Ethics & Foreclosures

The number one business story of the week is surely the foreclosure story. A number of U.S. banks, including most notably Bank of America, have suspended mortgage foreclosures for the time being due to worries over flawed paperwork.

Here’s just one of many news items on the topic, by David Streitfeld and Nelson D. Schwartz writing for the NYT: Largest U.S. Bank Halts Foreclosures in All States

…Bank of America instituted a partial freeze last week in those 23 states, and three other major mortgage lenders have done the same. The bank’s decision on Friday increased pressure on other lenders to extend their moratoriums nationwide as well.

An immediate effect of the action will be a temporary stay of execution for hundreds of thousands of borrowers in default. The bank said it would be brief, a mere pause while it made sure its methods were in order….

As the NYT story points out, there is considerable pressure on lenders to put the brakes on. Members of Congress and various attorneys general are suggesting that it would be wise to do so.

A few quick points about ethics:

1) In case it’s not obvious, the freeze on foreclosures is an ethical issue, in addition to being a legal one. It involves shifting benefits, burdens, and risks among groups, including homeowners, banks’ shareholders, and taxpayers. (In this regard, it’s worth remembering that the banks are middlemen, essentially mediating a transaction between their shareholders, who have money to lend, and homeowners, who need to borrow. If there has indeed been any fraud or even lack of diligence on the part of the banks, it is an offence not just against homeowners, but against shareholders.)

2) Mortgages are not just like any other product. For starters, a home is by far the biggest purchase most of us will make in our lifetimes. Scale alone makes this an important issue. Further, home ownership is for most people laden with emotion. When foreclosures happen, people aren’t just losing a product; in most cases they lose a home. This is both morally significant, and accounts for at least some of the political attention being paid to the issue.

3) It’s not at all clear that a freeze on foreclosures is good for home-owners (or rather would-be home owners) over all. The ability to foreclose in the event of default is part of what makes it worthwhile for lenders to take a risk in lending money to buy a home in the first place. Also, foreclosures put houses on the market, helping to keep prices down. Fewer foreclosures may mean a rise in prices. (See CNN-Money: Foreclosure freeze shakes battered home market). Since ethics is, in part, about evaluating outcomes, recognizing the effects of the freeze on the full range of stakeholders is ethically important.

7 comments so far

  1. Lalitha on

    True, you have attempted to capture the foreclosure story in all its ethical dimensions. You have also pointed out that “the freeze on foreclosures is an ethical issue, in addition to being a legal one”. Hence, the issue is not to be looked exclusively from the angle of ethics or of the impact of outcomes on the different stakeholders.
    It is primarily, let us face it, a legal issue where the lenders have bent (or broken?) the legal provisions. Let us be clear: issues acquire ethical color only when they are not tainted by illegality. When something is outright illegal or legally incomplete or inchoate, it is necessary that efforts to salvage the situation from total collapse of the lending institutions are taken and if taken, would ultimately serve the interests of all the stakeholders – especially, the shareholders of these banks!
    Consider the contra situation: when these foreclosures are struck down by the courts later due to faulty or incomplete documentation, leading the banks to avoidable embarassment and transaction costs and the defaulting home-owners made to suffer in a state of suspended animation due to this bungling!

  2. Jeff Moriarty on

    Hi Chris,

    Good stuff. I would quibble with your characterization of (1). Is it really *shareholders* loaning money to homeowners, with banks as the middlemen coordinating the transactions? I don’t know. Some of the money the (U.S.) banks loan is money they borrow from the federal reserve, other banks, and various other creditors (in the commercial paper market, perhaps?). Also, isn’t a lot of the money they loan from their own customers? So the offense in question, if there is one, is against a broader range of subjects than you suggest.

    Best,
    Jeff

    • Chris MacDonald on

      Jeff:

      Good point. You’re right — I’ve oversimplified. But the main point remains that the banks (or, if you wish, the decision-makers at the banks) are just middle-men, lending other people’s money. That raises obvious agency problems. But yes, the range of principals is (even) wider than I originally suggested.

      Chris.

  3. Chris MacDonald on

    Lalitha:

    Thanks for your comment.

    But I’d like to quibble with your claim that “issues acquire ethical color only when they are not tainted by illegality”. Many issues are both legal and ethical issues; the two categories are not mutually exclusive. And I think it’s important to remember that this is not only a legal issue, because even if courts determine that there was no legal wrongdoing, it’s still entirely possible to hold that there was unethical behaviour.

    Chris.

  4. Lalitha on

    True, you are right about some issues while being perfectly legal yet are unethical. But in MHO, this is one issue when it is more likely to kick up lot more legal imbroglios than ethical concerns and I still believe that while the prices of houses may become pricey for the potential / new purchasers in the short term, it would stabilize as soon as the legal documentation is straightened out and foreclosures take place. Who knows, the defaulting borrowers may during the interim period come by some extra money to stave off the grab of the lenders and the shareholders also would then be happy to get back their ROI!

  5. Christian Tan on

    The structural system of the market is polished on the outside, but the core is purely black market. I know… I was a loan officer and left before the market crashed… What people aren’t aware is that they are like corn crops and they get cashed in whens it fully matures. The market crash is as predictable and as systematic as how it was in the first crash (great depression). but forget about the effect… that’s spill milk! Let’s focus more on the important matters such as purpose behind the cause for such effect. Rothschild owns the international banking system through its puppets “trilateral commission” or “pyramid” The first crashed happened because they decided to use JP Morgan to purchased all the banks and leave the smaller banks out to get supplied by them.. The effect?! “simple: higher interest rates which no one can afford and control of economic growth! This made them the “life support” of the U.S. economy! The plan worked.. Now for the bigger purpose behind this effect! Rothschild a.k.a. private party then payed off its friend “Teddy Bear” to sign off an agreement to allow the creation of “federal reserved” who will then payoff the debt of the country (U.S.) in return the Citizens “americans” will have to pay back the deficit with taxes.. The U.S. in modern times had the money to pay off the deficit, so they had to crash the market as a result to maintain the debt! Then they deducted income from peoples 401k’s and making people pay less tax so the amount of the deficit is now unattainable to pay off!! Thus making every americans alive and unborns slaves to debts. We have gone from being the producer to consumer within the last 20 years!! everything now is out sourced!!! In 2006 bush signed the North American Union then in 2009 the market crashed happen.. fascinating don’t you think?

  6. Christian Tan on

    Why don’t people ever wonder… “Why do lenders refinance people as much as they can? Why is there not a law that prohibits homeowners or lenders to exceed the limit on refinancing?” FACT: If you refinance your $400,000 house you interest might be lower but the closing cost on that is 6% (400,000 x .06 = $24,000) so now your new loan amount starts a new cycle of 30 years @ 424,000 balance.. sure you can deduct your 5 year mortgage payment but does it really make a difference? THE ANSWER IS NO! and that’s how mortgage works!

    common mistakes:

    1.) people don’t see the fees because everything is done in the back. They know the closing cost but they don’t see the “cash” value in person! “The lender takes the percentage from equity and cash it in for real money!”

    2.) People use their equity thinking it’s really theirs when they still owes mortgage to the banks. Big mistake! the money you pull out actually goes back in to your debt with “interest”.


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