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IT’S OFFICIAL: Henry Blodget Says It’s Okay to Walk Away From Your Mortgage!
By JLP | January 14, 2010
Anyone remember Henry Blodget? Well, he was the dude who worked for Merrill Lynch during the internet boom. He talked up internet stocks in Merrill Lynch research reports and then dissed those same stocks in private emails. He eventually lost his job and settled a lawsuit with the SEC without admitting or denying wrongdoing and paid a $2 million fine.
Since then he’s written a book and currently writes columns for various websites. Ramit over at IWillTeachYoutoBeRich posted a link to Henry’s latest piece, Yes, It’s Okay To Walk Away From Your Mortgage. Some of Blodget’s logic doesn’t make sense. For instance…
“…The contract spells everything out: If you stop paying, the lender gets the house. That’s it. Unless the contract specifically differentiates between a failure to pay based on hardship (involuntary) and a failure to pay based on a collapse in the value of the house (voluntary), there’s no difference. If you had a “moral obligation to pay,” that would be spelled out in the contract.
Now, compare this to a situation in which you DO have a moral obligation to pay: When you borrow money from a friend at no interest, for example. THAT is a moral obligation to pay. In this case, your friend did not lend you money to make a profit. Your friend loaned you money as a favor–with no collateral or contract.
And here’s another way of looking at it: If you have a “moral obligation” to pay your mortgage, doesn’t the bank have a “moral obligation” to keep you in your house? After all, they loaned you the money to buy it, got your hopes up, moved your family, etc. (And, no, of course the bank doesn’t have this moral obligation).”
So, if you borrow from a bank, you’re under no moral obligation to pay it back since the bank is making money off the transaction. But, if you borrow from a friend interest-free, then you do have a moral obligation to pay it back. Interesting.
Can you compartmentalize morality? Is it okay to act with morals in some circumstances but not in others? If so, who’s to decide what’s a moral decision and what’s not? What if you borrow money from a friend with interest? Is it then okay to walk away from the debt since you’re no longer “morally obligated” to pay it back since it’s a business transaction? What if there is no contract?
This is crazy. The bottom line is YOU do what’s right, no matter what. Sure, there are circumstances beyond your control when you might lose your house. Perhaps your company shuts down and there are no other jobs in the area. Losing your home might be a reality. But to simply walk away because it’s worth less than you paid for it EVEN THOUGH you can afford the payments is wrong. No ifs, ands, or buts…it’s WRONG!
All this is going to do is make things harder on those who are responsible. For those who can get a loan, there will be longer contracts to sign with lots more CYA clauses for the banks.
I’d like to put this topic to bed but I keep running across stuff that I have to address. Feel free to leave a comment&151;or don’t if you’re tired of talking about this topic.
Topics: Credit Crisis | 29 Comments »
January 15th, 2010 at 12:18 am
A lack of moral obligations has caused a lot of problems in this country. Yes, you may have borrowed from a big greedy bank, but you ought to repay what you agreed to pay.
JLP, your example of borrowing from a friend at interest is good for this analysis. If your friend charges you 4% interest (or whatever the IRS imputes as interest), does that mean you shouldn’t feel an obligation to pay them back? That’s not being a good friend.
How can you break that logic just because you’re dealing with a faceless corporation? If it’s not good on the personal level, it’s not good on the corporate/business level.
But then again, maybe you don’t believe in absolute morality (or absolute truth).
January 15th, 2010 at 12:19 am
Gee if he says it’s ok I guess I have to take back everything I’ve said…in BOTH posts
January 15th, 2010 at 12:22 am
I think it’s perfectly fine to walk away from a mortgage that one can afford to pay. It’s business. Just as filing bankruptcy is perfectly fine, because it is legal. Personally I am highly opposed to bankruptcy, and honestly believe it should be used as a last resort. I don’t believe that it is used as a last resort, and it’s often used by people who barely have a reason to do so. However, to say that it’s “WRONG” to walk away is not at all a reason not to do so, for those who find it the best business decision.
January 15th, 2010 at 4:48 am
It is immoral to default on the loan to a friend because the friend has no real recourse short of a lawsuit. A bank who has lent a mortgage, on the other hand, has explicitly granted an alternative path to being made whole by requiring the house to be used as collateral. When the loan is made, the bank has prejudged the two possible outcomes–full repayment of the loan, or default on the loan and consequent seizure of collateral–as equivalent. If they did not judge the two equivalent then the loan was their mistake and their responsibility. So the outcome is moral insofar as both parties have been satisfied in the terms agreed upon.
