Guest Post: On The Ethics Of Mortgage Loan Default

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Submitted by Greg Lemelson At Amvona

On the ethics of mortgage loan default

it ethical for the American homeowner whose mortgage has been
securitized to default, even If they are not financially distressed?  

First, consider it is unlikely that
marketable, fee simple, insurable title can be obtained as a result of
fulfilling the obligations of the related promissory note.  On the
contrary the titles to some 60 million homes in America are badly
clouded.  Secondly, encouraging investment in an asset class that has
been artificially inflated, then deliberately destroying the price of
the asset, as part of a separate profit making scheme is unethical, and
any agreement based on this type of fraud is grounds to consider the
original debt instrument used in the agreement null and void. 
Fortunately these grounds are unnecessary, as increasingly US courts are
ruling that these mortgages are already invalid for numerous other

On November 12th, 2010 we published our article “Tattoos, Pyramid Schemes and Social Justice
in which we advocated that homeowners consider suspending their
mortgage payments.  In the article we enumerated reasons why we felt
this action is both ethical and prudent.   On January 11th, 2011 we
published our articles “Ibanez– Denying the Antecedent, Suppressing the Evidence and one big fat Red Herring
which outlined the legal realities of securitized mortgages, and the
impact of the landmark Ibanez decision on homeowners, particularly in
Massachusetts.  We affirmed our conviction that Massachusetts homeowners
with securitized mortgages might want to consider suspending their
mortgage payment, and place instead their funds into an escrow account.

Both articles were widely published and
read, and in both cases we received also some negative feedback,
although strangely, only from foreclosure defence attorneys.  Their
sentiment was universal “we would never advise a client to stop paying their mortgage
- we marvelled.  When challenged on this point, or presented with the
evidence, none could provide any reasoning for this advice that they
would so confidently given their clients, nor could they identify a
fallacy in the arguments we had made, or a fact we had misrepresented.

Perhaps they recognized the intrinsic
problem in responding simply “because that is what people do, and we
should take it for granted that because people do it, it is correct.” 
Such inductive reasoning at the corporate level can not be defended as
anything more than “group think".

In such a case, we suspect fear, shame
and guilt are more powerful drivers than reason. Further, such thinking
serves only to exaggerate the anxiety that stems from the perceived
consequences of default.  This is not a coincidence, or something which
is “hard-wired” into the human person.  These are emotional controls
that have been cultivated over many decades that encourage borrowers and
in particular homeowners (those in possession of real property), to
follow unnatural social norms, even at the expense of critical thinking
and reason.  Thus the context in which such financial obligations exist
go almost entirely unexamined.

Financial and ethical considerations in
which default is not only feasable but perhaps even a moral imperative
are ignored.  In sharp contrast are the standards lenders within the
same culture abide in their quest to maximize profits.  Needless to say,
this asymmetrical ethic, leads to the possibility of abuse, and
widespread economic injustice.  In our society, it is now the case that
debtors, and in particular home owners are akin to indentured
servants.  The severity of the condition is directly and inversely
proportionate to the misdeeds of the financial system which gave rise to

Ultimately we were forced to conclude,
that those who possess too much fear and too little confidence are
acting in fact on the basis of emotion, even though the prospective
outcome is not what they would otherwise choose.  A spirited response in
reason is what is necessary to ensure that such emotions do not distort
rational thought and overcome it.

We hope the above articles, along with
the following serves as a practical, financial, and above all ethical
framework for understanding the risks involved in continuing to make
mortgage payments on securitized loans and their derivatives in light of
what is known today about the serious defects in chain of title, and
the abuses that took place by many in the securitization process.

We do not make such suggestions lightly.


A catastrophe of “epic proportions”

Despite our concern over the seriousness
of the advice given, we never wavered in our conviction that we were
“right”, even if unpopular. 

