrong and your bank’s shareholders have been hurt. But assuming you are a banker and know what you’re doing, you understand this risk, have priced and allocated it in every mortgage loan you’ve made, and are now grandstanding for no apparent reason.

    Comment by Sam B. — July 20, 2009 @ 8:40 am

  33. Michael,
    Most bankers I know are investment bankers; nonetheless, if commercial banking works differently, then you borrow money from your depositors at whatever interest rate you pay on savings deposits (which is probably well below LIBOR at this point, although I haven’t looked at LIBOR in several months) and lend it out at a higher price. Either way, there’s a spread between what you borrow at and what you lend at, and a large portion of that spread is the risk that you’re taking.

    And even though Chris is wrong from a legal perspective (which he realizes—the borrower does have title to the home), from an economic perspective, there’s a strong argument that the bank owns the home economically and is, in essence, renting it to the legal owner. That is, the bank has all of the risk of ownership for the first several years,

    Comment by Sam B. — July 20, 2009 @ 8:44 am

  34. I believe that people have a moral obligation to do everything reasonably within their power to pay off their debts. This whole discussion, however, is based on the assumption that a person’s situation is such that it is not reasonably within his power to pay off all of his debts. The only question is which debts will get paid, and to what degree.

    The law varies from state to state – in some states (i.e. those that have not passed a law to the contrary) if a house is foreclosed upon a deficiency judgment will be granted requiring the debtor to make up the difference. And that debt won’t go away unless the person declares bankruptcy. And I personally have very little sympathy for a common collection of banking practices that couldn’t be better designed to make that event come about.

    It is worth mentioning, by the way, that the contemporary banking system is based on the premise of systematically defrauding depositors to the tune of 4% a year. Inflation as we know it wouldn’t exist if the (contemporary) banking system was based on sound legal principles. q.v. Bank of Amsterdam, 17th century, for one that was.

    Comment by Mark D. — July 20, 2009 @ 8:47 am

  35. I think some of you all are way off base about this subject. There are times when one can not pay back loans not for any reason than some bad situtions. We lost a business that required us to bind all our assets to the loans. The economy failed. We were living modestly as per LDS doctrine. In fact after the business failed we payed the loans until we were suffering so much that your dear Bishop stepped in and we were told to get legal advice. That strong believe of being totally honest all most cost me my health and my families well being. Foreclosure and bankruptcy were a blessing. The ‘Banker’ words are very judgemental and narrow minded. Not all cases are black and white. Living beyond ones mines, having a good time, then renigging on loans is wrong but when the situation is beyond ones control there are laws that help to correct the problems. More than 60% of homes in my area are underwater (30%-50% under value) and families may never get out of those homes. Don’t forget the FHA and the banks pushed the American dream down to the lowest citizen and everyone is suffering. Bad program and bad results.

    Comment by MDavis — July 20, 2009 @ 8:57 am

  36. Oh, Michael. Everyone here got your point in your very first comment.

    But don’t we also believe that if we don’t have charity, then nothing else matters much? Don’t we believe in bearing one another’s burdens? Love one another? Avoiding judging?

    Try to put yourself into the place of someone who might need Geoff’s excellent advice. Say you go to work tomorrow morning and there’s a pink slip on your desk. You clean out your stuff and go home to tell your family that you are out of a job. You’re not too worried– you think you’ll just get another one soon and everything will be fine. But maybe months go by– you send out hundreds of resumes– and nothing. You are burning through your cash a lot faster than you ever thought possible. The baby gets sick and you don’t have insurance anymore. The car breaks down. Your reserves are gone.

    More months go by. You start to sell things to pay the bills. The boat– the extra car. Soon you are selling the TV and the furniture.

    You take a menial job at 1/3 what you used to make, but it just isn’t enough. Finally one day you open the mortgage statement and they want thousands of dollars, and you have a few hundred sitting in the checking account. You’ve had hot dogs and macaroni for dinner one too many times. People are starting to look at you with pity– or they just avoid you. Your wife cries herself to sleep every night.

    There are probably people living this right in your own neighborhood or even family. What are you doing to help them bear their burdens besides pointing fingers at them and calling them deadbeats?

    Comment by C Jones — July 20, 2009 @ 9:12 am

  37. I largely agree MDavis. There are many perfectly moral and legitimate reasons to finds oneself facing a foreclosure. This post is about the best ways of dealing with that painful situation.

    It is useful to have someone articulate the judgmental attitudes people in trouble face on the subject though so for that reason Michael’s participation here has served a purpose. LDS families in severe financial distress must not only navigate their financial difficulties, they must dodge the the sniper fire from so-called “friendlies” in the church.

    Comment by Geoff J — July 20, 2009 @ 9:17 am

  38. C Jones,

    Stellar comment.

    Comment by Geoff J — July 20, 2009 @ 9:18 am

  39. Maybe all this mortgage/LIPOR/lien talk got me confused, but did Michael (#26) recommend that borrowers facing financial crises have sex and get high with their banker? It’s probably not a fruitless strategy actually, but personally I prefer Geoff’s more honest, covenant-respecting approach in the o.p.

    Comment by BrianJ — July 20, 2009 @ 9:40 am

  40. I feel bad that the banks can’t repay their stockholders for their losses. After leveraging 30:1 the actual deposits (as opposed to the good old rule of 12:1 just a few years ago) to make crazy loans, I feel bad for the world citizens. Obviously the stockholders knew they were involved in a risky endeavor, but I still think that banks need to show more integrity in their dealings so they don’t put the world economy in jeopardy.

