Saturday, February 23, 2008

Subprime Ethics

One more issue on the subprime market has come up.

Is it unethical for a home owner to walk away from their mortgage, if it is in their interest to do so?

Suppose you bought a home and took out an adjustable rate subprime mortgage. Your initial rate was 8%, but it would reset to 9.5% very soon. Unfortunately, you will not be able to refinance the house since housing prices have declined and banks have tightened their lending standards. At a rate of 9.5%, your finances will be stretched very thin. You are tempted, therefore, to drop the keys to the house off at the local mortgage broker who financed your mortgage in the first place. Now there are a lot of ramifications of doing this, not all which I understand -- you might still end up owing the bank money, requiring a bankruptcy filing, and you could also end up with a big tax bill from the IRS for any loan amount that the bank writes off. But for my point, let's just assume (very safely) that there will indeed be circumstances when it is in the individual's interest to default.

It is not as if you CANNOT make the mortage payments, just that it really is not in your economic interest to do so. You, and your family, would be better off renting a house, saving the difference between your new mortgage payment and the rent, and of course dealing with all the implications of the default.

Is it unethical to walk away from that mortgage?

I say... no.


Blue Ridge Cabin Rentals said...

Absolutely they are wrong when you have a adjust mortgage means that you agree to the change in interest rate. You have to plan that many things may happen to make that not happen and you would be responsible. Not being able to flip, not being able to refinance, job loss, illness etc......

I think people should pay a penalty of 7 years no homeownership and not able to obtain that loan type ever again.

Payment should be made to lender till home is resold with homeowner being responsilbe. With such a high volumne and slowness of banks to move foreclosures you may be talking a year or more you would be responsible.

I also think if people paid a larger deposit they would have more of an invested interest in a property.

So stop the jingle mail! (keys being mailed to lenders)

Rubenator said...

A stupidly got into an ARMS mortgage 19 months ago.I have been paying 1600.00 dls a month. I have always paid my mortgage on time. One of the mortgages is at 7.5% the other at 11.5%.I have tried to refinance. I bought my home in Maine for 210,000, but now it is worth 198,000. The mortgage companies want 5 % down. I dont have 12,000 dollars plus closing costs. I don't want charity I just want a fair interest rate. Can anyone help me? Do I just bite the bullet for another 2-3 years if I can?, so I can get some equity?