On May 25th, 2011 a report was released
based on a Massachusetts investigation that identified fraudulent
documents clouding the titles to Massachusetts properties.  The report
cited the example of homeowners who were already in some stage of
default for financial reasons, and discussed the issue of fraudulent
conveyances as a result of perjury.  It would be an error to present
this information only as a means to stave off foreclosure for those who
no longer have choices.  Perjury is the fruit of a system built on many
layers of fraud that diseased the entire securitization process. 
However, the important aspect of the report was not the examples of
those who are financially distressed, but rather, (and correctly) the
implications to those who are neither in foreclosure, nor financially

Although it took only 8 words to say
what took us just about 6,000 in our last article to say, and although
it came about 7 months after our initial article, the unmistakable words
“…the ownership of your house is in question” finally had emerged in main stream media.

The problem is hardly unique to Massachusetts.

We also hope that the foreclosure
defence attorney’s (or more importantly their clients) who so strongly
criticized our thinking on the matter, will listen to the words of John
O'Brien, Register, Southern Essex District Registry of Deeds – his
proclamation does not leave much room for interpretation; “This is a catastrophe of epic proportions." 

The report is limited in scope as it
cites only one example of a name used (namely “Linda Green”) to commit
perjury and cloud thousands of titles to Massachusetts homes.  However,
there exists far more names other than “Linda Green” which have been
used to commit perjury - the math is not difficult.

Nonetheless, the report barely touches
the tip of the proverbial Iceberg, for the issue of perjury pales in
comparison to the fundamental and irreparable harm done in the
securitization process, which universally affects securitized mortgages
nationwide - a fact that will be increasingly revealed. 

For example a review of what has been said on the Ibanez matter makes any investigation into mere perjury wholly unnecessary.

In the November 2010 article we wrote:

“Americans have a
duty to ask critical questions about the operations of their financial
institutions, and if evidence has been presented that a deal was made,
but not everyone was playing by the rules, than those deals need to be
looked at again. It is not good enough any longer to say, if it
doesn’taffect“me” than, I’m not getting involved. We have a duty to one
another as Americans, and more importantly as human beings, to care
about truth and justice. What’s more, apathy, so long as we are not
affected, is a short lived consolation. Ultimately, this crisis will
affect everyone …”

Mr. O’Brien goes on to say of
Massachusetts homeowners who have not necessarily defaulted on their
mortgages, but whose mortgage documents have been perjured:
"They may not be able to sell their home, and they may not be able to refinance their home. And that is a major, major problem."

Here is another excerpt taken from the November article:

"It has been
made to appear as if those who have fallen on hard times are a matter of
"incidental" inequalities in an otherwise procedurally just system.
However, it is precisely the opposite which is true. Our financial
institutions have created deliberate inequalities, through the use of
procedurally unjust systems."

Marie McDonnell, a Forensic Mortgage
Analyst provided the following comments in the same May report
(referring to the titles to Massachusetts properties):

"I'm speechless. The scope of the problem is unimaginable; the depth of the fraud is shocking."


You mean there is something in it for the bank?

People are not stupid and ought not to
be treated as such.  They make mistakes from time to time, but that is
not the same thing as being stupid.

The value of your home may be going
down, but this condition will not last forever – obvious though it may
be, it’s still wroth stating; nothing last forever, including rates of
increase or decrease in asset prices.  In the meantime, a few folks from
your bank or the government (not clear if they are necessarily separate
entities any longer) may try to convince you that there are some things
you can do with your home to improve your lot, and help you transfer
this “unwanted” asset to themselves (even if it does provide shelter -
Investment qualities aside for a moment).

Here’s the recent Menu:

1. “The sucker trade”
aka refinancing.  It goes something like this:  “Can I exchange your
big unsecured “credit card-like” debt which was improperly secured for a
properly secured mortgage on your home?” And what do you get for this
trade?  A fraction of a point off the interest rate on your note.  Never
mind one was unsecured and the other secured. 

There is secured
debt and there is unsecured debt.  The two are not the same in value to
the barrower, nor are they the same in value to the lender.  We would
challenge anyone to find a business in the world that would choose
secured debt over unsecured debt (regardless of their financial
condition), for a fraction of a point.  Why should consumers be any
different? There is one adage in business that is eternally true: “there
is no free lunch”.

