Here's a question a reader asked Bankrate:
I bought a home two years ago that's now worth $120,000 less than I paid for it. Ouch! What's more, the bank won't touch a refinance. But I do have about $80,000 in savings. If I used it for a down payment to buy another home, then let the other go into foreclosure, could the bank come after the equity in the more recently bought home? Yes, it's a shady thing to do, but I feel it's my only option.
The response goes on to talk about what's ethical in personal finance and how it pertains to this situation. I won't give you their answer -- I thought it would be fun for all of us to give our thoughts on it instead. So, if someone is underwater on their home yet has money they could use to keep making the payments, is it ethical for them to let the house be foreclosed on and use their assets to buy another one?
Also, for a real-life example of how this might happen, check out The Foreclosure Crisis Hits Close to Home, Part 2.
I'm glad we've established it's legal. Still(!) waiting for people to explain why it's unethical.
Posted by: Noah | December 03, 2008 at 01:29 PM
Noah/All - This is grey area just like many things in life. I hope we have established that ethics and what's legal are two different things. Bottom line, if you are being deceptive for any reason it is unethical. It doesn't matter if you feel like everyone else is doing it. Most people agree integrity is a critical aspect of ethics. A mortgage is promissory note. It is a contract where one party makes an unconditional promise in writing to pay a sum of money to the other under specific terms. You have to be deceptive to intentially allow your home to foreclose when you are easily able to make payments. Regardless of whether or not you think your home is a good value still. That does not even include potentially being deceptive on your next mortgage application.
FMF - I like how you get this started then stay out of it. :-)
Posted by: Todd - Prosperity Junky | December 03, 2008 at 04:02 PM
Todd --
Ha! I get into enough debates here without being in every one of them! ;-)
Posted by: FMF | December 03, 2008 at 04:14 PM
Was making loans to people that could not repay them unethical or just dumb? Is defaulting unethical or just smart? I can see situations where it may be ethical or not. I can see situations where others actions may be ethical or not. I would not make others actions the ethical criteria for my own, but I take exception to those who believe ethics is only for others. Intent plays a part. Still life goes on. Should circumstances change, birth, death, divorce, illness, transfer, unemployment, what may have been unethical may no longer be. What is impossible cannot be ethical.
Posted by: Lord | December 03, 2008 at 05:19 PM