When to walk away from a bad mortgage
Since the housing bubble burst, many Americans have found their finances underwater. They’re paying on homes that are worth much less than the mortgages against them. More than a few have chosen to walk away from these debts.
Called a “walkaway” or a “strategic default”, deliberately defaulting on your mortgage is becoming more common as the real-estate market continues to struggle. Some experts believe that as many as 20% of homes currently in foreclosure are the result of walkaways: people who had the means to pay their mortgage but chose not to when their life circumstances changed and they found their homes unsellable.
Businesses walk away from bad investments and debts like this all the time, but for an individual to do it takes guts. There’s a huge stigma associated with walking out on your mortgage. Americans feel that there’s something morally wrong with not paying your debts, even when those debts are astronomical or unfair.
As Matt Taibbi puts it in his new book Griftopia:
When you meet people who are losing their homes in this foreclosure crisis, they almost all have the same look of deep shame and anguish. Nowhere else on the planet is it such a crime to be down on your luck, even if you were put there by some of the world’s richest banks, which continue to rake in record profits purely because they got a big fat handout from the government.
That’s why one banker CEO after another keeps going on TV to explain that despite their own deceptive loans and fraudulent paperwork, the real problem is these deadbeat homeowners who won’t pay their…bills. And that’s why most people in this country are so ready to buy that explanation. Because in America, it’s far more shameful to owe money than it is to steal it.
Whether or not you agree with Taibbi’s take on the mortgage crisis, you’ve surely seen that look of shame on the face of anyone you know who’s lost a home to foreclosure. Despite of the social pressure to keep making payments, though, thousands of borrowers are defaulting. The rate of walkaways went from virtually nothing in 2007 to nearly a fifth of foreclosures today. That’s a huge increase.
What Happens When You Walk Away From a Mortgage?
Given how many homes are underwater these days, it’s probably not surprising that I have a friend who is considering walking out on his mortgage. I get asked for financial help or advice a lot since I started this gig at GRS, but I was clueless on this one. Some quick math revealed that continuing to pay his mortgage makes no financial sense for my friend: The house is worth much less than he owes. He can’t sell it. He no longer lives there; it’s just an albatross around his financial neck.
Still, I thought my friend must have other options, so I called up mortgage expert Keith Gumbinger at HSH.com. Gumbinger had some great suggestions for what to do when you’re facing overwhelming mortgage debt.
Gumbinger agreed that bailing out of a mortgage sometimes makes good financial sense — but the consequences for doing so are steep. “You can certainly walk away and let it go to involuntary foreclosure,” Gumbinger said. “That’s your ultimate hammer. But there are consequences in the rest of your life.” Walking away from a mortgage should be the absolute last resort.
Walkaways face some serious issues:
- Your credit will plummet, making it tougher to get anything from a rental apartment to car insurance.
- You’ll be stonewalled by the mortgage industry for seven years.
- The mortgage company can come after you for the money they lose on your property when they’re forced to sell it below market value as a foreclosure. That’s the bad debt you were trying to walk away from, coming back to haunt you.
Before walking out on a mortgage, Gumbinger says you should call your mortgage company. Lenders don’t want you to default on your loan — and stick them with an unwanted house — any more than you want to destroy your credit. They’ll talk to you.
“You should be able to get a reasonable response,” Gumbinger said. This far into the mortgage crisis, most lenders have experienced staff people who do nothing but negotiate loan modifications, short sales, and planned foreclosures with their borrowers. They have clear processes to handle this type of situation. It won’t be fun, but if you stay engaged, you stand to get out of your mortgage with your credit in better shape than a foreclosure would leave it.
Gumbinger warns to carefully document the entire process. Keep notes of who you talked to, and get agreements in writing.
Loan Modifications and Short Sales
Before you call your lender, decide what outcome you’re after. If you’re looking to keep the property but can’t keep up with the payments, call and talk to your bank about a loan modification. There are federal and private programs to help troubled borrowers get their mortgages adjusted. You may qualify to have your mortgage interest rate reduced as low as 2%, or to have some measure of your debt forgiven so that your monthly payments don’t exceed 31% of your income.
If you’re ready to walk away from the mortgage entirely and don’t want to keep the house, talk to your lender about a short sale. In a short sale, you agree to retain possession of the property, keep it in good shape, and sell it on the bank’s behalf. With the bank, you agree on a sale price that reflects the current fair market value of the property, even if that’s much less than what you owe on it.
Note: You probably want an attorney to help you with these negotiations.
Usually, a short sale agreement will have a two- to three-month time limit. After that, you and the bank can negotiate a “planned foreclosure” or “deed in lieu”. Instead of simply walking away and forcing the bank to take costly legal steps to repossess your home, you can give it to them. In exchange for saving them the hassle of taking it, they’ll go easy on you with the legal and financial consequences. Again, use an attorney to negotiate this on your behalf.
Any of these options should bring you a happier ending than simply mailing the bank your keys without a word.
“Because you’ve tried to do the right thing, it does preserve to a greater degree your opportunity to participate in the housing market in the near future,” Gumbinger said. Your credit will still take a hit, but if you do a short sale or planned foreclosure, you may be able to buy another house in two to four years. If you even want to. After being burned by the housing market, many people are happy to become permanent renters.
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There are 255 comments to "When to walk away from a bad mortgage".
I would definitely suggest the short sale. It’s always better to work with the bank than run away from them.
It’s definitely a bad idea to walk away from your home mortgage.
When you said, “Americans feel that there’s something morally wrong with not paying your debts, even when those debts are astronomical or unfair.” I just had to shake my head. OF COURSE IT’S WRONG TO NOT PAY YOUR DEBTS! As a borrower, one has agreed to the amount owed and the interests rates. Once those papers are signed, it’s the responsibility of the borrower to pay it back according to the terms. That what was agreed upon.
I know a person that walked away from their home, and I could not believe their lack of moral integrity. They could continue making the payments, but decided to walk away because they owed more money than the house was worth. I don’t think I can look at my friend the same again.
Seriously you twit? Screw the banks! They’re all crooks anyway. They are the morally corrupt. They caused this problem in the first place. Let them pick up the pieces!
I’m still a bit in shock that an article like this would even be posted at GRS.
Getting Rich Slowly is (or I always thought it was) about taking stock of your financial situation, facing your past poor spending decisions with responsibility and patience, and setting a new and more financial steady path for yourself. That *responsibility* part is a HUGE part of the process.
To all of those who already have and will continue to comment on the perceived (and it is a perception, folks) lack of morality where “walking away” is concerned: it’s a BUSINESS decision, not a moral one.
Let’s say that your family can barely function financially due to circumstances beyond your control. (I mean, did your family REALLY invent credit default swaps? Seriously??) You now find yourself in a situation where your home is underwater. Putting your family’s financial future at risk for a crummy mortgage is not only irresponsible, it could be argued that doing so itself is immoral.
I wish the “morality police” surrounding those who default on crummy mortgages – which were funded by banks with questionable (to say the least) ethics – would get off of the high horses. Circumstances change, folks. If someone has to walk away from a worthless house due to a bad mortgage – that someone is trying to find a solid future. Those who advocate the shackling of someone to a bad mortgage for the sake of “morality” probably wish to see the return of debtor’s prisons.
Hey – let’s force those who “walk away” to wear a big red “M” on their chest, in homage to the “Scarlet Letter”. Give it a rest, those of you in judgement.
Like Kate, I was a little surprised to see this title on GRS too. After reading the entire post, I will agree that walking away from a mortgage should indeed be the last resort…I wouldn’t even think about doing it unless I couldn’t afford groceries. I’m with Kate and Derek above, responsibility is king whether you owe more than its worth or not.
Crystal, Kate and those who are morally sanctified but lacking in good common sense. Have you ever been offered a loan modification on a property for which the law allows a reduction in principle) and the bank will only considered a mortgage higher than the original ($196K to $244k) with a ton of added penalties and fees the mortgage is 40 year with a balloon payment which cannot be refinanced so you are paying $1500 to rent a $60k home you will never own and your children or grandchildren will never own. This after being on Worker’s Comp for a year and now disability. Are you saying I should keep paying morally, really? A reputable attorney told me if you were my parent I would tell you get rid of this bad investment and just get a fresh start. You may feel morally righteous here but if this were your parent somehow I don’t think you would have the same sense of morality. Of course, if you did, I would not judge you.
Agree with above two posters–and, could not disagree more with the suggestion that owing money is more shameful than stealing. I get the point the writer was trying to make, but quite frankly, part of the reason we are in this mess to begin with is that people had no problem whatsoever borrowing astronomical amounts of money without thinking about the risk they were taking.
Strategic defaults ARE morally wrong. It’s a far cry from those who are down on their luck and cannot afford their mortgages to those who walk away simply because the house isn’t worth what it was before. A house is shelter, and if people would stop looking at it as an investment, they’d be less inclined to walk away from an obligation they willingly entered into. Strategic defaults prolong the housing crisis for no reason other than these individuals’ looking at the bottom line instead of the long term (and societal) ramifications of their choices.
Is this article serious?
JD, why haven’t you ever done an article on declaring bankruptcy to get out of credit card debt? It’s the same basic principle. I thought the mantra around here was to fix cash flows and pay down debts; not just take the easy way out and leave someone else holding the bag.
Hmmm… will tomorrow’s article be on how declare Chapter 11 bankruptcy as a means to get rich slowly?
J.D.’s note: I didn’t read Sierra’s post as advocating strategic default. Her friend is considering it, and Sierra’s exploring the options. I think this is a Good Thing. I felt like her recommendations made sense. If the article was all, “Heh heh, here’s how to screw the banks”, I wouldn’t have published it. Instead, it seems like Seirra’s saying “Before you take such a drastic measure, consider these alternatives.” I don’t think it’s wrong to talk about his stuff!
Sierra’s note: Hey all! I’m just chiming in now; my computer’s been down all day. It’s true that I like a good controversy, but I didn’t intend this article to be all that controversial. I don’t think anyone should simply abandon ship on a mortgage, but a lot of people have so when someone asked me about it I looked into it just like I do when people ask me about investing or getting out of debt.
What I like about Matt Taibbi’s book is that he uncovers a lot of the outright criminal activity that went on in big financial institutions during the housing bubble. A lot of people made bad financial decisions, but focusing exclusively on individuals and letting banks off the hook obscures the picture.
That said, I could have worded my opening better. Re-reading it, I see how it could be read to mean that walking out on a bad mortgage might be a good thing, and that was not my intention at all. Rather, I wanted to show people what other options they have if they find themselves unable to keep paying a mortgage, or trapped like my friend in a bad investment.
Agreed. Why is it so acceptable to walk away from mortgage debt? In that line of reasoning, I can walk away from student loans or credit card debt because whatever I bought turned out to be worth less than what I thought.
All parties in the transaction – individuals borrowing more than reasonable, banks too eager to sell to subprime, and government for encouraging universal homeownership – should all be held partly responsible for the crisis.
Individuals have suffered from lower house prices and layoffs. Banks have suffered massive losses on foreclosed properties. Politicians have been kicked out of office. It’s even pain for all.
What’s unfortunate is that the responsible have been dragged down along with everyone else. Layoffs have affected everyone. Some responsible banks are being trashed along with the big 4. Upstanding politicians have been voted out along with everyone else (or shot).
As Sierra points out, there are serious consequences to walking away from your mortgage. I think what she is suggesting is to weigh these consequences against the benefit of not having an upside down loan on your hands. It’s a cost-benefit analysis.
Morality probably should be part of our financial system, but as we’ve seen over and over again, it’s not. You can hate the system, but if you don’t play by its rules, you’ll likely get burned. Thank-you, Sierra, for talking about how to reduce the burn.
For example, I work for a construction company. We submit bids for 99% of our work. When you submit a bid to a local government agency, you are saying that you agree to do the work for the price you submitted. There are times that contractors will be the low bidder but will withdraw their bid. There are consequences, they may lose a bond and have a bad mark on their credit rating, but the decision is made because the consequences of performing the work in the bid are greater. Is this morally wrong or a sound business decision?
I am not saying that one should sign any agreement without thinking about the consequences because you can always back out. Going into a deal on bad faith is wrong. But the stigma that you are a reprehensible citizen if you have to default on your mortgage is no better. Whether we like it or not, we have turned our houses into an investment of sorts and therefore, we must look at a home both ways: as shelter and as an investment.
With that said, I believe the article gives good advice on what to do if you find yourself in a situation where a default is an option. It shows more options other than just walking away without a word.
Add me to the chorus of people that take issue with this article. I understand that there are a ton of people out there that are in foreclosure because they cannot pay mortgages for any number of reasons (unemployment, medical emergencies, other major life upsets). However, I do not get walking away from a mortgage they could otherwise pay. And blaming the banks because they were deceptive or dishonest is not a good reason. If you made a bad financial decision (bought a house that turned out to be overpriced…getting caught up in the overheated housing market…etc. etc.) then you deal with the consequences. It was still your decision and now your obligation. I know it is difficult and limits your options but…well…that is kind of the way life is.
The advice presented in this article is good. Walking away should be an absolute last resort, you should always talk to your bank about a loan modification or short sale first, which I imagine many people don’t.
And if the bank is unable to work with you and you’re forced into foreclosure, then so be it. They have (or should have) considered the risk of lending to you in the first place, and are prepared to deal with the potential losses associated with that. But your credit will be destroyed, and rightfully so. Hopefully it’s enough to put you on the right path again, the path of only buying things that you have the money to pay for.
I think it is extremely odd that this article is talking about a “strategic default” and then the quote used talks about someone “being down on their luck”.
I would NOT classify someone that did these things as down on their luck:
– Chose to purchase a house that was more than they can afford
– Chose to sign mortgage papers, most likely for an exotic loan that would become more expensive over time
– Probably did not read any of the loan documents they signed
– When things get tough, they walk away
I would classify them is irresponsible.
There was no guarantee when they bought the house that prices would continue to skyrocket, and they would gain astronomical amounts of “equity”.
I also think it is quite crazy how we continue to blame the banks. I have not heard one story of a mortgage banker holding a gun to someone’s head forcing them to sign loan documents. PEOPLE WERE FALLING ALL OVER THEMSELVES TO TAKE OUT LOANS THEY COULD NOT AFFORD. It is not the bank’s responsibility to decide what you can afford, any more than it is the grocery store’s responsibility to decide what groceries you can afford. TAKE RESPONSIBILITY FOR YOURSELF.
I think, in general, people in America are starting to lack morals. Most people just do whatever they want to do, and then make up stories after the fact to justify their actions – “It is the bank’s fault”.
We are also becoming very politically correct – PC. 25 years ago this type of action would have drawn outrage. Now, it draws outrage when someone like me tries to argue for doing the right thing.
The US has lost its way – big time. We’re a country full of greedy people. End of story.
I once bought a brand-new car and financed it.
A year later, I discovered it had plummetted in value. In fact, at the time, I owed more than the car was worth.
So I walked away from it. Mailed in the keys and ruined my credit.
Sounds stupid when you put it this way, doesn’t it? Well, to some of us, it sounds stupid when it’s about a house, too.
Pay your bills, deadbeats.
For me, the scariest thought is that of the mortgage company selling your house (generally well below market value) and then coming after you with a lien on your present house/whatever other collection tools they have for the rest of the debt anyway. If you can make the payments and depending upon your situation/location, it may make more sense to try and rent it and hold until the market (hopefully comes back). I believe since the whole mortgage crises that banks have gotten 1) a lot more effective; and 2) a lot more aggressive in going after people who walk away.
Wow – I can’t quite wrap my head around why so many of you folks are so quick to jump down the author’s throat about this article. Unless I’m missing something, I don’t see the part where she outright CONDONES a strategic default as a method of getting rich slowly. In fact, she very clearly states that it should be nothing other than an absolute last resort.
Wow, let the judgements begin!
I’d really like to see how most of the previous commenters would behave if they were underwater on a house they couldn’t afford or needed to move for a job.
When you take out a mortgage on a house – the deal is between you and the mortgage company. You keep making the payments and you get to stay in the house and eventually own it. If you don’t make the payments, the mortgage company can take the house and sell it.
