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Ethics of Foreclosure

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Ethics of Foreclosure

John-Paul
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Posted 04/04/09 - 11:01 AM: Subject: Ethics of Foreclosure	#1
Tent villages (hoovervilles) are appearing around some US cities. What is the necessity of this action, which I assume nobody in such a village takes out of free will (those who do I exclude from my considerations)? We also want to exclude social, contractual and political considerations, although I admit my motivation for the question is social. The villages are inhabited by people who have had their houses repossessed by a bank. They had entered into a contractual agreement with the bank whereby they obtained freehold rights to the house with money stumped up by the bank. The house itself stood as security in the event of default in the repayment of the bank's loan. All this is laid down in contract, and the terms of the contract give the bank the right to foreclosure after a given number of payment defaults. So far so good - nobody (in earnest) disputes this right accorded to the bank by such contract forms. Foreclosure means: the agreement was meant to run a certain number of years with a certain calculated repayment plan (including the costs of the finance). In the event of payment default, the bank prematurely cancels the agreement and makes use of its right to set its costs off against the value of the house. Typically, no money is left over. The erstwhile owner is homeless. All above board. But what are the ethics of the bank's action? The agreement was made between two sentient human beings in full possession of their reason and full knowledge of the economic context, both personal (in the bank's case, corporate) and political. Both parties knew they were entering a risk. The (then) aspiring homeowner does his sums and says "yes, with some modest development in my business/ my career I will have little/ no difficulty in repaying". The bank says: "this person has the background, the qualifications and the economic basis to fund the necessary payments, so our investors' money is safe". Both these statements contain an element of risk. Let's eliminate some scenarios. If the owner had said not the above but: "the old crone will bequeathe me her stash of cash which I really need to fund this loan" and then the old lady dies, leaving her money to another relative, the borrower is stumped. He has overplayed his hand, if he cannot replace the source of funding, the bank gets the house. This seems morally right because a gamble made under free will has simply not paid off. Another scenario: The bank goes to the wall. Here there are state mechanisms for the protection of (investors and) borrowers. The extent to which THEY may be ethical or not cannot (for space reasons) concern us this time. The result is not necessarily homelessness. In these two scenarios, blame has been worked with and apportioned. The gambler must shoulder the consequences of his busted flush. The state has shielded (to an extent, which as said cannot here be discussed) the blameless investors and borrowers. Clearly these are less blameless if at the time of the contract all the pundits were already predicting the bank's demise, this cosideration also we eliminate (because ipso facto). But going back to the sentient parties and the reasonable agreement, who is to blame if the entire economic landscape changes? Both the banker and the borrower would have subscribed to the premise "the economy will grow at around 2%, my/his business needs also to do so, no more no less". Had the bank set THAT down in writing and bound itself to THAT condition, no foreclosure would be possible. Once more: ASIDE of business, political or legal considerations. Just pure ethics. The bank UNDOUBTEDLY set faith in such macroeconomic prospects and ran its own business accordingly. How can it ethically apportion blame if its borrowers apply the identical principle to their business practice? Assuming the cause of the borrower's default is the failure of business growth (microecomically), is not the bank in the selfsame boat ethically? Do we not, for this blame-free scenario, need a Plan B (ie not foreclosure)? Certainly: Contract is contract. But relying JUST on that is an ethical dead-end. Is not foreclosing in the context of general economic decline grossly immoral? This I would submit.
"Christianity is not a religion of morals but of therapy" (Eugen Biser) to which I add "... not properly a religion ..."

