Strategic Defaults – Are they Ethical?

Posted by abarker on February 9, 2010 under foreclosures, Uncategorized | Read the First Comment

I listened to a podcast last night on voluntary foreclosures. It was interesting. With a voluntary foreclosure, the borrower elects too let the home foreclose, even though they can afford to make payments because they have so much negative equity.

Strategic defaults are especially popular in areas like Arizona, California, and Nevada, where home values shot up, and then plummeted down in a matter of years. People who bought during the peak have literally seen hundreds of thousands of equity lost in the flighty real estate market.

For people in this situation it becomes an economic deal. They can quickly purchase a new home for half the price of their current property, then stop making payments on the home that they owe far more than it is worth and let the bank take it back.

States like Arizona actually have laws that banks cant seek deficiency judgments for foreclosures, regardless of the reason.

My question is, is behavior like this ethical? These borrowers signed a note where they committed to pay back this mortgage loan. They agreed to these terms.

In my opinion it isn’t ethical. The bank never did them anything wrong, the owners are the ones who agreed to pay back the note when they signed it. Making banks lose $100,000′s of thousands of dollars by strategic default isn’t much different than armed robbery. Either way, the banks are going to lose money they are entitled too.