Both sides take a risk on that type of deal and if things don’t work out, one or both sides will lose.
Most of the time (historically at least), both sides win – this is why there is a big mortgage industry and lots of happy home owners. Sometimes things don’t work out, mistakes get made and there are losses.
I don’t see anything “moral” about the situation.
I would also question the advice in the article about using a default as a “last resort”. If you are in a situation where you are fairly sure you’ll eventually be mailing in the keys, you owe it to yourself and your family to bail as quickly as possible. Fighting a losing cause will just deplete your family finances and make things that much harder once you default on the house.
Holy Cow. The bulk of this article is fine, trying to give advice on how to work your way out of an underwater mortgage without just mailing in your keys and walking away. And doing the right thing.
But the first few paragraphs are just awful (IMHO) and have no business being in GRS.
“Businesses walk away from bad investments and debts like this all the time, but for an individual to do it takes guts. There’s a huge stigma associated with walking out on your mortgage. Americans feel that there’s something morally wrong with not paying your debts, even when those debts are astronomical or unfair.”
I know contract law, and the contract is void if you enter into it under duress or with undue influence, or if you were not of sound mind or incapacitated. If we rule out those things, the contracts that brought someone into debt IS FAIR and if it is “astronomical” it is the person’s fault 100% that they got into it in the first place!
Of course it’s unethical and immoral to not pay it if you are able to pay it. Why even suggest otherwise???
And for the record, businesses do not “walk away” from their debts (or investments) used to purchase assets that depreciate all the time. Where does that even come from?
The body of the article is fine but the first paragraphs are just awful.
@Money Smarts Blog:
“Both sides take a risk on that type of deal and if things don’t work out, one or both sides will lose.
I don’t see anything ‘moral’ about the situation.”
So that’s it then? In the world of finance, there is no such thing as “morality?” Only “risk” and “reward?”
So I suppose then that there’s nothing immoral about shoplifting? After all, you’re taking a risk (that you’ll get caught). If your gamble pays off (and you don’t get caught), then you get to acquire an asset for free. The stores already expect to lose a certain threshold of product to breakage and theft, so it’s built into their pricing model already.
The stores clearly post the terms of the “contract,” namely that “Shoplifters will be prosecuted.” So as long as you consent to your side of the contract (that is, you accept that if your risk doesn’t pan out, the consequences will be prosecution), then there’s nothing wrong with attempting to shoplift, right? It’s just two parties entering into an agreement, balancing risk and reward.
This is insane, people. Is this really what society is coming to? This unbridled greed and rampant rationalization of amoral and immoral behaviour is going to be our downfall, mark my words.
You want to talk about morality.
How is it moral that a banking oligarchy made up of mostly foreigners was given the authority to issue currency and create credit out of thin air through their central bank – the Federal Reserve – using a system of usury and fractional reserve banking that would make the most sophisticated ponzi schemes pale in comparison?
Wake up. Stop acting like children and grow a pair. Get off those pills and come back to reality!
I know several people who had to sell homes at a loss and ended up owing more than they got for the house because of work transfers. Every one of them paid off their debt (over time, of course). I don’t know a soul who’s just walked away from a home/mortgage.
1) simply owing more than the house is worth and wanting to get out because the asset you thought would appreciate, didn’t. You can still afford the payments and have no outside reason to move.
2) Your ARM has readjusted such that you can no longer afford the payments (this happened to a lot of people). Some people would argue that you shouldn’t have entered into a mortgage that you couldn’t afford when the rates adjusted. That’s probably true on some level but I do believe that there were some predatory lending policies during the housing boom and even, probably, some actual fraud on the part of the banks.
3) Your house is worth less than you owe and you can still afford the payments, however, life circumstances have changed significantly (job, family, etc) such that you need to move a substantial distance.
I don’t think it’s fair to say that everyone who walks away from a mortgage is morally reprehensible, nor is it fair to say that everyone who walks away from a mortgage is morally justified. Like most things in life it is rarely as simple as black or white, but a multitude of shades of grey.
For people who think that it is always the fault of the person who signed the mortgage papers without reading them, I would encourage you to listen to
“The Giant Pool of Money” produced by This American Life at NPR http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money
I think this is a helpful article for people who find themselves in a bad situation. Thanks for putting together the information.
I think renting the home would be the best option but my wife is strongly against this.
I’ve looked into Walking Away, I don’t really have the appetite for this either….
I don’t want to be a victim of the market place, I want to find a way to take advantage of this situation. If you’re not looking at this from a cost benefit standpoint then your have your eyes wide shut to the reality that there are real pressures on the individual to provide for themselves while the corporations are bailed out with liquidity, I can’t get a refi becaese the loan to value precludes it. If our government had done the same for these large banks, I wonder where we’d be today?
“Lenders don’t want you to default on your loan – and stick them with an unwanted house – any more than you want to destroy your credit. They’ll talk to you.”
Really? Have you ever heard of toxic assets? If they really wanted to talk to you, we wouldn’t be hearing so many stories about people who call countless times to discuss the mortgage to no avail. Until we make it impossible for banks to write off their losses from foreclosure, we will continue to see banks who ignore those who want to modify their mortgages.
@Kevin – There is a difference between a failed business deal and committing fraud.
Shoplifting is illegal, walking away from your mortgage is not.
If you default on your mortgage, you don’t get to keep the house.
Think of it this way:
John takes out a $50,000 business loan to start a business. This loan is not secured by any personal income or assets (I know this isn’t realistic).
After two years, the business is out of money, so John closes the business and defaults on the remainder of the loan.
In this case, John could easily keep up the payments (his wife has a good job) and eventually pay off the loan if he chose.
But the loan was against the business – not John’s house or income or any family assets.
Is John morally wrong for not paying the business loan?
If this business was a house, would it be any different?
The day I returned to work after our move, I was informed the paper I’d been working for was cutting all its editorial staff. I was able to do quite a bit of freelance, but my income was cut by half (making us VERY glad we’d bought less house than we could afford). Values started softening the next year. Then, enter the triple whammy of: financial crisis, auto industry nearly going under (I live in Detroit so this affected us badly), and a huge government corruption scandal which meant no one would invest in the city (for good reason). None of these things are my fault, and yet I’m stuck with a house I can’t get rid of.
We’re struggling with what to do…we need to get out of here, but it would require a $100,000 pile of cash at least to make up the shortfall. I keep hearing nightmares about short sales. We’ll keep making the payments, and I certainly think a walkaway is wrong on many levels, but watch the judgy attitudes. Not everyone who finds themselves in this situation is a buy-buy-buy deadbeat.
I still think it would be great if Sierra would do some posts on families with children and money. That’s a big part of finances that GRS doesn’t address as often or as in-depth as it does other parts of finances. And it’s a part that someone who teaches her children to eat kale has personal experience with. The retreads of controversial topics frankly aren’t that interesting.
I have an issue with some of the “all debt is fair” commenters who are lamenting the moral state of our country.
I know some people (before the laws changed) that were committed to paying their debts. They paid for years, didn’t take on any new debts when they realized they were in trouble, went to credit counseling, etc. The mail was late on their electric bill and once their creditors found out, their interest rates skyrocketed over night. Now, they COULDN’T afford groceries, or the mortgage. So, they called the creditors, sent letters, continued to pay what they could afford, and here’s the sticker, the creditors wouldn’t budge. They wouldn’t negotiate. No reduction in interest rates or payments. They had to declare bankruptcy. Is this all on those people? Is it entirely their fault? Would you consider this fair? Because I sure wouldn’t.
I’m well aware that people take out mortgages they can’t afford, and certainly don’t condone that. But, you know what? Our society doesn’t do a good job of educating people on what these things mean, either. If you’re a family that’s been living in a cramped apartment and suddenly, this great deal pops out of the woodwork and no one bothers to explain the risks to you, who holds the blame? Because I don’t think that it can be pinned entirely on the homeowners here. Yes, they share the blame, but the way you simply write off these corporations that *let* these people get into these exotic mortgages knowing what would happen and lambaste everyone else just illustrates the first few paragraphs of this article. Of course, as Bogey pointed out, it’s not the bank’s responsibility to tell you what you can afford, but banks and creditors also do not let you just borrow whatever you want. More than a few of these were glaringly obvious pushes by these creditors to make people *believe* they could afford what they couldn’t. IMO, that’s just as reprehensible.
I do know people who are in danger of losing their homes and it’s horrible for them and their children. Stressful, depressing, debilitating, humbling, and embarassing.
But even so, talking about strategic defaults not because you can’t pay but simply because you don’t want to? That’s not getting rich slowly. That’s get rich quickly thinking and it’s crap.
I am so tired of people blaming the banks. The banks did not do anything wrong. In fact, people praised them a few years ago for making home ownership possible for people. Take responsibility for yourself.
First, I want to say I understand people going into foreclosure because they had to spend every penny on medical bills to their child’s life. I think we need more programs in this country to help people who have had huge medical expenses that wipe them out.
I see too many people who just don’t feel like working collecting their government checks. Why do we give them money?!?
Now, a lot of people who were getting into the sub-prime mortgages didn’t have a dime in their savings account or a job. They didn’t even need any money to close on the house. The borrowers figured their house will go up in value and they’ll get a job next week, so there is nothing to worry about
. Sure, the banks were stupid enough to lend the money, but why on earth would somebody accept a mortgage when they don’t have any savings?
There are too many people out there playing the system, and they don’t care who it affects.
If I bought a house and wasn’t able to make the payments I’d go get another job. I would do what it takes to make that payment. What’s that you say? There are no jobs in this crappy economy?! Look around! Everyday I drive to work I see dozens of “Help Wanted” signs. I’m sorry they’re not the ideal job for you, but it’s a job that pays the bills!
Errrggghh!
I feel like I’m witnessing a witch burning or something. Poor Sierra.
Thanks for writing this post, I think it is important for people to have this information when they feel they have NO other option.
I can’t believe so much hate and blame is being spewed on the irresponsible borrowers. What about the lenders? These mortgage companies basically lent WAY too much money, to WAY too many people who had no means to pay back that money. They then bundled up these cheap debts into “investments” that were then sold off. Their irresponsibility led to and economic CRISIS that then triggered one of the largest recessions since the 30s, and effected people all over the WORLD. And then they got BAILED OUT while people lost their homes, their jobs and their retirement savings.
If anything it’s these banks and mortgage companies that need a morality lesson.
Thanks Sierra for including the quote from Matt Taibbi’s book. I wasn’t familiar with it. And thanks @dee for the NPR link, this looks really interesting.
HAHA, apparently the article was right about Americans believing it to be immoral to not pay your debts! I, also, agree with most of the comments. As someone who graduated college and entered the workforce during the recession, when I eventually buy a house it will be with the understanding that the value could drop astronomically within months of purchase. Houses are not sound investments, we have to stop treating them like they are!! Houses are for living, raising kids, and hopefully one day being able to live without a mortgage.
Taking out a mortgage and then walking away, especially when you are still completely capable of paying, is most definitely immoral.
This has always been a controversial topic with people raging on either side of the debate. I think most of the comments reflect the savvy of people who read this site and their knowledge about finances and what is financially right and wrong. However, most people are not as educated and don’t always understand the legalese in contracts or take the time to drill into what each clause means. When I bought my house, I think I signed about 80 pages of a 300 page stack of papers. I sure was intimidated and made my lawyer work for his money, but not everyone is going to do that. Sure there are people that want to beat the system, otherwise we wouldn’t have so many Ponzi schemes, blackmailers, etc.
Bottom line is that banks KNOW what they are doing and some individuals do and some don’t. Also, you can’t always forecast the cards that life will hand you that will effect your financial situation, i.e death, divorce, job loss. Some people will try their best and others will do what’s best for them and will say “too bad, that’s the price of doing business.” I don’t think tax payers are left holding the bag any more because the banks have been paying back the US Government Bank for the loans, it’s the Fannie’s and Freddie’s that haven’t recovered and probably never will.
Add me to the list of people who were shocked by this article. Not able to pay your mortgage is one thing; able to pay but unwilling because it’s not a good financial decision is another.
The only time foreclosure should become an option is if you cannot AFFORD your mortgage.
My cousin and his wife are walking away from their home soon. They aren’t doing it because of the mortgage exactly. They’re doing it because of the property taxes. They are more than 15 years into a 30-year mortgage and don’t have any home equity loans. But the property taxes in their area, which was re-classified as “resort” from “farming” have gone up and up and up. Their monthly payments have more than tripled in the last few years alone. And not a dime more is going to the mortgage — it’s all taxes.
They built the house themselves, and it’s beautiful with hardwood floors and hand-crafted molding, and they are moving into a double wide trailer with their three kids in a different tax district. They are horribly ashamed, but both parents are working 60+ hour weeks to pay their property taxes, and they can’t do it anymore.
Money Smarts Blog with comment #17 is spot on.
I don’t see anything “moral” about the situation either. It’s simply the cost of doing business.
Walking away from my mortgage in Florida was the best investment I ever made. Check to see if you’re in a recourse state or not!! Florida is in a recourse state and they can garnish your wages for balance of the loss on your house!!
In this case File Chapter 7 Bankruptcy to wipe out all debts and you will be better off than being a slave to the banks that made shoddy loans to overvalue their assets.
My Chapter 7 was discharged 10 weeks ago and I have a 651 Experian Score. I can get a car loan now and might be able to get a 4-5% APR here in 2-3 months. Not a bad deal in my opinion.
Now I’m in a better financial position than ever as my bank (for whatever reason) doesn’t want to take my worthless property. Maybe it’s to cook their books and overvalue their assets?
Just my 2 cents that thinks it’s more to be a debt slave to the banks.
@Liz…that just sounds weird. How could property tax increases make a mortgage payment triple in a few years? Did they fight the assessments? Can they sell the home rather than walk away? I assume the value of the property has gone up with the assessment for property tax, and if not, then the assessment is wrong. And – If both parents are working full time and 60 hour weeks but they can’t afford the property taxes on their home, then something is seriously wrong with the picture that I’m not seeing. (I’m not up on American property taxes to be fair, but it sounds weird to me).
My spouse & I have been through foreclosure – not “strategic” (our circumstances changed dramatically and we didn’t have the money to pay even if we wanted to). For credit ratings & much of the foreclosure process it makes relatively little difference whether a foreclosure is “strategic” or involuntary. My spouse has actually become a short sale consultant for a local realtor…
I found GRS well into our foreclosure process, and we have found a whole new (almost) bank-free, debt-free and less consumerist lifestyle thanks in large part to GRS. Our next step is moving to a much lower-cost area of the country (thankfully also closer to family).
So, I don’t mean to take a position on “choosing” foreclosure, but if you find yourself facing a foreclosure…a couple of process thoughts:
1-each case is unique, and it is very hard to make generalizations, in part because no single bank’s policies are completely consistent (and policy differences from bank to bank can be vast)
2-each state is different. In some states, if the home is your principal residence the bank can’t come after you for the deficiency (the loss the bank takes). In others, they can but rarely do. A lawyer can help negotiate whether and to what extent you are on the hook for the deficiency (whether you have money is the main issue-if you are broke, the bank is more likely to not seek the deficiency from you). In some cases the bank may have you sign a new, personal (not secured) loan with a future balloon payment (no current payments) for the deficiency. In some states the process is very rapid with few ways to delay, in other states it is relatively easy to delay for many months.
3-if you have the time and are persistent, you can save a lot of lawyer dollars by doing most of the negotiating yourself and using the lawyer only for court dates & filings and any face-to-face meetings with bankers. Many areas have non-profit foreclosure avoidance organizations, but in our area they are a little swamped and so you won’t necessarily get a lot of personalized help (still, free is a good price). A good lawyer will be able to help you determine how much you can do yourself vs. what makes sense to pay professionals to do. In some states, folks who aren’t otherwise licensed for real estate or law must be licensed to negotiate debt on your behalf (many of these are new laws).
4-banks now have big departments to deal with their distressed properties, but this means there are lots of representatives, and some have different levels of effectiveness – we called on one issue 3 different times, got 3 different answers, eventually one that stuck. If you are not yet delinquent, you may not be talking to a dept dealing with distressed property. In some cases (depends on bank, state, and who knows what all) you won’t get anywhere until you are delinquent, in other cases it is best to start before you are.