Paul
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Posted 04/04/09 - 05:20 PM:	#2
Anybody who was able to get a mortgage had plenty of money in order to qualify. I would certainly never be able to get one, and don't expect to ever have the luxury of home ownership. Truly poor people with houses typically either inherited them or bought them at a time when they were less poor. In either case, they would not still have a significant original mortgage -- so they must be refinancers who uses their house as a credit card while not actually making enough money to live on. Why should people who lucked into a house and then used it as a credit card get to live in a house for free, while renters still have to pay a monthly rent AND never got the pseudo-credit-card AND don't get a house? Why should we feel sorry for the foreclosed person just because their exceptional privileges are gone and they have to live within their means like the rest of us now? It seems to me that any argument that it's unethical to foreclose someone makes it equally unethical to not let a nearby renter move in and take over a house for sale without paying for it. Yet we would all call that theft. So why doesn't everyone call staying in a house without paying the mortgage theft as well? It's theft from the bank, who actually owns the house, just the same as I would be stealing if I moved into somebody else's house without paying. The villages are inhabited by people who have had their houses repossessed by a bank. Evidence for this unlikely assertion please? There've always been "tent villages", it's called the homeless, and the vast majority of the residents of them have certainly never had a house. At any rate, I can say with certainty that anybody in a tent village is there due to lack of income. Saying that it's due to somebody not allowing them to steal their property might be technically accurate, but it's absurdly misleading. You could as easily say that the entire homelessness problem is caused by banks using locks and security guards to protect their vaults, instead of letting anyone walk in and take money like they should. Edited by Paul on 04/04/09 - 05:27 PM

John-Paul
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Posted 04/10/09 - 08:02 AM:	#3
You ask for "evidence" of my claim that tent villages are occupied by the dispossessed. In answer: I was referring to an article in the "Süddeutsche Zeitung" of 3rd April titled "Slums im reichsten Land der Welt" (Slums appear in the richest country on earth). The Süddeutsche has my trust - I have no reason to believe the report is a fabrication. I am not suggesting that houses be occupied by squatters nor that banks should open their vaults to all and sundry. Stepping back into the argument, neither am I suggesting that defaulting mortgagees need to be seen as squatters, robbing the bank of its (undoubted) rights. If you look at my argument, I actually spend most of it (in space terms) acknowledging the banks' CONTRACTUAL right to repossession. I was and remain aware of the legal issues. We need to disentangle ourselves from them to think more philosophically (here: ethically). In this area, neither you nor anybody else has risen to my challenge: BOTH parties at the time of the agreement MAY have acted differently had they bound themselves to some form of clause with the effect "the economy will grow at around 2%, my/his business needs also to do so.". This provokes the question (already at the time of the agreement): What happens if growth is LESS THAN 2%? I referred to this possibility as a "Plan B", without fleshing it out. I was thinking of some similar provision (in effect) to the Chapter 11 insolvency legislation you have in the US. Better to provide space for the business to recover and continue contributing to the economy than have the social upheaval of commercial retrenchment (in that particular branch). "Plan B" would acknowledge that neither the bank nor the borrower were TO BLAME for the non-occurrence of 2% growth. Also that it is not socially intelligent to require retrenchment in the area of the family home. Because there is no blame here, it is unethical of the bank to dispossess. The mortgage contract needs to be set on a new pair of feet (however fashioned). The economic loss would need to be borne by both parties. We are discussing here (or actually, not discussing) the ethical issues arising out of mortgage agreements - you will appreciate that this cannot include the ethics of squatting (where there is no mortgage agreement) nor the ethics of bank robbery (which has nothing to do with anything I have written). Ethically, these people should not be thrown out of their houses. We need to change the law to accommodate this.
"Christianity is not a religion of morals but of therapy" (Eugen Biser) to which I add "... not properly a religion ..."

Caldwell
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Posted 04/13/09 - 12:44 AM:	#4
John-Paul wrote: The economic loss would need to be borne by both parties. To a certain extent. All loans are risky, some much less than others depending on past histories (of job and income and spending habits). In fact, I think even in good economic times, if a borrower runs into trouble with payment, he or she can make arrangements with the bank (they don't foreclose right away) up to I don't know how many months. Ethicswise, the calculated risk favors the banks. It is in the contract. There can be arguments to be made, such as "the borrower should save for financial difficulty", "we don't care where your money comes from: beg, steal, or borrow, just pay us.." Unfortunately, job loss (excluding lay offs) is always seen as the fault of the borrower. Even getting hurt on the job is often seen as the worker's fault. Getting sick is, too. Perhaps, a more educated consumer would factor all these before signing the contract.

