Some household finance issues

[clifp]

Quote:

Originally Posted by ronocnikral why potentially legal, and maybe wise from a "business" point of view. for me, my morals would dictate my decision more than those other two things. i borrowed money and agreed to repay. and while i have some sympathy for the OP's position, this is all being brought around by their own choice, not from unfortunate events like being laid off, having a major illness in the family etc. jmo.

He is borrowing money from a bank not his brother. You know banks the same institutions that trigger universal default so that if you missed your credit card payment on your department store credit card, another bank would held your Visa card would jack up your interest rate to 29%.

The bank and the OP entered into a contract. Do you think the bank would say gee lets try and do the right thing instead of trying to maximize profit? I don't. The contract was written by the bank's lawyers and the OP had two options sign or don't buy the house.

The contract was written to penalize either party for failing to live up to their side of the contract. It should be a business decision are the cost (short and long term) for fulfilling the contract (i.e. paying the mortgage) greater than penalties for breaking it. If JimOH was a business and walked away from the mortgage, as many business are doing with commercial real estate, nobody would complain about their lack of morality.

Nor is the bank completely screwed in this situation. If they determine that JIMOh has the resource to pay off the loan, they have the legal right to pursue their claim in court. If they decide not to do so it is only their own fault.

I am all for people behaving in a more moral fashion, don't cheat on your taxes, don't cheat on your spouse, don't lie etc. However, because mortgage and house buying are such an important transaction we have 20+ pages of a contracts, regulated by the government, which spell out exactly what is legally expected of each party. I don't think injecting morality is helpful. So if JIMOh comes ahead financially he should do it.

The flip side is as bank owner, I am sick of people whining about the mean banks being unreasonable and not cutting my mortgages payments. Hell yes they aren't cutting your mortgage payments, you signed a contract, and you even specified under penalty of perjury that everything in your mortgage application was true. A lot of the reason you can't make your mortgage payments is cause you lied on the mortgage application. If JIMOh walks away I would hope that bank would pursue him and if necessary force him into bankruptcy to recover their money.

Right now I think we have have the worst all of worlds in the housing market. One group is behaving in "moral" fashion. This is primarily individuals but also some banks under pressure from government. The other group is behaving in legal fashion and living up to the letter of the contract. Finally, we have a third group is who is acting both illegally and immoral. In this three way fight the moral group, (which yes includes all of those who are paying or paid our mortgages) is getting screwed by the other two groups. If we stop trying to argue about what and moral and immoral and focus on stopping illegal behavior I think we will be much closer to solving this mess.

[Emeritus]

Quote:

Originally Posted by ronocnikral why potentially legal, and maybe wise from a "business" point of view. for me, my morals would dictate my decision more than those other two things. i borrowed money and agreed to repay. and while i have some sympathy for the OP's position, this is all being brought around by their own choice, not from unfortunate events like being laid off, having a major illness in the family etc. jmo.

I've taught both contract law and ethics. IMHLO there is no moral or ethical dimension to non fraudulent behavior with regard to contract law,and I assure you that businesses do not see any moral obligation at all on their side. Airlines overbook all the time. Every party to a contract always has the choice to perform the contract or pay the damages for breach required by law.

Teaching consumers that they have a unilateral moral obligation that goes beyond the legal obligation is itself unethical, since businesses refuse to accept the same obligation. I do agree that among people who accept a mutual obligation ethical issues may arise,

[MasterBlaster]

Quote:

Originally Posted by Emeritus I've taught both contract law and ethics.

regardless of what you taught.

In my book if you default on a loan you promised to pay back just cause' you see a better deal makes you a slimebag in my book.

And just cause' someone else did something slimy doesn't make you any less so.

[jimnjana]

Quote:

Originally Posted by MasterBlaster regardless of what you taught. In my book if you default on a loan you promised to pay back just cause' you see a better deal makes you a slimebag in my book. And just cause' someone else did something slimy doesn't make you any less so.

I agree. In this case, it just doesn't even make economic sense. On the one hand he sounds like he understands he will need to payback the difference between what the home could sells for and what is owed (5Ok ish or so). But he expects his income to recover in 3 to 5 yrs. W/O doing the math for him, it sounds like he would come out ahead staying where he is. Vs renting a place and paying the difference in what he owes etc...Heck, by the time the place sold it could be a year or so down the road to begin with. Also, never mentioned why he just doesn't stay in current job until the home is sold, then switch careers. Yep, its legal. But it still stinks.

[Free To Canoe]

My younger relatives bought a house and went under water big time during one of those other recessions. They went through the travails of renting out of state and for a while, paying the difference out of pocket. This went on for over 10 years during which they had to rent because they couldn't make the down payment to buy.
They finally worked their way out from under it.

I respect them.

