I’m kind of sensing a few themes developing from those defending the defaulters: - If it’s legal, it’s ethical. The discussion on non-recourse loans falls into this category. - Banks took advantage of borrowers by offering loans they knew (or should have known) could not reasonably be repaid, so therefore it’s okay for borrowers to “stick it to them.” - Banks knew there was risk that borrowers would default, therefore it’s reasonable for them to do so. - If corporations can (strategically) default, individuals can default.
I was thinking about a buddy of mine that bought an apartment in 2006 in an “up-and-coming” neighborhood downtown. He paid $330,000 for a one bedroom apartment, and at the time thought it was not only a great place to live, but a terrific investment. Presently he’s had it on the market at $270,000 for two years and not had one single person even look at it. The going rate in the building is around $160,000 for a similar space. He and his wife together make a decent living, call it around $225k a year, so they’re more than able to afford the mortgage. About a year ago they both decided they really wanted to start a family, but had zero room for a baby. Essentially their life was on hold because they lived in an illiquid apartment. Fortunately for them the renters market has been extraordinary so they decided to rent it out and buy a house. They found a renter in a matter of days, and now their mortgage is covered by the renter (though not enough to cover their HOA fees which they still pay). In this situation, would it have been ethical for them to walk away if they couldn’t have found a renter? I believe so. They made a bad decision buying where they did when they did. Because of that their lives were on hold, and it was creating tension in the relationship (as all financial issues tend to do). Not to mention the biological clock ticking in his wife. All and all, last year wasn’t awesome for them and had they not been able to move…well, they’d certainly be much less happy than they are today. I gather that the “you signed a contract so you must honor it if at all possible” crowd would say just that…he would have had to stay put and honor his agreement at the cost of a happy marriage and starting a family. Does that really sound ethical to you guys? What about your duty to your family? What about what’s in their best interest? TL;DR - It’s a business decision. Their are consequences to breaking any contract, and the counterparty is well aware of what they’re getting into. You must consider all sides of the equation - business and personal - and ultimately do what’s right for you and your family. That’s more ethical than staying in a shitty situation because you don’t want to break your word.
STL, I was personally in a similar situation just a year ago, and wrote a big check to get out of a house because it was too small for our growing family. It sucks, and I would prefer to have the money, but for me the cost of compromising my ethics was higher than the financial cost of making up the difference. I just see it this way: I paid what I felt was a fair price for a house based on the information at the time. It turned out to not be a wise choice, and someone had to pay for that. Why would the bank have to eat the cost for my mistake? The bank never forced me to buy a house, and it was up to me and the seller to determine a fair price at the time.
I disagree with Sweep The Leg’s post above so much that I am tempted to call it wrong, though it;s hard to say that an ethical judgment is wrong. They made a lousy investment and there isn’t even much pain to them in living with the consequences. They signed an agreement. They even have a decent way to ameliorate pain to themselves by renting out the place. This stuff “I gather that the “you signed a contract so you must honor it if at all possible” crowd would say just that….he would have had to stay put and honor his agreement at the cost of a happy marriage and starting a family. Does that really sound ethical to you guys? What about your duty to your family? What about what’s in their best interest?” is a bad strawman. I would say that they should do just what they did - rent it out to someone else, cut their losses and avoid causing any losses to the lender. If paying HOA fees (I don;t know what that means, incidentally) on a bad investment causes them not to have a happy marriage then their marriage sucks anyway. I think the notion that someone thinks that having marital discord because they have to pay HOA fees on a bad investment they made constitutes undue harm to themselves so they can default on a big obligation is the worst kind of self-indulgent, immature unethical thinking. It’s a serious character flaw in my book. In getting any future loans, that story would deeply handicap their chances of getting the loan because every lender that I have ever known would regard that as exactly the kind of flawed character that doesn’t get a loan.
