Tuesday, December 6, 2011

The morality of losing your home

A very high percentage of all homeowners owe more to the finance company than their homes are worth on the market and have what are called upside down mortgages. Homes in my own neighborhood have lost over half their value recorded at the height of the housing bubble. Let me give you several different scenarios concerning the situation facing homeowners. Unfortunately, very little of the news coverage of this situation talks about the moral issues involved.

Scenario #1: Home purchased 10 or more years ago for $250,000. As the value of the home increased, on paper, the homeowners borrowed more against the "equity" of their home until they had borrowed over $300,000 dollars. They used the money for living expenses and to take several vacation trips. They were going to sell the home, but before they realized what was happening the market dropped. Their home is now likely worth less than $250,000. Are they now justified in taking a strategic foreclosure?

Analysis: Who took the risk that the market would fall? When the homeowners purchased the home did they expect home prices to fall? Was that a realistic assessment? If I buy a new car and finance the entire purchase price can I realistically expect to sell the car for what I paid? But you say, real estate is not like a car. Wrong. Real estate is exactly like a car. For too many years real estate agents have been saying the same inaccurate statement, "They aren't making any more real estate, values can only go up." The answer is they may not be making more real estate but they are making more houses. The housing market is just like any other market, it can get over built and over sold. But didn't the finance company take the risk that the value of the house might fall? Yes, but if you borrow money are you saying you have no moral obligation to repay the loan? Isn't that the moral equivalent of stealing? Couldn't both the homeowner and the finance company come to an agreement? Is the motive for moving a consideration of the morality of walking away from the obligation? Is there a moral obligation to repay a loan? Do I have to ask that question?

Scenario #2: Homeowners were living in a home that escalated in price during the boom. They sold their existing home at a considerable profit and used the money to make a down payment on a much more expensive home. Their mortgage was much higher than they could afford but they counted on the market to continue to rise and were expecting to flip the new home at a profit. Now, they have a home worth much less than the high equity to value mortgage they obtained. Are they now justified in dumping the home?

Analysis: How is this example different than the first one? Does the morality of allowing the home to be foreclosed change because these homeowners "can't afford"  the encumbrance? Does the morality of the situation change because the homeowners were involved in speculation? Who took the risk that the home would go down in value? Is the financing company morally wrong for loaning so much money against the property?

Scenario #3: Homeowner has lived in the home for several years and was employed at a well-paying job. The home was subject to an 80% mortgage and the homeowner had never missed a payment. Homeowner lost his job and is now finds it difficult to make a mortgage payment. The house has dipped in value and is likely worth somewhat less than the mortgage. He has had the home on the market for over a year. Is he now justified in walking away from the home?

Analysis: There is no moral issue with losing your property due to sickness, loss of work or other external cause. If you made payments on the home in good faith, both you and the finance company took the risk that the mortgage might not get paid. The finance company extended the loan based on its perceived value of the home. Should the homeowner continue to pay on the mortgage if he is able to do so when he could buy the same house for less money?  Is he justified in allowing the finance company to take the home?

All of these examples point out the moral dilemma of the housing downturn. At what point is a homeowner morally justified in walking away from an obligation to purchase a home? Is there a moral obligation to pay one's debts even if the original purpose for the debt no longer applies? Is this an issue that even raises to the level of morality? Is it immoral to steal? Is it immoral to cheat your neighbor? What about "Thou shalt not steal?" Exodus 20:15. 

In a Church News Editorial dated September 20, 2003, the commentator said, "When a widow lamented that a creditor would take her sons as bondsmen because she could not pay a debt, Elisha asked what she had in her house. The inquiry, it appears, was to determine what resources she had at hand to pay the debt. When she replied that she had nothing but a pot of oil, Elisha gave specific instructions; as she followed them, the oil was multiplied. Elisha then told her, "Go, sell the oil and pay thy debt, and live thou and thy children of the rest." (See 2 Kings 4:1-7.)

The Editorial goes on to say, "Elisha gave simple, practical counsel to the widow. There is no all-encompassing answer to the question regarding what people might do to pay off their debts today since circumstances vary. The moral of the biblical account, however, is universal: individuals are responsible for and should pay their debts. Elisha did not take upon himself the widow's debt, nor did he transfer to another the obligation to pay it. The debt was hers to pay."

Doesn't Elisha's council apply today to the homeowner?

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