5-short sales can happen (as noted they still crunch your credit history- but perhaps not as much as foreclosure) but will usually make the process even more paperwork intense. If you are living in the home, a short sale may mean you will have to move sooner than if you go all the way to foreclosure (but not always).
6-be ready for some randomness in the process. I’ve seen 2 properties in similar situations with the same bank in the same city proceed in very different time frames. Also, the bank’s lawyers have a lot of cases and sometimes will leave a message for a homeowner’s lawyer that turns out to be a mistake. Sometimes a file seems to get lost for a while and then all of a sudden, when it is found, tries to make up for lost time.
When should you walk away from a bad mortgage? When you admit to yourself that you are a total failure as a human being and that you have lost any shred of decency that you had left.
Seriously! What’s next, “when it’s okay to cheat on your taxes?”
These stories should always include the state that the house is in. The consequences for the borrower are so different depending on whether it’s a non-recourse state or not.
It also bears on the moral question. The lender knows the legal environment in which they’re making the contract – I think it’s morally fine to mail in the keys in these states.
never, ever, ever ever buying a house. never ever.
even with my apartment’s leaky ceiling and my dodgy electrics, i will never set foot out of a rental situation unless it’s with enough cash to buy a place outright.
which will be never ;P
1. It IS immoral to intentionally take out a loan that you don’t intend to pay back. In US law this crime even has a name: Fraud.
2. It IS immoral for a company to fool you into signing a contract with provisions you did not expect. This is also fraud.
3. However, once an agreement is in place and both parties have acted in good faith it is a BUSINESS ARRANGEMENT. You should do everything you can to fulfill the terms of this arrangement but this may not be possible or, in fact, wise.
4. Each party in this arrangement takes a risk. The bank takes a risk in that you could leave the home before the value – foreclosure costs – sale fees is more than the loan is worth.
5. You take a risk that the bank will foreclose on your house when there is extra value in the home.
6. The bank has insurance against the issues in #4. Also, as noted in the article, the other costs involved in walking away are very, VERY steep.
7. You have NO recourse if #5 happens.
So – if the amount of extra money (above what the house is worth) is more than the cost of walking away and you took the loan in good faith what is the moral issue with walking away?! After all, the bank would have NO issue in taking your house if you missed payments and you had paid 90% of your loan. This is just the inability of people to separate their feelings from what is a business deal.
Jake
PS There are so many other options, some described in the article, that just walking away is probably a bad idea in all scenarios.
The responses to the article are very predictable. Some holier-than-thou preaching from people who dont really understand what happened, and the consequences of both the housing boom and bust.
As bad as it might sound, strategic default makes sense for the country as a whole. Contrary to the uneducated opinion of people claiming its morally wrong to walk away from an overpriced mortgage, people doing just that was and is neccessary for the US to recover from what happened. The immoral thing was taking out the loans in the first place, causing young people starting families to be unable to afford a home.
Strategic default has caused the price of a single family home to plummet back to reasonable levels so that normal people can actually buy and afford a home. You cannot run an economy on the sale and resale of homes. You cannot have your population spending 40% of their income on a mortgage.
The reset in the housing market was neccessary. If you bought a home during the height of the frenzy, then you are probably an idiot. I dont really feel sorry for you. However, deciding to walk away from your mortgage the last two years did have positive impacts on the nation.
As usual, things are much more complicated than people think.
Excellent article.
The banks did nothing wrong? Go read some books. They specifically went after minority and people with low education levels and pressured or lied to them to get them to rework their mortgages. It was a common tactic that if a homeowner missed a mortgage payment banks would send the homeowner credit extensions. From the bank’s perspective, a bad loan was a great business plan, either the person paid way too much money or the person defaulted and the bank took ownership of the home. Go read some books. The banks were and are evil.
Second, remember that I don’t necessarily agree with every article published at Get Rich Slowly. I’m not religious, but I occasionally publish articles about why religion is an important part of personal finance, for example. That doesn’t mean I’m endorsing that viewpoint. It simply means that I know that religion is an important part of personal finance for many people, so it’s a topic worth exploring.
I’ve never walked away from any of my debts, and I don’t advocate that anyone else do so, either. But not everyone shares this viewpoint. I’d rather have this article about financial options out there in the search engines than articles actually explaining how to walk away from a mortgage.
For all of you so absolutely convinced of the moral decrepitude of someone who would walk away from their mortgage, congratulations on your life being morally flawless in not just your finances but all other areas of your life as well.
You *are* morally flawless, right? Right?
I can honestly tell you I understood the risks of walking away better than I understood the risks of buying that house. Why? Because there was a big effort to cover up those risks when I was buying. I was young, inexperienced, and yes these jerks out there took complete advantage of me. Knowing everything I know now, yes I can tell you the banks should not have approved the mortgage for my husband and me. Our debt to income ratio was all wrong. But, and I am speaking honestly even if it makes me sound completely stupid, we believed if the banks approved it (our application was NOT falsified in any way), we were obviously more credit-worthy than we thought and yes, when we bought it, it seemed like a sure thing. Like I said: young, inexperienced, and foolish. You call me a deadbeat, I feel swindled.
There has never been anything like what was going on in the housing market a few years ago and some markets were much worse than other places in the country. We’d all love the tried and true to stick to everything but it doesn’t. The best decision I made, personally, was walking away from that nightmare of a house. I would never have had a chance in hell of recovering from that disaster for tons of reasons, not the least being how underwater the house was. “Fool me once, shame on you. Fool me twice, shame on me.’ Every mortgage payment I made was the bank fooling me into staying in a worthless propety that was putting a major strain on my family. The longer I stayed, the harder it would have become to recover.
By the way, my experience with the bank? We tried and tried and tried for months to talk to them. Nothing. We called. Voice mails and voice mails and voice mails. Most times, the mail box was too full to leave a message. When it wasn’t, we left a message. They never called back. We wrote. Certified letters, regular letters, express letters. Nothing. Not a damn response on anything except the same generic letter with the same generic form we submitted over ten times. It’s a joke.
We’re not done with this mess. Wait until they start their lawsuits. Talk about wreaking havoc on the credit system. Maybe this will be the end of FICO and force banks to go back to true, moral lending practices that force them to review applications invidually and completely.
“Americans feel that there’s something morally wrong with not paying your debts, even when those debts are astronomical or unfair.”–Of course there’s something morally wrong with not honoring your promise to pay back the money someone gave you: it’s STEALING. The debts are not ‘unfair’: you knew the terms and agreed to them. IT’S STEALING to take money and not give it back.
Of course there’s something morally wrong with not honoring your promise to pay back the money someone gave you: it’s STEALING. The debts are not ‘unfair’: you knew the terms and agreed to them. IT’S STEALING to take money and not give it back.
You’re not “taking” money; you’re signing a contract to borrow money secured by collateral, which is a house. If you forfeit the collateral, you’re taking a path contemplated at the time of the loan.
I’m not saying there aren’t moral implications to it, but equating it to “theft” is just silly.
I gave up on paying my mortgage over a year ago and it was absolutely the right decision.
Here’s a concept for your moral high-horse folks chiming in: the bank made a loan based on what they thought the house was worth…so guess what? They can have the house back now. There is no morality involved in this transaction.
I live in a no-recourse state. I’m not legally obligated to pay this bad loan so why would I? Did I break a law in the process? None that I can see, other than making some Saints of the Internet Morality Task Force cry.
JD – I’m with Beth (comment #49). I took issue with the article not because it it explaining the pros and cons of walking away, but because it started off by painting people who are in underwater homes as having debts that are somehow unfair.
My house was purchased for $180,000 6 years ago and it’s currently valued at around $130,000. Thankfully, we made a very large down payment so, even with a $50k depreciation, we’re still not underwater. I’m frustrated that my house isn’t worth as much, but that’s not my mortgagor’s fault. We both agreed to terms – if I was going to call them “unfair,” I should have done so before I signed.
THAT’s what didn’t sit well with me about the article. It’s fine to take a business-like approach to the situation and default if that’s a risk you’re willing to take. But don’t try to make the rest of us feel badly for you by saying the terms, to which you agreed, are unfair.
“The debts are not ‘unfair’: you knew the terms and agreed to them.” Knowing and agreeing to the terms does not mean that the terms were fair. Soemtimes people got taken for a ride. Sometimes people got cheated. Sometimes people were lied to. Sometimes people made mistakes.
I put over $150K into my mortgage for five years. For this I was rewarded with negative equity of around $50K compared to my mortgage balance. If I spent an additional $150K for the next five years, I might be able to sell for what I owe. $300K for what will basically amount to rent. That works out to $2500 rent per month, which will get you extreme luxury in this area. Instead we chose to bail and move into an apartment in town where our total shelter costs dropped to $1000 per month.
The readers of this blog would evidently tell me that it is sound financial advice for me to continue throwing good money after bad. Evidently a mortgage payment that equates to paying rent at double the going rate is a sound investment. Ten years of home ownership with ZERO equity is a good investment.
Wow.
If that is the collective wisdom of this site’s readership, then count me out!
I’m very happy to see the number of people here that disagree with this article.
Walking away from debt is wrong. Not only will it hurt you in financial ways, it allows people to believe that they are not ultimately responsible for their own actions.
If I’ve learned anything in business, finance and life, its that your word counts. You should hold your word at an extremely high value, because you never get rich or successful (however you measure it) all by yourself. You need support…friends, family, partners, professionals, all of whom have a vested stake, either emotional or financial, in you keeping your word.
None of us are perfect, we all make mistakes. Don’t just walk away from them, fix them. Bankruptcy is a free ride in too many ways, and this contributes to our economic downfall. Property loans are not always going to be ‘above water’, so what? If you bought the home to live in, live in it and its value will recover over time. If you bought the home as an investment, its your responsibility to manage that investment and if it looks like the numbers won’t work anymore, you sell.
Thank you people for restoring my faith here. For those of you that have suffered a strategic default, bankruptcy or similar, I feel for you and I know it wasn’t a painless decision. I encourage you now to rebuild the value of your word, and think very carefully before giving your word in the future, for a debt or anything else.
I disagree with the suggestion that this is all the bank’s fault. For one thing, banks have been around for centuries. Do you really, honestly think that it just occurred to them a few years ago that they could make more money by extending questionable loans?
Is it possible that banks were employing responsible lending practices, until a particular government administration, having promised to work on “Affordable Housing” as one of his election mandates, prodded the banks to relax lending standards a little, so more people could qualify to buy homes?
Because more people buying homes was a good thing. At the time, houses were appreciating rapidly in value, but only the middle and upper class were able to take advantage of it. Consequently, their wealth was growing, while the lower economic class’s was not. “The rich get richer, while the poor get poorer!” were the headlines.
This was seen as “unfair” to the poorer people, to whom banks didn’t want to lend. They were being frozen out of the market, unable to use home ownership to grow their wealth, like the middle class was. So the government pushed the banks to let those folks in on the action, too.
And we all know how that turned out.
But it sure is a lot easier to just say, “Banks are evil,” isn’t it.
It’s very hard to view this issue objectively unless you’re able to separate emotions from reality/logic. While I never chastised those who chose to strategically default, I also never thought it was something I would consider. That doesn’t imply that those people are wrong but rather I was lacking knowledge and was being mentally blocked by societal taboos.
My wife and I purchased our condo almost 6 years ago for the sole reason of making it our primary residence and starting a family. We had loose plans to sell the home 5 years after purchase in hopes of gaining more space to grow our family. After doing a lot of research, talking to friends, experts and our mortgage companies we made the decision to attempt a strategic short sale.
It’s really hurtful that so many ill-informed people would cast shame upon me for this decision. I don’t think you realize that there are repercussions and that this is simply a different way to fulfill the contract. It’s not like I’m attempting to keep the house and not pay, nor did I buy the condo with the intentions of doing this. It simply doesn’t make sense for me to penalize my family by staying in the house for a long enough time to recoup the loss.
Instead, I have chosen to take the penalty as a mark on my credit and go through the uncomfortable process of short sale. Instead of moving to a larger home with a mortgage we’ll be moving into a rental home in March. The short sale process is nearly complete and I can’t say I regret the decision.
However this doesn’t mean I now enter into new agreements/loans assuming I can just bail whenever I want. This isn’t the type of thing you plan to do as the negative results will snowball faster than that positive ones.
I’d love to see how the people who are so adamant about the immoral aspect of walking away would handle the situation once the are actually in it. It’s very easy to point the finger when it’s not your life.
How does drastic economic down turn result in me being a failure? That type of thinking basically takes hard work and strategy out of the equation and leaves you with luck, which doesn’t seem like a good way to live.
I’m actually a little surprised how late GRS is doing a piece on this. I’ve seen a lot of other posts on lots of other blogs and discussion boards on strategic default and they always result in huge numbers of postings arguing back and forth about the “morality” of the situation. I don’t think anyone has ever changed anyone else’s mind with these.
I just wanted to add a couple points. Real estate is really local and I really think attitudes may depend on the situation where you are. However, here in AZ, the realities are:
1. Houses are 50-80% down in value from their peak. When people owe twice what their house is worth and all projections have them taking 10+ years to get back up in value, it is hard for them to psychologically keep doing this. Don’t they have to pay to live somewhere and they might as well stay there? Sure, but for whatever reason, this is difficult for people.
2. Short sales are insanely difficult to get accomplished. I think the article presents a little too rosy of a picture of this. Those people who are “dedicated” to the process at the banks are undertrained and overwhelmed. The stories of incompetence (losing documents over and over) are inconsistency (different responses from different people every time) are legion. They take so long to get answers that foreclosure happens anyway, their pricing is all over the map, and the stats on the number of short sales that actually go through to closing tell the story. I know very well-educated, concientious people who couldn’t get through the process. Even for those that have good reasons to try to get out, the options here aren’t all they’re cracked up to be.
Wow, it must be nice to be so perfect, to never have had anything in your life go wrong, a major illness, a divorce, a job loss. Where can I get one of the lucky charms you folks have? Or a crystal ball? Look, when you get a mortgage, all the numbers might work really well, and then the bottom might fall out of your life a few years later. Are you saying that my family should do without everything, sell all the furniture, do without electricity/phone/health care/groceries/a car, all to fulfill the mortgage? You never know what life will hand you. Should we sit shivering in a dark empty box, cold and hungry, with nothing, sick, or realize that circumstances have changed? It must be great to live such a charmed life. I hope you judgmental people don’t have to find out how life can turn on a dime someday.
“For one thing, banks have been around for centuries. Do you really, honestly think that it just occurred to them a few years ago that they could make more money by extending questionable loans?”
You do realize that the federal government deregulated a lot of banking practices and standards, such as interest rates, right?
If this was a moral issue on the bank’s side of things, they would be doing all they could to help people close short sales and mitigate their damages. Don’t think for a second that the banks attach any moral value to the mortgage contract (until they are on the news trying to guilt people into staying in the contract).
For all those people who think there is something morally wrong with terminating a contract early, I hope you never have to deal with the “shame” of ending your cell phone or cable contract to switch to a cheaper plan elsewhere. That just is not fair to the poor phone company who did nothing wrong.
I have a couple of things to say about this article. One, I completely disagree that a short sale is better than a foreclosure, at least in my home state. To begin, short sales stay on your credit report almost as long as a foreclosure. My understanding a foreclosure stays on 7 years and a short sale 6-7, so the difference in impact on your credit rating is pretty negligable. Secondly, if you have a second mortgage, the mortgage company may 1099 you for the 2nd, which is a huge tax consequence. Also, at least in Minnesota, there is a six month redemption period for a foreclosure. During that time frame, you can live in your home rent free and try and save up some money to at least be able to rent somewhere decent.
When i but a fund on vangaurd that turns out to be a bad investment, do i go to the broker and ask for my money back? can i walk away from my portfolio losses of 2008? i mean, i felt swindled too – all these funds i bought were waaaay overvalued.
People want the upside appriciation of a house, but don’t want the downside. It shouldn’t matter how “underwater” the house is. If the value of the house had doubled, people wouldn’t be giving the bank (or the previous owner) a cut. Investments work both ways.
