I mentioned the other day that couple in the "60 Minutes" segment who has decided to walk away from their mortgage, even though they can afford it. The house is suddenly worth less than they owe on it, so hey, why should they honor the promise they freely made? What is honor anyway nowadays?
Patrick Deneen worries about this. He says if ordinary schlubs like this are walking away from their commitments, it's only because they're following the example set by elites, like corporate types that felt no loyalty to their workers or the places that had sustained them. Hey, it's just a business decision. Nothing personal. Excerpt:
As the Greeks well knew, the vital ingredient for shame - and, correspondingly, honor - to function in society was immediacy and care for the people in one's polis, their views and opinions, the esteem they bestowed or withheld. Elites were honored in our society to the extent that they were themselves exemplars of the virtues that they both preached and expected of others in turn. The current widespread hostility to all these elites - Wall Street, lawyers, doctors, politicians - reflects the breakdown of a covenant of respect and honor. As our economy has become more abstract and distant, as our "communities" are compared to bedrooms (or perhaps, more aptly, hotel rooms), as our sense of continuity between past and future has been undermined by rampant mobility, impermanence and instability, there can be little wonder that "shamelessness" has spread like a contagion through our society. Such lack of shame and disregard of honor began at the top and now ripples downward through the feeding chain of class and status.
How'd Bob Dylan put it? "Steal a little and they throw you in jail, steal a lot and they make you a king."
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DavidTC writes: "That sound fair until you realize that banks were doing the exact same thing in reverse...if the property decreased in value they weren't lowering payments, and if it went up in value and they took it back they weren't reimbursing anyone. Let me play a tiny violin for them."
Short lesson in property law follows. When the bank forecloses on a mortgage, the judgment in foreclosure instructs the sheriff to seize the property and offer it to sale on the courthouse steps after public advertisement. When the foreclosure sale occurs, the first bidder is the bank, who offers the secured amount of the mortgage. Thereafter, if anyone bids on the property, the amount in excess of what the mortgagor owes, less expenses, is the mortgagor's, not the bank's.
Of course in the situation where the amount remaining on the mortgage is greater than the actual market value of the property at the time of the foreclosure sale, the bank may be the only bidder. And in that case, should the bank offer just the market value and there are no other bids, the bank will receive title to the land and in addition a judgment against the mortgagor for the difficiency between sale price and the amount remaining on the note. Such judgments usually remain enforceable for twenty years in most jurisdictions. Walking away from a bad investment may not be the most prudent business decision one could make.
JLF,
Not all states do the courthouse steps drama. We do it right in front of the home, sometimes while the owners are looking out the window. Not much better. All in all foreclosure is a nasty business. I'm glad I'm out of it. You're completely right about the walk away.
Well, this thread is pretty much played out, but it's obvious I got under Franklin Jennings's skin in a big way. Sorry to break it to you Franklin, but what I was talking about is standard operating procedure in the business world. It's not a matter of being part of "honour" or "Mammon's flock" as you put it or any other matter of ethics, but just a simple matter of economics that anyone who is experienced at this sort of thing doesn't get all huffy about when it happens. Also, you seemed to miss the part about paying damages to make the other party whole, which means that no one is economically worse off by terminating the contract.
Let me provide a short illustration. Company X signs a five-year lease to rent office space from Company Y. Two years into the lease, Company X's business is booming, and they need more office space, which Company Y can't provide. Should Company X (a) hold off on hiring more people and expanding its operations (which would increase the economic benefits for itself and the general economy) because it can't fit in the current space, or (b) should it break the lease, pay off Company Y for whatever amounts are left owing on the lease for the next three years (or some lower amount, if Company Y is confident it can rent out the space quickly - in either case, making Company Y whole), and move on to new, bigger office space? The answer for anyone with a modicum of sense is (b). Everyone is better off, prior promises notwithstanding.
That, my friend, is why breach or early termination of contract, absent fraud, is not generally treated as a criminal offense or something in which you can receive damages for other than simple compensatory damages. Again - Law and Economics 101. I've been on both sides of such situations, and I can tell you, no one whines about "honour" or "Mammon" when they happen, they just get things done and move on to the next deal. As stated above, that's life in the big city, sorry if you haven't been able to experience it. But feel free to castigate those who make things happen from the sidelines, that's always fun, I suppose.
