Nagle Law Group
Q: A Moral Dilemma or a Contract Right?
A: Despite the fact that walking away from a mortgage may be in the best economic interest of homeowners, many refuse to do so because of a sense of moral obligation to honor their commitment to pay the mortgage.
This perceived “moral obligation” seems to be limited to the residential real estate world. Owners of commercial properties generally feel no such obligation and will walk away from their mortgage if it makes economic sense. The reason commercial property owners do not feel this moral duty is because they are exercising a right given to them in their mortgage loan. This is because many, if not most, commercial mortgage loans are “non-recourse”. This means that if the owner does not make the required mortgage payments, the lender can foreclose on the property, but cannot sue the owner for any deficiency between the value of the property and the amount owed on the mortgage.
Unlike commercial mortgages, residential mortgage loans are not explicitly written as non-recourse. Because of Arizona’s anti-deficiency laws, however, most mortgages of one or two family dwellings will, in fact, be non-recourse so that the lender cannot sue the homeowner for any deficiency. These laws, therefore, are an implicit part of the mortgage contract and all lenders in Arizona are aware of these laws when they make any residential mortgage loan. It is usually the homeowner who is not aware of the anti-deficiency laws.
Walking away from a mortgage, therefore, can be simply viewed as exercising a right given to the homeowner in his mortgage contract. Is it morally wrong to exercise a right given to you by your contract?
The mortgage lender knew when it wrote the mortgage that there was a possibility that foreclosure would be its only remedy in the event the homeowner elected to walk away. So why should the homeowner feel any sense of shame or remorse when this outcome is simply what the homeowner and mortgage lender bargained for?
Additionally, the anti-deficiency laws serve a broader public purpose than simply protecting the assets of the homeowner. If lenders come to realize that they will have no recourse (other than foreclosure) against borrowers who elect to walk away from their homes, perhaps in the future they will take a more careful and disciplined approach to lending and thereby we will all avoid some of the worst consequences of ill-advised mortgage loans. Walking away from a mortgage is not an easy decision to make and it is strongly advised that the homeowner seek the advice of an experienced real estate and bankruptcy attorney and tax accountant before making such a decision, as it is imperative to understand all available options, the risks and liabilities associated with each option and the impact any decision will have.
Nagle Law Group’s experienced legal team combined has been practicing real estate and bankruptcy law for over 50 years. They pride themselves on being dealmakers and not deal breakers, an important distinction when deals present many complex questions from clients! For more information, please contact Stuart Pack at (602) 595-6951 ext 122 or email Stu at email@example.com.
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