    Now Michael’s point about personal responsibility is an important one. We all have a responsibility to ensure that we don’t hurt the bank shareholders and their employees. We need banks to keep the current economic system in place. I think that as long as families decide to take risks by borrowing money they don’t have, banks will stay in business. I’m worried that people won’t take risks and that banks won’t assess risk. Boy, it sure is complicated.

    Comment by Kent (MC) — July 20, 2009 @ 9:49 am

  41. Geoff J., thank you for your enlightening advice for people facing foreclosure. I’m sure it will be useful in many corners of the Church these days.

    Comment by Kevin Barney — July 20, 2009 @ 10:21 am

  42. But I think you failed to mention how hard it is to get a redo on some these mortgages. Only 84 people nationwide qualifed for the 2008 government program. The rules are very hard to match. If there is a large underwater difference nobody will pony up help for you. We begged for help to everyone but because we were paying the bills no one would talk to us. But when we stop paying, we got more attention than we could stand. The redos have to be payed back in 3-5 years and then the regular mortgage continues again. The government gets 50% of the profits when the home is sold. There are many other details to the programs. By the way foreclosure is not painless and can be very stressful. Anyway your posting is helpful and the church rarely teaches us what to do when things go wrong and most leaders have little traning in these matters. A Temple recommend doesn’t stop the sheriff from throwing your stuff to the curb.

    Comment by MDavis — July 20, 2009 @ 10:25 am

  43. MDavis,

    You are referring to the ill-fated Hope For Homeowners program. That was indeed a massive flop. However, millions of loans have been modified by banks and millions more will be modified. In many cases a modification is in the best interests of the banks and banks always go for their own best business interests.

    But you are right that sometimes banks won’t modify loans no matter how much the borrower pleads. As I mentioned, even if banks refuse to modify a loan a family can stay in the home for 6-12 months rent free while trying to convince the bank to play ball (and while looking for work or whatever). That can make a big difference.

    Comment by Geoff J — July 20, 2009 @ 10:37 am

  44. One last word from me and then back to work. There are also state laws that protect the families during a foreclosure process. Like you said it takes time for the bank to process a foreclosure, then the sale of the property take some more time. After the sale the owner has what is called a redemption period. This period of time is for the homeowner to redeem the property, which is the outstanding payments, fees and legal costs. The redemption period is for a certain time and then the homeowner has to move out, period. In my state you get 30 days if the property is abandoned, 6 months if occupied or 1 year if the property is larger than 5 acreas. Good to know the rules.

    Comment by MDavis — July 20, 2009 @ 11:01 am

  45. Another couple of things: I used to work for a Savings and Loan. Even when a property is not upside down, banks do very poorly on foreclosures because when a home is foreclosed on it 1. is typically left in bad condition by the previous owner. 2. has the pariah of being a foreclosed home, so sells for less than it is worth. 9 out of 10 times, banks lose money on foreclosures. But they do them because risk management indicates they make money on other loans that are paid due to fear of penalty.

    Secondly, we have a friend who’s home has dropped from 1.2 Million to $500k and who just recently lost his job. He has 4 kids, lives in Arizona, and was doing reasonably well for himself prior to the job loss. He is still in his home, but is working 2-3 Jobs to make ends meet. It seems his area, (Mesa Az) was severely impacted by the housing bubble and by the hyper growth there over the past few years. He is surviving, but he is trapped in his job options because he can not move due to his upside down home. To me, This is why Geoff’s counsel is very helpful and important.

    Comment by Matt W. — July 20, 2009 @ 11:16 am

  46. If I end my cell phone contract early by paying the $200 early termination fee, am I immoral? Obviously not. It was on option in the contract. Contracts implicitly include all of the applicable contract law on the books in the locality in question. Bankruptcy, loan modification, etc all have a legal basis and thus are implicitly contained as options in any applicable contract. Immoral is burning the house down and telling the insurance company it was an accident. Exercising a legal contract option cannot be immoral. Unless of course you’re a contract killer…

    Comment by Owen — July 20, 2009 @ 11:29 am

  47. Re: #44,#45, and #46,

    Word.

    Comment by Geoff J — July 20, 2009 @ 11:41 am

  48. Owen (#46) that was a great example. If this forum had karam, it would be +1 for you.

    Comment by kevin — July 20, 2009 @ 1:50 pm

  49. Owen (#46), If you pay the deficiency the cancellation fee analogy is reasonable. You give up the home and agree to pay the difference after the foreclosure auction.

    However, if one is not a candidate for bankruptcy, walking away from a house because there won’t be a deficiency judgment is at the very least a morally questionable thing to do.

    Suppose you have a million dollars in retirement accounts, plus a mortgage that is $200,000 under water. Walking away without paying the deficiency (legally required or not) under such conditions doesn’t exactly look like the upstanding thing to do.

    Comment by Mark D. — July 20, 2009 @ 2:31 pm

  50. How do you decide when the question shouldn’t only focus on whether one is upholding the terms of the contract? (And in an open, upfront way.) Why does it matter how much I have in retirement if the contract didn’t take that into account? Suppose I “legitimately” walk away from a $500k house today, then next year I get a killer job that pays $50 million a year—should I go repay the bank what it lost? Why?