I applaud this! It’s unfortunate there aren’t more people like you in this country. No doubt it sucks big time, but we all have made unwise choices in life (investment or otherwise), and the important thing is that we continue to learn from these experiences. The example that Sweep gave of the family that found out soon after they bought their place that they had overpaid is sad that it impacts their lifestyle and they felt constricted, but they made a decision to pay the $330k, and it certainly is not the bank’s fault that the home values sank so much in that area.
I suspect he means that market rent is high enough that they can cover their mortgage and insurance, but not their homeowner’s association fees (HOA). A bit harsh with your view of their marriage. “Financial difficulties” is among the most common (if not the most common) reason marriages end. That doesn’t mean those marriages sucked.
In STL’s scenario walking away sounds like a pretty bad financial decision ethical or not. Their credit would be destroyed and they wouldn’t be able to get another loan for another seven years. In the meantime they would have to have been paying for rent on another place. Also, I bet if your friend took the PV of the the monthly HOA fees he’ll have to pay it would probably be in the neighborhood of the equity loss he took on the home purchase.
You guys crack me up. First off, the HOA fees (higgmond is right - Home Owner’s Association) is not even a material fact. I just included that because, well, it’s true and part of the story. They amount to about $250 a month so feel free to discount it using whatever rate you see fit, but they’re not recouping their equity loss of nearly $200,000 from foregoing the $250 a month. Many of you are personifying the lenders (banks). You’re not borrowing money from your grandma for this house. You’re getting from an institution that has just as much and probably considerably more information than you do. When you buy a house it’s an investment (and hence a risk) for both parties involved. And, for the sake of humanity, let’s assume we’re all entering into mortgages in good faith. No one wants to be put in a position that’s makes strategic default an option. But here we are. Continuing to use my friend as the example, but with the “what if” of not finding a renter, you need to face reality. You have three options: 1) Continue to live there and pay your debt to the bank; 2) Sell and take the loss; or 3) strategically default and start over. Let’s examine each. 1) I guess the vocal majority say this is the ethical thing to do. I completely understand this position. Honoring contracts is absolutely critical for capital markets (and society in general) to function at all. However, the truth is sometimes there are other considerations. In my buddy’s case, it came down to the desire to start a family and relieve the stress created by financial hardship. (Those of you that believe this is bogus and their relationship is in trouble anyway have either never been married or just fucking retarded.) Forget the strawman counter. This whole debate is a circle jerk anyway. I think we all have to agree though, you can’t ignore the consequences your actions have on your loved ones. 2) Taking a loss in the amount facing my friend isn’t practical in the least. Try doing the math. You think a couple making $225k (gross) can absorb a loss of ~$170k? This isn’t even close to a realistic option. However, I fully agree that if you can do it, this is the correct option. 3) Recognize you made a poor choice (incidentally so did the bank), cut your losses, and live to fight another day. Are their financial repercussions? Of course. Bankruptcy would be a certainty and for seven years your credit score would suck. But, again using my example in particular, it wouldn’t be the end of the world. I don’t really think anyone’s opinion is changing here. Maybe we should tackle the gay marriage or abortion debate instead. As much as I do hate having to wax philosophical, we probably should bother to define ethics before moving on. We all seem to have our own opinions on what it is, and therefore can’t reach a reasonable common ground. TL;DR - Every situation is different. Like any other major issue it not as easy as being right or wrong. The answer is almost always somewhere in between. @BVal - Just wanted to point out your comment about it not being the bank’s fault home values sank. Was it that particular bank’s fault that particular apartment tanked? Perhaps not but they at the very least enabled it. Were banks in general a huge part of causing the housing bubble? None of us should feel sorry for any of these banks. They’re all run by professional with people like us working there. Sure, my buddy made a bad decision. BofA, Citi, et al. made hundreds of thousands of bad decisions. You (the royal you, not BVal individually) think the world would be better off if individuals ate the loss instead of putting it back to the banks? I guess if individuals acted ethically that would have happened to a greater magnitude than it has. That would be a more interesting debate for us pragmatists anyway.
