Guest Post: On The Ethics Of Mortgage Loan Default

Tyler Durden's picture

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cpnscarlet's picture

Is it me, or is this a new view of ethics I'm not familiar with? If you say you're going to do something (repay a loan), and you can, but you don't...isn't that LYING??? How can there be a moral imperative to go back on your word when you can make good on it???


gmrpeabody's picture

I think what you are missing in the question was, that the banks already have defaulted by not securing and protecting you future title to the property. They have lied to you, and then cheated to gain addition profit.

It does complicate the issue somewhat.

JLee2027's picture

Well said.  It's not your grandfathers day when the bank held your note and you paid them. The note has been sold, chopped into pieces and those pieces resold. It's kind of hard to prove who holds what when the courts are paying attention.

bk1037's picture

One portion of this issue I do not grasp is some people's tendency to rationalize default out of a fear factor about payments going into some deep dark hole. If I pay anyone on any bill, note, payable, any balance due, I not only get receipts, I do due diligence on confirmation of account balances on a regular basis with the bank or vendor in question with independent verifiable information, and I keep checking as I need to until I am satisfied that I received credit. To me, there is no excuse to not checking that you get credit for what you pay in, even if it is extra work.

Some try to assign a moral equivalnce to the whole situation, and attempt to justify jingle keys, defaults and squatters rent, by what they may see and hear about others or what they hear banks are doing (or not doing). It is hard to generalize how people feel when they execute a note/mortgage and their commitment level, but the bottom line is funding was provided on the borrower's request to complete a transaction. Not enough people check to see who they're dealing with from a banking perspective before they enter into a large agreement, and seek to deflect blame and responsibility elsewhere when things get difficult. And believe me, I am no friend of banks, their culpability in the robosigning / foreclsoures are horrific to put it mildly, and banks deserve to get tagged for a number of the problems they cause. They have mucked up much of the real estate property title picture in the United States for the next generation at least, and it amazes me that people would buy property without knowing if they are buying good title.

My suggestion is to stay away from anything that has been in foreclosure in recent years, I still believe state law is going to prevail on this when all is said and done. If banks did not follow state law when they securitizied the mortgages and brought in other investors, they will lose their ability to foreclose. Banks will be seen legally not to have a basis to foreclose, if this chain of title is suspect,  and will be thrown out of court. No one told them they had to use MERS, or sell the note to other 3rd parties. Tough if it hampers their lending business.

I still have some doubt that the lending business is vibrant anyway with real estate marked down by 1/3 since the start of the socalled Great Recession per recent industry reporting. Since this decline exceeds the 1930s, it is remarkable that to me that not only is this whole episode since 2007-2008 considered a recession, but that a technical recovery has been in place for the last 2 years. What a total crock.





Prometheus418's picture

On further consideration:

After looking into this a little bit, I am concerned about the provision of clear title when my mortgage is paid in full, so I sent a message to my cousin, who is a title lawyer in my county.  I'm going to see if he thinks this argument has any chance of working.

The gist of it was a follows: 

I am going to request a clear chain of title from Wells Fargo.

If they do not comply, I'll bring civil suit to force compliance.  

Since my mortgage was entered into MERS, it's likely that they cannot provide this, as in most cases, the original promissary note was destroyed, and the title was divided into tranches.

If they cannot provide a clear chain, I will ask the court for clear title, and a refund of payments made on the account.

The moral justification being that TARP covered my mortgage when it was divided and repackaged with toxic assets, and I should not be forced to pay the same bill twice (once directly, and once through inflation.)

If they can provide clear chain of title, great.  I have no issues with them in that case.


amvona's picture


For some reason the entire article didn't make it onto ZH (hopefully it will soon).  In the meantime, you can view the entire article at:



Tyler Durden's picture

Indeed, there was a mistake in the synthax. It has been fixed now. Apologies for that.

halvord's picture

There is no such word as 'synthax'. The word you are looking for is synthrax.