    Comment by BrianJ — July 20, 2009 @ 3:21 pm

  51. Yes, you should. And if you ever declared bankruptcy, you should pay back those losses as well.

    The reason is that you promised to pay back those creditors, and the fact that you have been legally absolved of paying them does not absolve you from a moral obligation to make good on your word.

    Of course, a bank charging you 30% interest that you did not anticipate, might be a reason to pay back just the principal and skip the usury, but that is more of a grey area. Personally I think wildly variable rate loans are immoral and contrary to sound public policy. But then one did sign up for such abuse…

    Comment by Mark D. — July 20, 2009 @ 3:45 pm

  52. Interesting points in #50-51. Mark seems to be pushing for a sort of “unwritten order of things” and Brian is going for the “follow the written contract” approach. I actually lean toward Brian’s view on this one — especially when there are detailed contracts written by competent lawyers involved. As was mentioned, with things like mortgages the obligations of both parties are clearly spelled out ahead of time and the penalties for breaking those obligations are agreed upon as well.

    Comment by Geoff J — July 20, 2009 @ 4:05 pm

  53. I am suggesting that people follow what they promise in the contract. The only way you can get out of it is because the government recognizes that there are certain scenarios where hardship makes it advisable to modify or nullify certain provisions after the fact.

    For example, if you declare bankruptcy with any real assets, the government will require you to file chapter 13 and spend three to five years making payments on some sort of cents on the dollar compensation plan.

    In this case, just because a deficiency isn’t worth pursuing in court, doesn’t mean that the legal and moral thing to do is to avoid paying it. In most states, the government hasn’t even nullified your obligation, the bank may simply feel it isn’t worthwhile to chase after you with the legal system . Avoiding payment because someone hasn’t sued you to collect yet? Is that the moral thing to do?

    Another case is our current Treasury secretary. He didn’t pay a rather significant amount of taxes he owed, and then when he was caught he paid only the amount that hadn’t expired due to the statute of limitations. That doesn’t exactly set a good example for one who is the cabinet secretary in charge of the IRS, i.e. only little people pay their taxes – the rest find ways to evade them.

    And yes, I don’t think the legal and the ethical are identical categories.

    Comment by Mark D. — July 20, 2009 @ 5:42 pm

  54. More months go by. You start to sell things to pay the bills. The boat– the extra car. Soon you are selling the TV and the furniture.

    You take a menial job at 1/3 what you used to make, but it just isn’t enough. Finally one day you open the mortgage statement and they want thousands of dollars, and you have a few hundred sitting in the checking account. You’ve had hot dogs and macaroni for dinner one too many times. People are starting to look at you with pity– or they just avoid you. Your wife cries herself to sleep every night.

    This is us. This is what we’ve been living for 18 months now, since my husband got laid off from the company he’d been with over a decade. We don’t live in a crazy-lavish home- it was <300K. Both our cars are paid for, our kids go to public schools, we do obviously have internet- try job searching without it these days- and getting out if our package deal would cost us more than just honoring the agreement. So we have tv too. We don’t have cell phones anymore. When this started, we had our six months reserves, and we made them last 13 months. Now, were are one of Those families.

    Only… only…

    There are no menial jobs to even take. Over 400 resumes sent out. On an interview today, DH showed up at the 2:00 time, only to find 13 other applicants stacked and waiting to interview as well. All for the 2:00 time. He doesn’t know how many were stacked for 3:00, or 1:00 or so on…

    So. Don’t you DARE tell me I am violating my covenants because we might not make the mortgage payment. So far, thank God, we haven’t missed one. But shame on you, Michael, for suggesting my worthiness is tied to my economic situation. How dare you make such a presumption. How dare you?

    Comment by Tracy M — July 20, 2009 @ 7:29 pm

  55. You might as well give it up Mark. I spent all morning stating the same case as you. These guys do not believe that they are morally responsible for the economic transactions they enter into. They have separated their Temple covenants from their economic obligations and placed them in a separate room where it is OK to walk away and let someone else pay for it.

    Comment by Michael — July 20, 2009 @ 7:33 pm

  56. This is almost as fun as debates over the definition of “intelligences.” :)

    Comment by Ben — July 20, 2009 @ 7:39 pm

  57. Tracy, our comments crossed. I was not responding to you directly in my post above because I had not read your post when I typed it.

    I am sorry to hear about your situation. I have been helping out many families in our ward here in Florida with the same challenges.

    There are difficult choices to make in situations such as yours. My point (and frustration) was that the commentors were disconnecting their moral obligations from their economic transactions. My argument is that economic obligations are moral obligations. They cannot be separated.

    As with all such situations, there are difficult choices to make even with moral obligations.

    I hope you are able to remain in your house.

    Comment by Michael — July 20, 2009 @ 7:45 pm

  58. Michael,

    I have taught moral theory for many years and I have rarely encountered such a simplistic conception of morality. There have been quite a few arguments for a moral approach to this issue on this. They may have just gone over your head.

    Comment by Chris H. — July 20, 2009 @ 7:46 pm

  59. Geoff, I think it’s wonderful of you to offer this advice for any who might need it.

    Comment by E — July 20, 2009 @ 7:59 pm

  60. Sorry Chris. I don’t follow moral theory. I try and stick with moral truth instead. That must be why it is going over my head.