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Posted 04/14/09 - 02:32 PM:	#5
Nope. (my simple answer to the question in the first post.) What I find ethically immoral in the entire scenerio is this: Compound interest on the house. My problem is this. You purchase stuff with my money. So I charge you for using my money... then I charge you for the charge of you using my money.
"...There was a writer who asked why it was that when we find positive experiences we say that only the physical facts are real, but in negative experiences we believe that reality is subjective. He made an example of those who say that in birth only the pain is real, the joy a subjective point of view, but that in death it is the emotional loss that is the reality." - Tony Ballantyne, Recursion. _____________________________________________ Truth is want. - The internal state of matters. Truth is Need. - The external state of affairs.

swstephe
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Posted 04/14/09 - 05:08 PM:	#6
there are many other such videos under "related" It seems like a lot of non-American news sources are trying to sensationalize the situation in America. Yes, it is bad, compared to previous prosperous times, but it is certainly not widespread. There has always been a homeless problem, it will obviously get worse as the economy gets worse. It is only interesting to see it in such a prosperous country. I think the foreclosure part is perfectly ethical. Each person entered into a contract. The bank was put at risk taking on the responsibility of the loan and the person took on the risk of foreclosure and bad credit. The foreclosures helped create the financial crisis. The people and banks that were more on the irresponsible side, (or trusting to be insured), are paying the price now. That is the wonders of capitalism, with usury, (charging insurance), and low levels of liquidity. Blaming foreclosures is like blaming jails for prisoners.
Ethics is the measuring of morality. Morality is the measuring of good. Good is the measuring of benefit. Benefit is the measure of values.

xzJoel
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Posted 04/15/09 - 01:10 PM:	#7
John-Paul wrote: In this area, neither you nor anybody else has risen to my challenge: BOTH parties at the time of the agreement MAY have acted differently had they bound themselves to some form of clause with the effect "the economy will grow at around 2%, my/his business needs also to do so.". This provokes the question (already at the time of the agreement): What happens if growth is LESS THAN 2%? I referred to this possibility as a "Plan B", without fleshing it out. . . "Plan B" would acknowledge that neither the bank nor the borrower were TO BLAME for the non-occurrence of 2% growth. Also that it is not socially intelligent to require retrenchment in the area of the family home. Because there is no blame here, it is unethical of the bank to dispossess. The mortgage contract needs to be set on a new pair of feet (however fashioned). The economic loss would need to be borne by both parties. It is interesting that you would choose to frame the issue in "ethical" terms rather than "legal" terms as if the law does not somehow relate to a public expression of ethics. In any event, contract law does not generally deal in a strict "law" sense with issues of blame. That the mortgagee and mortgagor are equally blameless in the event of a default by the mortgagor is of no moment to contract law. This lack of provision in law for a blameless defaulter is no accident, but rather an ethical decision about the status of parties to a contract. Where two parties are able to freely negotiate whatever they like in a contract, the law and ethics hold them to it. The law (mainly through case law) has drafted a variety of equitable (read "ethical") defenses to the enforcement of contract. Your argument appears to be that ethics has additional standards beyond that which the law already recognizes. In this case, you are proposing some sort of "unstated assumption that later turns out to be wrong" exception to the enforcement of contract. Putting aside the result of a contract, what does this suggest for the terms of drafting a contract? Must a bank, because it is not the lowly homeowner, be a psychic or alternatively omniscient so that it can properly state all possible assumptions that go into drafting an agreement so that it can rest assured that it can ethically enforce its contractual rights? If we know that drafting contracts will become unwieldy if we impose your "unstated assumption that later turns out to be wrong" loss sharing provision, are we not ethically (and practically) required to reject your ethic? Aren't contracts an ethical good? Once we get past the problems with drafting future contracts should your rule be adopted, we can look backwards at already formed contracts and apply your previously unanticipated rule. Without belaboring the point, I almost see your argument as this: "Homeowner and bank to come an agreement about the terms of a mortgage. Both of them assume society will chug along at x% per year, thereby making their terms seem reasonable. When society fails to do its job at maintaining the x%, the parties to the agreement are blameless that the contract is no longer as advantageous as they had hoped. Consequently, either a) society should pay for its failure by guaranteeing the deposits of the bank investors or b) the bank