Foreclosed Loans Raises Questions about Morality
July 13th, 2009
Foreclosed loans are raising questions about morality. Generally people feel it is not right to escape from loans unless one is deep underwater. By underwater loans are meant those loans whose amounts are more than the worth of the properties mortgaged. If the house value has fallen to abysmal depths is it right for the borrower to just walk away from the house and the loan? Many think it is not moral to do so. But there are many others who will justify their stand considering the extraneous circumstances. For others it is not a matter of justification – they will walk away whether right or wrong.
This is the conclusion drawn by a study conducted by a group of researchers from Chicago who focused on ‘jingle mail.’ It meant returning the keys to the lender because of falling property value and not necessarily because of personal financial troubles. According to calculations 20% to 30% of the residential houses are now swimming underwater. The researchers show that a good number of mortgages fit into this category and this might prompt many to walk away.
Paola Sapienza of Northwestern University and two of his colleagues conducted a survey on 1,000 citizens asking them their opinion about walking away from mortgage commitments. 80% made no bones about the reality of the problem. Some other questions were also asked – if they knew of others in default, if there were many foreclosures in their locality and what would be their reaction if the value of their property fell by $100,000. The reply to the questions showed their gradual change of attitude when the problem of foreclosure no longer remained confined to others but came nearer to themselves, their friends and neighbours.
Sapienza said, “The stigma starts to go down. You’re sitting in your home and you know a lot of neighbors in foreclosure. It’s starting to become more ‘normal,’ in a way, maybe even acceptable.”
The other point wherein moral codes began to be waived was when it came to falling property value. Some said they would walk away if they were 10% underwater. If the drop was by 50% (as is happening in many pockets of the country) one sixth had no qualms about walking away.
According Professors Luigi Zingales and Luigi Guiso of European University Institute of Florence as well as Sapienza about a quarter of all the defaulting mortgages are in this category – borrowers are toying with walking away not because of medical reasons or job loss but because of the loan not worth maintaining.
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- Washington Mutual, the Symbol of the Foreclosure Crisis, Continues to be in Trouble
- The Consequences of not Paying Mortgages Can be Grim
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