    Comment by Michael — July 20, 2009 @ 8:10 pm

  61. Huh? I am pretty sure that is not why.

    Comment by Chris H. — July 20, 2009 @ 8:20 pm

  62. Michael, 55: Actually, I’m listening to Mark D because he’s not making over-the-top judgmental accusations or brushing aside everyone else’s thinking with holier-than-though language (your #60 is a great example). I don’t think it’s fair of you to taint his argument by likening it to yours.

    Mark D: Thanks for engaging my question.

    Comment by BrianJ — July 20, 2009 @ 8:33 pm

  63. Michael,

    I’m afraid Mark D’s arguments are galaxies away from yours and attempting to hitch your wagon to his train is an epic failure for you. In other words, he makes cogent arguments with some nuance and you bray like a dumb jackass. That’s why you get your sorry butt chewed hard by rightfully outraged people like Tracy M and Mark D has people engage him.

    PS — For the record I have never written a post on “gay rights” as you mentioned in #1.

    Comment by Geoff J — July 20, 2009 @ 10:13 pm

  64. Mark #53: I am suggesting that people follow what they promise in the contract. The only way you can get out of it is because the government recognizes that there are certain scenarios where hardship makes it advisable to modify or nullify certain provisions after the fact.

    The banks know the laws in each state and bake terms into the contracts to account for them. The contracts spell out the consequences of not paying the mortgage and some people simply choose those consequences. Everybody gets what they agreed to in advance. The banks dictate the language of the contracts after all. So not paying the full amount is following what they promise in a contract in that they are accepting the practical consequences of not paying.

    Comment by Geoff J — July 20, 2009 @ 10:27 pm

  65. Geoff J (#64), I agree that banks should plan for a certain percentage of defaults, and price that risk into the interest rate.

    The problem here is that we have a moral hazard, where if a significantly larger number of people walk away from their loans because they feel no particular compunction to pay them back, the interest rates for everyone will go up.

    In that sense the gratuitous defaulters are getting a free ride on the backs of other borrowers, without their consent. I don’t think that is a particularly moral thing to do.

    Comment by Mark D. — July 20, 2009 @ 10:46 pm

  66. There you go again implying some kind of unwritten order of things Mark.

    where if a significantly larger number of people walk away from their loans because they feel no particular compunction to pay them back, the interest rates for everyone will go up.

    Your arguments remind my of the paradox of thrift that says when individual consumers save money it is good for those individuals yet it is bad for the overall economy. So is it morally wrong to save money since if we all did so it might be bad for the economy too? That is essentially the argument you are making for people who follow their contracts vs. following your unwritten order of things regarding mortgages.

    gratuitous defaulters

    The devil is in the details here. Defining gratuitous defaulters can be fuzzy. I can assure you that the family in my example is nowhere near the ballpark of a gratuitous defaulter though.

    This post is for the vast number of people out there who are really hurting and need some practical advice.

    Comment by Geoff J — July 20, 2009 @ 11:30 pm

  67. Geoff J,

    The “paradox of thrift” is based on Keynesian economics, which is far and away the most discredited economic theory in history, the attraction to big state spenders notwithstanding. Real thrift frees up real resources for productive uses. Digging holes in the ground is not the highway to prosperity, unfortunately.

    Also, you seem to imply that all moral and ethical questions are part of an inscrutable “unwritten order of things”. Unwritten perhaps, inscrutable no.

    I agree with your practical advice, by the way. The question at hand was the hypothetical of what one should feel obligated to do if one comes into a large sum of money after the fact.

    Comment by Mark D. — July 20, 2009 @ 11:46 pm

  68. I suppose Marxism might give Keynesianism some competition for that title…

    Comment by Mark D. — July 20, 2009 @ 11:51 pm

  69. Well I certainly won’t try to defend Keynesian economics. I was just reminded of that paradox of thrift idea by your comment.

    If you find your home foreclosed upon and then come into a large sum of money afterward you are free to make whatever charitable donations you wish (including donations to banks)

    Comment by Geoff J — July 21, 2009 @ 12:04 am

  70. I wouldn’t normally call paying back a debt a “donation”. More like an “obligation”.

    Of course, recognizing an obligation to make up the deficiency (long after the fact) by other means sounds pretty responsible to me. Social cost, social remedy.

    Comment by Mark D. — July 21, 2009 @ 12:25 am

  71. I suppose in the states where banks can try to collect from you after a foreclosure that makes some sense. AS I understand it, in many states once the bank seizes the asset that is the end of the debt.

    Comment by Geoff J — July 21, 2009 @ 12:50 am

  72. Now, class, your assignment is to determine how your arguements thus far relate to the “anti-banking” crisis in Kirtland, OH. Members of the church lost money in a venture promoted by Joseph Smith and Sidney Rigdon.

    Questions to consider:
    Were Joseph and Sidney morally responsible for the funds lost by members of the church in their financial institution?

    Should they have covered the losses of others in this instance?

    How many times did Joseph Smith declare bankruptcy?

    How does Joseph’s experience relate to the one currently being experienced by members today?

    Comment by Floyd the Wonderdog — July 21, 2009 @ 4:26 am

  73. Geoff J (#71): The laws vary on this from state to state. I understand that Arizona, for example, is a “non-recourse state”, meaning that the (primary) mortgage holder cannot sue the foreclosed upon homeowner for the deficiency.

    See here.

    Comment by Mark D. — July 21, 2009 @ 6:30 am

  74. Geoff,

    Sounds like you know what you are talking about. I hope some people find your free information useful.