Iam_Silverman's picture

Although I may not agree with the premise of this article, I do appreciate the effort.  On the other hand, you seriously need to run your work through a technically competent proof reader.  When an article of this breadth such as this is rife with grammar and spelling errors, it doesn't lend much credence to the author.

oklaboy's picture

cpn, take the blinders off. First, they loose title by securitization, and now you are paying on something you may not get the clear title for? Second, they rigg the game, purposly and intentionally, to lend money at less than your  sterling rating to folks who they know cannot pay it back, setting up the collapse? Third, the resulting planned for collapse, compounded by rampant inflation caused buy Benniecopter and timmy, cause your property value to plummet, and the cost of essentials to sky rocket? And then they have the balls to want to raise taxes, furthur complicating the situation? The rules went out in 2006, it's a new ball game, new rules, new field.

spekulatn's picture

The rules went out in 2006, it's a new ball game, new rules, new field.


Some poetic justice....



Marty Rothbard's picture

If it is true, as this article says, that a clear title can not be delivered, after the mortgage is paid off, how is it unethical to stop your payments?  My parent's approach to buying a house is looking better and better.  Live with your parents, or rent, until you can pay cash.

Boop's picture

But that wouldn't work either!  The seller would have been paying a mortgage and wouldn't have clear title to transfer!


(Is that not so?)

jmc8888's picture

Not always, people that never had a mortgage, or one of the few lucky ones where their mortgage was never MERS'ed would be ok.  Loans which were paid off before all this MERS crap started would also be ok.

So basically you want a house that the previous owner either paid cash, built it themselves, or finished paying off the loan before MERS started.  There are a lot of those out there, but it is a small percentage.

Overall when the chips fall, and the banks lose, those in the houses will have to somehow be given a new title, even if they never 'paid off' the loan.  I don't know how this last part happens, but it can be done, even if it might be precedent setting.

The alternative is unthinkable, which of course, is currently the status quo.


HoofHearted's picture

People were given title to land that neither they nor the US government owned. It was 40 acres and a mule, but the land was land that the Native Americans (or First Nations, depending on where you come from) legally should have had. It's always possible to just claim "squat where you are, and it is yours," but that seems highly unlikely. Rather, my guess is that Uncle Sammy will take away all property rights at some point and we become the fascist state for which we're headed.

tonyw's picture

If you have a contract with a bank that allows you to walk away from a house loan/mortgage without recourse then the bank has willingly entered into this contract and given you this loan, you have a commercial agreement with the bank. Should the terms allow it the bank may change the interest rate if it is e.g. linked to a base rate such as Libor, the bank will change the interest rate regardless of your circumstances and even game Libor. If you are a small businessman and have an agreed overdraft the bank will have no hesitation in withdrawing the overdraft at short notice, note here they are using the legal conditions of the loan etc and it's nothing to do with ethics. Is it ethical to borrow money at 0.5% and lend it out at say 5% or 20% for a credit card?

It's not about ethics, it's about the law and contract conditions. If people want to walk away then consult a lawyer & accountant not an ethics counsellor. Let's say you have lent me money as a friend, then I would do everything in my power to repay you.

blunderdog's picture

That what I'm always saying.

Ethics has been completely driven out of business by law and legalism, so it just doesn't make any sense to apply ethical standards to business relationships.

If you want to be "ethical," you might say it's unethical for a bank to sell bad mortgages as risk securities, too.  That also happens to be legal, so no one really cares what your personal feelings about it are.

Marc45's picture

Agreed. Ethics and the law are separate concepts. Ethics has to do with intention. The law has to do with logic. A common tactic amongst the unethical is to perpetuate a fraud without violating the law. They can then claim "it's all legal". Courts sometimes will see through this and rule against but its tricky.

This mortgage article is a red herring. Despite all the media claims, there is a property deed chain that can be verified and no one is getting a free house or their loan dismissed. Those who default still face credit report problems and if the default is to a no-recourse loan, then the terms are clear...the lender only has claim to the property. Of course, saying it like it is doesn't get attention like this article.

For those who think defaulting on a mortgage is a sweet deal, remember that most folks put up a downpayment, made improvements and were hoping their house would be a nice nest egg. The real crime is the banks who are getting the sweetest deal of all from the government.

Wynn's picture

I mostly agree with you cpn. Your own personal honesty is one of the few things completely within your control. Sure, banker dishonesty and subsequent opulence make for great justifications, but at the end of the day, your word either means something, or it doesn't.