While I naturally lean towards the side of it is wrong to walk away from a debt. But something Sierra wrote does have me thinking, because something similar happened to my wife.
“deceptive loans”
What I would like to know is the extent that this actually happened as opposed people willingly turning a blind-eye to the structure of the loan, or assuming that they would be able to pay increases as they come.
A few years ago, before we got married, my wife bought a used pickup from a local dealership. I was still across the country and unable to help. The salesperson qualified her for a car loan, and sold her a vehicle with an “estimated” payment of $250/month. When she got the first bill, it was $800! Over 50% of her monthly take-home, and way more than she could afford. Of course, the problems didn’t end with the repo and she was forced to file for bankruptcy shortly after we got married. But if the salesman hadn’t lied about the payment, she would have never bought it in the first place.
Excellent article. People seriously underwater should consider the pros and cons of defaulting as well as bankruptcy. If you have a $250,000 loan for a property that is now worth $80,000 (this is happening in parts of Arizona, Florida, and Nevada), it does not make much financial sense to keep making your payments even if you can afford them. People who can’t make their payments should consider default and bankruptcy options even if they are only moderately underwater. At some point these things become a business decision.
The banks make ALL of their decisions from a purely business standpoint — there is no morality involved. Have you ever heard of a bank giving a struggling widow with three kids a pass on the last year of her mortgage payments and cancelling the loan so she could stay in a house with her kids. Or have you ever heard of a bank giving someone with a serious medical condition the chance to stop six months of payments so they can stay on their feet while ill and then get back on track with the payments when the illness passes. PLEASE. The banks and corporations make these decisions based upon the relevant laws (taking full financial advantage of every government tax credit, legal regulation, and bailout). It is time regular people starting playing by the same rules.
A bit off topic, I have friends who deliberately leave the country to evade paying back their student loans after they received not 1 but 2 useless degrees with no job prospects. I have less respect for those people than I did before. Financial irresponsibility is a part of personal responsibility. I have no sympathy for those people who put little to no money down on a home and gambled their financial credibility by ‘HOPING’ the value of their homes increase. DH and I do not believe in paying more than what is worth, by taking in a mortgage, these “homeowners” are nothing more than ‘homeborrowers’. If you did not buy your home in cash 100% then you shouldn’t be a homeowner. I have lived in other countries (Asia and S America) and barely anyone has a mortgage. They save and save by renting or living with parents until they can afford their own home in 100% cash. That to me, is a form of financial discipline Americans can NEVER adopt due to the relentless desire to ‘gamble’ their money for temporary or lofty ‘homeborrowership’ in hopes of gaining equity which leads to willingness to pay HIGHER property taxes. Moral of the story to those walking away from underwater mortgages: rent until you can afford a home in full.
So sad to see this article and to see it HERE. I consider it a bit of a cop out to post it and then back aways saying that you may not agree with the theme. Your readers expect you to post content that upholds a certain level of standards and ethics. It’s why they come here.
So very sad. The whole thing.
Here’s what it comes down to.
Jim: “Hey Tom, nice house!”
Tom: “Thanks, we just bought it. Got it for $250,000. Worth every penny, in my opinion.”
Jim: “Really? Ouch… I wouldn’t have paid more than $180,000.”
Tom: “Seriously? That darn bank scammed me! I’m mailing them the keys!”
I’m still stuck on how people can find themselves in this problem to begin with. You know how much you make each month. You know how far you can “stretch” your money each month. It seems that many were fooling themselves. When we went to purchase a home, we set a dollar amount to spend which we felt comfortable with. The mortgage broker and agents told us a number of times we could “afford” to spend over $100,000.00 more. We didn’t understand how they got that figure. I didn’t make sense when we looked at our paychecks. Most people seem to be easily swayed. We do not have a grand, huge home and three car garage, but we have a nice sized lot, spacious home for our family and now it is paid off. We also never took out any equity lines of credit – I think, too, that this is one area that can really sink people and help to put them in the upside down situations. You have to be independent thinkers and not allow other people (or yourself through denial) to get into these types of situations to begin with.
We talked to a local broker about selling and short sales. First problem, even in the rosiest scenario we would still end up bringing $30K to the table just to escape our mortgage. Second problem, our broker said that if a buyer’s broker called about the house and heard “Bank of America” that they would just hang up. Yes, it’s that bad. So we exercised our side of the contract. We stop paying, you get the house back. See? Wasn’t that simple?
P.S. You people on your high horses of morality…..unlike others here, I truly *DO* wish for you to end up in financial distress! Yes, I just said that. The difference is that when you do, I’ll gladly come to your aid and comfort without judgment or condescension.
To those who think the banks did nothing wrong, I suggest you read “Too Big to Fail” by Andrew Ross Sorkin and “The Big Short” by Michael Lewis.
@Kevin – you are being way too simplistic and narrow minded.
John is a homeowner, married with two children. They bought a home for $250,000 and put 20% down. They paid their mortgage on time. The wife was in a car accident, had huge medical bills and also lost her job since she wasnt able to work. The husband picked up a second job trying to cover the mortgage. The home is now valued at $80,000. The family owes $175,000.
At some point, the monthly mortgage is quite simply a bad business decision. No one wants to give up on the dream of home ownership. They’ve got children to feed and to raise. They’ve got bills and expenses beyond the mortgage.
The bank gets to keep the down payment and all of the money that has been paid into the mortgage. Plus, the bank owns the property.
The person walking away from the loan gets nothing. They’ve blown $75,000 with nothing to show for it.
Wow, seems like all the amateur financial gurus are also amateur spiritual advisers.
regardless of all the moral posturing, there are some things in this post that struck me as incorrect:
first off, lenders will NOT give loan modifications to 99% of people who are in a position to be considering a strategic default. In order to qualify for a modification, you have to be paying over 31% of your monthly income toward the mortgage, and you have to be suffering from a demonstrable financial hardship (reduction of income, divorce, medical, etc). Simply being underwater on the mortgage will get you NO sympathy from the lenders.
Additionally, if you are going to work on applying for a loan modification, there is NO reason to hire an attorney. Attorneys have literally no qualifications that put them at an advantage to negotiate with lenders, and they will charge you a cool $150-200 per hour to fax papers to the lender.
The only person who can help you negotiate a loan modification is a HUD-certified housing counselor, who are trained on how to prevent foreclosure. you can find one in your area at hud.gov, and their services are ALWAYS free; there is absolutely no reason to pay anyone anything to help you fix your foreclosure problems, and it is illegal in many states to charge money to do so.
I don’t have a problem with people mailing the bank the keys to their house, even if they can technically afford it. It’s built into the contract that they can do this. What I do, however, have a big problem with is living the house during the foreclosure process mortgage-free until you are evicted. How nice that you default on the mortgage AND get to save a bunch of money for yourself in the process! I wish I could do that, but I can’t, because I’m actually paying my mortgage. If you are living mortgage free for months and even years in some cases, you sure as hell better have a good emergency fund at the end of it to keep you out of financial trouble in the future.
Note: This criticism is directed at people this article addresses, i.e. those who technically can afford to make payments but choose not to. It’s an entirely different matter if you are unemployed or with huge medical expenses. I have more compassion in this case for mortgage and rent free living in a soon to be foreclosure.
1. Nothing is “just a business decision”. One cannot separate their faith from their walk. The very idea of contract law is built around making sure the terms are very clear for both parties so that they do not enter into a binding agreement blindly. The moral responsibility is for both parties to read the contract closely – or hire a representative to do so. All of this big, bad bank talk is just nonsense. They provide a product, and it is up to the consumer to understand what they are buying. In the case of “fraud”, fraud in the inducement is a legitimate reason for a court to declare a contract null and void in which case a consumer would not be obligated to make payment. However, things such as adjustable rate mortgages are not fraudulent. The terms of the contract state how long the rate is fixed, when it starts to adjust, by how much it can increase in a given year, and what the lifetime interest rate cap is. If you did not read or consider the implications of that arrangement, that is your fault – not the bank’s.
2. Handing over a house simply because it has declined in value is morally wrong. If you are perfectly capable of paying the loan, but are unwilling, because the house is now worth less than when you bought it, tough. The mortgage contract has no stipulation in it regarding the value of the house. That is a risk you take in buying a house. It is certainly a bummer, but bummers don’t warrant you walking away from a contract – it makes you a liar.
3. Not all circumstances are created equal. There are people who plan well, save a down payment, have an emergency fund, buy a modest house, and the world falls apart – they lose their job, or health or both – the economy tanks – they work two jobs to pay the bills, but ultimately, the emergency fund disappears, and they are unable to pay the mortgage. At that point, the general welfare of your family is of greater importance than meeting your contractual obligation. First Timothy 5:8 tells us that if anyone does not provide for the members of his household he has “denied the faith and is worse than an unbeliever”. No one should judge a person in this situation as immoral, and we should be careful not to make blanket statements as to the morality of a decision like that.
4. There is certainly gray area in all of this discussion, but some things are clear:
a) Not paying your mortgage can be sinful (immoral)
b) Not paying your mortgage may be the lesser of two evils if you are paying the mortgage company and neglecting the care of your family.
c) There are legitimate, desperate cases where a family has no choice but default. In those cases, it could hardly be considered immoral. However, in those cases, the debtor should do everything possible to help meet as much of the obligation as possible – keep the house clean (curb appeal), pay as much as possible, maintain good communication with the lender, etc. I have zero sympathy for people who trash the place and walk away with no contact with the lender.
The responses here are quite interesting. My reaction to the concept of the strategic default is, I think, colored by a story that ran in one of the major daily newspapers on the subject, I can’t remember which one. The couple profiled had purchased a home at the height of the bubble. The house was in a good area, they have a child, both have good, high-paying jobs. They were considering a strategic default on their mortgage for no reason other than the house had lost value. That’s it. They weren’t getting divorced, it wasn’t that they couldn’t afford it.
To me, this is sort of like selling your stocks because the market is in the tank–the idea to “cut your losses.” Yes, it might be painful to make payments knowing that your house is underwater–but honestly, is that why the house was purchased? No, it was purchased to live in.
It’s one thing to default due to tragic and unforeseen life circumstances. It’s another to go this route because you expected a house to keep appreciating and when it doesn’t, you walk away. I suppose my question is, if everyone did this, wouldn’t the housing mess be far greater than it is now? How would you feel if your neighbors to the left and right strategically defaulted, taking the rest of the street’s property values along with it? (I understand there are some states like this right now, and it’s not pretty.) But multiply that by all 50 states instead of the three or four most heavily impacted right now, and it would make things far worse.
I think as a society we are fortunate that so many equate paying debt as a moral obligation.
Walking can seem like the logical solution, but the consequences are harsh. Thanks for the insight!
@Chris.
Good for you. You are smart and engaged. You probably went to college and you probably spoke with your family to get their advice before making your decisions and your parents probably had a lot of good advice for you.
I’m in the same boat and I feel blessed and exremely lucky.
I’m shocked by all of the people insisting that this article endorses some kind of massive moral failing.
Mortgages are contracts. They spell out what the contracting parties’ obligations are to each other under a variety of circumstances. They include provisions for the borrower’s ceasing to pay the loan. This possibility is a reason that mortgage rates are (and should be) greater than inflation. It’s also why there are serious financial consequences to default, so that people have strong incentives not to do it unless necessary. Banks don’t lend money assuming that no one will ever default. If banks miscalculated the risk of default, then they will deal with the consequences–as will borrowers.
I am not a homeowner. Should I ever buy, I will certainly do my best to avoid getting into a situation that would make default an attractive option. But if that were to happen, I would have no moral qualms at all about defaulting for the good of my family’s long-term finances.
You need to give more info on the modifications. They are a joke! They hit your credit score badly when you are just in temporary modification. They kept me in a temporary modification for 10 months! Then denied me, with no cause. Because they dont have to tell you. Then they want all their money up front from the reduced payment difference. so then I know a few people who lost their house because of this. Because you have to pay within a month all the months difference or they start to foreclose. What a joke! So I had to battle them to correct my credit report and was lucky enough to have just enough equity in the house to refinance with another bank. Bank of America is the devil! I was lucky. But I know many who desperately tried and lost their house anyways.
Also the tax implications of a short sale need to be mentioned. Also, in 7 years the house we all foolishly bought could come back and break even without destroying your credit. Or maybe wait for it to come up a little more so the short sale tax implications dont hit you so hard.
I second everybody who says that the banks don’t use ‘moral’ as their guidelines when they decide on their course of action and neither should individuals when it comes to a decision.
And it’s clearly not the same thing as theft. I could go into an extended comment on contracts, penalties, what the bank receives, etc but really – if it was theft, people would be in jail for walking away from their mortgages.
Some commentors want to return to an era of debtor’s prisons. Victorian age was indeed extremely ‘moral’.
“The mortgage contract has no stipulation in it regarding the value of the house. That is a risk you take in buying a house.”
I would argue that this is a risk that the bank takes by approving the mortgage.
A bit off topic, but as someone who lives in a “recourse” area – I find it astounding that companies would lend large amounts of money to people who can just walk from the obligation without having to pay the mortgage balance, even if they could.
“All of this big, bad bank talk is just nonsense. They provide a product, and it is up to the consumer to understand what they are buying.”
Wouldn’t that same line of thinking also absolve drug dealers from any moral problems? What about companies who make defective toys? What about an automobile manufacturer whose cars have safety defects?
Why *shouldn’t* people opt for the second option when it becomes financially more prudent for them? That option *is* open. It’s in your contract. It’s essentially the entire point of having a loan with collateral. If you default, the lender gets the collateral. That’s their protection and it’s built-in.
Maybe it’s historically unprecedented for defaulting on a mortgage to be advantageous to the borrower instead of the lender in such large numbers, but why shouldn’t they take advantage in that situation? Banks would do the same if they had the option.
Health insurance companies have been doing this for decades — they cancel your policy when they decide you’re more expensive than it’s worth. People are currently lining up across the country to defend this system in the US. The big difference here is that when your health insurance is cancelled you can literally die, and when your house if foreclosed on, everyone at the bank pretty much just goes about their lives.
There are plenty of other ways businesses take their own advantage in the system all the time. UPS has a contract with the city of San Francisco to pay all their parking tickets monthly, because it’s cheaper for them than trying to find legal parking while they do their deliveries. Where’s the moral outrage over the abuse of the system?
What about businesses that incorporate themselves in Delaware to avoid paying taxes? Where’s the moral outrage over that injustice?
Or how about companies that routinely give their employees 31 hours a week, because if they get 32 or more they count as “full-time” and would need to be given health insurance?
Where’s all the outrage over everyone else using loopholes in the system to their own advantage? Why is it only outrageous when it’s an individual who’s probably really struggling, and will see a marked improvement in his life who does this sort of thing?
Besides, even the “morals” that people use to justify this outrage are ridiculously ethnocentric. Islam prohibits the charging of interest on loans as immoral. Why don’t we all adopt *that* moral and take a second look at the banks who are financing these things?
@MoneySmartBlog: I suspect my perspective is coloured by that as well. I live in a full recourse province, and there’s no way it would ever be to your advantage to walk. They’d come after you for all you’re worth and more.
To say “it’s far more shameful to owe money than it is to steal it” is pure bullshit. I wouldn’t believe anything else the author of “Griftopia” had to say.
The people that have commented so far that call this a moral issue (including myself) are upset about the people that are truly talking about strategic defaults – they can pay the mortgage as agreed but because they are severely underwater now they don’t want to for a variety of reasons.
Others are in turn accusing us of being on a high horse and clearly having no sympathy or understanding for people who signed in good faith but have had something go wrong (an illness, job loss etc.). However, THOSE ARE TWO DIFFERENT SITUATIONS.
A strategic default because you are underwater vs. a foreclosure because situations have changed are not the same thing. I have all kinds of sympathy and understanding for people who are in situations where it is feed your family or pay the mortgage. I absolutely do not have sympathy for people who are underwater but are still able to make their payments as always. That just means you made a bad investment. Happens everyday. Unfortunate that it was with your house but still just a bad investment.
“Because in America, it’s far more shameful to owe money than it is to steal it.”