    The overgrown home values bubble in California has burst! I remember when home values were going sky-high. It was insane. Many members of the church who were affected by the circumstances you mentioned have come back to Utah licking their wounds and without their shirts.

    Comment by Dave C. — July 21, 2009 @ 9:11 am

  75. Dave C — I can imagine there is a lot of that. I hope not too many members in Utah feel it is their Christian duty to rub salt in the wounds of the folks coming back.

    Mark D — Thanks for the useful link.

    Floyd — Interesting points.

    Comment by Geoff J — July 21, 2009 @ 9:39 am

  76. Geoff,

    Re: “I hope not too many members in Utah feel it is their Christian duty to rub salt in the wounds of the folks coming back.”

    There is plenty of salt around here, but as far as I know, no one has been using it in that way.

    Comment by Dave C. — July 21, 2009 @ 9:55 am

  77. Mark,

    “Keynesian economics, which is far and away the most discredited economic theory in history”

    That is not true and you know it. It is the economic theory most disliked by Mark D. Many leading economists are respected Keynesians.

    Comment by Chris H. — July 21, 2009 @ 11:48 am

  78. Many leading economists believe things that have never succeeded in real life either. Macroeconomics in general is a pie in the sky endeavor that has little or no relation to reality. , because it is operating at too high a level of generalization. Hence, for example, the complete and total surprise to the whole field with the last financial crash.

    Why? Because, among other deficiencies, macroeconomics doesn’t deal with finance or industrial organization at all. In the Keynesian model, for example, money is spent and magically flows through a money multiplier with no consideration for real world factors.

    The whole field of Keynesian economics has but one recommendation for all ills – increase government spending to eliminate unemployment. Keynes himself specifically endorsed digging holes in the ground.

    Here is Arnold Kling, an economist with some considerable experience in the field, on the state of modern macroeconomics.

    It is no accident that Keynesians are virtually all leftists, by the way. It is because Keynesian economics is not a science by any stretch of the imagination, it is a political program that pretends to be one.

    Comment by Mark D. — July 21, 2009 @ 4:47 pm

  79. Not say you have to like it, just do not spread BS about it.

    Economics is not a science. Free-market/Friedmanite economics is no more scientific than Keynes or Marx.

    Yes, Keynesians are leftists. It is because they value human well-being.

    Comment by Chris H. — July 21, 2009 @ 4:52 pm

  80. To the degree that economics is not a science, it is a complete fraud.

    Comment by Mark D. — July 21, 2009 @ 4:57 pm

  81. Those claiming that it is a science are the frauds.

    Comment by Chris H. — July 21, 2009 @ 5:01 pm

  82. The irony here is that the macroeconomists (Keynesians mostly) are the ones who insist that macroeconomics is a rigorous mathematical science.

    Most microeconomists, and the Austrian school in particular, deny that what Kling calls “stochastic calculus p*rn to satisfy young men’s urge for mathematical m*sturbation” that so dominates modern macroeconomics has any particular relevance to reality.

    Comment by Mark D. — July 21, 2009 @ 5:10 pm

  83. WTF? You dismiss Keynesians as being a political program and not economics and then you cite the Austrian School as support. You appear to be unable to see the politcal hacks on your own side.

    Comment by Chris H. — July 21, 2009 @ 6:14 pm

  84. “Yes, Keynesians are leftists. It is because they value human well-being.”

    Do you really expect your readers to take you seriously when you make comments like that? As if caring about human well-being is what distinguishes leftist Keynesians from others. The level of political disoourse in this country is low enough–please don’t make it worse.

    Comment by gary — July 21, 2009 @ 6:58 pm

  85. Sorry, gary. I didn’t mean to let you down with my blog comments aimed at Mark. Feel free to lighten up.

    Comment by Chris H. — July 21, 2009 @ 7:19 pm

  86. Chris H., I am not sure Geoff prefers that we entertain this debate here. I will say that I assume that the Nobel Prize in Economics for 1974 was awarded to Friedrich von Hayek for a reason.

    Ludwig von Mises predicted the Great Depression years prior, while American economists were maintaining that things were hunky dory. The same might be said about the recent crisis. All the people that predicted it approached the issue from a microeconomic angle. Greenspan was all “just print more money” and we will be fine. As far as I know Austrian economics has the only comprehensive theory of why that doesn’t work, in fact the only practical theory of why there are economic bubbles in the first place. There are no bubbles in Keynesian economics.

    Comment by Mark D. — July 21, 2009 @ 7:26 pm

  87. The 2008 prize was like given to the quite left-leaning (not all Keynesians are left-leaning) Paul Krugman for a reason as well.

    Few American economists were Keynesians before the Great Depression. Hey, we will have to pick this up elsewhere. I will let you know if I start a Keynes post on my solo-blog. Peace.

    Comment by Chris H. — July 21, 2009 @ 7:31 pm

  88. Chris: The Nobel Prize was indeed given to Paul Krugman for a reason. That reason had nothing at all to do with Keynsian economics. His work was entirely unrelated to things Keynesian.

    Sorry to intrude. I had no idea that your statements here are inside jokes. I will definitely take your advice.

    Comment by gary — July 21, 2009 @ 9:44 pm

  89. Feel free to join in. It is not my blog. I am not much for being chastised by strangers. If we are going to count Nobel Prize winners as evidence for anything, my side would surely win.