I would agree that critiquing the marriage because they wanted to avoid the strains of financial difficulty is kind of bogus. One of the leading causes for divorce is financial strain. Drinking wine out of dixie cups sounds romantic in frats and country songs, but it doesn’t take long to realize it’s hard to maintain a solid relationship when you’re broke. Particularly when you add kids and maternity leave to the mix. While it’s nice to have romantic ideals, the successful marriages I’ve seen were successful because they were committed to the marriage, and thus committed to avoiding compromising situations and unnecessary strain (rather than just letting themselves fall into these situations and trying to tough it out). A friend of mine named Swack Blan had a six year relationship blow up when someone went overseas to study for a PhD. I think the relationship had been through enough that both parties got overconfident. In hindsight, the proper committed move is to just avoid those scenarios entirely where possible (as Sweep’s friends did). So, now that this thread is officially moving in tangential directions, I vote we move the discussion on to capital punishment.
@Sweep the leg - What was the point of that previous post? To concede that the ethical thing to do is to live in the house and pay down the debt but then point out that a strategic default would be better for his marriage? What kind of ethical point is that? The notion that you can do something unethical because you having more money is better for your spouse is silly. If I can rob a liquor store and get away with it, this is better for my wife and kids but that’s hardly a convincing ethical argument for robbing a liquor store. In fact, being married usually implies more of a responsibility to pay because it is likely that both spouses signed the note and both have income to pay the note. The bank had even more reason to believe that the note would be paid because two people of presumably good character signed the note. BTW - In the future do not include suggestions like “we probably should bother to define ethics before moving on” when you are having a discussion about ethics. We don’t have to go back to first principles to have a meaningful debate about ethics. If you need a review of first principles (which kinda seems likely) then it is up to you to do that on your own.
He was simply providing an illustration of someone in a bind, but then went on to point out that what fortunately happened in that situation was the best of all worlds. They managed to rent the place and cover all significant costs so everyone won. Without looking back at the post I believe he then went on to say “well, if that hadn’t been an option, then…” But I think you’re misinterpreting the example.
Yet another bad analogy. Robbing the liquor store is illegal and violates all ethical constructs including the one’s we’ve put forth. Poor example.
After minoring in Philosophy I can tell you first hand, if PhD’s in the subject matter are forced to begin a debate by defining ethics I don’t think we’re above it either. And reading a book won’t define ethics. It’s pretty obvious the root of the debate stems from both sides applying different ethical constructs. If we can’t agree on a construct then arguing this case to infinity can’t be won and neither side will be persuaded.
I feel pretty good about my position in an ethical debate when the people on the other side are resorting to “whoa, let’s define ethics”. Ph.D.'s in philosophy are surely not forced to begin debates by defining ethics and that would be a very stupid waste of time. I almost never discuss axioms for example when I am discussing math results. As to your comments - your first comment refers to an earlier post of SweeptheLeg. I objected to that one in an earlier post. An analogy surely does not have to be a perfect analogue to make a point. Your suggestion that somehow it is different because one is illegal and one is not is irrelevant. There are plenty of illegal things that are ethical and there have been plenty of times in history when defaulting on your debt was illegal. The point, however, is that suggesting that you can change rules of ethical conduct toward a third party because you are married and thus have a responsibilty to your wife for your own welfare is ridiculous. Such a proposition allows people to take less responsibility for their actions because they are married, allows married people to behave in less ethical ways toward other people than unmarried people, allows people like lenders to discriminate against married people because marriage diminishes the chances of receiving treatment implied by good charcter and 50 other problems. Honestly, there are some good points in this debate but the proposition that you have less responsibility to behave ethically because you are married is just dumb. It’s so dumb I can’t believe I am arguing about it. I also reject your notion that the debate is about “applying different ethical constructs”. SweepTheLeg even seems to agree, for example, that living in the house and paying back the mortgage is the moral high ground. Then he brings up the dumb point that marital responsibilities somehow relieve him of ethical responsibilities to someone else. That’s just not a rational ethical construct because it brings up bajillions of ludicrous consequences (like you can rob a liquor store and call it ethical or those other ones mentioned above). You can’t just make up your own rules and call them ethical constructs. Anyway, I’d be happy to get the debate back on track with the claims that it is ethical to default on the loan because the bank is happily accepting default risk, gets paid for taking on default risk, accepts market risk when it is lending on risky assets, etc all of which are decent constructs. The “I’m relieved of my ethical repsonsibilities because I’m married” is not a decent ethical construct.
