I'm hearing that many home foreclosures are so-called strategic defaults. People who can afford to keep paying are repudiating their mortgage obligations because their property values have fallen, and they don't see them recovering for a long time. Homeowners figure that they can rent a similar house for a lot less than their current mortgage payment. Or they can use other capital they may have to take advantage of depressed prices to buy a similar house for less than their present mortgage balance. What do you think about this?
I'm old-fashioned about contractual obligations, and I think that homeowners (or investors) should continue honoring their mortgage contracts with all the resources at their disposal. Default is an ethical choice only for people who can no longer afford the monthly payment because of circumstances beyond their control, such as job loss or illness -- not high living (past or present) or a speculative hunch that prices would keep soaring. Sadly, millions of people are in the true-hardship category today.
Strategic defaulters are taking advantage of the fact that many mortgages are "nonrecourse loans," meaning that the loan is collateralized only by the property itself, not by any other assets the borrower owns. So if a borrower stops making payments, the lender has no recourse other than to seize the property; the borrower's remaining assets are usually untouchable.
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I have heard strategic defaulters argue that they have a higher moral obligation to maintain their family's financial security than honor a debt to a giant mortgage lender. I think this sort of moral relativism is a slippery slope.
On practical grounds, a strategic default could ruin your credit rating for a long time. That could make it very hard for you to rent your next home or, even worse, to get a new mortgage to buy another house at today's lower prices. That's not very strategic thinking. (For more on the financial fallout of a strategic default, see Walking Away From a Mortgage.)
Have a money-and-ethics question you'd like answered in this column? Write to Editor in Chief Knight Kiplinger at ethics@kiplinger.com.
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