The extraordinarily lenient treatment of foreclosures, particularly in California, is also premised on them being rare events caused by black swans like personal financial catastrophe. If folks use them merely when they're net beneficial, the generous leniency afforded folks in personal catastrophe will not be extended next time.

Banks understand this. This is why, when they write contracts between each other, defaults do not result in "Oh, sure, keep the property for another twelve months and then mail the keys in and we're even stevens."

If you could remove the users ability to use the software when you refunded them $30, like the mortgage lender can when the homeowner stops living in it, you'd probably still be in business even with your clause.

On the other hand, if all of your users bought your software, thought it sucked and never used it again, and then got their refund, well, you should probably be out of business.

The OP's situation is not analogous. He is not free riding.

Edit: On the other hand, the year's worth of free rent before being evicted is to me a bit morally shady.

As an aside: I do a functional-limited trial rather than a time-limited trial precisely because 100% of the use of the software for 48 hours satisfies the need for 95% of my customers. "First year free" would wreck my business pretty comprehensively if folks took advantage of it.

I'm confused why you're using the word "compassion" at all, and coaching your argument in terms of how "compassionate" banks will be in their terms next time around.

Banks exist to make money, the terms they offer are a balance of how much risk they are willing to take, how much return they can earn, government regulation, and competition.

The OP does not owe the banks anything other than the terms of his contract, and the terms say that if he doesn't pay his mortgage he'll lose his house.

A foreclosed house still has value and can be resold. The bank also retains all the mortgage payments made prior to foreclosure.

They can only lose their hat on a foreclosure if the home was overvalued. It's their responsibility to assess the property. I don't see why they get let off the social hook for playing fast and loose, yet we're expected to hold the lendee's feet to the fire for doing the same.

> "the generous leniency afforded folks in personal catastrophe will not be extended next time." What generous leniency from the other party? What leniency exists are legal/regulatory terms known to the bank before they signed the contract. If those terms increased their risk, it would be naive to assume they didn't increase their rates to cover the difference.

Further, don't misunderstand the huge glut of shadow inventory for compassion. The banks are simply dragging their feet to avoid admitting their losses.

First of all, the "extraordinarily lenient" treatment is nothing like lenient if you happen to have a second mortgage, which was pretty common during the crisis.

Second, banks can and do write contracts like that and have defaulted on them by returning the collateral and forfeiting their investment. There are tons of examples of banks doing just this that two seconds with google would have found for you.

Third, this punishment of banks by foreclosure is exactly the point. Socially, we do not want banks making loans that will not most likely be repaid; that's what leads to financial crises as we are currently experiencing with negative knockon effects expected to (optimistically) hinder the economy for 10 years.

Fourth, the banks were asked by the government, and by good conscience, to make a fair deal with homeowners. The government is subsidizing taking the loss on the mortgage and reducing the principle to something reflecting reality. For various reasons, banks are choosing not do to this. Foreclosure is the proper response.

TL;DR: I would trade the ability to return to this restaurant and get good service for $8 in a heartbeat."

See the flaw in this argument? There are established standards of behavior in our society; tipping your waiter, paying off your mortgage if you are able to, etc. Sometimes circumstances give you the ability to flout these standards without contractual consequence, but that doesn't make it ethical to do so.

So if one side gets to operate as a business with no ethical standards, why should I as a homeowner be held to a different standard? At the end of the day I'm responsible to my shareholders (myself and my family), and I have to make the decisions that put me in the best financial situation I possibly can.

Note: I currently own a home in Plano, TX that is around $30k under water. It's currently a money-losing rental, but if that rental income where to stop... so would my mortgage payments. I'm more than prepared to walk away from that catastrophe.

2) The societal norms in b2b deals are different than in home mortgages. No one expects you to exercise an out of the money call option, but you are expected to exercise an out of the money mortgage. Similarly, the societal norms when hiring a web designer are different from the norms when dealing with a waiter. You tip your waiter, you don't tip your web designer.

This does not make it ethical for you not to tip your waiter, even if you say "but I'm doing it for the benefit of my family". Similarly, the fact that different norms of behavior apply to corporate debt than to mortgage debt does not make it ethical to ignore societal norms.

[edit: to clarify, I do mean that it's unethical not to tip your waiter in the event of good service, as tim points out below.]

This is true to a degree. But remember that banks and real estate investors are expected to be much more knowledgeable and sophisticated players in the market than someone buying one house as a primary residence.

Similarly, the societal norms when hiring a web designer are different from the norms when dealing with a waiter. You tip your waiter, you don't tip your web designer.

I am a DBA, not a web designer, but I have gotten bonuses above and beyond the agreed upon minimum in both full time and contract work. This is very similar to a tip and often they arrive at the number in a similar way (a percentage with percentage based loosely on their evaluation of my performance).

Also, it is worth noting that the tradition of tipping came from a desire to secure exemplary services. Personally, I consider it quite ethical to not tip if the service is subpar and I will tip generously if it is better than I expected.

Yes, but they shouldn't be, and many people are starting to figure this out. When the bank loaned you the money, they knew they were taking a risk and they get the home as collateral. There's no reason not to walk out on a deal gone bad just like any business would. The idea that it's immoral to foreclose is simply absurd, it isn't breaking the contract, it's exercising the out clause of it, and for that the bank will get the property.