Absolutely dead wrong without a single doubt. Anytime you’re debating the ethics of an issue you must begin by defining which construct you’re basing your entire logic train on. From one construct to another the application of ethics differs entirely. If two philosophical debaters cannot agree on the same construct, then there’s very little likelihood they will arrive at the same conclusion. Or that either side can prove the other wrong (unless they can prove one construct does not apply - not likely - or unless they’re planning on disproving an entire ethical construct - less likely -). They’ll often have to agree to disagree. Typically only when both debaters are applying the same construct can one side hope to reach a “victory”. That’s philosophy 101.
I don’t think I understood your objection then.
Since our argument is that ethics with regards to business contracts are dictated by law and the resulting expected market behavior, we are in fact arguing that legality is a factor. So the example still holds no water. Particularly, since we’re arguing that in our view, obligation to the family supersedes obligation to the bank. It does not mean it’s “less ethical” but simply by our reasoning, disadvantaging your primary promise to your family to uphold one to the bank would be unethical (only per our construct, obviously not per yours). We’re not saying you have no obligation to the bank, but only that there’s a point where if you’re forced to choose between undue hardship to your family and disadvantaging your kids vs handing the bank the keys, there’s definitely a line where you just give them the keys.
No, what sweep said was that the family managed to rent out the place and faced minimal costs so everybody wins, that’s great (because we’re not saying you have no obligation to the bank). He then goes on to say had that not been an option he would have gone with the default.
No, we’re saying you’ve accepted a different primary responsibility to the family within the same construct. It’s not so much different from saying I have ethical responsibilities to my friends and my family. But when forced to choose, I have to go with the family even if it means a possibly unethical move towards my friend. Now, a wise person avoids these sort of circumstances, just as a wise person avoids buying a house in a market that they may not be able to afford. But once those cards are dealt, family first. A similar parallel would be if I signed a non-compete agreement with a bank that later kept me from providing for my family and caused undo hardship. I would choose in a second to exercise every legal option to get out of that contract despite the fact that the bank seemed to think I was violating the spirit of the agreement as they understood it. In business, ethics and legality are often intertwined.
I’ve been in tons of ethical debates with philosphy professors and nobody ever felt compelled to define ethics when they atarted. I would have responded “Stop patronizng me” and gone on. I shared a house with a philosophy professor, for God’s sake, drank beer and discussed the ethics of dating hot college students and never once defined ethics. I don’t quite understand this statement “our argument is that ethics with regards to business contracts are dictated by law and the resulting expected market behavior, we are in fact arguing that legality is a factor”. Is your argument really that laws define ethical behavior? If so, I’m pretty much dropping out of this debate. I think, for example, it would be hard to find any of those philosophy Ph.D.'s to agree with you. In particular, it means that ethics depends on where you live, what time you live in, whether Democrats or Republicans are in charge of the legislature, etc. It means that legislators are the ethical authorities of society - that Michelle Bachmann, for example, is an authority on ethics. You just can’t believe that. However, there is no question that if we define ethical behavior as that which is legal then walking away from a mortgage is completely ethical. You’re mixed up on this stuff about family - I suggest that you try to deal with the consequences of saying that getting married changes your ethical reponsibilities to other people. For example, if we accept the idea that undue hardship happens to someone sooner when they are married then when they aren’t simply because the hardship is visited on another person, then a bank should be less willing to lend to a married person than an unmarried person. Further, getting married represents a material change in the condition of the loan. A bank would be justified in putting a “non-marriage” clause in the mortgage, i.e., “if you get married, we are declaring a default”. You can’t unilaterally change your commitment to the bank like that without allowing the bank to respond in ways that nearly everyone would find ludicrous. I think the issue about non-competes is very different, in part because I think non-competes are inherently unethical and ought to be illegal except in really narrowly defined ways (which isn’t to say that I’ve never forced someone to sign one). A bank loan is a mutual agreement that in almost all cases the person with the obligation under the contract sought out. A non-compete agreement is usually foisted on someone who needs a job and often has no real choice. I think they are almost automatically contracts signed under duress and thus breaking them has no ethical consequences even if there are legal ones. However, I would say that to the extent that there are ethical issues in breaking non-competes, the presence of family doesn’t enter into it. BTW - from a strictly legal standpoint, your marital status in breaking a bank loan or non-compete is irrelevant.