Free to canoe

[oneils]

What is the amortization period of the mortgage? If your payment is 2600 a month for a ~350K mortgage, it sounds like it is amortized over 15 years. Can't you refinance to a 30 year mortgage to give you more breathing room through the career transition? I think that would free up about 1k per month.

[Gumby]

Quote:

Originally Posted by oneils What is the amortization period of the mortgage? If your payment is 2600 a month for a ~350K mortgage, it sounds like it is amortized over 15 years. Can't you refinance to a 30 year mortgage to give you more breathing room through the career transition? I think that would free up about 1k per month.

You probably can't refinance if you're underwater on the loan.

[Emeritus]

Quote:

Originally Posted by MasterBlaster regardless of what you taught. In my book if you default on a loan you promised to pay back just cause' you see a better deal makes you a slimebag in my book. And just cause' someone else did something slimy doesn't make you any less so.

Corporations try to inculcate naive children with this belief.
It makes it so much easier to screw them as customers and employees

What do you call overbooking by airlines? you sell the same seat to two people?

You realize that in most of the world workers have real contracts. Companies in the USA preach loyalty and sell employees down the river at the first chance.
Teams fire coaches and pay them off. Coaches also walk
That is the real world.

I fully agree that in a situation where promises are truly mutual and both people feel the same way it is a different story.

[oneils]

Quote:

Originally Posted by Gumby You probably can't refinance if you're underwater on the loan.

Doh.

[Moemg]

Quote:

Originally Posted by ronocnikral why potentially legal, and maybe wise from a "business" point of view. for me, my morals would dictate my decision more than those other two things. i borrowed money and agreed to repay. and while i have some sympathy for the OP's position, this is all being brought around by their own choice, not from unfortunate events like being laid off, having a major illness in the family etc. jmo.

I think Bestwifeever mentioned in another thread the best thing I have ever heard . If instead of losing money you had gained $100,000 would you give the bank the gains so why should they be responsible for your losses ?

[photoguy]

Quote:

Originally Posted by Emeritus there is no moral or ethical dimension to non fraudulent behavior with regard to contract law,and I assure you that businesses do not see any moral obligation at all on their side.

I totally agree in this case that there is no moral issue between the bank and homeowner. I think it's especially important to realize that in the case of home buying, the bank can hardly be considered an unsophisticated or naive investor that isn't 100% aware of all of the ramifications of the contract.

The bank certainly knew that the home buyer could default for any reason, including strategic, and decided to go ahead with the loan. They ultimately decided that the risk of making the loan and their options for recovering if a default occurred was a worthwhile endeavor.

However, I think homebuyers do have some moral obligation to not leave the public holding the bag so to speak. Strategically defaulting makes the situation worse for everybody when there's not much slack in the system to handle shocks.

[Emeritus]

Quote:

Originally Posted by Moemg I think Bestwifeever mentioned in another thread the best thing I have ever heard . If instead of losing money you had gained $100,000 would you give the bank the gains so why should they be responsible for your losses ?

Not the contractual issue. You go to a pawn shop
the pawn star gives you a 100 dollar loan on a watch
110 dollars payable a month later.

for some reason, due to a glut of watches a month later the watch is worth $80. Does it amke sense to buy the watch back?
Now what was your promise? to pay back 110 dollars, OR was it to either pay back $110 or let them keep the watch?

Under contract law it's always the second alternative. Under contract law you promise either to fulfill the contract OR to pay the damages required by law. You can do either.

Corporations turned over employee pensions to the PBGC and no one said BOO! from an ethical perspective.

[ERD50]

Quote:

Originally Posted by Emeritus Now what was your promise? to pay back 110 dollars, OR was it to either pay back $110 or let them keep the watch? Under contract law it's always the second alternative. Under contract law you promise either to fulfill the contract OR to pay the damages required by law. You can do either.

That's it. I think it was Brewer in an earlier thread who turned my thinking around on this. I saw it as a moral issue, but as stated earlier, the bank went into this knowing you either pay or you lose the house. That is the contract that was made by both parties.

-ERD50

[clifp]

Quote:

Originally Posted by photoguy I totally agree in this case that there is no moral issue between the bank and homeowner. I think it's especially important to realize that in the case of home buying, the bank can hardly be considered an unsophisticated or naive investor that isn't 100% aware of all of the ramifications of the contract. The bank certainly knew that the home buyer could default for any reason, including strategic, and decided to go ahead with the loan. They ultimately decided that the risk of making the loan and their options for recovering if a default occurred was a worthwhile endeavor.

Good points

Quote:

However, I think homebuyers do have some moral obligation to not leave the public holding the bag so to speak. Strategically defaulting makes the situation worse for everybody when there's not much slack in the system to handle shocks.

This is where the situation gets tricky. It is one thing to expect somebody who finds a $100 in store to turn it in. A hundred buck while real money, it isn't life changing. On the other the difference between paying $100K and not paying it 100K on loan is life changing for many probably most people.

