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Is defaulting on mortgage immoral?

By Cathy Moran

Falling home prices have lead to a surge of strategic defaulters, in real estate columnist Kenneth Harney’s words:  people who abruptly choose to stop making mortgage payments.  These folks have made an economic decision that continuing to pay on a house that is significantly underwater does not make economic sense.

Harney is clearly bothered by this choice by people who appear to be able to make the payments, but elect instead to default and lose the property.  In this and an earlier column, he raises the question of the morality of  elective mortgage default.

I’ve been chewing on that idea:  is there a moral issue when a borrower voluntarily defaults?  The law attaches  consequences to certain promises, such as the promise to repay money borrowed.  If the borrower is capable of repaying but does not, is that a moral failing?  Or is it nothing more than the weighing of the consequences of shunning a legal duty vs. the cost of performing the promise?

I tried thinking about this from the lender’s side of the transaction:  are there any moral obligations that the lender assumes when they make the loan?  Could the lender exercise a legal right (to foreclose, say) and yet violate a moral precept?  (All of this presupposes that corporations have morals, or moral duties, of course.)  Would a lender have a moral obligation to modify a loan in the absence of a legal obligation?

Or, is all that is involved in the mortgage loan transaction the undertaking to expose yourself to certain unpleasant consequences if you default?

It bears more thought.  I routinely ask bankruptcy clients whether it makes sense to continue to pay on mortgages where the loan balance is significantly greater than the property’s value.  I want them to consider the option of walking away in the course of the bankruptcy.

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About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

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Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said “try”).

Here, I allow myself to tell stories and express strong opinions. We dig deeper into how to consider bankruptcy and navigate a bankruptcy case.

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