But, now that the justice system has been broken, in an ill conceived plan to save "the system", it is a murky dilemma that could have been avoided.

Transformer's picture

I just can't understand why people don't get it.  A contract depends on both sides of the agreement keeping to their terms of contract.  As soon as the terms of the contract are violated, the contract is null and void.  Either side can then sue for breach. A court can decide if the parties cannot work it out.

  This is not a promise to a famiy member.  It is a business arrangement.  When the lienholder breaks contract you no longer can be held to your "word". 

  To think that, "I gave my word", to someone who then breaks the contract or the law, and then think you are still beholden, is complete naivete. 

  Since so many people think like this, you can certainly see how the bankers took advantage of the situation.  Your own personal honesty also includes not letting others screw you over.  You give your word on a deal.  The other guy attempts to screw you and doesn't deliver (clear title).  Are you still beholden to follow your "word"?  NO, if you are an honest person, you take care of yourself and your property rights.  If that means not paying the crooks and working it out somehow so you can get clear title, you are merely attempting to consummate the original deal.  Because the other side broke contract they have lost their rights, and your efforts are now better spent trying to achieve your original goals (clear title on property) than to continue to pay the fraudulent mtg holder.

Manthong's picture

No different from front running algos that grope the fairness out of the market, or the investment banks hedging debt to infinity, or the Treasury issuing debt that is impossible to repay.

The system is rigged and by repudiating debt (and margins) you repudiate all of their schemes. Some are starting to realize they can beat the system before it beats them.

Obama did it to GM stock holders and bondholders and United Airlines did it to their stockholders and employees. They got away with it without much fanfare.

A lot here are just getting out of the debt stranglehold the old fashioned way.. by paying it off and not incurring new debt.

Manthong's picture

dupe.. sometimes the server is fast.

Stax Edwards's picture

Because the game was rigged and they knew it and did not disclose it to you.  I say that is sufficient reason.  While those of us with stellar credit bought homes in good faith we were not aware they were writing the same loans with the same terms to the jobless deadbeats.  That is reason enough for me.

Dburn's picture

It really depends on a simple question: Do you feel that you should perform in a contract where the other party deliberately commits fraud in multiple ways? There are normally remedies in court for this, but one of them isn't that the party that commits the fraud gets the full benefit of the contract (Plus more) and is free to do it again and again and you have nothing to show for it but an attorney's bill provided there is money to pay one.

It's the social stigma of non-performance on an agreement that has been the foundation of this mass transfer of wealth. Maybe it's the person who paid off a house or had one handed to them complete with a clean title who is outraged that someone could essentially get something for free if the fraud was exposed and the judicial system was honest. "That bullshit isn't fair. I paid for my house ( or my parents did) dammit". Touching stuff. Many people buy into it.

But to keep everything in outrage equilibrium, you would also be against someone winning monetary damages in a breech of contract where one side committed theft and fraud during the course of the contract that ended up damaging the first party extensively.

Therefore you are for people who commit fraud and condemn people who react by refusing to allow it to continue. That makes people who proselytize the social and moral responsibilities of satisfying one's obligations look pretty silly. There is no such thing as a unilateral agreement.

rawsienna's picture

Missing nothing. In fact, many of these loans are guaranteed by Fhr,Fn and Gnma so if people choose not to pay it does not impact the banks, we the taxpayers are on the hook. Underwater homeowners have the option to strategically default, the government has the right to make sure that those borrowers never get a gse or FHA loan ever again,

RafterManFMJ's picture

If you lie to the Devil, is it a lie?

If you kill someone tying to kill you, is it murder?

If you refuse to pay for the trap they've built for you, are you a deadbeat?

sleepingbeauty's picture

I see that you have been junked a bunch. But I agree fully with what you said. Two wrongs do not make a right. Excusing my bad behaviour because of your worse behaviour is not the basis of ethics. However, if the contract is broken by the atrocious behaviour of the banks, then ethically you are not bound by that document. The contract is not broken until the courts rule it so.



ibjamming's picture

And the worst part end up taking down others when you bail.  EVERYONE can't stop paying or EVERYONE will lose.

Greed...wanting to get out before the widows and cut losses.