What???? We borrow to buy cars, houses, and use credit cards all the time. When did owing money become shameful? Matt – If I walked into a bank and stole money, is that a business decision? I obviously need the money pretty badly, so that makes it justified? Give me a break! How is that different than taking out a mortgage, or any loan, and then deciding later not to pay it back? It is my responsibility as a buyer/borrower to do my due diligence and sign those papers with eyes wide open. And pay back the money borrowed. Otherwise, yes it is immoral because it is stealing. For years we were in a housing bubble and everyone knew it. It couldn’t last, but like lemmings, folks bought real estate that was over-valued because the prices kept increasing. It was hard not to get caught up in the frenzy, but no one held guns to peoples heads to make them purchase. Home ownership is a profit risk, a gamble, just like owning stock. It’s also a long-term investment. If it is still worth less in 15 to 30 years from now, then you truly do have my sympathy. Still there is never any guarantee that investments will appreciate.
I thought this blog was about learning to make sensible decisions about how to spend money. Maybe the next few posts should be on how to know if you qualify for a mortgage (not just the bank’s responsibility) and debunking myths about home-ownership and the financial ramifications. Americans are so caught up in the dream of home-ownership we don’t even question whether it is the right decision for them at this point in their lives. Unfortunately some folks learned the hard way, and I truly do feel for them, but walking away from a mortgage and filing for bankrupcy are forms of stealing money from other people. In my book , it’s a white collar crime. 7 years of bad credit is still better than prison, which is what the guy wearing the ski mask robbing a bank would get if caught.
(Yes, you forfeit the collateral, but then you didn’t really own that collateral in the first place until you pay back the loan – the bank does. You made an agreement. What is that worth? If you prove that it is worthless, then yes, there should be ramifications. If somebody else’s money must make up the shortfall, whether it is a bank or our government, it is ultimately somebody else’s money. That is stealing.)
I read through all the comments and I agree the most with the person who commented above me, Tyler. A mortgage is a contract. It is insane that people are made to feel they’re committing a moral mistake by exercising an option in the contract – ie, to give the bank back its collateral for the loan.
One thing I can add to the discussion that I didn’t see mentioned is that the risk to one’s credit score is very overblown. I know several people who went into strategic default, ALL of their credit scores rebounded (some over 700) within a year of the foreclosure.
@tyler
“What about businesses that incorporate themselves in Delaware to avoid paying taxes? Where’s the moral outrage over that injustice?”
Because incorporating yourself in Delaware doesn’t avoid you paying taxes, that’s a myth. There are other advantages, but you still have to pay taxes to the states you operate in as well
Whats your take on credit card debt then? You’ve usually consumed everything you’ve charged, so where’s the value
Why is it a moral issue for individuals to default, but not a moral issue for corporations to do it? It’s seen as just a cost of doing business. Why do we require that individuals act in a morally upright fashion but let corporations so wholly off the hook?
I, for one, am glad that GRS would publish an article like this. I think a lot of the comments are just people elating in feeling morally superior over others on the basis of a morality that not all might share. What’s the point?
Save the upset for the rotten corporations who are really screwing us over.
“walking away from a mortgage and filing for bankrupcy are forms of stealing money from other people.”
except that they are legal options available to american citizens whereas stealing is illegal.
“walking away from a mortgage and filing for bankrupcy are forms of stealing money from other people.”
except that stealing money is illegal and walking away from a mortgage or filing for bankruptcy are both legal.
Why is it a moral issue for individuals to default, but not a moral issue for corporations to do it? It’s seen as just a cost of doing business. Why do we require that individuals act in a morally upright fashion but let corporations so wholly off the hook?
Especially when those same corporations hire well-educated experts to get them into the situations that they later have to default from, and also well-educated experts to obfuscate the terms of agreement that lay individuals are then morally bound by (according to the commentariat here). Talk about imbalanced.
To take out a mortgage, both parties (the bank and the homeowner) agree to the value of the home. Why does the homeowner the only one who needs to abide by that assessed home value if it was priced incorrectly? If the house was overvalued, and the homeowner walks away, the bank keeps the downpayment plus any money that has been paid towards the mortgage plus the property. And yet some posters compare walking away from a mortgage to stealing? I’ve had possessions of mine stolen from me, and never, ever when someone stole from me did they also give me anything of any value in return.
Sorry, I don’t agree that walking away from a mortgage is a “business deal” where you are just taking a loss.
If you purchased shares in a stock and the stock market plummetted, you take a loss, yes. But you do so by selling the stock at it’s current price, and **losing the money you paid** for the stock in the first place. You take the hit, not the company or the brokerage house who sold you the stock.
Buying a house is like buying a stock certificate: you are hoping the value of the home increases beyond what you are paying in interest on your mortgage. The analogous situation with a mortgage is: you “purchased” that mortgage (stock) from the bank, and now (boo hoo) it’s not worth anything–that’s your problem, not the bank’s. You owe them for what you borrowed–the bank doesn’t owe you. If you made money on your house, would you owe the bank out of your “profit”? No of course not. Why then does anyone think the bank should owe you for your loss?
@chris #69
Amen! Who cares about predatory lending? Use some common sense people. If you knew that your take-home pay was $3000/month and your mortgage payment (not including taxes and insurance) was $2000/month or more, why would you ever have signed up for the loan? That’s just outright foolishness.
However, there are many scenarios where people have done everything correctly and find themselves completely underwater because the econonmy has tanked. It’s easy to sit in judgement and say what you would or wouldn’t do when you aren’t facing the exact situation that other people are facing. Somebody else commented that there a million shades of gray and I think that was a very accurate assessment.
I know I’m resurrecting an old thread, but I am pondering this whole thing this morning.
The argument here from most on the moral ground seems to be that I buy a house as an investment and if the value of the house goes down I’m stuck with the consequence of my choice. Fair enough, but lets look at it from the other side.
I didn’t really buy the house, the bank bought it. They agree to let me live there as long as I make payments to them for the next 30 years, then they will give me ownership of the house. The bank made the investment, not me. Shouldn’t the bank be willing to accept the loss on their investment? How’s that for a moral twist? Lets not forget too that many mortgages include PMI which in theory insures the bank against default. I paid to insure the bank against the likelihood that I would one day walk away. Really the only true moral consequence I see is this: when I default on my loan, I impact the property value of my neighbors. My neighbors didn’t enter into a contract with me. They did however accept the risks of the market when they bought their house, and so even that gets a little gray.
Enough theory though, here is my real predicament. I bought my house in 2006 for $340,000. Today it is worth $200,000. I want to move in 5 years to a house with another bedroom. I’m able to make the payments. I just called the bank today to try to refi to a lower rate. They have no interest in refinancing my $260k loan, and why would they really? There is no advantage to them. Note:I’ve already refi’d once under home affordable.
So what do I do for the next 5 years? How do I maximize the value of the money I have in the bank, and in commitments to house payments for the next 5 years? Make giant payments on the house? I could do that, I have the cashflow surplus. Remodel the house to bring up the value? I would use cash, I’m not chasing bad debt with worse debt). Added benefit is that I get to live in the remodeled house bringing some level of pleasure. Do nothing, and bring cash to the closing to avoid debt? Hope things rebound in 5 years (I have no faith in this option). Add a bedroom to my existing house? An option but less than ideal cost wise. Walk away from my mortgage? Maybe, but has financial consequences that might hurt me more than I want long term.
For those who have been through a short sale, what happens? Does the bank look at your assets and decide you could afford it, and thus play hardball?
We discussed this topic at length on Seattle Bubble back in November. It was quite an interesting conversation.
A mortgage is a legal contract, into which both sides entered voluntarily. I do not see how it’s okay to “voluntarily walk away” from such a commitment. And to do it because one is “upside down?” Really? If one borrows for a new car, then, is it okay for her/him to walk away from the loan? New car loans are ALWAYS upside down the minute one drives the car off the lot.
Don’t get me wrong – I don’t blame the author for investigating, and reporting on, the consequences of such a decision. She merely answered a question. I believe that badmouthing her (or JD) is out of line.
What’s not out of line is the comment that just because one was not a good consumer (bought too much house or car, used too much credit – e.g., borrowed more money than s/he could afford) should not become others’ problem except in the direst of circumstances. Because you, John/Jane Doe, default on your mortgage, I get to pay more for mine.
Finally, a comment I can’t resist: I personally know two people who walked away from their mortgages. First was quite well-to-do, walked away because they couldn’t sell for what it was worth (upside-down before that was a term), the second was not well-to-do, but kept buying things they couldn’t afford. I am not happy with either of the two passing their debts on to me (directly or indirectly doesn’t matter – big business always gets paid).
First, it is important to look at this in a different scenario: if we faced the same mentality in car loans, we’d be in trouble. A new car loses value immediately and we are all upside down in car loans (assuming one buys it new). If we can walk away simply because we owe more than it’s worth, nobody would make car loans or make the loan too expensive. Even though the loan is backed by collateral, once a car is used, it’s not worth nearly as much as it is new and the bank will lose.
In turning to the mortgage situation, I’ve heard so many statements about how the banks are bad for making these mortgages possible and how they reaped in profits so this is payback. But the reality is that the vast amount of profit (the purchase price) is not going to the bank but to the SELLER. The seller wasn’t bad in pricing his or her house to what the market was paying. The buyer was happy with the price of the house until the market turned down. This is not an unfair situation–it’s a FREE MARKET SYSTEM where value is only a reflection of perceived value and the market will always flucuate.
Discussion of the housing bubble was going on as far back as 2001 when I bought my house. The prices kept going up and housing starts were going up, up, up. The question was not whether the bubble would burst, but when it would burst. Lots of things were more expensive during this time–not just home prices. It was also more expensive to get home repairs done because companies were flush with business and they raised their prices because demand was high.
Increased demand = increased price This is basic economics. Calling a price unfair because one paid it when demand was high does not make the price unfair. And blaming a bank because you agreed to market value AT THE TIME of the purchase does not meant the contract is unfair.
I also do not agree that businesses walk away from bad debt all the time. If a business makes a bad decision after they signed the contract, they are still liable for the contract and a lawsuit will occur. They pay unless they are in bankruptcy. While we all think of big businesses getting money from TARP, the truth is that the TARP funds are being paid back, with interest, and many of the big banks have fully paid them back.
Agreeing to the terms of a loan and then not paying on it when you can is wrong. It is not just a business decision–it is breaking your word. I understand where a person loses a job, has health problems, or the like. I don’t understand when it is a deliberate choice because your perceived value of an item goes down.
@94 “You owe them for what you borrowed—the bank doesn’t owe you. If you made money on your house, would you owe the bank out of your “profit”? No of course not. Why then does anyone think the bank should owe you for your loss?”
Nobody thinks the bank owes the mortgage owner anything or expects them to pay back the principle and interest payments made so far.
Which is the other place your analogy falls apart – or rather parallels it more aptly than you intended. When you say “But you do so by selling the stock at it’s current price, and **losing the money you paid** for the stock in the first place.” – that’s exactly what you do when you walk away from the mortgage – you lose every bit of money you’ve paid so far, from your down payment through principle and interest from the time of purchase until the time of default.
(I do grant that the bank itself only receives the benefit of principle + interest, I’m just annoyed by analogies that don’t work)
““The debts are not ‘unfair’: you knew the terms and agreed to them.” Knowing and agreeing to the terms does not mean that the terms were fair. Soemtimes people got taken for a ride. Sometimes people got cheated. Sometimes people were lied to. Sometimes people made mistakes.”
Ignorance in this comment. If people got cheated or are lied to, then the contract they signed is VOIDABLE. Yes that is unfair. It’s called misrepresntation, it’s a very noted way out of a contract in common law.
However—If the person signing the mortgage “made a mistake” that’s their own fault. It’s perfectly fair.
In Finance there are only good business/investment decisions and bad ones.
How many employers make the moral/right decision when it comes to paying employees or laying people off or promoting people or shipping job overseas b/c it would cost less.
How many business go bankrupt or fail and walk away from a lease or contract.
A corporation pays and financially supports Congress to create laws that are favorable for its business even when it harms the community directly or indirectly through various means such as environmental damage, plant closing etc… This sounds like the “right” thing to do.
How many businesses get tax abatements from a city and then leave once they stop providing the incentives.
Why do we allow companies or corporations to constantly screw over the cities, taxpayers, citizens and employees.
Oh that is just business…. Well when I walk away from my house that is just business…
I don’t see you soapbox moralists screaming on here every time an insurance company decides to not give insurance to someone with a pre-existing condition, or to deny someone a liver transplant b/c it isn’t covered by insurance.
You have to love how people apply “morals”…
Hypocrite
“A mortgage is a legal contract, into which both sides entered voluntarily. I do not see how it’s okay to “voluntarily walk away” from such a commitment.”
it’s okay because the ability to walk away is built into the contract and the bank agreed to that contract when they gave you the money.
“However–If the person signing the mortgage “made a mistake” that’s their own fault. It’s perfectly fair.”
Also, if the bank made a mistake by approving the loan it’s perfectly fair for the homeowner to walk away from the loan.
“If people got cheated or are lied to, then the contract they signed is VOIDABLE.” Good luck fighting a bank when they have all the money and the lawyers and you are broke.
@102 The ability to walk away is not written into the contract, the terms of punishment for failing to uphold your side are written into the contract.
The law is also a contract. What you are saying that it is okay to murder because the contract says that there is a clause that says you can murder in exchange for a life sentence.
It is kind of agrivating that this article came out so late, and says NOTHING new. It also shows that she’s done zero research on the subject, people are ignored by the banks all the time, the money that the government gave to the banks for loan modifications has hardly been used, and it’s not as easy to get a hold of someone at a bank as she makes it seem. Some people (#48) can’t get a hold of a person at the bank, I’m shocked that JD let this article that was slapped together with no research come out on his website by one of his staff writers. If you think it’s immoral or not, that’s not what matters, what matters is this article is a waste of space where people seek advice and stories about personal finance.
@99 Tracy–I disagree. You aren’t “losing all the money you’ve paid on your house so far” when you walk away from a mortgage.
You don’t “lose” that money–because that wasn’t your money in the first place!
You were just paying back part of the large sum of money that you borrowed.
So the homeowner doesn’t lose anything at all by walking away–only the bank loses.
Ok, I stand corrected… I guess I’m the only person who finds this post and all the comments BORING and predictable as all get out. Maybe GRS is the one personal finance site/news organization that hasn’t already had this discussion a million times.
Channeling Tyler K. if he weren’t too busy (again) arguing his side that it’s ok to default,
Nicole
p.s. Next week let’s discuss whether SAHM or WOHM are morally right.
I think it is interesting to see the people who got in bad circumstances and defaulted or declared bankruptcy getting upset about the people declaring that walking away from a mortgage is wrong.
Hello? If your interest rates skyrocketed or you lost your job and can’t find another one, well, that’s what those are for. No one is talking about you. They are talking about the DEADBEATS that CAN afford their mortgage that they agreed to and don’t want to pay anymore.
The arguments that these DEADBEATS make are pretty lame. There are predatory lenders out there, but most of you didn’t deal with a predatory lender. You dealt with a lender that wanted to help you get a loan. The onus (responsibility) lies with YOU to know how much YOU can afford, not the bank. Pretty convenient to try and blame them for these “toxic assets”. It is only toxic because it was a bunch of morons that couldn’t afford the home and still bought it. Not to mention it was a relaxing of regulations (by the government) that made it easier and easier to get these loans.
If anyone is taking advantage here, it is the homeowner taking advantage of the bank (AND ME). They gave you a rate based on their perceived risk of you defaulting. They don’t take into account you being dishonest and walking away when you CAN pay. Well, they didn’t when they made the loan. Thanks to you, they will now.
Oh, and for full disclosure: I own a home that is under water (barely). Based on my decision not to buy in the overpriced area, I didn’t lose the bulk of my value. At 22 years old, I was smart enough to make a decision like that. I was also smart enough to not buy more than I can afford. I have since taken a job an hour away and I don’t live in the house. I can afford to make the house payment and the rent payment every month.