This is why so much
mortgage loan activity in the last 1.5 years has been refinancing. 
Banks are not interested in taking on new risk, they are interested in
mitigating old ones.    These new notes and mortgages don’t find their
way to MERS, and they do not follow the “old” securitization process. 
These original wet-ink notes find their way to actual bank vaults this

No need to worry
about the 30+ pts. you’ve lost on what is probably your biggest
investment -  because of the asset bubble you did not see, understand,
or create - after all, why worry about what may take more than 20 years
to recover in value when you can save a fraction of a point on the cost
of your debt – listen to the radio adds, and the brokers – there has
“never been a better time” (sounds creepily like 2005).

2. “The Kumbaya”or
the “we’ll get through this together” offer – aka the ‘short sale’
option.  Think of it as making smoresand singing Kumbaya with your
servicer.   Only when you go home from camp, you lose everything, and
they gain everything thanks to PMI, GSE guarantees, credit default swaps
and deficiency judgments.  If this continues unabated, use the mortgage
escrow account we suggested setting up to start buying stock in Wells
Fargo or US Bank – the money will be better spent – at least you’ll be
on the other side of the asset transfers.

3. “The Gandhi”
aka “just give me your house because I asked nicely, and you’re an
honorable person and we know you want to do the ‘the right thing’ ”
option or ‘Deed in Lou of foreclosure’.  By far the best choice for the
peacemakers of our modern society.  If you think you can take this high
road, get ready to also walk around barefoot, spin cotton on a simple
gin for hours at a time, live in a tent, and give up marital relations
with your spouse – because that‘s what it means to be like Gandhi –
pacifist through and through (never mind true pacifist are one in 10
million, or maybe less).  A great many who are actually afraid, claim
instead to be pacifists - this might be a good time to do a Myers Briggs personality test.

4. “The Pinocchio”
or “free lunch” option (don’t worry, there is really no cost) - our
personal favorite which is now being espoused by an anxious Wall Street
government.   Payments to homeowners who surrender their real estate,
rather than raise legitimate legal challenges to the ownership of the
home you and your family live in.  You will only have to trade in “real”
property, for a few pieces of paper (that will get you by for a few
months), backed by nothing, that make cell phones look
depreciation-resistant.  For some reason the image of Pinocchio turning
into a donkey keeps coming to mind.

Imagine all that work with  no
self-interest, bankers are a generous bunch, perhaps when they come,
they will even ‘greet you witha kiss’.    A great many mortgage brokers
who represented predatory lenders were also willingto offer their advice
duringthe golden years of the housing uber-bubble.  These are the same
people, with a different slant.  At that time, the refrain was “prices
will only keep rising, so you can do something like pay any price”
because by this logic, if prices keep rising, no price is too high.

Now the financial industry which has helped us move from a country which makes things, to a country which makes things up, are
chanting their inglorious antiphon – prices will only keep sinking, so
let us take that house off your hands, after all, we’re in it together
and both parties are taking a loss. Right?  This way you can get rid of
the discomfort of having to deal with this.  By this logic, no value is
enough to fight for your home, because prices will keep sinking and
thus, the value will ultimately go to zero. 

Both statements are logical fallacies and indeed two sides of the same coin – although they have distinct attendant emotions.

In every transaction there is a buyer
and a seller – no matter what monetary instruments are used in the
consummation of the transaction (debt, equity, currency, etc.)  Your
home is no different.  It may help to not think of it as shelter for a
moment or as “the American dream” (needless to say the dream needs to be
elevated).  Try for a moment instead to think of it first as just 2 x
4’s and drywall.  If this is hard to do, consider thinking of your
American dream as being fortunate enough to live in a still largely free
country of plenty, to have had a mostly good life, reflect on your
positive memories – and let your house just be an object (last time we
checked there were no shortages for future reacquisition) – that is what
it is after all, it’s just an object.