This is not to say that all contracts are moral. It would be immoral, for example, to sign a contract with a mentally retarded person or someone else similarly incompetent and capable of being taken advantage of. Banks certainly do not fall into this category. The mortgages now being strategically defaulted upon were made with full knowledge that the value of the collateral could decrease and, if anything, should have been made from a position of superior information.
One might conceivably argue that defaulting homeowners are behaving immorally because they should have understood it to be implicit in their contract that the bank was only loaning the mortgage under the assumption that default and surrender of collateral was the inferior option due to its relative rarity on a historical basis, or, in other words, that the bank didn’t mean what they said. In terms of judging the actions of homeowners this consideration is irrelevant. Attempting to divine the motivations of a counterparty with superior data and vastly more favorable access to capital markets is a ridiculous moral requirement.
January 15th, 2010 at 7:18 am
Using this logic, it isn’t immoral for credit card companies to raise your rates, alter your payment due dates, or cut your credit limit and charge you an over limit fee.
“It’s only business.”
People are quite libertine when it’s in their favor, and that’s what makes walking away from your mortgage immoral except in extreme circumstances beyond your control.
What if your friend were one of the shareholders? What if your friend demanded the home as collateral? The bank isn’t a pawn shop and that’s how this type of thinking (Dan’s and Yana’s) treats them. The bank DOESN’T WANT your house. They want you to pay your mortgage like you agreed to do. The existence of collateral doesn’t relieve you of the obligation to repay your loan. Imagine what kind of recession we’d be in if everyone did something this stupid.
January 15th, 2010 at 8:18 am
The phrase “My word is my bond” has gone out of fashion years ago, except as a marketing gimmick.
Morality? Not since the 60′s. Remember, everything is relative.
Whenever you hear about someone finding and returning a large sum of money, you also hear about a ton of criticism of this person, calling this person all kinds of names because the person did the right thing and returned the money. And on the flip side, you hear about people expecting a reward and suing for one.
The real golden rule “Do unto others as you would have them do unto you” has been replaced with “Those that have the gold, make the rules”.
Getting back to the original subject, part of the problem is that US mortgage law makes mortgages a non-recourse loan for the lender, so people aren’t on the hook for the rest of the money and all they suffer is a bad credit score for a few years. Retirement accounts are usually out of reach of creditors, so there is a perverse incentive not pay. Banks have a bad reputation because of all the tricks they’ve been using to generate punitive fees by taking advantage of people’s stupidity, laziness and innumeracy. So people feel justified in sticking it to banks.
January 15th, 2010 at 9:50 am
He’s an idiot…
BUT he has a point.
If the contract states that there are no legal recourses other than ownership being turned over to the bank, then walking away is allowed.
His moral obligation arguement is just idiotic.
January 15th, 2010 at 10:00 am
Putting aside the moral issue his unqualified statement that:
“…The contract spells everything out: If you stop paying, the lender gets the house. That’s it. ” is legally incorrect in many states.
Here in Florida (for example) the lender doesn’t just get the house if you fail to pay. They also get a deficiency judgment against the borrower for the difference between the loan balance plus costs and interest and what the lender got for the property at the foreclosure sale.
January 15th, 2010 at 10:26 am
Hehe, here we go again.
JimmyDaGeek, I love that argument that we’ve “lost our way” and America is a God-less, immoral nation ever since the JFK years. Yeah, the 40′s and 50′s were soooo much better! We threw an entire race (the Japanese) into internment camps and stole everything they had. We beat blacks for no reason other than the color of their skin. And I’m sure we looked down upon Latinos just as much as the rest.
Now onto the topic at hand. Banks chose to make the loan to you. They performed underwriting services to analyze your ability to pay. They performed housing assessments to determine the value of the home. Then they made you put down 20% so you had some skin in the game and were much less likely to walk away in the event that the house lost value.
Wait, what’s that? Oh they didn’t do any of that? Wow, who would have thought that ignoring decades of sound lending practices would come back to bite them in the ass?
Seriously, that is the entire reasons banks used to make you put 20% down. They want to see you’re responsible enough to save up that sum of money. And they also want you to having a large financial attachment to the home, greatly reducing the chance that they might get stuck with the home. They did not do their job, and it wasn’t out of ignorance. They were greedy and wanted more money, more profits, and more for themselves!
And JLP, as much as I like you, saying “No ifs, ands, or buts about it” does not show your willingness to encourage learning and debate. I don’t post here so people can ignore my arguments. I come here because I want to hear people that disagree with me. I want them to prove me wrong!