investors should be deprived of recourse while the homeowner benefits by the passage of time in that the homeowner either 1) does not have to leave and incur the cost and heartache attendant with finding a new place or 2) the property value stabilizes and rises enough that it is sufficient for the homeowner to volitionally sell the house." You make the point that the parties would have acted differently had they written the unstated assumption into the contract. Knowing now what they did not then, what would they have done differently? Would the homeowner not have purchased the home? How would the bank and the homeowner have decided to value the risk? Who would have born the risk? Assuming that the parties would have acted differently in the past requires a fair analysis of what the world was like then. For starters, the bank is fairly unlikely to have taken the risk of the loss. A mortgage is the bank securing a loan against the value of your property, not the bank co-investing in your property. If the value goes through the roof on the house, you don’t pay the bank more than you do if the value of the house stagnates. Similarly, you don’t pay the bank less if the value of the house declines, you either pay the same or have the bank forgive your debt. In other words, the risk of what happens to the house is solely yours, and this is as you intended. Now let’s say you wanted the bank to share the risk with you. Do you think the bank would do that for free? Do you imagine the bank would go from someone loaning you money to someone who is investing with you out of kindness? What would have been most likely at the time you drafted the mortgage was that the bank would have charged you additional fees to share any risk with you. If you did not pay those fees, they would not share the risk. Now that you are looking back and trying to insert new terms into the contract, what do you do about the fees for risk sharing that the homeowner did not pay? Should the homeowner have to come up with those fees prior to receiving ethical protection from foreclosure? Does the homeowner get to both receive the benefit of the unwritten term and avoid the burden? Where in this new ethical paradigm is there consideration for society? Isn’t it just the taxpayers that subsidize the homeowner's misfortune when they cover the bank’s losses during the period that the homeowner is not paying and the bank does not have cash in hand? Why do I, as a totally non-volitional participant in the system, have to pay for your poor choices because you and the bank assumed a rosey world for the foreseeable future? How is it ethical to take money from my pocket that would have gone to whatever I elected to ethically spend it on so that you can not be evicted? The thrust of your argument appears to be on blamelessness, but I think you fail to account for the breadth of harm and the blamelessness of all those harmed. The fact is, sometimes blame is not required for either non-ethical or ethical action (as opposed to unethical). If your ethics is purely predicated on doing no harm and acting only to remedy harm, I don’t have much I can say to you. Bear in mind, however, that many people’s ethics are largely based in the facilitation of commerce. My enthusiasm for response has waned, but I’ll get it back. Edited by xzJoel on 04/15/09 - 02:21 PM. Reason: Spelling.
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ciceronianus
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Posted 04/15/09 - 01:42 PM:	#8
The OP presents a scenario which is essentially legal. It is not useful to apply ethics to such a situation, just as it is not useful in most cases to think of the law as equivalent to morality, or judge the law by one's moral sense. It is improper to "blame" someone for not making payments, and equally improper to "blame" someone for foreclosing on a mortgage which is in default, in the example being used. Contracts are not entered into for "moral" reasons, and so there is no reason to judge them "morally." One could as easily claim it is "immoral" to sue for breach of contracts of any kind in times of economic distress, as there is an increased likelihood that there will be a breach of the contract which will not be the "fault" of either party, or that it is immoral in those circumstances to even enter into contracts.
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Cadrache
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Posted 04/15/09 - 02:17 PM:	#9
The real Ethics part of the whole thing is this:[to me] Government is supposed to provide the people with what they consider is the basic rights of survival. "Justice" (seems to) dictates that those that create a loss of property should compensate. Government did not create the contract therefore the compensation should fall upon the banks; since they profited from the exchange of the reduction of the quality of the survival of family in Tent 7126.
"...There was a writer who asked why it was that when we find positive experiences we say that only the physical facts are real, but in negative experiences we believe that reality is subjective. He made an example of those who say that in birth only the pain is real, the joy a subjective point of view, but that in death it is the emotional loss that is the reality." - Tony Ballantyne, Recursion. _____________________________________________ Truth is want. - The internal state of matters. Truth is Need. - The external state of affairs.