Mortgage Meltdown: How Banks Silenced Whistleblowers
Who’s to Blame for the Mortgage Mess? Banks, Not Homeowners
From the second article:
Again, I’m not saying that the borrowers bear no responsibility. In fact I started my blog in 2005 basically based on the premise that the housing market was so screwed up that it should have been obvious to anyone who bothered to apply even a tiny dose of common sense.
But that doesn’t mean that the banks are innocent victims here, either.
@106 – Homeowners do lose a lot when walking away. Their credit is ruined for a long time. You can also be sued in states where its allowed. You dont just get away and walk off into the sunset.
I think most people thinking like you should just advocate that your state become a recourse state and let the mortgage companies sue for the remainder of the loan. Then strategic default would be a non-issue.
@70 – I bought a short-sale that and had to work with Bank of America. What a nightmare, took almost 6 months from the time we agreed on a price. The entire time BofA was practically non-existant when it came to updates or other info, and we complained enought that it was fast tracked, according to B of A. I can completely understand buyers and realtors not wanting to deal with them.
@106 KM
That would only be the case if mortages were principle only, no interest.
@70/109 I hate Bank of America with a passion and would rather be homeless than have to deal with them for housing.
The process as described in this article may be what works today but two years ago, when I was faced with losing my house, it was virtually impossible to set up any kind of a negotiation with the bank. Service reps weren’t knowledgeable or trained to deal with loan modifications or short sales at that time and I got run around after run around in last ditch attempts to save my house and my credit. In the end, I had no choice but to move out and let the bank have the house back.
I’ve said it before and I’ll say it again: the banking industry allowed many people (including me) to buy properties we never should’ve been allowed to buy. When all was said and done, I was out of pocket a quarter of a million dollars in down payments on unsustainable real estate buys. That didn’t stop me buying again however. I bought another house before the foreclosure on the one I left was even finished. I did that by buying a trashed foreclosure at auction dirt cheap, putting down another $50k against the low mortgage and financing the rest with a private money loan from a local builder who preferred to get a 9% return on his money as opposed to .25% from a savings account. Fine by me.
And yes, I did learn my lesson regarding buying to much house and taking out mortgages. Boy did I ever. When my current mortgage is paid off, I will never ever take out another mortgage again.
Very loose numbers:
Lets say I borrowed 130k (at 6%) to buy my house.
Over ten years, I pay just over 9300 a year on the mortgage (principle + interest, excluding taxes from my example)
At the end of that 10 years, I’ve paid the bank almost 100k. (93529)
Most of that, however, was to interest – I still owe 108k on the actual mortgage.
My house, however, is only worth 70k, because it’s lost value.
When I walk away, the bank has received 170k value for their 130k loan. Now, they had to pay the original seller 130k, so really, they’ve only made 40k profit.
Mortgages are structured SPECIFICALLY to protect the bank to the utmost and make it very unlikely that they actually ‘lose’ money in the case of a default – the default has to happen extremely early on in the process or the house has to drop a LOT in value (in my example, my house’s value dropped almost in half – with a downpayment, it probably DID drop completely in half – and the mortgage company still didn’t actively lose, assuming it costs less than 4k per mortgage to service a loan … granted, when it goes into default, it probably does cost them more that last year, but my point stands)
Re: the people who mentioned car loans – car loans are NOT structured this way at all.
And for the record, I lost the house due to job loss not because I just got sick of it all and wanted to walk. I ended up having to file bankruptcy too to avoid the constant harrassment from debt collectors to whom the bank sold my file. One after the other called me, harrassing me all hours of the day and night, some of them so illiterate I couldn’t figure out what they were saying half the time. Reminded me of the Sopranos and the crooked and corrupt rackets they ran!
@Edward #64
I live in Minneapolis. We got our loan in 2001 from a large national bank, and we had to resist a LOT of pressure to buy more than we could afford. Everyone I know who bought around the time we did has the same story – being pushed and pushed and pushed to borrow much more than they could afford. Not from shady operators – US Bank, Wells Fargo, TCF. I distinctly remember the pressure in the closing meeting, when I slowed everything down by reading what I was signing and every professional involved acted like I was ruining their day (that’s not just the bank staff – also the two real estate agents). It was obviously not standard for people to read the documentation themselves.
We’ve had some splashy arrests in outright fraud cases, mostly flipping & stealing identities to do it, but also mortgage companies either encouraging borrowers to commit fraud or outright doing it for them.
The big banks also targeted vulnerable people – especially those who didn’t speak English, who relied on a bank employee to tell them what the documents meant, but also elderly people (specifically there was one program that sent young salespeople into church congregations to target elderly folks with paid-off houses into refinancing).
Just about everyone who got a mortgage in that time period was the target of some of these tactics. Not everyone fell for it, and of those who did of course many had their own faults – some ignorance, some greed. But a lot of them were simply victims of a scam at a huge scale.
@Nicole:
The controversial topics are novel on this site though, because J.D. usually refuses to cover them. Some of us gave up reading a lot of the other personal finance sites for a variety of reasons (personally, I don’t care what jesus thinks of your budget, and I don’t want to learn a whole dictionary of acronyms because you can’t just write “my daughter” or “my husband”, for instance) so this isn’t something that we’re seeing re-hashed for the millionth time.
I sort of agree with you, though, I’d rather read about how to open a 529 account or something, that would be more useful. It’s not like anyone who was seriously considering defaulting on their house learned a lot from this article (“Oh, it will be bad for my credit? I didn’t realize!”).
I learned that loan modifications are extremely rare. Many lenders will give a trial modification, then after the owner has done well with that for many months, the lender says nope, and demands payment for all the back-interest from the modification period. I met 2 people at the HUD office who were dealing with that.
I also learned that foreclosures and short sales only wipe out 1st mortgages. Owners are still responsible for their 2nd mortgages (and a lot of us in this situation have 2 mortgages, were in 0-down 2 mortgage loans from the get go, that’s why we’re so far underwater).
Sadly, there are posts all over the internet just like this one that completely ignore these things.
One more thing:
I have a hard time working up a lot of sympathy for my lender. The CEO of Taylor, Bean & Whitaker has been indicted for massive fraud. He almost single-handedly took down his firm, Colonial Bank and Freddie Mac. Still has millions. Trial is pending.
http://www.loansafe.org/usa-v-lee-farkas
Honestly I will give my view based on what I’m seeing as a real estate broker. First many of you are voicing/venting out names of deadbeats which makes no sense in a situation like what the blog writer is trying to get our opinions on. Secondly lets define “deadbeat”. Deadbeat is anyone who decides not to take on their responsibility of roles whether it be a job, family, money, credit & etc. So lets measure the “foreclosure crisis” against this term:
You are not a “deadbeat” if you’ve payed on your mortgage & all of a sudden you lose income because you lost your job, & now you can’t pay the mortgage.
I’ve concluded the economic recession has divided the economy into a 3 part category recession may are affected by all 3 and many are affected by just a few. They are:
A. Loss of Job
B. Credit Card
C. Foreclosure
My conclusion is you are not a “deadbeat” if Category A happens to you & you’ve got to choose between losing credit cards or your mortgage in foreclosure. I say choose because if you dont make payments on your credit cards for 6mths they “charge off” most mortgages go into foreclosure >/=3mths+. So depending on who & what you owe to me it’s not worth draining everyone to elevate your financial loss. So to defer this kind of thinking for abit contact a local realtor & request a “CMA” in past 3 months in your subdivision then take the price/sq.ft. in the “CMA” and multiply it by your sq.ft tax records has it at. Then contact your lender & request what is your current mortgage balance once you have the 2 amounts compare them then seek an attorney specialized in “real estate” & request they give you the best advice possible. In the end no mortgage is really toxic until you’ve lost your job, and then the “aftermath” will kick in & it’s just not “worth” what you have to face futuristically if you don’t play your cards right from the very beginning the minute you “lose your job”.
@Tracey (#118-ish):
I really, really detest when people make arguments like the one you just made.
“Most of the money was interest anyway, so the bank is getting their cake and eating it too!”
You cannot ignore the opportunity cost the bank shouldered in making that loan. That money didn’t come from nowhere; in lending it to you, they couldn’t lend it to someone else, or invest it.
The $40k “profit” the bank made has to be weighed against how much they could have made on their money somewhere else. What if they’d just sat on it and kept it in a savings account at 1.5%? What if they’d lent it to a non-deadbeat at 5%? What if they’d invested it in gold and made 12%?
Arguments like yours are so short-sighted and ignorant that it just makes my blood boil. It demonstrates a complete lack of insight into the realities of finance and economics.
There’s no black and white here. It’s not all the borrowers’ fault, and it’s not all the lenders’ fault. There’s blame to share on all sides.
The lenders were eager to make loans that their own models told them were risky, but they were willing to accept the risks because they thought there were profits to be made. They encouraged people to take out loans that even a decade before they wouldn’t have agreed to make. On the other hand, every individual borrower bears responsibility, too. Nobody was forcing them to take out a mortgage they couldn’t afford. This is a systemic problem, with a share of the responsibility belonging to all parties. There’s nuance here; to blame just the borrowers or just the banks is facile but wrong-headed.
(That said, I do agree with the previous commenter who loathes the quote Sierra included in the article: “In America, it’s far more shameful to owe money than it is to steal it.” This is idiotic, and I’m not sure how Matt Taibbi can write that with a straight face. It makes me doubt everything else he writes.)
Okay. With that general statement out of the way, I’ll go through and reply to individual comments.
@Kevin – that’s funny, because what *I* really, really detest is when people make arguments like the one *you* just made! LOL And it makes my blood boil too, because you demonstrated a complete lack of awareness of what really happened during this recent crisis.
Your argument is great for an economics textbook, but ignores the real-world scenarios. When banks structure things so that they gain 10x profit on defaulted loan packages, then they begin to seek out borrowers who are more likely to default. That’s the reality, and that’s why your argument completely misses the point.
P.S. Tap the breaks on the hyperbole a bit too, will ya? Thanks.
“The onus (responsibility) lies with YOU to know how much YOU can afford, not the bank.” If I were a bank and it was my money that was being lent out, I know that I would do some research to figure out how much the borrower could actually afford.
No they won’t. They will assign you to someone who won’t answer your calls. Voicemail boxes will be full. They will send you conflicting documents. Even if you do what they say, they will come up with reasons that you owe more and even if you go all the way to the executive resolution group, they still won’t have answers. I have been going through this with Chase for two years now after I had emergency surgery and got behind. At no point have I gotten the same answer from two people. They keep adding fees and more fees, even though I was in a repayment plan. At the end of the repayment plan, they said that even though I had been making two mortgage payments a month, I still owed $10,000, although NO ONE could explain why or how. I was turned down for a modification, and didn’t qualify for a short sale according to Chase. Dealing with them has been the biggest nightmare that has gone for two years with no resolution. They won’t talk to you, and they really don’t want to help you. At least in my experience.
I think the author meant to say ‘In America, it’s far more shameful to fail to pay back owed money than it is to steal money outright.’
JD —
http://www.thedailyshow.com/watch/thu-october-7-2010/mortgage-bankers-association-strategic-default
Wow, this is generating a lot of discussion! Few banks are willing to consider a modification if you are able to continue to pay… At the end of the day, Walkaway, or Strategic default is defined in this sense by people having no issue paying, but deciding not to anyway
Example, John buys a house in 2006 for $200,000. John doesn’t have much towards a down payment, but as a first time buyer, he was able to qualify for a 0% down loan. Similar homes in the area are selling for $250,000, so John feels this is a good, safe deal. John has a 30 year fixed rate that he can very comfortable afford, with plenty left over towards retirement, savings, and discretionary spending, and pays $12,00 a month for his mortgage. In 2011, John finds out that the market has changed drastically, and the house would sell for approximately $100,000. John has always paid the regular amount on his mortgage, but currently owes $185,000. He lives in a non-recourse state. John decided that he’d be better off renting, as currently a similar place rents for $600/month. John decides to let the bank foreclose on the house, and take it back to sell as a Real Estate Owned property. The bank has no recourse to come after John for the difference between what he owed and what it got in the open market. The bank loses a lot of money on the property in unpaid interest. John loses the money that he’s paid into the mortgage so far, and takes a huge credit hit (say -150 points) that’s a strategic default.
There’s a moral part, but only in how you view yourself — do I personally feel morally obligated to continue making payments because doing so will keep my foreclosed home off the market and have a positive influence on those around me that are trying to sell. This is a personal decision that one makes.
The biggest point I think many are missing is that when you take out a mortgage, you sign a contact with the lender. That contact outlines how much you’ll pay, and at what rate. It also defines what will happen if you STOP paying. Note, this contract doesn’t outline, or judge your reason for stopping payment, it only assigns consequences.
Simply put, a mortgage says we’ll give you XX amount now, and you agree EITHER to pay that back at XX/month for XX period of time… OR if you do not pay, you will be assessed penalties up to and including repossession of your home.
The contact was an agreement… you chose to agree to pay the bank over a period of time, or give the home back. The bank agreed to the same terms.
I don’t know if anyone has mentioned this yet, but I don’t see where the big deal is to be underwater a bit? I bought my house 5 1/2 years ago to live in (like I assume a lot of readers here did), not in hopes of a quick profit. I made sure I could afford the mortgage payments when I took it out, again, probably what we all did or at least knew we should do. Whatever amount I might now be able to sell the house for has not affected the monthly mortgage. So it really doesn’t matter to me what the theoretical value of my house is. Sure, I’ve probably had to live in it a year or two longer than I had ideally dreamed of, but that’s primarily b/c of a little event called Hurricane Katrina (and I’ve got plenty of mortgage company issues from that). Sure I’d like to sell it and upgrade to a bigger house and a nicer part of town now that I have a child, but when buying a house you are subjecting yourself to a number of external forces you don’t have control of (economic cycles and Acts of God/ shoddy engineering, gentrification and whatever the opposite is, among others). If you can’t give up that control perhaps you shouldn’t be buying a house. No one is entitled to large profits off their home. So maybe I can’t get the full amount of what I paid for it, but so what? The market will rebound, and I have a place to live I can afford in the meantime. Plus I’ve had a mortgage interest deduction that’s saved me thousands and I have built some equity. Good things have gone better? Yes. Is any of it my fault? No. Regardless of the current lowered resale price of my home I have still enjoyed many benefits that have made home ownership worthwhile.
I realize that many people are in different situations with ARMs, maybe are grossly underwater, or have to leave to pursue career opportunities, etc. But for most of us, so what if your house is underwater?
Actually, in America, the founders of this great country foresaw that honest people can have bad circumstances or make bad choices, and thus bankruptcy is written into the Constitution. People are not supposed to have to remain debtors all their lives. I think if people are hopelessly underwater on a mortgage, they should exercise their contractual option to exit the agreement.
The real problem here is the concept of 30 year mortgages and those mortgages being underwritten by the US government as a way to promote/encourage/make possible home ownership. In many countries you can’t get a mortgage for that duration of time, and only wealthy people can afford to buy homes. Everyone else rents. Banks would almost never make 30 year mortgages except for the fact that they are guaranteed by the government. So basically the banks can’t lose. The only people who can lose are individual homeowners or taxpayers as a collective.
I bought my current house as one step away from a foreclosure. We didn’t use the term short sale back then but I suppose that’s what it was.
Can someone explain to this Canadian why the US keeps on going through these social experiments that never seem to work out? Why not start moving towards banking and other systems that are proven to work in other countries?
http://www.american.com/archive/2010/february/due-north-canadas-marvelous-mortgage-and-banking-system
Also, for future articles – is investing in short sales / real estate in hard-hit areas like AZ and holding on to it a good long term investment? It would be nice to get an impartial view of this, most of what’s out there is written by realtors and makes it seem a lot easier than what people are saying here.
@126 what you quoted is not what I said and not what I argued- don’t put words into my mouth.
I didn’t say they’re getting their cake and eating it too, and obviously it’s in the bank (and the economy’s) best interest for the mortgage to be paid off in full. It may not, however, be in the individual’s best interest.
What I AM saying is that the people in this thread who are saying ‘why should the bank be the one who has to take the horrific loss’ is that in most cases, they’re not. And the banks themselves are WELL aware of this – which is why they make the loans in the first place. They are taking a risk and hoping it pays off. If the mortgage owner defaults, that IS their opportunity cost.