January 15th, 2010 at 10:39 am
From user yougotg:
“Take for example if I am a Christian performer contracted to perform at what I thought was going to be a Christian wedding, and it turns out to be an interfaith wedding, I may have a MORAL objection to fulfill the contract… you can not force me to perform to contract even if YOU think it is my MORAL obligation…”
To all those that say. “You’ve made a promise, now keep it”, how would you respond to this?
This is the first counter-example that I was very intrigued by. I find it interesting because the performer expects one thing, a Christian wedding, just like the borrower expects his house value to increase. They both get something they were not prepared for, and they both signed contracts saying they would preform either by paying or mortgage or singing a song. However, like the poster states, you can’t force someone to sing a song no more than you can force them to pay a mortgage. Thoughts?
January 15th, 2010 at 10:58 am
If the contract lets me walk away from a mortgage and turn the house over to the bank, I think it is ok to walk away if I so chose. Why not? It is part of the business transaction. How does morality play into that? Why even bring it up?
January 15th, 2010 at 11:10 am
JT,
The Christian performer should perform at the wedding and chalk it up as a learning experience. From that point forward, they need to make it clear (put it in the contract if necessary) that they will not perform at interfaith functions.
You wrote…
“I find it interesting because the performer expects one thing, a Christian wedding, just like the borrower expects his house value to increase.”
They may have expected the home value to increase but that doesn’t mean it will happen. They gambled and they lost.
ctreit,
Why even bring it up? Because you can’t separate morals from business transactions. You either act with morals or you do not. Just because the contract says it’s okay to do doesn’t mean it’s the morally right thing to do.
Take it further…what if EVERYONE acted this way? What if all homeowners who are currently underwater decided, “To hell with it. I’m walking.” What do you suppose would happen to the economy?
January 15th, 2010 at 11:13 am
in most of europe, prostitution is legal.
it is illegal over here in the us.
so who is right and who is wrong?
January 15th, 2010 at 11:28 am
Foreclosure is not equivilant to a satisfied mortgage.
Relinquishing collaterol at a pawn shop is equivilant because of the higher rates.
Do they do the opposite of a defficiency judgement? In other words, what happens when you default on a house that sells for more than the mortgage?
January 15th, 2010 at 11:39 am
JT,
HELL YEAH! I get so annoyed when older generations believe the younger generation is a waste.
Don’t forget we had doctors RECOMMENDING cigs, we had segregation up till the mid 1950′s, and I am SURE the older folk of the 60′s really thought highly of youngens of the 60′s with their Beatles, long hair and weed lol
January 15th, 2010 at 11:42 am
Newflash: An ex-securities analyst, who was fired from Merril Lynch and barred from the securities industry by the SEC because of securities fraud, says that it is OK to have no morals.
What a joke.
January 15th, 2010 at 12:03 pm
BG, hahaha. I do see the irony in that!
JLP, if everyone acted this way then housing values would correct to the norm a lot sooner rather than later. There are two things that have to happen: all the debt must be paid down, or it must be defaulted on. We’re just arguing over who takes the hit. In then end, it doesn’t matter on a macro scale and housing prices will drop to roughly 2.5 times the median wage.
We’re in a vicious circle where housing prices must come down to meet wages, but falling prices are leading to job losses which only further depress wages. It’s the great unwind, and just as aggressively as it ramped up, so too will it coming riping apart.
If you have done so yet, I urge you to check out Dr. Housing Bubble. The site is filled with great information, especially in regards to all the shadow inventory.
Trying to argue morality is a losing battle for both sides. While there may be absolute truths, it’s certainly subjective in this gray area.
January 15th, 2010 at 12:11 pm
“JLP, if everyone acted this way then housing values would correct to the norm a lot sooner rather than later. There are two things that have to happen: all the debt must be paid down, or it must be defaulted on. We’re just arguing over who takes the hit. In then end, it doesn’t matter on a macro scale and housing prices will drop to roughly 2.5 times the median wage.”
It would have happened a lot sooner had our stupid government not tried to step in and “save” people from losing their homes. That’s the real reason this has dragged on like it has.
If people want to walk away from their obligations even though they can afford to pay them, then I have the right to voice my opinion about it.
January 15th, 2010 at 12:36 pm
JLP,
Agreed on both points.
I see you’ve been commenting over there as well.
Another interesting post
I think he says what we’ve all been trying to: it’s the rational thing to do, but not the moral thing to do. I can agree with that.
