Friday, June 17, 2011

Ask RC: Question about foreclosures.

Question: My husband read Biblical Economics and learned much. What is your opinion about giving back our rental/investment property to the bank as a foreclosure?

Not long ago I received another interesting question related to our current economic hardships. A friend wondered if investing in Iraqi currency in anticipation of a steep devaluing of that currency was legitimate. I explained an important but often overlooked element of economics (which also touches on oil speculation and even ticket scalping)- the economic value of sharing risk. If I buy Iraqi denari at x and turn around and sell then at 10x I have not profited illegitimately but have shared in risk that provides genuine economic benefit to the whole Iraqi economy. (Of course I cannot cry if I sell x for a loss either.)

What has that to do with foreclosures? Possibly everything. First let’s cover the easy part. If you agreed, in taking a loan, to pay back that loan, you have an obligation to pay back that loan, whatever might have happened to the value of what you bought with the borrowed money. In this kind of situation that loaning institution is not sharing in the risk. They are simply supplying capitol and you are serving as the risk taker.

But suppose that the language of the loan agreement says something like this- you may either pay back the loan, or you may give the collateral/home back to the lending institution, and lose whatever money you might have put down. In this instance the bank is sharing in the risk of your investment. There is no shame in turning over the keys.

Where it gets fuzzy is when this relationship is not made clear. Consider, for an odd analogy, the game of basketball. Suppose you are a conscientious Christian who desires at all times to abide by the rules. Suppose your team is down just a few points in the waning seconds. The odds say your best bet is to put one of your opponents on the foul line. Do you foul him? Is the foul simply a trade for free-throws, or are the free-throws a punishment for wrong-doing? If the former, certainly you are free to foul. If the latter, even if it costs you the game, you are duty bound not to foul. You cannot do wrong (foul) that good (winning the game) may come.

In these difficult times it is all too tempting to take advantage of systems designed outside a Christian perspective. Bankruptcy is one example. Trading in the keys on an upside down house may be another. At the end of the day, however, the Christian is called, in good times and bad, to let his yay be yay and his nay be nay. If I promised to pay, I pay, even to my own hurt. It is fair, however, to consider what I actually agreed to do. I know many Christians are frustrated in their attempts to talk over their agreements with banks, which won’t begin that process until the Christian first begins to not pay on the loan. Here I would argue we keep our vows to our hurt. We don’t miss payments in order to start a conversation on a short sale or a foreclosure. If they won’t renegotiate as long as we pay, we keep paying.

These matters, in short, are not terribly complicated. We do what we promised to do, and everything will be okay. We need to have faith to believe God sees and honors our integrity.


Anonymous said...

What about the Biblical prinicple of pleading with your lender?

And if your lender, the one your indebted to tells you they can help if you do (a), (b) or (c). One of those options being short dale or Deed in Lieu.

I'm speaking about when you cannot pay on your house any more because of a lack of money. Getting debt in other areas to pay of another debt you can no longer afford is unbiblical, as well.

So, if you plead to your lender and follow their advice, isn't this Biblical?

Anonymous said...

I checked the fine print on my mortgage loan and it said I am obligated to pay the loan...there is no option to "pay or give back the collateral". So I will just keep paying on my promise, no walking away from an underwater house.

Matthew said...

In the following comment, I hope to make an alternative case that, at least in cases where the debtor intended to repay the debt at the time he borrowed and where the right to bankruptcy was not waived, bankruptcy is a moral option. This is because it is in accord with biblical principles of morality and because the lender is expressly assuming the risk of the bankruptcy.

Scripture makes clear that mandatory debt forgiveness and setting bondservants free is a hallmark of a just society. Exodus 21:2 states: “When you buy a Hebrew slave, he shall serve six years, and in the seventh, he shall go out free, for nothing.” Deuteronomy 15:1 states "At the end of every seven years, you shall grant a remission of debts." Leviticus 25 states that in the Sabbath Year, the land shall feed the servants. Nehemiah 10 reiterates the forgiveness of debts as an ongoing requirement during the restoration of Israel from exile. In addition, Philemon illustrates the fact that these principles still have a place in the New Covenant.