    Comment by Chris H. — July 21, 2009 @ 9:54 pm

  90. I don’t count a Nobel Prize as more evidence than simply having conducted serious work that is widely acclaimed to have advanced the state of knowledge of the pertinent field. i.e. prize winners may have dubious or controversial programs outside the scope of their award, but what a substantive award is actually granted for is sufficient evidence to conclude that the winner’s whole life’s work cannot be dismissed with a wave of the hand.

    I don’t dismiss Krugman’s work in international trade for which he was awarded a Nobel Prize. That is not to say that his political commentary is worthy of similar recognition. And I consider Krugman, by and large, an improvement over the previous generation of left-wing economists, who were, for example, virulently hostile to free trade and the theory of comparative advantage.

    By the way, Keynesian economics was largely discredited over thirty years ago, during the seventies, because the theory predicted that the conditions which prevailed during the seventies were impossible (i.e. simultaneously high unemployment and inflation).

    Among the principled criticisms of Keynesian economics is that it takes no account of rational expectations, it is based on a static model that takes no account of time, and that monetary considerations were added as an afterthought. Mises documented a long list of other problems. The biggest one is that economic aggregates are dubious generalizations of much more complex microeconomic phenomena.

    Comment by Mark D. — July 21, 2009 @ 11:35 pm

  91. That is not to say that there aren’t serious pursuers of (neo-)Keynesian economics today, just that they are a now a small minority, dramatically down from the 1960s when they dominated the entire field of macroeconomics.

    And that is all because Keynesian prescriptions were tried on a massive scale in the 1970s and were a disaster. Wishful thinking isn’t going to make this time around any different.

    Comment by Mark D. — July 21, 2009 @ 11:48 pm

  92. Holy crap. Give it a rest guys. I only like threadjacks when they aren’t deathly boring.

    Comment by Geoff J — July 22, 2009 @ 12:11 am

  93. Sorry, Geoff.

    Comment by Chris H. — July 22, 2009 @ 12:43 am

  94. lol, love you guys.

    Comment by Jacob J — July 22, 2009 @ 7:52 am

  95. Back to the topic…?

    My initial engagement with Mark D was about the gray area between the “letter” and the “spirit of the law”—or, as Geoff calls it, the unwritten order. If Mark’s side is white, and the other side black, it appeared in his comments that he was claiming much of the gray area as “white territory”; I was just pushing back on that, but not trying to claim all the gray as black.

    In other words, I agree with Mark that there is a gray area, where defaulting on a loan (or any contract) doesn’t exactly absolve one from all obligations just because the terms of the contract are followed. By analogy (well, okay, maybe by bad analogy), if the man who robbed Michael’s corner store (#15) dutifully completes his 2-year prison sentence for his crime, does that mean his moral obligations have been met?

    Comment by BrianJ — July 22, 2009 @ 9:04 am

  96. Brian, since when has NewCoolThang been a forum for speculation and a discussion of ethics? I look forward to more insightful posts by Geoff on practical things. I’d be especially interested on learning if anyone has any proven methods for removing blood stains from poly-cotton blend fabrics.

    Comment by Kent (MC) — July 22, 2009 @ 9:48 am

  97. We won’t uncover any universal ethical rules on this matter in this discussion no matter how hard we try. The point of this post is to give practical advice for people who are actually hurting and scared and who are actually in danger of losing their homes. The only thing abstract ethical discussions do in these kinds of settings is make people who are hurting already feel harshly judged on top of the pain they already feel.

    Comment by Geoff J — July 22, 2009 @ 9:49 am

  98. Looks like Kent and I commented at nearly the same time. We actually have discussed ethics here in the past (meta-ethics at least) but I worry that doing so in this thread only rubs salt in the already deep wounds of the people this post might help.

    Comment by Geoff J — July 22, 2009 @ 9:56 am

  99. If one declares bankruptcy or allows a home to go into foreclosure without making up the deficiency, I don’t think the terms of the contract are followed at all. What has occurred is one of the following:

    1. The bank doesn’t feel it worth the effort to sue to collect the deficiency
    2. Your state doesn’t allow them to sue to collect the deficiency.
    3. The federal government legally absolves you from paying some or all of your debts

    Same deal if you go to prison. Going to prison in no way reduces your “debt to society”. Not in the slightest. Restitution (direct or indirect) is the only way to do that.

    Often times of course, the legal action will not be prison at all, but rather a criminal judgment that the offender has to pay. One can’t get criminal judgments discharged in bankruptcy, btw.

    Comment by Mark D. — July 22, 2009 @ 12:05 pm

  100. And that is allowing that it is not practical for many to make full restitution, and I woudn’t expect them to do so in a majority of cases.

    And in many cases the counterparty to the contract deserves real moral responsibility as well, and IMO the reasonable restitution (where it is possible at all) is often significantly less than what the contract would imply. For example, credit card companies charge ridiculous interest rates and late fees in part due to the high probability of default. So if you pay such a debt after the fact, when you are not legally required to do so, certainly the principal plus reasonable interest is more than adequate to make the bank whole again.

    And of course in the case of a foreclosure, if a banks are so incompetent as to finance not just your house, but a whole housing market at twice long term trend values, they certainly bear (IMO) about 80% of the responsibility, no matter what the contract says. That is why many states don’t allow banks to sue to collect the deficiency in the first place.

