The Short Sale Hardship Letter: What Is It? Why Is It Important? How Do I Write It?

April 27th, 2011 by Marc

“Short sales” continue to grow in number and now — with REOs — represent a substantial portion of the real estate market. When seeking a short sale, the owner will invariably be asked by the lender to submit a “hardship letter.” Owners should make the hardship letter as compelling as possible, while — needless to say — remaining honest and accurate. (more…)

Is it “immoral” to intentionally default on your mortgage?

December 1st, 2009 by Marc

A recent piece in the Seattle Times raised some interesting issues about the interplay between contracts and morality.  Specifically, is it immoral to simply walk away from a mortgage where you owe far more than the home is worth?  At least one law professor believes that homeowners should indeed walk away, and they should so so without any guilt.

I tend to agree with Professor White. It seems to me that people are held to an unfair standard of “morality” when it comes to business decisions, a standard that is not applied to a business entity. For example, if a corporation stands to benefit from breaching a contract, you can bet your bottom dollar that the corporation will avoid its contractual obligations. Nobody will bat an eye.

A person, however, is held to a different standard. When a person enters a contract — including a mortgage — it is assumed that the person has given his “word,” his solemn moral promise. Even where the person stands to lose money by performing his contractual obligations, many people think that the person simply must soldier on and must comply with the contract or he has acted “immorally.”  Don’t believe me?  Check out these comments.

From my perspective, people should do what is in their best self interests. If defaulting on a mortgage is the best course of action, all things considered (including damage to credit score), then the borrower should default. The lender took a risk when it loaned the money, a risk reduced but not eliminated by securing that loan with the house at issue. Thus, the lender — just as much as the buyer — took a risk that house values would decrease, thus jeopardizing the security for the loan. The lender, then, should be prepared for the consequences.

I think Professor’s point is a good one: people don’t default because of social pressures to not do so, social pressures that are applied only to borrowers and not lenders.  This exacerbates the burden on people, to the benefit of the lenders, as a result of the market implosion.