I think the argument that “it’s best for the family” has been taken as fact but I feel it doesn’t hold water for several reasons. First, defaulting on a mortgage does not make a financial issue go away. It only changes it from a cashflow/balance sheet problem to a credit problem. And all of the (possible) guilt and hand-wringing that could cause problems for a marriage are going to be a problem regardless. Second, and this has been stated before, marriages should be able to weather difficult times. Hell, they put it right in the vows: “for richer or for poorer.” I’ve been through more than my fair share of financial hardships, and going through them with my wife has only made our relationship stronger. Third, and this is particularly true for those of us with children, doing something that is potentially unethical is probably not going to be “in the best interest of the family.” Children learn a lot about the world by what their parents do. If we make a decision to avoid paying a debt, we will have more money in our pockets to buy worthless crap for the kids but our children will learn the lesson that when things get difficult you shrug and blame somebody else, particularly when that someone else is a faceless corporation. If it’s causing undue hardship to the point where you can’t provide food or shelter, that’s one thing, but in the example above, we’re talking about a couple making $225k. Not exactly on their way to the poor house.
In all of my examples I’ve factored in the cost of bankruptcy. In other words, you’d have to REALLY be underwater. I’m not talking about a case where you can buy “more toys for your kids” (because at that point, the financial loss on the home would in no way be large enough to outweigh the cost of bankruptcy). That just wouldn’t be smart. I’m talking about cases where you’re liquidating their college funds (not essential, but still important) to make payments on a home that a massive loss.
Joey, I posted a long response to you, but then deleted it. I definitely disagree with each of your points, but I don’t think either side is budging on this one, so I’m going to let it drop. Enough has been stated already to guess what I’m going to say. All I will say is to your philosophy example, there is a clear difference between defining ethics as a verbal definition and stating which construct you’ll use as a framework for discussion. I particularly disagree with your assertion that it’s okay to violate some contracts that are signed because you disagree with them while others must be honored, but whatever.
I want to see your long response… Anyway, I advise people all the time about non-competes and I never tell them it is unethical to break them. It’s not because I “disagree” with them - it’s that I think they are coerced agreements. A pretty time-worn ethical principle is that you can’t be held to agreements that you made at gun point. I’ve signed non-competes where someone told me I would either sign the agreement or be fired. There is just no sense in which I am ethically bound to honor that non-compete because that is just too much coercion. Anyway, I absolutely think that there are all kinds of ethical ways to violate a contract. The biggest one is non-performance by the other party. I’ve advised people to not honor employment contracts for example when the company was not keeping up its end of the deal.
I just went back to the OP’s initial post. It begins “This might be an easy answer……” That’s certainly proven to be true!
Well had I known you wanted to see it, I wouldn’t have deleted it. It was pretty long, so maybe tomorrow or Sunday I’ll try to recreate a version.