    Comment by Mark D. — July 22, 2009 @ 12:17 pm

  101. Great Mark — you are free to pay whoever you want whatever you want.

    If I was in a situation like the family in my example and had to foreclose on a house I wouldn’t even consider trying to pay the “deficiency” back. The bank got what it paid for — the house. If the market dropped that would not be my problem. They are free to hang on to it until values increase if they want after all.

    If you would pay back the difference in the loan even after they get the asset I wouldn’t try to stop you. If were to try to tell me to do the same my response to you would be “piss off — it’s none of your business”.

    Comment by Geoff J — July 22, 2009 @ 12:19 pm

  102. Of course, it is none of my business. It is just my opinion. Legally speaking, the bank didn’t pay for the house. It loaned money to the borrower who paid for the house. The house is just collateral.

    As a comparable example, suppose the bank lends you money to purchase an automobile, you can’t make the payments, and they repossess the car. They will sell the car and send you a bill for the difference. Paying such a bill is pretty practical advice. Unless one really enjoys being on the other end of a collection lawsuit…

    Of course, Geoff, if you think the ethics of loan repayment is sufficiently far off topic (which I suspect you do), I will be glad to drop the issue.

    Comment by Mark D. — July 22, 2009 @ 12:33 pm

  103. Geoff: “The point of this post is to give practical advice for people who are actually hurting and scared and who are actually in danger of losing their homes. The only thing abstract ethical discussions do in these kinds of settings is make people who are hurting already feel harshly judged on top of the pain they already feel.”

    In some ways I’m not far from being in the position of the people this post is trying to help, and in a strange way this meta discussion is calming to me. I imagine that, like me, people facing this type of challenge already question their “moral irresponsibility”—even without blatant condemnation from people like Michael. I find it helpful for me to explore that gray area because without that exploration it’s just a big unknown and I can’t determine whether I’ve crossed some line that I don’t want to cross. Furthermore, it prepares me to rebuff assinine condemnation from people whose “hearts really go out to me” (i.e., think I’m a scumbag).

    Mark: I’m following you on loan repayment to a point, but not so far as to ignore that the bank enters into a speculative agreement when it agrees to view a house as being worth some amount of $$. It’s not my fault nor the bank’s if housing prices plummet. You bring up the contrasting example of a car loan, which is a good example because it illustrates that banks don’t take cars as collateral because they know the car will lose value.

    Kent: Hey, I tried something speculative in #19….

    Comment by BrianJ — July 22, 2009 @ 2:52 pm

  104. Well Brian I am certain that there are no universal rules to this. Each case is different. I think we can safely say with President Hinckley: “Do your best, do your very best”. And if you are accosted by someone like Michael as you are doing your best you can feel free to say with Geoff J: “piss off”.

    Comment by Geoff J — July 22, 2009 @ 7:24 pm

  105. Geoff,

    I am pretty sure that there is an Ezra Taft Benson quote about not using bad language. I cannot believe how this younger generation does not see the connection between their personal language transactions and their moral obligations.

    :)

    Comment by Chris H. — July 22, 2009 @ 7:59 pm

  106. Geoff J, For what it’s worth this whole thing is a sufficiently grey area that I would hardly think less of anyone for considering the matter closed. The law does, for example, with regard to practically all debts after a period of time.

    Generally speaking, five to ten years after an ordinary debt becomes delinquent, it is no longer legally collectible. It is called the statute of limitations. The Old Testament documents a similar rule:

    At the end of every seven years thou shalt make a release. And this is the manner of the release: Every creditor that lendeth ought unto his neighbour shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the Lord’s release. (Deuteronomy 15:1-2)

    I think this is a good thing.

    Comment by Mark D. — July 22, 2009 @ 8:02 pm

  107. Hmmm, bankers and morality, where do we begin this discussion? How about with the fact that banks lend out more money than they have to loan? They give out in loans ten times more cash than they have on hand, in the ‘fractional reserve’ system. This dilutes the purchasing power of everyone in the central banking system.

    Comment by Mike — July 29, 2009 @ 2:33 am

  108. Your #1 point definitely deserves to be said.

    We have been told to honorably clear our debts. However, depriving our own family of all security is not required, and draining your savings is exactly that. Besides, it’s not like banks are moral beings; they’ll steal all they can without qualms. I know it’s beside the point, but hell, I hate bank managers!

    As far as getting a windfall after walking away from a mortgage and/or being released of obligations towards it? I’d say my morality would dictate I go and make a payment, but that’s me. Despite what I just said.

    Actually, I don’t think Keynes could have predicted a circumstance like the oil crisis of the 1970s, which was essentially responsible for stagflation. His theory didn’t assess variables so totally beyond any control by the government/national economy and independent of global business cycle (oil price kept rising with demand shrinking while world economy was in recession! Add to that recent minimum wage increases, rent controls and other independently growing regulation/bureaucracy…). So no, Keynes didn’t say stagflation couldn’t happen; it’s more like he had nothing to say about it. The discrediting done in the seventies was done by ideologues, who cherry-picked their way through Keynes, helped with much misunderstanding by their predecessors.

    Comment by Velska — July 29, 2009 @ 6:03 pm

  109. As far as banks go, for centuries fractional reserve banking was illegal, even though banks did it any way. That is why we call putting money into the bank a “deposit”. The bank was supposed to hold onto it until the depositor came to withdraw, where in practice banks generally have always treated “deposits” as loans to the bank. And the first thing to know about any loan is that you might not get your money back.