I feel like there are two situations that everyone is treating as one.
1) You’ve lost your job, your spouse lost a job, you’ve taken a huge pay cut – ie SOMETHING has happened such that you no longer can afford to pay your mortgage. In this situation, I think everyone mostly agrees that you need to do something – foreclose, short sale, whatever since you can’t afford to live in the house.
2) You’re now underwater on your home, but you can still easily afford the payments without a change to your quality of life. It’s this case I think that has people up in arms. You can pay your mortgage so why aren’t you?
Also, sort of a side note, I don’t understand why someone would buy a house with the plan on buying bigger within 5 years. Why not either rent for the 5 years, or start off by buying the size of house you actually want? What is the benefit here (besides hoping your house drastically increases in value)?
It’s important to consider that a mortgage is usually done as a contract under seal, which in most states grants the lender a much longer statute of limitations. For example, in Georgia it is 20 years. That’s a very long time to be looking over your shoulder.
I really could give a rat’s behind what people think of me. I pay my debts and am careful with my spending so that I don’t have to live in fear. For those who are not so wise, I bear no ill feelings or harsh judgments.
What pisses me off is when I see people biting the hand that fed them. The bank didn’t mislead you or deceive you. The bank didn’t rip you off. You made a bad decision. If you have to go bankrupt, try to at least learn something from the experience. Those who play the victim card have an uncanny tendency to walk themselves right back into the same situation again.
No need for me to weigh in, as it seems both sides are well represented here. All I will say is that such passionate debate is almost always the main driver of education and change, both of which are clearly needed to clean up this mess.
@132 So what if your house is underwater?
Balloon mortgages and ARMs are a good example of why being underwater is trouble. Many people got balloon or ARM loans thinking they’d refinance before things got expensive. 5 years ago, the idea that you might be underwater after 10 years was ridiculous. Now people are facing the fact that their balloons are going to come due, but refinance is impossible. A person can make every payment on time for 10 years and if they are underwater when the balloon is up they are foreclosed. After 8 years, why would that person not get a 2 year head-start and start the foreclosure rather then throwing huge sums at an ever-decreasing equity?
I think so many people are judgemental of folks considering foreclosure because they’re not in the situation. So many of these comments say things like “I guess if you’re in situation x,y or z, then it’s OK. And then they go on to prentend that situations x,y and z are not common and that most foreclosures and voluntary foreclosures don’t involve x,y and z. Look around at the 10% unemployment rate and you’ll see that lots of folks are pretty desperate right now. And listen and realize that there are other situations that you might not have considered.
As my example in this comment, many of these voluntary foreclosures are an attempt at getting the situation under control before it spirals into an even bigger mess.
This article is a little disturbing. To say that it is understandable to walk away from a mortgage because it is a bad investment is absolutely crazy and it does add to the poor economy right now. I do not want to take away from the bankers responsibility at all. Some of the bankers and real estate agents alike should be in jail for what they have done. However, lets look at it in another way. What if, when times are good, your property doubles in value. What are these people going to say when the mortgage company comes to them and says “hey, your house is worth twice what we loaned you. We plan on increasing your principle next month accordingly”. I imagine these same people that have walked away from their mortgages would be pissed.
“Also, sort of a side note, I don’t understand why someone would buy a house with the plan on buying bigger within 5 years. Why not either rent for the 5 years, or start off by buying the size of house you actually want? What is the benefit here (besides hoping your house drastically increases in value)?”
The idea of a starter home certainly isn’t new. My parents generation often moved up after five or so years to a larger home. A starter home is a valuable concept and has benefited people in the past. I think the problem came when people’s starter homes were already 25% or more of their take home pay. This doesn’t really allow you to save that much for another down payment. You are thus relying on unprecedented appreciation to move up. The dramatic rise in home values in the mid 2000s caused this.
My block is a good example. All the people around me, who have been in their homes since before the housing bubble paid around $60,000 or so for a comparable home. We paid $165,000 for our “starter” home in 2007. Oh, how I wish we could have paid $60,000 instead, but such deals were not available by the time we could buy. So we will be in our starter home for much longer than we intended. We’re okay with that, and I think you will see more people doing this.
But back to the original question. The benefit is that you build up some equity and hope for reasonable appreciation. By saying that renting is an equally viable option, you are overlooking all the other pros to home ownership like control over your domain and the reality that in many places in the country rentals just aren’t that appealing. In my neck of the woods, you either have to rent in a multi-family unit or you end up paying as much in rent for a free-standing house as you would for a mortgage. This reality motivates people to buy a starter home, even if they intend to move up in five or so years.
Home ownership, like finances in general, is not always about dollars and cents. We often talk on this site about how it might be more financially prudent to give up that daily latte (to rehash a tired example), but the enjoyment of the latte trumps the crude financial benefit of giving it up. I think home ownership also swings that way sometimes. Yes, it might make more financial sense to rent for longer, but quality of life is important too.
Is it illegal to walk away from your mortgage? I see people comparing it to stealing from defrauding the banks. Can banks pursue legal steps against someone who strategically defaults?
Some might argue even though it’s legal, it’s still immoral. But I think if the cost of keeping a promise is high enough, it’s forgivable to break that promise. Let’s say you promised your mom to come home for Christmas, but your employer doesn’t let you go. I’m sure it’s not immoral here to disappoint your mum? Similarly, is the good karma of keeping your promise and continuing to pay the underwater mortgage worth the five or six figure sum that it will save you? Am I a bad person for weighing money against promises?
“What are these people going to say when the mortgage company comes to them and says “hey, your house is worth twice what we loaned you. We plan on increasing your principle next month accordingly”
If that was written in the contract, I have no doubt the banks would do that in a heartbeat.
There are two types of problems being discussed here. The first is folks who can pay their mortgages but elect not to. The second is folks who cannot pay their mortgages (generally because the economy went south or they got sick) and need to walk away. Most — though not all — commenters agree that these are different, and that the first is worse than the latter.
That said, I find the arguments about the moral/legal implications of contracts fascinating. Chickybeth makes a great point by asking if you’ve ever broken a cell-phone contract in order to find a better deal. How is this different? she asks. But another commenter pointed out that when you buy a new car, you’re upside-down on that almost immediately, but we don’t consider it right to walk away on that deal. How is this different? I think we could have a long, fruitful (and probably contentious) discussion about the moral obligations of contracts.
To be honest, though, the arguments about morality aren’t compelling to me. Like Nicole — who has apparently seen this discussion many times before — I find the whole “it’s immoral” thing boring. Sorry, but it’s true. I’m not saying it is moral to walk away from a mortgage, just that it’s a dull conversation. (It’s like arguing about abortion or Mac vs. PC or any other thing where nobody’s going to change their minds.)
After reading all of these comments, my biggest concern is that those in the know seem to think that Sierra’s article is sloppy with the facts. That’s a problem. A few commenters have pointed out that mortgage adjustments aren’t as easy as Sierra makes them sound. Lizzy (#109) is particularly harsh in her criticisms. I wish Sierra were reading the comments so she could respond to them!
Finally, it is hugely ironic indeed that the Mortgage Bankers Association found itself underwater on its $79 million headquarters (for which it paid only 5% down). Their solution? They got out of the loan. Details aren’t clear, but it appears they did a short sale. Talk about “do as I say, not as I do”…
In response to:
“Also, for future articles — is investing in short sales / real estate in hard-hit areas like AZ and holding on to it a good long term investment? It would be nice to get an impartial view of this, most of what’s out there is written by realtors and makes it seem a lot easier than what people are saying here.”
http://www.usatoday.com/money/economy/housing/2009-02-12-vacancy12_N.htm
1 in 9 homes in the US are vacant, and its even worse in Arizona. There are tens of thousands of excess homes, and more falling to foreclosure every day.
If you want a second home to vacation to in the wintertime, then now is a great time to buy. If you are looking to invest… I would pass.
@Jane – 145.
Thanks. I’ve never spent much time thinking about buying a home. I’m a grad student. I’m not in a long term relationship. And I don’t know where I’ll be in 2 years. For me, renting makes the most sense.
It is interesting to hear what’s going through peoples minds.
Perhaps someone else has covered this and I missed it. There is an element of morality with foreclosures that exists even if you don’t let your morality affect your dealings with your lender:
When you do anything that reduces the value of your home (walkaway, fail to make payments, renegotiate, or sell short) you have a direct effect on your neighbors because any of these options will reduce the value of their homes.
Just something to think about that I just realized (and have had an issue with in the past).
Case 1) We’ll call him John, lives in CA, near the bay area. He has his real estate and lending license. His home’s value is rocketing through the roof @20%. So he continues to take out second mortgages (cashing out his ‘equity’) to invest in other opportunities. When the bubble burst he walked away, having full well the money to continue to pay the debt. He is now renting, or maybe he’s living in one of the other smaller properties he purchased with the cashed out equity money. What he did was perfectly legal – and considered by some to be financially savvy. (Personally I think it was morally questionable and part of a disturbing trend toward doing what is permissable rather than what is right)
Case 2) We’ll call him Sam, purchases a house in good faith near his office, a reasonably priced and sized home for the area and his family of 5. The bubble bursts, and while he still has a job, he is interested in pursuing an oppportunity halfway accross the country that could result in significant financial and personal gains for his family. They put the house on the market for what they bought it for, it doesn’t sell. They lower the price to what they owe, it still doesn’t sell. They pay 30K of their saving towards the loan in order to pay down what they owe so they can reduce the price, it STILL doesn’t sell. They decide that the opportunity to move is more important than shackling their family’s financial future to a house that will not be worth more than they owe for at least 20years. Should they have stayed, not pursued advancement, what if he didn’t have a job lined up, is that good enough reason to throw more money at the problem?
Personally I own a second home that I could probably sell for what I owe (despite my down payment and the fact that I’ve been paying on it for 9 years), if I continue to make my payments, it will continue to be worth approximatly what I owe, which means that I am essentially paying a large sum of money in rent – not to mention upkeep. A lot of my neighbors have decided that it’s not worth honering the debt, I personally like having the home, so it’s not the best investment, I hope someday I won’t owe as much as it’s worth, and I’ll recoup some of my costs, but maybe my 15year ballon will come due before that, and I’ll be unable to refinance because the home is worth half of what I orginally loaned and despite paying off half the loan I need to have 75% loan to value to refi a second home.
I appreciate the article, but I do think that the picture of doing a short sale or mortgage modification are painted as significantly rosier than they are. The only people I know of who have gotten modifications are those who have demonstrated (through divorce, loss of income or medical issues) an INABILITY to pay the mortgage.
JD
It is very clear that Sierra has a “less than perfect” understanding of the issues her post brought up.
You may want to go read the blog Rortybomb (rortybomb.wordpress.com) and/or CalculatedRisk (calculatedriskblog.com) to get a better understanding of the ins and outs of mortage default, mortgage and promissory contracts, and the strategic/tactical policy(s) in place that deals with this issue.
Both blogs have a huge archive of pertinent information, and have a lot of interviews with policymakers, legislators and analysts who know more about this subject.
On a factual basis, I was concerned about this post for several reasons.
1. No attention is given in the body of the post of the difference between your mortgage agreement and the promissory note that you sign when borrowing money to buy a house. The house is not collateral to be exchanged if you default. There is a lot more to it than that, and this post didn’t even touch the surface.
2. As many people have brought up, even in a non-recourse state – you can and probably will be 1099’d by the bank if they foreclose and the auction value is less than you owed in your promissory note. You will be liable to pay taxes on the difference between the sale amount and what you owed and there is no way to escape the IRS.
3. Many banks (overwhelmed by the sheer numbers of defaulting mortgages) aren’t moving to foreclose even after the debtor defaults. If you default, but your bank doesn’t foreclose on you – you continually show as a person more than 90 days in arrears on payments (continually trashing your credit scores) without an end in sight for you (unless you declare bankruptcy opening up another huge can of worms). Banks are not obligated to foreclose, even when you default. That is an option for them, but not one they always take. There are tons of complications that can arise from this situation – again it wasn’t even brought up.
4. There also seemed to be some serious back and forth within the article of discussing strategic default with distressed default. It was muddled and that didn’t add anything to this topic.
All in all, a very disappointing post, and one that didn’t bring out the best in conversation in the comments.
I hopefully will not have to do a “strategic default”, but will if it comes to it, with no qualms. My situation:
1) Bought the house 5 years ago. We didn’t expect to buy without a down payment, but renting in this college town was expensive and depressing. We bought less house than we could (even without a down payment), got a mortgage with 0 down, fixed 30 year, and a reasonable interest rate. This would never happen now; someone must have blinked.
2) We’ve paid extra each month, paid down quite a bit of the principal.
However, we now found ourselves in the position of moving abroad for work this summer. We’re putting about $8000 into the house to fix it up for sale. We aren’t upside down, but won’t make a huge profit.
Hopefully, we’ll sell it. We’re pricing it to move and just break even. If we can’t sell it, we can try to rent it, but I won’t try that for long. I don’t have it in me to manage a house in this country while living in another (more expensive) one.
I work for a real estate developer.
Ah, remember those heady days in 2004 and 2005 when home values were going up and up with no end in sight? Everybody wanted to jump on that bandwagon – the media, developers, real estate agents, lenders, sellers and buyers.
Imagine you’re a homebuyer in 2005. Real estate is rockin’ the joint. Friends who bought homes just two or three years ago have doubled their investment. Interest rates are good and the headlines keep telling you that median home prices are up another 8-10% each quarter. Clever mortgage products enable you to qualify for your dream home with little down payment whether you can actually afford it or not. Warning signs? Bubble schmubble! Everybody insists you should BUY NOW! It’s the best investment you’ll ever make. I personally wrote advertising copy that said just that.
So you buy a brand new home for, say, $500,000. There are many parties to this transaction – the builder, the lender, the seller’s broker, your realtor, the appraiser -all of whom agree that the value of the home is $500,000. All of the comparable values of other homes in the market support the $500,000 value. The appraiser evaluating the property gets paid to submit a value of $500,000. The builder gets paid by the lender when you take out your mortgage at the $500,000 value. The broker and your realtor earn commissions based on a $500,000 value. Your insurance carrier write a policy based on a $500,000 value. Governmental agencies receive transfer taxes and property taxes based on a $500,000 value.
Now fast forward to 2011. Your home now has a value of $200,000, but you still owe more than $450,000. Clearly, all of the parties to the transaction shared in a delusional error – that the $500,000 value of the home was realistic, supportable and sustainable. Some of the parties to the transaction no doubt encouraged the delusional thinking in order to profit from the transaction. Everybody involved in the transaction made a mistake, but if you continue to pay off your mortgage you, and you alone, will pay for that mistake. The other parties PROFIT from the mistake. That hardly seems fair.
That being said, if you plan to be in the home long term, and if the income which qualified you for your loan has not significantly changed, and if you were not duped into a sleazy loan product, I think that paying your mortgage is the honorable course of action.
On the other hand, if you have lost some portion of your income, you need to sell but can’t, can’t refinance, can’t modify, your lender put you in one of those slick, sleazy mortgages, your financial and mental health are threatened by your upside-down home — then BAIL! Bail without guilt. The realtors, builders, sellers, appraisers, media, government, and most especially the lenders are just as much to blame, if not more so, for the mess we are all in now as are the individual homeowners that got caught up in the heady bubble atmosphere.
I am in agreement with @Nicole who suggested that I think people at GRS would appreciate more posts from Sierra that address issues with which she is more familiar, like finances and family/children. A topic like this one, although it ended up being quite popular for comments, would be better addressed by someone who has done a lot more research or who has a lot of personal experience. Also, as per JD’s recent post about blogging, the more personal the post, the more interesting it is. I keep hoping that Sierra will find more of a unique “voice” here.
I’ll make a couple points.
first, you can’t walk away from a mortgage. Because you don’t have one, the bank or lender does. I have also noticed the term mortgage thrown around casually. Others saying they “got” a mortgage, or they “have” a mortgage, or they “applied” for a mortgage or they “pay” a mortgage.