John-Paul
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Posted 04/19/09 - 01:15 PM:	#10
Thanks for taking the time to grapple with the issues I raised I'll interweave some answers. xzJoel wrote: It is interesting that you would choose to frame the issue in "ethical" terms rather than "legal" terms as if the law does not somehow relate to a public expression of ethics. Of course it's possible to review the problem from several standpoints. In setting the legal issues for a moment aside, I am not in any way challenging their validity. I simply want the focus to be purely ethical. The law is certainly broadly related to the ethics of the legislating sovereign but not in the particulars - consider the rights of an employer, which can certainly be used unethically. We then speak of the abuse of those rights. There are other examples, but that's offthread. xzJoel wrote: In any event, contract law does not generally deal in a strict "law" sense with issues of blame. That the mortgagee and mortgagor are equally blameless in the event of a default by the mortgagor is of no moment to contract law. This lack of provision in law for a blameless defaulter is no accident, but rather an ethical decision about the status of parties to a contract. ...so we'll please set law issues aside. The lack of provision in law for a blameless defaulter is NOT an ethical decision, how could it be? My point is precisely that this decision (if that's what it was) is unethical. It is unethical because it is not possible to identify a wrong action. xzJoel wrote: Where two parties are able to freely negotiate whatever they like in a contract, the law and ethics hold them to it. Sorry, no. The law does this, ethics does not, I remain with my argument. xzJoel wrote: The law (mainly through case law) has drafted a variety of equitable (read "ethical") defenses to the enforcement of contract. Your argument appears to be that ethics has additional standards beyond that which the law already recognizes. In this case, you are proposing some sort of "unstated assumption that later turns out to be wrong" exception to the enforcement of contract. I agree with your equity point. I refuse to be drawn into a wider consideration of ethics in law, because I am divorcing the two. Look at all the books in your library which deal ONLY with ethics, and those that deal ONLY with laws of various types. How did they do that? I'm currently delving only in the ethics library, my proposition happens to have a legal background. I propose no unstated assumptions and (in answer to a point further down the page) would not in all practicality suggest retrospective application of corrective legislation. Mortgage agreements would contain a clause similar to those in insurance contract which exonerate the insurer from liability in cetain defined events (act of God, civil commotion etc.). Here, the mortgagee would carry the risk of inadequate professional advice (due care) and market failure (recession). Loss of job by the mortgagor would not in itself be enough to activate the new provision - it would have to be loss of job because of general decline in economic activity. Putting aside the result of a contract, what does this suggest for the terms of drafting a contract? Must a bank, because it is not the lowly homeowner, be a psychic or alternatively omniscient so that it can properly state all possible assumptions that go into drafting an agreement so that it can rest assured that it can ethically enforce its contractual rights? If we know that drafting contracts will become unwieldy if we impose your "unstated assumption that later turns out to be wrong" loss sharing provision, are we not ethically (and practically) required to reject your ethic? Aren't contracts an ethical good? No, but with respect that's not my argument. Once we get past the problems with drafting future contracts should your rule be adopted, we can look backwards at already formed contracts and apply your previously unanticipated rule. Without belaboring the point, I almost see your argument as this: "Homeowner and bank to come an agreement about the terms of a mortgage. Both of them assume society will chug along at x% per year, thereby making their terms seem reasonable. When society fails to do its job at maintaining the x%, the parties to the agreement are blameless that the contract is no longer as advantageous as they had hoped. Consequently, either a) society should pay for its failure by guaranteeing the deposits of the bank investors or b) the bank investors should be deprived of recourse while the homeowner benefits by the passage of time in that the homeowner either 1) does not have to leave and incur the cost and heartache attendant with finding a new place or 2) the property value stabilizes and rises enough that it is sufficient for the homeowner to volitionally sell the house." You make the point that the parties would have acted differently had they written the unstated assumption into the contract. Knowing now what they did not then, what would they have done differently? Would the homeowner not have purchased the home? How would the bank and the homeowner have decided to value the risk? Who would have born the