Thursday, December 9, 2010

The Foreclosure From Hell

I came across a story in the Wall Street Journal about a woman in Florida by the name of Patsy Campbell who has been in foreclosure for the last 25 years.  Since 1985 she has continued to live in her house despite not making any mortgage payments.  Ms. Campbell defiantly claims that she has every right to remain in her home until the case against her is adjudicated. However, she appears to be using every trick in the book to delay that day of reckoning.  The article describes some of the various tactics that she has used to stop the bank from booting her out of her home:

Ms. Campbell has challenged her foreclosure on the grounds that her mortgage was improperly transferred between banks and federal agencies, that lawyers for the bank had waited too long to prosecute the case, that a Florida law shields her from all her creditors, and for dozens of other reasons. Once, she questioned whether there really was a debt at all, saying the lender improperly separated the note from the mortgage contract.

She has managed to stave off the banks partly because several courts have recognized that some of her legal arguments have some merit—however minor. Two foreclosure actions against her, for example, were thrown out because her lender sat on its hands too long after filing a case and lost its window to foreclose.


Her latest tactic is to declare bankruptcy.  This puts a hold on the foreclosure proceedings until the hold is lifted by the bankruptcy-court judge.  According to the article, this will delay things at least four months, at which point the case will go to trial.  When that happens, who knows what new tactic Ms. Campbell will devise.

Now article states that she stopped paying her mortgage not because of a desire to freeload, but because an illness caused her to lose her job and get behind on her bills. However, once she recovered (and one can infer from the article that she did recover), she either should have resumed payments to make good on her debt, or given up the house. By mounting dubious challenge after dubious challenge, she is just trying to avoid the debt altogether.

On the one hand, there is nothing illegal about what Ms. Campbell is doing.  She is "working" the system to the fullest extent possible.  The law states that she is entitled to due process prior to the bank seizing her home, and it seems like from the article that the lenders have made a lot of missteps to say the least.  As with all U.S. citizens, she is entitled to have her day in court, and if it takes 25 years, that is not her fault.

Other the other hand, what she is doing is immoral in my humble opinion.  When her husband bought the house, he took out a loan and signed a contract which said that he would either pay back the loan or lose his home.  When he died, Ms. Campbell decided to stay in the house and take on that obligation.  By not paying her mortgage as agreed, she is failing to live up to the terms of the contract.  This may not be theft from a legal standpoint, but it is from a moral one.  While she certainly has a right to continue to live in the house, that does not make it right.

One can view Ms. Campbell as a woman before her time.  With the implosion of the real estate market, many otherwise upstanding citizens are engaging in a practice known as a strategic default.  This is where a person walks away from a house whose mortgage is greater than the value of the house despite the fact that the person has the ability to make the payments on the mortgage.  This isn't a case where somebody can't make their mortgage payments because they lose their job or become sick.  This is where a person actively chooses not to pay.

Attorney Jim Porter advocates such a strategy.  He argues that there is nothing wrong with this:

Let me initially say that you should have no guilt or remorse about not making payments to your lender. No one likes to default, but your mortgage is a contract — a legal document — not a moral promise. The deed of trust has language in it that should you default, the lender can take back your property. That was the agreed deal. Get over the perceived negative social stigma-at least that is my advice.


As much as I would love to disagree with him, he is correct in the sense that there is no social stigma to reneging on a loan.  Rather than shaming people for not living up to one's obligations, people are applauded for making what is perceived to be a wise financial decision.  While it may seem like a smart move to walk away from a money losing obligation, it undermines the adage "a promise is a promise". 

Now you may think that I am just being an old-fashioned pollyanna, but "a promise is a promise" helps to facilitate the economy and society in general.  Much of our financial system is based upon trust:  trust that when party A loans party B money that party A has a good chance of getting it back.  Sometimes unforeseen circumstances cause the borrow to default on an obligation, and that is part of the cost of doing business for the lender.  However, when there is a good chance that the borrower might decide not to repay a loan just because they want a free lunch, who is going to lend money?  Lenders are only going to lend money whose reputation is sterling, or they will demand a higher rate of interest increasing the cost of borrowing.

This is the situation that many parts of the financial system are in now.  There are people who want to refinance mortgages at low interest rates that are being turned away because the banks don't trust them.  There are small businesses who want to borrow money to hire more staff so they can expand that are being turned away because banks don't trust them either.  This lack of trust has tangible and serious consequences.

So yes, you can legally walk away from your obligations like Ms. Campbell has done and like Mr. Porter recommends.  However, there are consequences to this line of thinking, both moral and to the economy as a whole.

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