It's fully moral to have a society where no one tips. Prices would be 15-20% higher, waiters would get a higher hourly wage, and it would be fully moral not to tip. That does not make it moral not to tip (when appropriate) in our society.

It would be fully moral to have a society in which mortgages are treated as call options on a house owned by the bank. Interest rates/prices would be higher, banks would fully expecting strategic default whenever it became reasonable to do so, and strategic default would be fully moral. That does not make it moral to treat mortgages as call options in our society.

Social norms matter, and it is indeed immoral to take advantage of people who reasonably assume you will behave according to established norms.

I think you're right that there can be implicit agreements in place such as the agreement to tip your waiter. The waiter example is quite different because you've made an implicit agreement. The point of a contract is to leave nothing implicit.

Also, part of the confusion here is that there is no precedence to say what the societal norm is. Housing prices have never fallen this much before in our society.

You are not taking advantage of the bank anymore than they're taking advantage of you. They knew up front that you might default, penalties are in the contract.

It's not immoral, it's business. That most people have been hoodwinked into thinking it's immoral benefits the bank, so they're happy to feed that delusion, but it is a delusion.

Actually, no. The housing crisis was US govt created.

Govt agencies sued and restricted other activities of banks that didn't make dumb loans. Govt agencies gave special treatement to banks that used mortage banked securities with govt-approved insurance as their "regulated assets".

And then we had Fannie and Freddie lying about the loans in those securities, which threw off everyone's risk analysis.

And we're still pissing tax money into propping up the housing market via Fannie and Freddie.

FWIW, McCain actually tried to get Fannie and Freddie under control in 2005-6 He got his teeth kicked in. (To be fair, Bush didn't back him up.)

And yes, Fannie and Freddie execs of the relevant time frame were a who's-who of dem party leadership. Some of them are now in the Obama administration while others had prominent roles in his campaign.

I have read this so many times, and I keep looking for something that backs it up. Yes, the US government made mistakes in this, but "caused" it? Please. I worked briefly in the mortgage business, just at the the subprime crisis hit, and I held a license.

The operative word is "sub-prime". A sub-prime loan is one that does not meet the Fannie/Freddie requirements to be sold in the secondary market, and thus is not handled by Fannie/Freddie. Sub-prime loans were all that was available to many people with bad credit, and sub-prime was specifically not standardized (as "conforming" loans are). With all the various details and options and tricky features, each loan was unique and it was impossible for a borrower to take your loan offer down the street and compare it with a loan from another company. Thus, the simple fact that they were getting a loan meant that they shut up and took the crap you offered, with ridiculously high fees. At the time, for example, you could get a sub-prime loan closed in a couple of weeks, with great fees, or you could wait six or seven weeks for FHA to work their process (and that FHA clerk is not getting a bonus at the end of the year for the number of loans they process).

Fannie and Freddie went down because they bought the mortgage backed securities as investments, not because they wrote the original loans (or accepted them in the secondary market) themselves. It's actually pretty weird that they drank their own Kool-Aid about how great an investment MBSs were.

Noted conservative Krugman suggested creating a housing bubble after the dot-com bubble and applauded it during the early stages.

Sarcasm....

For starters, Fannie and Freddie had their share of the mortgage market plummet during the bubble years. The loans they've made performed much better than other syndicated bank loans. The risk analyses were improperly done by the ratings agencies, and their basis were not (or should not) have been primarily Fannie/Freddie data.

Also, do you have any evidence at all besides the ravings of Fox news personalities about the government suing to force issuance of bad loans?

Please, do learn something about the situation. A great place to start is the blogs Calculated Risk or Naked Capitalism.

You mean the rating agencies that were granted a monopoly on ratings by the SEC.... That monopoly meant that their ratings were unquestioned.

> Stop getting your lies from Fox news. You're completely and utterly wrong.

I note that none of your points actually refute my claim.

Fannie and Freddie's market share isn't the whole story. In fact, the bigger story was regulatory treatment of mortgage backed securities, which is why I emphasized it.

> Also, do you have any evidence at all besides the ravings of Fox news personalities about the government suing to force issuance of bad loans?

You've never heard of CRA?

From Wikipedia.

"The new Gramm-Leach-Bliley Act's FDIC related provisions, along with the addition of sub-section § 2903(c) directly to Title 12, insured any bank holding institution wishing to be re-designated as a financial holding institution by the Board of Governors of the Federal Reserve System would also have to follow Community Reinvestment Act compliance guidelines before any merger or expansion could take effect.[61]"

A loan to an individual is an agreement to repay that according to terms. I believe that there is indeed a moral obligation to attempt to fulfill that contract. The foreclosure clauses are meant to handle the cases where the borrower tries and fails to live up those obligations, not the case where the borrower chooses to ignore the obligations they agreed to.

Or to not repay and accept the specified consequences.

I believe that there is indeed a moral obligation to attempt to fulfill that contract.

Giving up the house does fulfill the contract. The only debatable point that I see is whether it's ok to live in the house without making any payments while the foreclosure process moves forward, or whether you should hand the keys to the bank right away.