Once you arrive at this moment of honest
detachment, then you might want to consider how those who are
interested in your home, see the world.  Humans are animals in a way,
and they are also far more.  Through our choices we move closer to the
animal kingdom of primal instincts or closer to another kingdom that is
very different than that of mere animals.   Let’s just say that your
bank, your servicer, the trusts, the depositors, the trust
administrators, the investors, the engineers of derivative products, the
CDO salesmen, the ratings agencies, the intermediaries entities, and
certainly their lawyers, have made choices (not that it can’t be undone)
to be a little closer to the animal kingdom – keeps this in mind when
speaking to them – it’s important.   To this group your house has
nothing to do withdreams– it has to do with one thing only; little
sheets of green paper.   Now think of money for a moment as a redemption
slip on society, and if you have many of these “redemption slips”, you
in affect have much you can ask of society if you so choose.


Ad Misericordiam

These folks want to redeem a number of
these “slips” on you as a member of society.  Perhaps your claim to your
home is weak, if it appears that the debt is greater than the equity
(understandings of both debt and equity need to be examined carefully),
or because you have struggled to make your mortgage payments, or because
you are legitimately concerned about getting clear title to your home,
or perhaps you just don’t want to participate in a pyramid scheme that
causes others to suffer.  That is ok, we understand, everyone will want
you looking at yourself full time, and if it applies, your misfortunes
in life.  If you have a personal misfortune such as divorce, loss of a
job, or heaven forbid a sick family member, expect it to be used against
you.  You might as well go lookinthe mirror and read yourself your
Miranda rights before you get on the phone with your servicer and
divulge every detail of your personal and financial life just because
they asked nicely and said they would “help”.  

Try to remember, you’re not calling
Mother Teresa.  That isn’t to say you shouldn’tempathize withthose who
would like to take your home.  Wall Street bankers and their progeny are
human too.  They suffer just like you.  They have personal short
comings like you.  Although their personal shortcomings less often
involve layoffs and confusing financial burdens – their suffering is of a
different variety altogether – nonetheless they suffer. 

It is better to keep your suffering to
yourself, they are not genuinely interested in hearing about it, and it
is best to vet who you share with in the first place, including the
details of your personal finances. There is nothing wrong with that
information being entirely private, although if you were raised in
America, you were not raised to understand this.  By preserving
yourself, you will also preserve your dignity – even if all else is
lost, nobody can take this last item away from you, and it is worth more
than all of the homes in America. 

It is a harsh saying, and we wish we
could find something more subtle, but we could think of no other saying
that more accurately describes what we are speaking of here, that is to
say “Do not give dogs what is sacred; do not throw your pearls to pigs.”  If at some point this seems like a good idea after all, it may be worth reading the line which follows from the one cited – the consequences are fairly clear.

Self-pity rarely achieves much. 
Instead, if the urge to sadness at your portion in life can’t be
overcome, then do it in private.  Perhaps think of those who have less
than you in life – perhaps orphans in Haiti or those in some other
seriously underprivileged society, than you will feel rich.  We have
poor in America, but we don’t have too many who are starving just
yet.    Prepare yourself to fight a good fight.  Even if you lose, you
will have the swagger that you fought for what is right and just, which
is easier to describe at parties than the procedure for rolling over and
playing dead.

It is a curious thing to witness the
endless talk of ”helping homeowners”, and of perpetual applications to
“modifications” and “forbearance”.   If a person draws you into a crime
unwittingly and unknowingly, a context in which you expend great time,
energy and resources, believing the circumstances to be quite other than
they in fact are, is it anything other than insulting when the same
person offers to “help” you with your “situation”?  Does an “appeal to
pity” seem like the most appropriate of responses?


Arbitrarily asserted, arbitrarily denied

These folks want you looking at yourself, because they don’t want you looking at them.  This behavior is so deeply ingrained in our culture that
even seasoned consumer and home owner advocates fall prey to the
proclivity of discussing primarily the circumstances of the debtor
rather than that of the creditor.   However, the question isn’t how good
is your claim to the security interest in the real property you call
home.  The real question is how good is the security interest of those
who seek to take it from you?  And how did something so simple and
mundane as a mortgage become so irreparably harmed?  Could it really
have been mere incompetence? 

