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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
-
December 31 RMD Deadline: What to Know and What to DoTax Deadlines The year-end deadline for required minimum distributions is critical for many retirees.
-
Top Tax Stories of 2024 and Key Changes to Watch for 2025Tax News The Kiplinger tax team is looking back at popular tax stories and looking ahead to potential tax changes in the new year.
-
Should All Student Debt Be Forgiven?student loans My favorite reform would be making the repayment of all student loans proportional to the borrower’s future earnings.
-
Should Lenders Mail Unsolicited Checks to Potential Borrowers?credit & debt When it comes to preying on weak credit risks, it looks like Wall Street is at it again.
-
Do Adult Children Have an Obligation to Support Needy Parents?savings Even if some siblings can afford to help more than others, no one should shirk the obligation to assist in some way -- financial or otherwise.
-
How Can the Approval Process for New Drugs Be Speeded Up?investing There are many reform proposals, including some from free-market think tanks.
-
Should Ethics Determine Who You Do Business With?Smart Buying Consumers seeking to do business only with ethical companies should ask these questions.
-
Should Colleges Use Collection Agencies for Overdue Student Bills?college Colleges have many potent options for getting students to square their accounts.
-
Hold Soda Makers to Account for Health Woes?Business Costs & Regulation A strong case can be made that it’s unethical for companies to target the very customers who shouldn’t be heavy consumers of a given product.
-
Ways to Protect Borrowers From Predatory Home Lendingreal estate Land contracts drain low-income communities of resources.