While it is true that we live in a different time and a different economic system than ancient Israel, the principles of justice are timeless and eternal and therefore remain the same. The question of how best to put these principles into practice, however, is a difficult one.

Despite this difficulty, the American bankruptcy system could be accurately described as one valid way to put into practice the timeless biblical principles of debt forgiveness and setting bondservants free. Unlike much of our legal system, the bankruptcy system is lawful at a constitutional level because the system is authorized by Article I Section 8 of the U.S. Constitution. This is important because the Bible does not condone lawlessness.

Matthew said...

In addition, the American bankruptcy code mirrors the biblical concern for the poor, and the protection of the lenders by restricting how often debts must be forgiven. The code is designed to provide for forgiveness without payment only for debtors whose median incomes are below that of the average household in a debtor’s state, and it provides that, for each debtor, debts can be discharged without payment only at the end of every 7 years.

One difference between the system of ancient Israel and the modern American one is that the American bankruptcy system does not automatically discharge debts on a set schedule. Rather, it relies on the debtor (and the bondservant) to petition the court for a discharge of debts. One strong similarity, however, is that, the lender is always obligated to forgive the debt under the specified circumstances. Except in very limited circumstances, neither system recognizes as valid a waiver of the right of discharge from debt.

This prohibition against waiver is key because it is where bankruptcy can be reconciled with the command that one’s “yes be ‘yes’” and no be ‘no.’”

First and foremost, in an economic context, the command is a prohibition against fraud. The basic definition of fraud is a false representation (made with knowledge of its falsity) which successfully induces reliance on the false representation to the detriment of the one who relies. In the case of a loan, fraud would be stating your intention to repay while intending not to repay, to the detriment of the lender. This is prohibited, and it is therefore irrelevant whether a waiver of the right of discharge exists.

Where, however, a debtor borrows money with the intention to repay, the question of whether the debtor waived his right to discharge is key. Where the debtor had not waived the discharge, and the creditor was aware of this non-waiver, the right of discharge is still the debtor’s just possession. Put another way, under the laws of ancient Israel and the laws of modern America it is as if there is a clause under every signature and attached to every promise that says “This promise to repay subject to debtor’s ongoing right to enforce lender’s obligation to forgive the debt incurred.”

Further, the debtor can justly exercise that right in every circumstance in which there was no fraud and there was no waiver. This is because in those circumstances, the lender lent the money with the understanding that the debtor could declare bankruptcy if at any time he decided to do so. In other words, the creditor assumed the risk that the debtor would exercise his right to be free from the loan. Where the debtor does this non-fraudulently, there is no injustice.

Anonymous said...

In general your logic is valid. However, the foreclosure issue is not about borrowers not paying their mortgage. It is about the lenders gaining the value of that loan multiple times through insurance, selling the loan, securitization and then trying to foreclose on a loan they no longer own or can prove even a causal connection to the loan. It also has to do with deceptive information provided to the borrower to coax them into the loan in the first place. The bible has a lot to say about that issue.

Anonymous said...

Here is a fact. 98 per cent of all loans let between 2000 and 2008 are now fraudulent. That means regardless if you are current or not you no longer have a legal obligation to pay. In fact you are paying someone who does not have a legal authorization to receive your payment or manage your loan.

These lender have been paid multiple times the value of your note. Let's put in simple terms. If you borrow money from a bank for your car you pay the bank. If your great uncle walks into the bank and pays your loan the bank releases the lien and sends you the clear title to your car. They do not continue to chase you for the once value of the loan as they have already received the money. In one instance of your mortgage the lender is receiving the value of your note from a 3rd party and still coming after you to pay the note. They are receive the value of the note multiple times. The courts have continually stated that is a BIG NO! NO!.