Possession is an important part of the
law.   If there is a serious and legitimate dispute over ownership,
which has now been well established for about 60 million properties and
some 7 trillion in securitizedmortgages, why would you give up your
legitimate claims?  Perhaps you would do this only if you did not
realize just how legitimate your claims are (default or not), and how
illegitimate theirs are, because after all it is not the topic of the
many phone conversations with your servicer.

In fact, given the gravity of the
question over clear title, the only seemingly prudent thing to do is to
suspend mortgage payments, weather you can afford them or not, and to
instead place those funds into a private escrow account, as we had
previously advised.   That is why they want you to be highly circumspect
of your condition in life, because you will be too distracted to notice
the thief in front of you.  Remember if greed doesn’t work, fear will,
and vice versa.  Think of them as the commensurate emotions associated
with bubbles and collapses – they vacillate, one to the other, but the
transfer of assets abides at a steady clip to those who feel no

These folks will try to help you
undervalue yourself.  Don’t.  You were not designed or built to be a
slave to another man through debt.  It is, for lack of a better word, a
sin.  If you don’t have a Ph.D in finance from Harvard, you probably
couldn’t design this Ponzischemeif you’re life depended on it.  Are you
accountable?  You are.  But they are more accountable.   It is important
to think for yourself when someone tells you something ridiculous like “prices will always go up”. 
Intellectual inertia with a streak of greed is wrong, but it is also
minor on a relative basis, and very prevalent.  However, using superior
knowledge and power to prey on the ignorant in a calculated way is more
serious.  You have a stronger claim to the security interest in the
property than they do, on many grounds, not the least of which is
ethical.  That isn’t to say you will win, but you have to try.

If they are to assert their claims
arbitrarily, than you can arbitrarily deny them - should the burden of
proof not be symmetrical?

It has been said that “time reveals
truth and justice”.  Do not worry about what others say about you today,
or next week.  Worry about what people will say about you in ten years
or more.  For it is only when we look back and remember, that we bring
our experiences of life into complete focus, and others see us for the
intentions which work inside us, and not merely the outward appearances
which can be misleading.   If somebody calls you a “deadbeat” or a “squatter
thank them, for is it not widely known that people judge others
according to the way they feel about themselves inside?  Or as the great
prophet Bob Marley once said “Judge not, for you judge yourself”.  Besides is there any more obvious way to poison the well, than to use such loaded language?

Your servicer wants updated details of
your financial condition in order to decipher if it is cost affective to
sue you for a deficiency judgment after your home is taken (if it is to
be sold in the near term, they will want the fastest sale, not the
highest sale), it is not primarily, as you may be told, to determine
qualification for a modification.  For example, they would like to know
where your bank account is so that they can attach it, and they would
like to know where you work, and see a recent pay stub, so they can
eventually garnish your pay.  Think through it – you live in the most
litigious society in the world.

After all, you are going to pay the
difference, either through a judgment, or such things as your
involuntary ownership of the GSE’s (another form of indirect wealth
transfer).  It is a peculiar thing indeed when we believe it is ok to
hand over the details of our financial and personal matters to perfect
strangers on the phone, because they have “represented” that they are
the counterparty in interest to a loan that was taken out as part of our
(unknowing) participation in a global pyramid scheme.

We now know much about predatory
lending.  We know about liar loans that were wholly executed by highly
compensated brokers.  We know that the more CDO’s and synthetic CDO’s
that were sold with AAA ratings (despite being jam-packed with sub-prime
paper), the more billions investment banks made.  We know that banks
understand that their security interest to the real property used in the
MBS trusts is not there, and that they are willing to use forgeries,
and perjury as their means.  Basically, the lesson of the last few years
is that the engineers of this hyper-pyramid scheme will do anything to
get what they want.

