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Wednesday, December 23, 2009

When banks talk morality

It's only when the law isn't on their side. But there can be no "moral" obligation to a corporation outside of the law, since outside of the law, the corporation doesn't even exist. It is, by definition, an "artificial" person. Mike Shedlock highlights a little-known aspect of Oregonian law:
Underwater Oregon homeowners find an escape hatch

The strategy works like this: Homeowners must first file Chapter 13 bankruptcy and file a motion asserting their home's value has diminished to the point that it's worth less than they owe on the first mortgage. If the motion prevails and the lender doesn't challenge, the court will then cancel the lien the second-mortgage lender holds on the home. The lender's secured debt is converted to unsecured debt, which most often is eliminated in full in the bankruptcy process.

It's not a painless strategy. Filing bankruptcy will significantly damage a consumer's credit.

And the strategy raises issues of morality, for lack of a better word. Many of these homeowners took out second mortgages to buy ski boats, trendy kitchen upgrades and other luxury purchases. Should they get off without repaying the loans? Oregon has at least six banks on the edge of closure after the mortgage crisis of the past year, and this could add to their risk.
The answer, of course, is yes, they absolutely should. The banks decided to loan homeowners the money in the full knowledge that home prices could go down. Retroactively changing the rules in order to prevent the banks from realizing the consequences of their actions is the only potentially immoral action here. As for "damaging" one's credit, that's a laughable concept considering how no amount of bad credit will prevent banks from lending to anyone in during the bubble and no amount of good credit will cause a bank to lend to anyone during the bust.

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