Friend and reader Loren Platzman alerted me to the article, “Walk Away From Your Mortgage!” in the Sunday Times Magazine ( the magazine was, in fact, sitting unopened by my desk at the time. Some days, I just know that reading Randy Cohen’s “The Ethicist” column is going to ruin my weekend.) The thrust of the article, an installment in the “The Way We Live Now” series, is that American cultural tradition has reinforced the belief that there is something unethical and shameful about voluntarily letting the bank foreclose on a property when falling property values have placed the mortgage “under water,” meaning that the home is worth less than the amount still owed on it. In such a dilemma, walking away from the mortgage is a rational course, but it involves intentionally failing to meet the obligations of the mortgage contract. A contract is a promise. Breaking a promise is wrong.
The author, Roger Lowenstein, argues that the supposed moral obligation is, essentially, a trap that benefits the bankers. He points out that loaning institutions routinely “walk away” from contractual obligations of their own when the penalties for default are less than the pain of paying. Lowenstein’s arguments in favor of abandoning bad mortgages boil down to two classic rationalizations: “everybody does it,” everybody in this case meaning financial institutions, and “they deserve it,” meaning that nobody should feel obligated to treat banks any more ethically than they treat everyone else. Both are ethically invalid. We have ample evidence that financial institutions have behaved incompetently, irresponsibly, unfairly and often dishonestly. That doesn’t make such conduct ethical or just, even when it is turned against them. Lowenstein’s theory is that we should let banks set the culture’s ethical standards.
His conclusion that it is not unethical to default on a mortgage, however, is correct. There is nothing unethical about giving up the property when completing the contract becomes both a hardship and financially illogical. As the article notes, mortgage contract and loan agreements include the penalty for default; it is anticipated by both parties in the contract, and is a part of the contract. The bank will foreclose on an involuntary mortgage default, in most cases, with nary a thought about the hardship to the homeowner and the family, nor is it ethically obligated to have such thoughts, for its first duty is to its investors and shareholders. Similarly, it is ethical for the homeowner whose mortgage is “under water” to use the foreclosure option in the best interests of those who depend on him or her: family members and other creditors.The bank is provided for in the contract. In the event of default, it gets the house.
Some might argue that sticking out a bad deal despite all hardship is the most ethical course. I might agree, just as it might be the most ethical course for failing businesses to sell off every asset and for their owners to indenture themselves to creditors rather than to declare bankruptcy. Not following the most ethical course, however, isn’t the same thing as being unethical. Balancing ethical and non-ethical considerations is an essential part of life, and learning to do it rationally and fairly is a life-long quest.
Yes, our word should be our bond, we should keep our promises, and those who keep promises that no longer make sense deserve our respect. But as with the woman who finally broke her promise to her late husband to have him lying for eternity over the resting place of Marilyn Monroe, there are times when breaking a promise is reasonable, fair, and ethical.
Defaulting on an under-water mortgage qualifies.
Now I guess I have to go read Randy Cohen….