risk? Assuming that the parties would have acted differently in the past requires a fair analysis of what the world was like then. For starters, the bank is fairly unlikely to have taken the risk of the loss. A mortgage is the bank securing a loan against the value of your property, not the bank co-investing in your property. If the value goes through the roof on the house, you don't pay the bank more than you do if the value of the house stagnates. Similarly, you don't pay the bank less if the value of the house declines, you either pay the same or have the bank forgive your debt. In other words, the risk of what happens to the house is solely yours, and this is as you intended. "... not the bank co-investing in your property." Correct, correct, correct. I would leave the business side of the matter out of consideration. There would under my proposion still be ample scope for benefit on both sides. In the case of default due to macroeconomic considerations (and only those), society will bear costs anyway, they are facts of life and with us, whether you want that or not. The question I am answering is: Why should these unearned disbenefits be borne only by the homeowner? The issue is not "leave the taxpayer/the shareholder alone" but "allocate the costs of macroeconomic failure equitably". Now let's say you wanted the bank to share the risk with you. Do you think the bank would do that for free? Do you imagine the bank would go from someone loaning you money to someone who is investing with you out of kindness? What would have been most likely at the time you drafted the mortgage was that the bank would have charged you additional fees to share any risk with you. If you did not pay those fees, they would not share the risk. Now that you are looking back and trying to insert new terms into the contract, what do you do about the fees for risk sharing that the homeowner did not pay? Should the homeowner have to come up with those fees prior to receiving ethical protection from foreclosure? Does the homeowner get to both receive the benefit of the unwritten term and avoid the burden? No I don't imagine the bank would act out of kindness. It would act thus for fear of having its trading licence rescinded by the regulatory agency, the sanction I would propose for non compliance. Since all banks would be having to bear such costs, there would be no competitive disadvantage. And since I would simultaneously regulate banks' ability to charge compound interest, they would be a far securer, unrisky but of course unprofitable investment, similar to government bonds. Banking is not an area of the economy where risk should be encouraged. This lesson should by now be clear to all of us. Again, the legislation for this would not be retroactive so all your existing mortgages would remain untouched. Where in this new ethical paradigm is there consideration for society? Isn't it just the taxpayers that subsidize the homeowner's misfortune when they cover the bank's losses during the period that the homeowner is not paying and the bank does not have cash in hand? Why do I, as a totally non-volitional participant in the system, have to pay for your poor choices because you and the bank assumed a rosey world for the foreseeable future? How is it ethical to take money from my pocket that would have gone to whatever I elected to ethically spend it on so that you can not be evicted? The thrust of your argument appears to be on blamelessness, but I think you fail to account for the breadth of harm and the blamelessness of all those harmed. The fact is, sometimes blame is not required for either non-ethical or ethical action (as opposed to unethical). If your ethics is purely predicated on doing no harm and acting only to remedy harm, I don't have much I can say to you. Bear in mind, however, that many people's ethics are largely based in the facilitation of commerce. My proposal may well lead to a relief for taxpayers who would not have to bear the social costs (illness, non-availability to the job-market, loss of tax revenue from the homeless, public health issues associated with substandard "housing", policing issues). No way would I propose any subsidy of the banks by the taxpayer. But like the health costs of their own employees, these are costs occasioned by the banks' engagement in the real economy and which they are perfectly capable of bearing. Indeed, more capable than the otherwise homeless homeowners. Division of labour. Some way or other, many of these new homeless will be traumatised into substandard performance (in economic terms, which I disrecommend) / lack of personal accomplishment (more neutrally) which is a graet loss to society not only economically but also in the value of personal contribution. The upheaval may cost more - that's not my central point. My point is that we should not support a system which looks as if it is apportioning blame by removing rights when there is no blame to be had anywhere. THAT is unethical. Edited by John-Paul on 04/19/09 - 02:09 PM. Reason: fear of timeout
"Christianity is not a religion of morals but of therapy" (Eugen Biser) to which I add "... not properly a religion ..."

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