Do our sources address "strategic loan defaults"?

Question

In the most recent episode of NPR's Planet Money Podcast, they interviewed a real estate lawyer in Arizona who talked about the large numbers of her clients who have been asking for advice about doing a "strategic default" from their mortgages. (Like most of Planet Money's episodes, it's very interesting and well worth listening to the whole thing.)

For example, suppose you borrowed $500K to buy a house during the bubble, and now, a year later, identical houses in the neighborhood are selling for $300K. You don't want to keep paying the $500K mortgage for a house that's really only worth $300K now. So, you go buy another house in the neighborhood, taking out a mortgage with your good credit. Then, you move into the new house and simply stop paying the mortgage for the first house. Eventually, the bank forecloses on the first house and takes it away, and your credit rating takes a substantial hit, but you save a ton of money.

Refusing to pay off your mortgage is a breech of contract, which is not illegal, according to this lawyer, and at least in Arizona, the bank can't even sue you to recover what they lent you other than by taking the house. (They can't try to garnish your wages, take your other stuff, etc.) So, for many people, this is a sound business decision.

They discussed the ethics of this on the podcast a little but of course didn't come to any definitive conclusions.

Here's what I'm wondering: Do our sources address this sort of maneuver? Is there any Halachic prohibition against refusing to pay off a loan? Are there any Mussar guidelines that address this?

We could all take turns spouting about our ethical intuition about this issue, but I'm really only interested in hearing about relevant sources in the literature. And of course, if this issue affects you practically (which it doesn't me, thank God), make sure to consult your own Rabbi and lawyer before acting on any information presented here.

Answer 1

Let's try this again; [h]apotiki is the name of the game here.

Rambam, Lender and Borrower 18:3

ז [ג] עשה שדהו הפותיקי לבעל חובו, או לאישה בכתובתה, והוא שיכתוב להן מכאן תגבו, ושטפה נהר--הרי זה גובה משאר נכסים, וטורף אותן; ואם התנה עימו שלא יהיה לו פירעון אלא מזו, אינו גובה משאר נכסים.

If a field was specified as payment to a creditor ..., and the field was flooded, other properties can be seized. But if the stipulation was made that repayment would come exclusively from this property, no other property may be collected.

So I think it all depends on the language of the mortgage; if US law limits repayment to the property, that should serve as the stipulation.

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On the other hand, we have the following, Rambam Laws of Sale 7:8-9.

ז,ח הנושא ונותן בדברים בלבד--הרי זה ראוי לו לעמוד בדיבורו, אף על פי שלא לקח מן הדמים כלום ולא רשם ולא הניח משכון. וכל החוזר בו, בין לוקח בין מוכר--אף על פי שאינו חייב לקבל מי שפרע--הרי זה ממחוסרי אמנה, ואין רוח חכמים נוחה הימנו. ז,ט וכן מי שאמר לחברו שייתן לו מתנה, ולא נתן--הרי זה ממחוסרי אמנה.

If one verbally commits to buy, sell, or gift, that's nonbinding, but the rabbis are very displeased with someone who doesn't honor his word. (Talmudic "Mussar guideline")

The Rama (C"M 204) concludes that the strong value on honoring one's word applies even if the price has since changed, though some Achronim disagree.

My guess is depending on the language of the mortgage, this might very well apply.

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If, however, this was just a normal loan, with the property as collateral, you'd have the following:

Kesubos 86a--b:

האי מאן דמסקי ביה זוזי ואית ליה ארעא ואתא בעל חוב וקא תבע מיניה ואמר ליה זיל שקול מארעא אמרינן ליה זיל זבין את ואייתי הב ליה ... א"ל רב כהנא לרב פפא לדידך דאמרת פריעת בעל חוב מצוה אמר לא ניחא לי דאיעביד מצוה מאי א"ל תנינא במה דברים אמורים במצות לא תעשה אבל במצות עשה כגון שאומרין לו עשה סוכה ואינו עושה לולב ואינו עושה מכין אותו עד שתצא נפשו

Rambam, Malveh VeLoveh 11:7--8:

לווה שאין לו מיטלטלין ויש לו קרקע--אם נודע לבית דין שתלה מעותיו ביד אחרים, כופין אותו למכור וליתן לבעל חובו. ואם לא נודע להם דבר זה, מחרימין על מי שידע לו מיטלטלין או מי שיש לו מיטלטלין ולא יביאם; ואחר כך יורדין לבינונית שבנכסיו, ומגבין לבעל חובו כמו שיתבאר. במה דברים אמורים, בזמן שנפרעין מן הלווה עצמו. אבל הבא להיפרע מן היורש, בין קטן בין גדול--לא ייפרע מן המיטלטלין, אפילו היו מופקדין או מלווה אצל אחרים: שהמיטלטלין אינן תחת שיעבוד בעל חוב מן התורה.

ח] מצוה על היתומין לפרוע חוב אביהן, מן המיטלטלין שהניח. ואם לא רצה היורש ליתן, אין כופין אותו

It is an absolute, enforceable mitzva to pay your debts; thus, if the borrower has cash, he must use cash before defaulting on any real estate. If, however, the first house was bequeathed to children, they should provide payment other than the house if so desired, but it's not enforceable.

Answer 2

"at least in Arizona, the bank can't even sue you to recover what they lent you other than by taking the house."

Traditionally in Halacha, if I borrow money (with a document and witnesses), not only am I obligated to pay it back (including wage garnishment as needed), but ALSO, all my real estate at the time becomes on lien to pay it back -- so that even if I sold my house later, the creditor could "repo" it from whoever bought it. So the obligation is on me, and beyond that, even on my property. Your case turns that on its head, where the only obligation is on the property. (Analogous to someone who bought real estate from the debtor; the real estate can be seized, but there's no personal obligation.)

I recall the discussion about the "Apotiki", in which one object is specified as the main source of collection; afraid I'm a bit rusty about the details.

Perhaps slightly more apropos is the fact that the Ketubah as we have it today is an obligation on the groom to provide a payment to his wife in the event of divorce or (his) death. This obligation is on his person (and even obligates him to go out and work, should he have no money and have no interest in changing that), and is furthermore on his property (should it later be sold). HOWEVER, the Talmud (Ketubot 82b) points out that this was by enactment of Shimon ben Shetach (~2000 years ago); previously, the Ketuba had been a specific object intended for collection. It appears that the change happened not because the old system was unfair vis-a-vis business ethics, but because it failed to provide women sufficient security in their relationships.

I'm dancing around your question, though. This would best be answered by someone with a solid background in Shulchan Aruch Choshen Mishpat.