Have things changed?  Is that what the
evidence points to?  Or is that what we want to believe about human
nature?  That these folks are not “that bad”?  Because we want to
believe something, does it make it reality?  An objective review of the
evidence does not indicate the players involved in your mortgage have
your best interest in mind.  It would be best to accept that upfront, so
that a reasonable plan, that actually has a chance at success, can be

This is not about “sticking it to the
bank”.  This is about legitimate questions.  Protecting yourself and
your family’s financial future, and comingto a reasonable business
solution to this very bad situation, that does not involve your
subjugation and further humiliation.   There may have been intellectual
inertia, even greed, in your actions, but where is it written that you
must live withthat mistake forever? and who qualified the bank to do the
judging?  At some point there has to be an agreement, and a settlement,
but you ought to meet the bank at the negotiatingtable at least as an
equal, if not a superior, for your misdeeds are minor in light of
theirs.  Do you call their CEO, Board members, or shareholders and ask
for the details of their personal and financial lives before you’ll
“discuss” anything?

All that should be said by a homeowner
is that the asset prices were wrong when you bought your home.  You had
no control over the setting of those prices – but the folks who did have
responsibility for the setting of asset prices, knew something you
didn’t and stood to profit from that special knowledge.  That’s why they
owned credit default swaps and not real estate when the bubble popped.

When the bank is willing to discuss a
settlement of your unsecured debt (as in they cannot legally foreclose
on your securitizedmortgage), then you can talk about a number that
makes sense for bothpartiesto avoid protracted and expensive litigation
that might lead to a judgment, which at any rate will be collected over
many years if at all.  Is this not the same as a principle reduction
today, particularly when future payment on a hypothetical judgment will
be made in dollars which are sure to be worthless.  At least in the
event of a write down, your bank has the opportunity to re-invest the
residual loan value in something that might actually appreciate, as
opposed to fixed payment in devalued future dollars.  But then again,
perhaps they already know this, which is why their first preference is
foreclosure.  For one, the value of your home does not have to be
impaired on their balance sheet, and secondly, although nobody is
telling you this, your home will appreciate again, and has far superior
prospects of beating the doubled edge sword of taxes and inflation, than
the bank wants you to know.


There is a right way and a wrong way to plunder

Plunder?  We confess it is a strong
word, and probably seems like a) it only corresponds to a small fraction
of the loans made that are now clearly understood as “predatory” in
nature or b) is hyperbole.  Neither is correct, it is rather the only
way to describe the mortgage securitization industry in the last
decade.  There is one characteristic of greed which is constant – the
addict always over stays their welcome (just ask casino operators or
stock brokers about the psychology of some of their clients).

Here are a few points to consider:

1. Why would such
products exist which have variable features as a function of time.  For
example, low front end interest rates with a later reset, or terms which
allow for the annexation of more collateral at a later date (deficiency
judgment).   Not unlike an actuary for an insurance company, a banker
makes a decision on risk based on a statistical profile of the barrow,
since past-time can only be known at that moment, why would future
characteristic of the loan be determined in present time, when the
future cannot be known?  Unless there is in fact some designs being made
on the future.

Remember, these
folks make their living from investments, and investors think far into
the future.  Most barrowers make their living from a paycheck, and their
future projects about as far as the Friday after next. 

The case of variable rate loans:

- If at a future date, the interest rate is static, the bank gains nothing by adding this feature.  
- If
at a future date, the interest rate is lower, the bank stands to lose,
when the customer refinances inside or outside the bank.
- If at a
future date, the interest rate is higher, than the customer may not be
able to afford the loan, in which case, the bank stands to make a
windfall through foreclosure.

Since our economists
have long held that both inflation and housing price appreciation are
steady, why would these loans ever exist?  As a sort of actuary, the
bank would determine the price for the risk based on historical
patterns,  set the terms, and a deal would either be done or not, and
every one would move on.  But that is not what happened with these
“innovative” products.  There was a “lead-in” and a carefully planned
design made on future time.