JLF
Short lesson in property law follows. When the bank forecloses on a mortgage, the judgment in foreclosure instructs the sheriff to seize the property and offer it to sale on the courthouse steps after public advertisement. When the foreclosure sale occurs, the first bidder is the bank, who offers the secured amount of the mortgage. Thereafter, if anyone bids on the property, the amount in excess of what the mortgagor owes, less expenses, is the mortgagor's, not the bank's.
I know the theory as to how that works, and I also know, in most cases, homes sold at auction foreclosure don't make anywhere near what they would make on the market. People do not pay top dollar for houses with holes in the walls and dirty ceilings.
This is obvious, as people who are selling their house actually straighten it up, they don't go 'Oh, that just need a paint job, we'll knock that off the price and you can get it done yourself. The house might have sold for the same cost if the property owner had fixed it up, but when he was thrown out on the street it was in need of a few hundred dollars worth of repairs and now it's going to sell for fifty thousand dollars cheaper. And, thus, he doesn't make back the forty thousand dollars of principle he repaid.
...assuming, of course, he actually paid any principle, and they didn't rig it where his first X years were paying 'interest'.
But I am aware banks do not directly benefit from foreclosures, but what has happened is that they benefit from more houses being sold because they make money during that.
Aka, if they foreclose, and someone buys at auction, they came out even, and now it's possible that person will finance their purchase through the bank, and it's also likely that person who bought the house at auction intends to resale, so that sale might go through their bank.
Or those sales might go though another bank, but some other foreclosed houses will go through theirs.
Housing churn benefits banks hugely when there are rising house prices, and foreclosure generates almost twice as much churn as just people selling, as people in the know buy the houses cheap at auction, fix them up, and resell them almost immediately.
No one can tell me there weren't some people in backrooms going 'You know, all these crappy mortgages are probably going to get foreclosed on...but, honestly, we'd end up making more money and can't lose any. So while we're not going to obviously make bad loans, which is illegal, we're just not going to check out the people we lend to very well.'.
Well, until house prices started plummeting. Ha.
Of course in the situation where the amount remaining on the mortgage is greater than the actual market value of the property at the time of the foreclosure sale, the bank may be the only bidder. And in that case, should the bank offer just the market value and there are no other bids, the bank will receive title to the land and in addition a judgment against the mortgagor for the difficiency between sale price and the amount remaining on the note. Such judgments usually remain enforceable for twenty years in most jurisdictions. Walking away from a bad investment may not be the most prudent business decision one could make.
Problematically for banks, 'market prices' haven't corrected themselves yet in many places, as, ironically, houses are not selling, and the only way to determine the value of a house is what its neighbors are selling for. Catch-22.
Wouldn't that be a kick, having paid $30,000 on a supposedly $300,000 dollar house since 2004, handing it back to the bank, walking away with $10,000 from the bank as the principle you've paid, and watching the bank be unable to sell it at $250,000, but unable to do anything because it 'officially' was worth $350,000, as that is what a nearby house sold for in 2007 before the collapse? Ha. I can see why people are doing it.
Ironically, this means you should get out now, while your house is still worth the original value on paper.
But, more to the point, you obviously should consult a lawyer before breaking any contract. Of course, considering how people don't bother to check things before buying a house, I doubt anyone will. (I have seen $450,000 houses backed up against a rock quarry. And people buying them. Morons.)
You can only sue someone who *has something.* Many home buyers had *no* downpayment, *no* savings, and *no* verifiable income. They borrowed in some cases *hundreds* of thousands of dollars with no way to pay it back.
IRAs? Many didn't even have bank accounts, or jobs.
They made out like bandits; still are - they lived in their houses for years, in some cases, rent-free. And lawyers reading can correct me if I'm wrong, but people can't have so much garnished from their wages (assuming they work on-the-books) that they can't pay for their basic human needs of food and shelter.
So, no, when many buyers walk from these houses, they know exactly what they're doing.
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