I am not sure what is more moral to repay the bank, or pay for college for your child, how about the nursing home for your parent, the cancer treatment for your spouse? On the other side Is it moral for the bank to foreclose on family, when the husband lost his job, and the wife had to go to part time work because she is undergoing chemo treatments? It is really a slippery slope filled with gray areas.

I don't think it is a productive to put morality into the equation. Both sides should be free to do what is in their financial self interest, without 3rd parties kibtzing (and this certainly includes the press and legislators) from
the sidelines, saying they are slimeball persons, or evil banks.

It seems to me that would all be better off, if as a generally rule people who stop paying mortgage, ended up in a streamlined bankruptcy court. Where a 3rd party would make a judgment about how much assets should go to the bank and much should be left to the borrowers. The defaulters would obviously suffer a credit rating which is how it should be.

On the other hand, I find it appalling that buying an overprice house and than defaulting on a mortgage, should be used as hiring criteria or deciding how much you should pay for auto insurance.

[ronocnikral]

Quote:

Originally Posted by Emeritus Teaching consumers that they have a unilateral moral obligation that goes beyond the legal obligation is itself unethical,

I still don't see this as true. Our morals play a part in all our decisions. It's where our morals are that matters. In this situation, some say follow the letter of the law, and some say do all you can to repay the loan. the question is "what are your morals," not "do you apply them or not."

i'm not here to try and convince someone "my way" is the correct way. my point is simply there may be more to this decision besides just following the letter of the law (or agreement).

[Bestwifeever]

Quote:

Originally Posted by Emeritus .... Under contract law you promise either to fulfill the contract OR to pay the damages required by law. You can do either.

Yes, you can pay the mortgage or you can pay the damages. You don't get a free ride by walking away from it. Even if monetarily you can escape paying $$$ in the short term, you will be paying with your lower credit rating. And karma's a bitch, by the way.

If there's a reason you can find to justify walking away--illness, loss of a job, toxic waste found under the property, whatever--that's one thing. I personally don't think knowing a mortgage is underwater is justification for walking away from a contractual obligation. The OP is surmising several other things will happen that will make it more difficult for him to make the mortgage payments (not that they will be impossible for him to make, apparently--he and his DW may have to cut back in other areas). Why decide to walk away now from a great house that they apparently enjoy?

[FreeAtLast]

Do you like the house?
I put everything that I had to get into the house that I am in now about 23 years ago. I was about your age at the time. I had an adjustable rate mortgage which were popular in the 1980's. The first 5 years were difficult in getting used to the higher payments.
My then income started to go up dramatically and things got easier. Things all worked out and I was able to pay off he house about 5 years ago.

I would stay for a while and see how the new job works out. Focus on being a success in you new job.

[Emeritus]

Quote:

Originally Posted by ronocnikral I still don't see this as true. Our morals play a part in all our decisions. It's where our morals are that matters. In this situation, some say follow the letter of the law, and some say do all you can to repay the loan. the question is "what are your morals," not "do you apply them or not." i'm not here to try and convince someone "my way" is the correct way. my point is simply there may be more to this decision besides just following the letter of the law (or agreement).

We let owners form Businesses corporations precisely so that the owners DON'T have to pay the bills. They can walk away if that is in their best intersts.

It is easy and routine to teach the young to act in the best intersts of the overlords by calling it "morals" or glory

I am always very suspicious of teaching different morals for the rulers and ruled.

If in some smothering dreams you too could pace
Behind the wagon that we flung him in,
And watch the white eyes writhing in his face,
His hanging face, like a devil's sick of sin;
If you could hear, at every jolt, the blood
Come gargling from the froth-corrupted lungs,
Obscene as cancer, bitter as the cud
Of vile, incurable sores on innocent tongues,
My friend, you would not tell with such high zest
To children ardent14 for some desperate glory,
The old Lie;
Dulce et Decorum est Pro patria mori.

[jIMOh]

I appreciate all the responses and shared a few of them with my wife.

The option to sell, then put unpaid balance on a credit card is a good "worst case" plan.

As for morals, is it moral for the politicians to create programs for others to refi (in better situations than me) but not allow me to refinance (because I have two mortgages)? I was told certain refinance programs for people "under" only work if there is one lien on house... I would only walk away if I saw a benefit, and I was having problems seeing a plus side to walking away anyways.

Thx for all input

[Moemg]

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Originally Posted by jIMOh . Right now we stopped the IRA contributions so we have more cash on hand to buffer the career change, and our 401ks have a little wiggle room (we contribute higher than the match), but even those will get reduced once I change jobs. We have about 200k invested now, age 37/36.

Excuse me if this was already asked but is the $200K all in retirement accounts ? If not why not just pay off the second mortgage to give you some breathing room during the job change ?