2. However, it will
quickly be pointed out that many barrowersagreed to misrepresent both
their financial history and circumstances in order to obtain these
loans.  This is true.  Here are some important points to remember:

a. There are both
qualitative and quantitative differences in the behavior of barrowers
who made misrepresentations and lenders who planned predatory loans.  In
quantitative terms it is the business of lenders to make loans, that is
to say market debt.  If there were no buyers for such loans, life would
continue on, and we may well have a healthier society.  However, the
same cannot be said of the lender, for if they do not issue debt, they
have no business so to speak of, and life does not “go on” for debt is
the instrument by which their income is earned, and unlike the
barrower, represents an “asset” to the bank under normal conditions. 
Therefore both motives and incentives for the making of new loans are
far greater on the part of the lender.

b. In qualitative
terms, the business of the lender is a) risk assessment and b) asset
appraisal.  In a consumer society it is critical that entire generations
of consumers (including consumers of financial products) never learn
how to do either competently.  We have largely succeeded at this task in
America.  The result is that the intricacies of risk assessment are
overwhelmingly within the circle of competence of lenders, and
completely outside that of the barrowers.  Again the balance of power is

To suggest than that the conduct of the
two groups is ethically symmetrical is incorrect, and masks the truth
that the real risk of systemic predation is inherently on the side of

The common refrain is that it was the
lack of restraint on the part of barrowers which caused the crisis, but
this is nothing more than to establish a false cause.  That is to say it
draws a highly questionable conclusion about the cause and effect
relationship.    The child of a false cause is naturally, a false
dilemma.  The bank bailouts were precisely that; a false dilemma sold to
the American people, and a prototype of the much larger wealth transfer
operation that was about to take place in the form of foreclosure.

In the construction of the bailout
package, the US treasury reduced the options Americans had to consider
to just two, which were sharply opposed and unfair to the American
people to whom It was presented (i.e. bail out the banks, or else we
will be facing “…the Collapse of the Global Financial System”). 
It is like being victimized twice.  By accusing the American people
(falsely) of being the cause, then forcing a false dilemma, those
responsible have not played fair, and have caused a great many to
overlook alternative explanations which are far more accurate.

Nonetheless, the fact remains that banks
lent vast sums to Americans at interest rates that did not reflect
prudent risk management.  There are only two possible explanations:

a) Our financial
institutions somehow suddenly lost (or perhaps never possessed) the
acumen that is part of their circle of competence; that is to say risk
assessment and asset pricing, and were revealed to in fact be imbeciles.

b) The loans made were predatory by design and served a purpose in their ultimate failure.

Despite many Ivy league degrees, bankers
are involved in a business model which is no more sophisticated than
borrowing  pieces of paper (usually from their friends) for zero
interest and loaning out the same at a rate of interest above zero. 
Given the simplicity of their business model, we are tempted to select
option “A” (our various and sundry encounters with bankers has served
only to affirm this preference).  However, “B” is in the only option
which excludes absurdity from the calculation.

This taken into consideration with the
certainty of asset price manipulation, and other abuses in the
origination, and reselling of these loans ought to be carefully

In truth, greed paints you into a
corner.  The only way out this time has been excessive liquidity, to
blanket over the fallout, like snow over an ugly landscape.  Yet, with
excessive money supply, comes excessive inflation, and with excessive
inflation comes a preference for hard assets over fixed income; in
short, your bank would rather have your home, than your mortgage
payments, modified or not.  Imagine, at the rate we are going now, what
the value of your future mortgage payment denominated in dollars will be
at the expiry of your loan term say 25 years from now.  No interest
rate is high enough now to outpace the real rate of inflation – and if a few rounds of golf with the folks at FASB allow you to keep your land grab on the books at unimpaired prices in the near term; well even better.

If we ascribe to a traditional definition of ethics, than we must
concern ourselves with that which we do voluntarily, and not what we do
because we are forced.  In this sense, the question ought not to be “is it ethical to stop paying your mortgage”? 
The real question in light of everything that has been revealed, and
the very real human suffering that has been caused is; “is it ethical to pay your mortgage.”

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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.