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Owners weigh morality of walking on mortgages
Amy Green, Religion News Service
June 23, 2010
5 MIN READ TIME

Owners weigh morality of walking on mortgages

Owners weigh morality of walking on mortgages
Amy Green, Religion News Service
June 23, 2010

ORLANDO, Fla. — Lynn

Thompson quit paying the mortgage on her investment property — not because she

couldn’t afford the payments, but because she thinks walking away is better for

her long-term financial health.

Thompson bought the property

here for $175,000 in January 2007, just as the housing market began its slow

downward slide. At the time, she planned to rent the house and eventually sell

it for a profit.

Today, she estimates the

house is worth $85,000, maybe less.

Unable to find renters to

help cover the mortgage, she tried to convince her lender to allow a “short

sale” — selling below the loan amount, with the lender forgiving the balance.

When the lender declined, Thompson decided to walk away.

“I would have basically no

money left every month if I made the payments,” said Thompson, a single

39-year-old pharmacist. “If I tried to sell the house in, say, 10 years from

now, I still would have to come up probably with, say, $75,000.”

Desperate homeowners like

Thompson have raised an ethical debate: Is it ever OK to walk away?

Nationwide, up to 25 million

homeowners — about one in four – are “underwater”: like Thompson, their

mortgages are worth more than their homes. Those who do walk away face an array

of financial consequences, from damaged credit to the prospect of a lender

suing to recover the balance. Yet for many, the question fundamentally is a

moral one. Is it the right thing to do?

It’s unclear how many

homeowners, like Thompson, are opting for strategic defaults — allowing their

homes to go into foreclosure even when they can make the payments. Many feel

their homes are decades away from regaining value and they see no other

options.

But especially in hard-hit

places such as greater Orlando, where 55 percent of homeowners are underwater,

the question is nagging at more homeowners, and the number of strategic

defaults appears to be rising.

Strategic defaults accounted

for 31 percent of all defaults in March, up from 22 percent the year before,

according to an April report by Paola Sapienza of Northwestern University and

Luigi Zingales of the University of Chicago.

That doesn’t mean, however,

that homeowners are walking away without feeling like they violated some

ethical or moral code about not buying something they can’t afford. Some are

left with a deep sense of debtor’s shame.

Brent White, a law professor

at the University of Arizona whose writings include The Morality of Strategic

Default, said more than 80 percent of homeowners still think defaulting on a

mortgage is immoral, and those who do it usually make the decision not for

financial reasons but emotional ones, he said.

In other words, it takes

more than a dismal financial reality to push homeowners to default. Often

underwater homeowners feel angry, depressed or hopeless, he said.

“People walk away because

they’re angry at their lenders,” he said.

“They have been unable to

work with them, and the government hasn’t done anything to help underwater

homeowners who are trying to make their mortgage payments. If people were

acting purely on a rational basis, they would walk away much sooner than they

do.”

At the heart of the question

are biblical concepts of promise-keeping and neighborliness, said James Childs,

theologian and ethicist at Trinity Lutheran Seminary in Columbus, Ohio, who

noted that one neighbor’s default can sink another neighbor’s property values.

“The simple answer is we

make certain promises when we move into a neighborhood that we’re going to be

good neighbors,” said Childs, author of Greed: Economics and Ethics in

Conflict.

“If my greed … is realized

at the expense of my neighbors and I say I’m free to do that, then I’ve missed

an ethical point entirely.”

Yet in an economy that rose

and fell on the backs of unaffordable mortgages, homeowners aren’t the only

ones to blame, ethicists say.

White, from the University

of Arizona, believes the housing market and economy could recover more quickly

if homeowners could rid themselves of negative equity, allowing housing prices

to hit bottom faster. The longer homeowners remain underwater, the longer they

feel poor and spend less money. What’s more, a job loss or medical illness could

be even more devastating.

For now, Mike Booth will

remain in his home. He and his wife bought their first home in 2008, two years

after they married, for $205,000 — a bargain since the house was appraised at

$240,000.

Today, he estimates the house

would sell for $165,000, but the 30-year-old engineer is taking the long view

on what he and his wife call “our little castle.”

“We’ve entered into a

binding moral contract,” said Booth, who lives in suburban Orlando. “… Really

we don’t think about it being underwater. It’s kind of like being in a

long-term investment, and tracking it daily doesn’t make sense.”