RockyRacoon's picture


Apparently, yes.  The first thing missing is a thorough reading before commenting.  After that would be a lack of comprehension of the neutering of a "moral" obligation due to the fraudulent securitizing of loans by lenders.  There are probably more things missing, but I'll leave others to discover them.

cranky-old-geezer's picture

Fine, go make your mortgage payments and drop the subject. No one else cares about your view of ethics.

This entire article is worthless.  Nobody cares about anyone else's view of what's ethical and what isn't.

Cleanclog's picture

Only the same thing as Goldman and the gang of banksters did when they sliced,diced and repackaged toxic mortgages, baked them up, got some AAA ratings iced on top for a pittance, and then peddled them to their favorite investors as a real good deal.  

Ethics have left the building, Elvis.

FEDbuster's picture

and the stinking, toxic crap still on the banksters books (not off loaded to suckers/clients) was transfered to the "bad" bank known as the Federal Reserve. 

jm's picture

This post is total shit.

I do not make such suggestions lightly.

Crab Cake's picture

Your use of logic and reason is without pale.

jm's picture

This miserable, stupid fuck is trying to make dishonesty and cheating an ethical issue, even an imperative. Wonder what book he is talking.

I have said in the past all that I am going to say.  I'm just too sickened by all this.  I saw retirees making grass soup to eat from their yards in other countries just trying to get by.  Here?  We refuse to pay our mortgage so we can have an iphone and cable.  It's all the fault of the "bankster class", so fuck 'em.  Pathetic rationalization.

Do what you want to do.  Don't expect any pity when you face the consequences.  If this is how America degenerates, you won't get a bit if it from anyone.

Crab Cake's picture

I won't need it, three generations of my and my wife's family live within 50 miles of each other. We have arable land, waterfront, with access to fish and game. We are moving to sustainability with solar and cistern collection/filtering. Plus some of our closest family friends are LDS. We've got food, water, shelter, energy, stored diesel, community, and the means to protect/provide for ourselves. A country boy can survive.

jm's picture

Hope you are making payments on what you owe, if you do.  Otherwise, some bank is going to love foreclosing and selling it someone more worthy of it.

Misstrial's picture

And don't forget property taxes, both existing and those yet to come.

The Beast *will* feed.


FEDbuster's picture

The terms fish in a barrel, or sitting ducks come to mind.  We are all just renters, or more correctly sharecroppers.

blunderdog's picture

The banks can't afford to foreclose, jm.  That's the point.  They already stole too much money and can't take the writedowns on the balance sheets without going out of business.

It's not ethical to stop paying a mortgage, but it's not ethical to pay thieves for robbing their investors, either.  Lesser of two evils, take your pick.

RafterManFMJ's picture

Are you taking applications?

vxpatel's picture

easy sir church alot, amerika is broken on every level, which is why we have so many personal/community/county/state/federal bankrupticies...

jm's picture

suck it on Sunday, prick.

Sunshine n Lollipops's picture

Are you fucking retarded? The plan is to put the payment into escrow until the title's status is verified. Noone is advocating walking away from mortgages, just ensuring that money isn't being fed to a black hole. Jesus H. Christ, get a fucking clue.

jm's picture

When I first wrote this, there were three fucking paragraphs up that said nothing of the sort.



WaterWings's picture

I recall you fail to understand the importance of fractional reserve banking in what I consider the "scheme of things".

You seem quite "trollish" for someone that has contributor status. Maybe you should write some articles; rather than roll around in the mud with us.

Stax Edwards's picture

It was no ones fault right JM?  You were only doing what was best for the bank at the time right?  The suckers who had the good jobs and good credit were just fools to sign up to buy those houses.  It didn't matter that you were giving the same loans to the unemployed, right?  Or is this just hard feelings stemming from all of your student loans for that ivy league finance education?  Don't expect any pity from the masses for your part in this.  You better hope you have enough arable land and diesel when the SHTF, cuz you aint gonna be very popular.  What bank do your work for JM?

oh_bama's picture

Well when I was still relatively young a couple of years ago I believe all what you have said


but now you just need to trust the FED and BTFD!!

hehe, the whole country is fu**ed. Both normal citizens and the elites became a huge group of  f**king CLOWNS!



jm's picture

I don't know what to say anymore.