Owe No Man Anything

In a June 21 response, attorneys for the church indicated the church had strategically defaulted on the mortgage after learning its real estate – a 23,635-square-foot office building housing the church – is worth only $2.375 million vs. the $7.653 million owed to the bank.

This strategic default involved an analysis of whether it made sense to use church members’ donations to pay the underwater mortgage while also trying to save money for expansion needs.

I remember arguing with a preacher once over the morality of strategically defaulting on one’s mortgage. He was of the opinion that, per Romans 13:8, we each have an obligation to pay off our debt. His argument struck as somewhat asinine (but less asinine than the argument that Romans 13:8 forbids the Christian from going into debt).
Anyway, the flaw in this preacher’s thinking was that defaulting did not lead to repayment of the debt. Most mortgage agreements work like this: the borrower agrees to borrow a certain amount of money and repay it, plus a usury charge called interest. The borrower is generally expected to offer some property as collateral. If the borrower fails to pay per the terms of the agreement, then he is in default, and the lender usually reserves the right to confiscate the collateral in order to cover the remainder of the principal. For most mortgages, confiscation of property is generally considered sufficient compensation in the event of a default (which is predicated on the theory that housing prices always go up and never come down).
Thus, the lender is essentially saying that the property offered as collateral is equivalent to the value of the foregone cash. Whether this assumption proves to be true in the long run is not the concern of the church, in this case, but of the bank that makes the loan. And if the bank’s estimation of the future value of property is wrong, it does not follow to claim that the church must repay the bank for a mistake the bank made. Furthermore, the bank has already said that ownership of the property in the event of a default essentially marks the debt as paid, so there is nothing wrong with the church defaulting on its payments in order to save money (in fact, the church would do well to default and then repurchase the property once the bank sells it).
Therefore, it is not wrong for the church to default on its loan, for it is simply making a prudent financial decision and will, even by defaulting, pay its debt. The bank, not the church, is responsible for determining market risk, and the bank, not the church, should bear the consequences of making the wrong decision.

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