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Saturday, January 16, 2010 2:53 PM

Walking Away Goes Mainstream; Yes It's OK; Moral Obligations Yet Again

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There is an interesting post on Tech Ticker with Henry Blodget called Yes, It's Okay To Walk Away From Your Mortgage.

As many Americans begin to realize that it will be many years (if not decades) before their houses are worth what they owe on them, the idea of walking away from your mortgage is going mainstream. Not surprisingly, the mortgage industry is doing everything it can to prevent this, including telling homeowners that they have a "moral obligation" to pay.

But do they?

There's no universal answer here, but in most cases, the answer is "Yes, it's okay to walk away." Importantly, the reason is not that "Wall Street deserves it" or "We've got to teach the banks a lesson" or any of the other retribution logic being thrown around these days. The reason is that you and your lender engaged in an arms-length transaction in which both parties balanced competing interests and spelled out their obligations in a clear, signed contract. And unless that contract states that you have a "moral obligation to pay," you don't have a moral obligation to pay.

You, meanwhile, also made a business decision. You decided to borrow money to buy your house even though it meant risking your equity, home, and credit rating.

And now it turns out that both of you made a bad decision.

Fortunately, you don't have to fight about what happens next. The contract between you 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 the lender thought at the beginning that you had a "moral obligation to pay," it would have specified that 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, and you promise that friend that you will give him or her every penny back. 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 to help you out--with no collateral or contract other than your promise to pay.

Blodget makes a powerful case distinguishing moral obligations of paying back a friend or family member vs. the moral obligation (none) on a mortgage with a bank.

If the lender thought at the beginning that you had a "moral obligation to pay," it would have [or should have] specified that in the contract.

Flashback December 17 2009: Morgan Stanley to Give Up 5 San Francisco Towers Bought at Peak.
Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.

The bank has been negotiating an “orderly transfer” of the towers since earlier this year, Alyson Barnes, a Morgan Stanley spokeswoman, said yesterday in a telephone interview. AREA Property Partners will take over the buildings. Barnes declined to say when the transfer will occur.

“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”
If Morgan Stanley can give back properties "to get out of the loan obligation" so can you. Some might suggest two wrongs don't make a right but where's the wrong?

Banks made a poor business decision and so did you (if you are considering walking away), and there are consequences on both sides. Banks, Realtors, the Obama Administration, and credit lenders are engaging in an all out campaign to get people to honor "moral obligations" that simply do not exist.

If you are in trouble, don't fall for this moral obligation nonsense. Indeed, if there is a moral obligation here, it ought to be for lenders to stop spewing lies about moral obligations.

As is always the case Before Walking Away Consult An Attorney. Thinking about bankruptcy instead? Here's How to Find a Bankruptcy Attorney.

Mike "Mish" Shedlock
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