ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Friday, December 18, 2009

Strategery or Immorality? Underwater Home Borrower’s Quandry: Should I Stay or Should I Go?

Home_under_water Over 5 million U.S. homes are under deep water – that is, the borrowers have outstanding mortgage debt that exceeds the home’s current value by more than 20%.  A homeowner in this situation that can afford to make mortgage payments faces a tough choice: stay and continue to pay *or* stop making loan payments and walk away.  A default is bad for the borrower’s credit score; but why stay when you could rent a much better crib for a lot less dough?

The Wall Street Journal explains:

A growing number of people in Arizona, California, Florida and Nevada, where home prices have plunged, are considering what is known as a "strategic default," walking away from their mortgages not out of necessity but because they believe it is in their best financial interests.

As the article reminds, the “standard mortgage-loan document reads, ‘I promise to pay’ the amount borrowed plus interest.”  Does this promise have a moral element? Lenders and others say there is an obligation to continue to pay, even if it has become inconvenient to do so:

George Brenkert, a professor of business ethics at Georgetown University, says borrowers who can pay -- and weren't deceived by the lender about the nature of the loan -- have a moral responsibility to keep paying. It would be disastrous for the economy if Americans concluded they were free to walk away from such commitments, he says.

But others would say it is quite ironic for the mortgage lenders to cry “morality”: 

Brent White, an associate law professor at the University of Arizona who has written about this issue, says homeowners should make the decision on whether to keep paying based on their own interests, "unclouded by unnecessary guilt or shame." He says borrowers can take a cue from lenders that "ruthlessly seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility."

What do you think, is walking away from your mortgage immoral or just (to borrow a word) common sense strategery?  Now who’s the sucker?

[Meredith R. Miller]

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