In his search for a solution to aligning the rational thing to do with the moral thing to do, we already had something in place: solid underwriting and 20% down. Everyone has some skin in the game when you’ve got to put tens of thousands of dollars down before you even get the keys.
January 15th, 2010 at 5:46 pm
I agree with Henry Blodget’s reasoning on why it is ok to walk away on a loan taken from a Bank. Taking loan from bank for House is a Rational decisional and not a moral decision. Banks are out there to maximize their profit (with no morality!!) so why customers should be stuck with morality in paying back loan. Let me give you an example… I am seller of Oil and purchased oil at $147 to sell to my customers. But prices went down very fast before I could sell all. Now does my old customers have a moral responsibility to buy oil from my at $147 when it is available at $100 at other seller? This is when they know that if they don’t buy from me, I will go bankrupt.
Please understand business taking loan from bank is business and not relationship.
January 15th, 2010 at 6:35 pm
nd wrote:
“Taking loan from bank for House is a Rational decision and not a moral decision.”
Maybe not, but choosing whether or not to PAY BACK THE LOAN is a moral decision.
January 15th, 2010 at 10:23 pm
Recently Morgan Stanley walked away from commercial properties in San Fran because the values dropped to a point where MS felt it no longer made sense to pay. They had the ability to pay, but they chose not to. I didn’t hear anyone claiming that MS is immoral for this action (taking the egregious pay is another issue).
It was business. But, these banks somehow expect us to “act morally” when it comes to paying them back. These banks failed to follow any reasonable underwriting standards despite loaning up to 120% of the mortgage. They also hire their own appraiser, which they force the borrower to pay for, and they shame us when we decide that we would be better off renting a house next door or buying a new property.
A moral business decision is where both parties live up to the contract. With a mortgage, the contract states that if payment is not received then the bank takes the collateral (the house). If the homeowner tried to shirk payment and keep the house that is breaking the contract.
Also, based on some of the posts, I don’t see how not making a mortgage payment due to hardship isn’t immoral. If giving your word to pay the mortgage is the basis then even folks who lost their job and cannot afford to pay are immoral. They said they would pay their mortgage when they took it out, and now they are not. That is breaking the contract.
If you argue those circumstances void the morality argument, then at what point is it no longer immoral to walk away from a mortgage. What if the borrower lost the company 401(k) match and can still pay the mortgage with taxable income, but they won’t be able to save enough for retirement unless they have a smaller rent/mortgage payment. What if it is a small business owner who fears her business will suffer due to the downturn and decides that a lesser rent payment will allow her to build a safety net to keep her business going?
If we keep it to a contract law case, which it ultimately is, then we can avoid passing judgement on others.
January 16th, 2010 at 8:50 am
MS worked a short-sale. all parties agreed on the terms. Otherwise, the lender would have sued.
January 16th, 2010 at 9:15 am
A lot of people are walking away from their mortgages here in Florida but they do not need to do that if they will get their interest rate reduced like I did.
January 17th, 2010 at 1:09 pm
Interesting bit on the Colbert Show that looks at this very issue. Amazing how insightful Colbert and Stewart are.
http://www.colbertnation.com/the-colbert-report-videos/261785/january-14-2010/the-word—honor-bound
January 18th, 2010 at 4:03 pm
Yes, I love Colbert. His satire is beyond amazing.
January 18th, 2010 at 4:43 pm
I have never watched Colbert or Stewart. Are they equal-opportunity bashers or do they just pick on conservatives?
January 20th, 2010 at 2:34 pm
#27 JLP) You should watch those shows (at least once). The both have guest interviews of surprisingly important people. The last show I watched had Stewart bashing on MSNBC for some blatant left-wing bias and inappropriate comparisons they were doing to Bush.
Granted both shows are left-wing leaning (what comedy show isn’t), they will both call a spade a spade. Personally, I like Colbert’s persona a little more — his style of comedy fits me better, but I do enjoy both.
I think they both do a good job of keeping the main-stream media (left or Fox) more honest.
January 29th, 2010 at 10:35 am
If business transactions were moral, there would be no contract required.
It is not the responsibility of the individual homeowner to prop up the economy for everyone else.
Perhaps forcing banks to write down the defaulted-on value of these homes is the only way to close the gap between the mortgages and the currently assessed value. A bailout for the individual homeowner, if you will.
If walking away from my mortgage meant more money in my pocket (long-term), I would do it, no question. I’m not going to suffer so banks can continue to take my money, tax money, and then strategically default on their own loans (see the recent strategic default on the Stuyvesant homes in NY).