    Nowadays we have the FDIC, etc. so what banks do isn’t exactly immoral, let alone illegal. However, the resulting monetary inflation is essentially the equivalent of a government endorsed 4% property tax on all dollar denominated assets. The primary beneficiaries of this “tax” appear to be borrowers. Of course the banks make a pretty penny too – most of the time…

    Velska: It didn’t matter what Keynes said or didn’t say – the reigning Keynesian economic policy of the 1970s (which should sound familiar) was to print and spend our way out of recessions. Instead we got high unemployment, high inflation, and high interest rates for more than a decade.

    Keynesian economics has only one claim to fame – to justify the policy of running deficits to lower unemployment. The only problem is that it has never worked. It is certainly not working now.

    Comment by Mark D. — August 2, 2009 @ 12:29 am

  110. Well, ahem, I’m a bit late to the discussion but Michael made me speak up.

    Article of faith 12 states: We believe in being subject to kings, presidents, rulers, and magistrates, in obeying, honoring, and sustaining the law.

    Foreclosure is a legal transaction in this country. In doing all you can do and still not having it be enough, some people must allow a home to be returned to the bank. They move out, they have their credit tarnished and live with the stigma of foreclosure for quite a few years.

    Michael you act as if this is a flip decision made in folly. It is not folly, and it is not fun. It is legal and allowed. And I’ll be damned if I sit here and read your comments and not speak up. These people are not less than. It is a business transaction that is sanctioned under the laws of this nation. Morality is a two-way street.

    Comment by robyn — August 2, 2009 @ 11:05 pm

  111. Geoff, one thing to add here.

    It’s true that second mortgages are not currently foreclosing for non-payment. But the lien remains on the property for a long, long time.

    This can come back to bite you if you ever wind up with equity in the property again. The 2nd mortgage guys can always foreclose then. And you’re going to be stuck with a big backlog of payments you’ll need to bring current.

    So I’d hardly call this anything more than a short fix for a family who is underwater at the moment.

    And what happens if the bank hands off the second mortgage to a sleazeball collection outfit at a discount rate?

    Those guys can be very unpredictable. Some might even force a foreclosure just so they can sue you later for a wage garnishment on the unsecured portion. They, frankly, don’t have to care about losing the house in foreclosure because they never dumped much money into it in the first place. To them, it will just be another unsecured debt to collect on, and they won’t care one jot about forcing a foreclosure on your home – even if they won’t get a dime of the equity.

    A far safer option if the 2nd mortgage is unsecured, might be to declare Chapter 13 bankruptcy. Then you can strip off a totally unsecured 2nd mortgage or HELOC and get rid of it with your monthly plan payments. And since the whole process takes place under the aegis of the Bankruptcy Court, there’s a lot less room for funny business from the creditors.

    Note, this “strip off” of a mortgage is only a viable option when the first mortgage exceeds the current market value of the house. If so, you can toss all unprotected mortgages in the pile with the credit cards and get rid of them.

    Bankruptcy can offer other viable options for troubled homeowners as well.

    But don’t pretend that simply ignoring a 2nd mortgage is anything more than a quick short-term fix.

    As for Michael – people who default on their mortgages ARE keeping their covenants. They agreed to pay, or the bank can take their house or sue them.

    If they don’t pay, they are still keeping that agreement they entered into. No dishonesty involved.

    Comment by Seth R. — August 8, 2009 @ 12:54 pm

  112. If borrowers have an ethical duty to repay their debts, no matter what, then the banks have an ethical duty to show compassion and mercy on the debtors.

    Besides, it’s immoral for a bank to demand someone pay $1.2 million dollars, plus interest, in exchange for a house worth only $500K. Someone is getting robbed in that transaction, and it’s the homeowner.

    Comment by Celestial Heretic — August 18, 2009 @ 3:24 pm

  113. An interesting study released October 2009 addressing this concept. A great read and addresses the ethical/moral/whatever-you-want-to-call it obligation so many here talk about it. There is some enlightening evidence that the ethical/moral obligation to the family might *be* to walk away rather than submit your financial well being for the long term toward something that doesn’t make sense.

    I have to admit that I didn’t necessarily agree with Geoff’s position here in full, but *it made sense* — heck until you are in that position we can only speculate. I can tell you that if I lost my job immediately and things were tough, my family would certainly make decisions we normally wouldn’t…not illegal, not un-ethical…but realistic and responsible ones for the survival of my family’s well being and future…and some of those might include stopping to pay certain things. As a member of an HOA board I see this daily…people who don’t pay their community fees because they lost their job. Frankly, I don’t blame them and probably a first place I’d look to.

    Anyway, enough ranting. Here’s the study entitled ‘Underwater and Not Walking Away:
    Shame, Fear and the Social Management of the
    Housing Crisis’ by a University of Arizona legal studies department: http://sacbee.com/static/weblogs/real_estate/SSRN-id1494467.pdf

    Comment by timheuer — January 8, 2010 @ 2:53 pm

  114. I think the Auhor of the article makes some good points, but fails to also recognize the emotional attachment people have to their homes, the lack of comparable alternatives to their homes, and the ability of people to hope that things will get better.

    Comment by Matt W. — January 8, 2010 @ 6:25 pm

  115. I really like what you guys tend to be up too. This type of clever work and reporting!

    Keep up the good works guys I’ve incorporated you guys to my
    personal blogroll.

    Comment by Rodger — September 6, 2013 @ 6:48 pm

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