Wrong.
The bank has the mortgage. You as a borrower have a loan.
Now, on to the contract. Every single commenter on here who implies that someone who doesn’t pay their loan, or who defalts is somehow breaking their contract doesn’t understand contracts very well.
The contract, commonly know as a trust deed or deed of trust is multiple pages, usually 10-20. Most of the verbiage in the Deed deals with default remedies. That means that most of the contract deals with what happens if you don’t pay.
Why do you suppose that is?
Also, the interest rate. Most everyone who borrowes for a home pays an interest rate, also know as a “risk premium”
Why do you suppose it is called a risk premium?
Because banks have done this before. It’s what they do every day and have been doing for ages. Banking is the world most profitable industry in history. And there is a reason why.
Banks understad the risk, that’s why you get charged a risk premium. Banks know some people default, that’s why what happens if you do is written in as part of the contract.
When someone defaults, they are not breaking the contract, they are simply enforcing a separate part if it. The contract doesn’t say pay or you are immoral. It says pay or we take the house back.
So either way (pay or default) your are fulfilling the contract, it just depends on which part.
And the ethical or immoral argument doesn’t hold water. The bank being allowed to take your home even though you are current on the payments, that would be un ethical. You being allowed to stay and keep the home even though you stopped paying th epayment. That would be unethical.
But simply following the agreement both parties signed at the onset is hardle unethical or immoral. And although foreclosure is uncomfortable for some and not desired, it still is part of the agreement.
And why you default does not matter. It may matter to commenters and pf bloggers, but as per the contract why one defaults matters zero. Because the bank doesn’t care. Just like they don’t care how you make the payment, they don’t care how you can’t.
As for contracts, we default on them all the time. Cell phones, cable have been discussed. Divorce, Speeding or running a stop sign. Overdrafting your checking accout. Lots of contracts with penalties or consequences for default.
Jason,
See my responses below to your comments regarding those of us who see a moral issue in this – I believe you called us hypocrites…
You said: “How many employers make the moral/right decision when it comes to paying employees or laying people off or promoting people or shipping job overseas b/c it would cost less.”
If this is a moral issue, which I agree it is, then why is not paying your mortgage not a moral issue. It is you who are the hypocrite. What you are saying is that because one company makes an immoral decision, we should make one right back at them. That solves nothing.
You said:”How many business go bankrupt or fail and walk away from a lease or contract.”
My comment would be the same as my previous one. Two wrongs don’t make a right.
You said:”A corporation pays and financially supports Congress to create laws that are favorable for its business even when it harms the community directly or indirectly through various means such as environmental damage, plant closing etc… This sounds like the “right” thing to do.”
Same comment.
You said:”How many businesses get tax abatements from a city and then leave once they stop providing the incentives.”
Same comment.
You said:”Why do we allow companies or corporations to constantly screw over the cities, taxpayers, citizens and employees.”
You said:”Oh that is just business…. Well when I walk away from my house that is just business…”
So basically, you’re furious for companies for being a jerk, so you’re going to be one too?
You said:”I don’t see you soapbox moralists screaming on here every time an insurance company decides to not give insurance to someone with a pre-existing condition, or to deny someone a liver transplant b/c it isn’t covered by insurance. ”
My comment: Insurance companies are selling a product. The primary goal is to make money on said product. It is not immoral to exclude pre-existing conditions no more than it being immoral to deny someone a mortgage that doesn’t have the ability to pay it back. The goal in both cases is to make money, not lose money, so it would be financially unwise to sell a product to someone when it will cost more to provide the product then you will make on the product.
By the way, a hypocrite is someone who condones a behavior on one hand and condemns it on the other. Telling people that not paying their mortgage CAN be immoral would only be hypocritical if one supported businesses not fulfilling their obligations. The same morality applies – do what you promised to do.
Neighbors of ours just walked away from their mortgage. The house was GIVEN to them 15 years ago, they refinanced 4 times at least, went all over the country on lavish trips, husband and wife did NOT work. They got a large inheritance when a relative passed away 5 years ago. Finally all the money ran out. The husband took a job 1500 miles away,they rented a truck and left. They did try to sell this house for $550,000, someone bought it for $229,000, in foreclosure. Here is the kicker for me. Due to facebook, I get to see all the pictures of their NEW house, with all the NEW furniture, and the NEW car in the driveway…..
I was thinking what a couple of other readers were…that unless you’re trying to sell, it doesn’t much matter that your home is worth less than what you owe. You’d need a much more compelling reason than that to walk away from the loan.
I read about people freaking out because they owe more on their cars than the car is worth, and again, it doesn’t matter unless you’re trying to sell or you end up totalling the car.
This is an unfortunate consequence of difficult to understand loans, and predatory lending. However, none of that excuses the borrower from their obligations. People should never take on financial obligations they do not understand. But not everyone took on a loan they didn’t understand or couldn’t afford. For many, unfortunately, circumstances changed. They lost a job, etc. But the speculative housing bubble, fueled by exotic mortgages and no money down lending was the root cause.
Some people walk away because of changed circumstances and I think that is OK, I am sure it is not easy for them. It is the people on here that walk away just because the value of their home went down (circumstances didn’t change), or the people that would rather blame a bank for giving them a loan. Sheesh People! This is a finance blog! You are responsible for your own decisions. They guy on the corner might give me drugs for free, so 3 years later I am to blame my ruined life on the pusher???? Seriously C’mon.
Banks and Government had their part in it but I am shocked at how many people are walking away just because it “strategically” benefits them financially, rather than some sort of hardship. And to blame the bank is ridiculous. Even a very uneducated person can do the math on how much of a house they can afford. The mortgage is not overpriced, you made a bad decision. It is the home that was overpriced, not the mortgage.
Again, another GRS article with not enough information, so everyone is left speculating on the situation at hand. How much does he owe? How much is it worth?
If there is a huge discrepancy, then perhaps the bank might consider reducing a portion of that mortgage. If we are talking only 10%, then there really is not much of a discussion. This is a down market and things like that happen. If you are able to pay off the mortgage tomorrow, I could see why that matters, but in the long run (15-30 years) the housing market will more than likely regain a lot of those losses. If it’s on the market, take it off. Wait a few months and then put it back on. Keep doing that until it sells.
I purchased my home in Florida 5 years ago. Currently, my home is worth less than 40% of what I owe on it. Have I considered walking away? Sure – BUT to me its a moral issue. I bought the house and signed the contract. Do I want to continue paying the mortgage each month? Not really, but I do because it is my moral obligation. I can easily afford the payments as my family income has increased over 300% in the past 5 years. Instead of a strategic default, I am currently in the process of building my dream home. When it is complete, I will rent out my current home until I have equity and can sell it. That may be 5 years from now, or 35. Either way, I’m doing the right thing. Unless you have had a huge change in circumstances, you should fulfill your moral obligation to pay your mortgage.
It is very easy to pin the blame on individuals for making bad decisions, but honestly, are people suggesting that every homeowner struggling with their mortgage payments right now is to blame for their situation? I currently own a house in Las Vegas (a small, reasonable house that was well within my budget at the time). That house is now over $100,000 upside down and I haven’t been able to sell it, despite the fact that my husband and I moved out of state years ago. Our mortgage is an adjustable rate, but because we have good credit, the bank won’t even consider letting us refinance into a fixed rate mortgage. Yes, we can make the payment, but the ARM is a noose around our necks every day, and we can’t plan for anything with any certainty because we’re at the mercy of the interest rate. Is someone really suggesting that I should have foreseen a massive recession that would leave my house worth practically nothing, when most professional economists in this country didn’t see it coming?
I wonder if all the people talking about “morality” are in the position of being underwater on a home?
We’re doing our best to hang on. We bought when we had no business buying (67K in credit card debt, high debt to income, etc.), but we spent several years digging ourselves out (we have zero CC debt now) and were on track.
Then we needed to move for our job. Gosh, if we had just tried to sell 6 months earlier.
Well, we moved and became unwilling landlords. Tried to manage it ourselves across the country, but ended up with a deadbeat. Currently using a management company who we don’t get along with.
It’s just not fun. Hubby wants to walk away, but I feel that we can’t. We signed the papers and we can currently afford to cover the mortgage if the house went empty.
We are about 30% underwater. If I had the money I’d just sell and take the loss…but it’ll take years to save up that amount of cash and I’m not going to use a credit card to do it. So what do we do???
We’ll keep trying to rent it. I’m hoping in 7-10 years we’ll have bounced back and just be able to break even.
Unfortunately, it’s an ARM mortgage and we can’t refinance….so fingers crossed that interest rates stay low.
So please, just know that some people are really trying.
If I found myself unable to pay my mortgage, I’d try to short-sell it first, then let it be foreclosed on before walking away from it.
If I could keep paying it, I would continue paying it, no matter what the value of my house. I bought my house in 2007, and I’ve done a lot of updating (i.e. electrical) and renovating (i.e. kitchen). On paper it’s probably worth less than what I bought it for, but I couldn’t care less. I bought it with the intention of living in it for a long time – what do I care what its value is unless I’m planning to sell it soon? Values go up and down, and I’m not going to stress about it.
Wow, this article sure stirred up more of a tempest than I expected. I’m really surprised by all the moral righteousness from readers. Like J.D., I’ve never defaulted on any debt. I don’t think I’ve ever even made a late payment. But
I’ve also never been in such desperate financial straits that I’d have to consider letting my home go into foreclosure, nor have I been trapped in a mortgage that ate up thousands of dollars a month for a house I wasn’t living in.
If I did find myself in one of those situations, I wouldn’t walk out on my mortgage. I’d try to negotiate one of the solutions I wrote about in this article. In fact the whole point of the article was to show people who are considering doing something as drastic as mailing the bank their keys and walking away that they do have other options.
Although I appreciate the intent to be informative, some of the advice is horrible. I am a bankruptcy attorney. I deal with this every day. Banks are not willing to work with you most of the time. People who suggest as much don’t know very much about how the mortgage industry is set up. Your “mortgage company” generally is not the lender. It is merely the servicing company. Most of the money you pay to it goes to the lender and it keeps a very small fee. Your “mortgage company” ultimately could care less if you let the house go. If you let it go, it is going to make thousands of dollars from the lender to conduct a foreclosure sale. It would take years to make that in general servicing fees. Further, the lender is generally insured through PMI insurance. So, if you walk the lender is going to get paid in full. That is better for the lender then agreeing to lower the payment for you. Anybody who has tried to get a mortgage modification knows it hardly ever happens.
Further, short sales are bad ideas for ninety percent of the people. There are two types of foreclosure states, recourse and non-recourse. In recourse states if the bank forecloses, there is no liability to the borrower. The remedy to the bank was the foreclosure. At the time of giving the loan, the bank was in the better position to know the value of its security. In recourse states the bank has the right to go after the borrower for any deficiency. Most states have a redemption period after a foreclosure sale where the borrower can live in the home and try to decide whether to save the home if he or she chooses.
A short sale in a recourse state generally doesn’t forgive the deficiency, and in a non-recourse state often times makes a person liable for money where otherwise the person would not be. Furthermore, once you do a short sale you have to move, thereby giving up any redemption right. A redemption right can be quite valuable because often times you can stay in the house for months not paying anything while saving up money. Moreover, sometimes a bank in a foreclosure sale buys the house back itself for what was owed even though market value is much less. In those cases, you wouldn’t owe the bank anything.
This message might seem self serving, but the reality is a little bit of knowledge can be dangerous. Most attorneys don’t charge a consultation fee. When sometimes hundreds of thousands of dollars are at stake, you probably should seek legal help. The banks have. Most other professionals simply have no idea or are self interested. For example, relators make money off a short sale, but don’t necessary know or care about the potential harm done by the short sale.
Finally, when walking there is no morality to consider at all. It is a civil contract. The consequence of the breach is laid out in the contract that the bank drafted. Further, the Banks have much better lobbyists writing the applicable laws. Moreover, the Banks acted unethically in undermining the value of people’s homes by giving out loans in the hundreds of thousands to people under false pretenses. If the Banks hadn’t done so, people struggling financially could simple sell the house as up until the Banks got greedy the market always went up. Remember Robin Hood is a hero.
Stephen:
It isn’t a moral issue for two reasons: First, the agreement people made with the bank that was drafted by the bank sets out the ramifications of defaulting on the loan. In other words, defaulting is handled under the agreement. Second, most people wouldn’t be in the situations they are in if the banks hadn’t so irresponsibly given out loans driving the value of everybody’s homes down. The same banks now can’t blame you for having to make hard financial decisions largely in response to the bank’s irresponsibility.
Moreover, many people were given loans under false pretenses. For example, it was common practice three years ago to sell you an adjustable rate mortgage promising you that when the rate was set to adjust you would be able to refinance. Nobody discussed what would happen if the value of the house dropped below what was owed on the mortgage. Further, for as long as I can remember people have been told that a home is one of the smartest investments one can make. People were told they always go up in value. Not so.
The central bankers behind the United Nations have a specific, documented-on-paper plan called “UN Agenda 21” which ultimately seeks to remove private property rights worldwide. The housing bubble and crash was intentional and the mainstream media coverage of the reasons why this happened was intentionally falsified, because the central bankers own controlling stakes in the mainstream media.
This same type of communist-style Hegelian methodology is being applied to healthcare, agriculture, climate change legislation, and the US dollar.
I just gave you the truth. What you do with it after that is not my concern. I am just a messenger.
I can tell you I am not a lunatic, a nut case, or a fringe conspiracy theorist. This is the real conspiracy deal.
Hmmm.
Is it anyone’s business to stick their nose into other people’s financial matters and place judgement? I think not. That is a sin.
Is it not a sin to attack an individual you know regarding morality issues when you wheel and deal every day of your life with corporations that care nothing about you or your community — and in many cases cause harm?
Is it not a sin to trust everything you watch and read in the media and then act on it without discovering what is the actual truth, on your own?
Let he who is without sin cast the first stone. Judgement itself is sin.
Brent T. White has great book on underwater homes/strategic default. “Underwater Home: What Should You Do if You Owe More on Your Home than It’s Worth?” It gave me a lot of good information and prospective on my personal situation. I am 90K underwater and feel that just because I made a bad finical decision in buying the house (both in timing and type of loan) it is not smart to continue making bad finical decisions by staying in the house. I am willing to take any consequences that might come from walking away. This is a interesting article thanks Sierra.
Another thumbs down for the article – it is badly researched. I personally spent 8 months trying to negotiate with my lender for a temporary extension on payments and then another 5 trying to get their approval for a short sale. The wouldn’t answer the phone, wouldn’t reply to mail and the 5 times out of 137 – yes, I know exactly how many times I called – calls I actually got a person, they couldn’t help or give an answer as to how I might find someone at the mortgage servicer who could. All they suggested was to call back because the lines were all busy. Getting a short sale approved is a joke. I can name at least 10 people I know personally who have had the same types of problems and any HUD approved housing counselor or real estate attorney will tell you the same thing.
All the writer here needed to do was ask a few people who have defaulted on their loans about the process and she would have likely received an earful about how impossible it is to make arrangements with the lender. Instead she trotted out the same tired bromides the mortgage industry tries to sell about how they want to work with borrowers. Sierra could also have spoken with a bankruptcy attorney and/or a CPA with experience with this issue for better information as well.
I don’t know who Gumbinger the mortgage expert is but he is dead wrong about banks expertise on workouts and willingness to negotiate payment plans or short sales. Even the most superficial research on those issues would have revealed that to the writer here.
What does it mean to walk away from a mortgage? Do you mean that you sell it because you can no longer pay? Why should that be shameful?
Or do you mean that you no longer make payments even though the house is still in your name?
What do you mean?
This is a timely article for our family – we live in Las Vegas, bought high in 2005, and are about 20% underwater, and that’s after putting over 20% down for a 30 year fixed mortgage. We did everything “right”. And, because we can (and can’t imagine not) we pay our mortgage.
The frustrating thing for me is the lack of help by the government programs that have been put in place. We should qualify, no question, for a HARP refinance. BUT the banks are allowed to charge any fees, closing costs, etc. for this modification, and there is a substantial rate premium. All I want is to refinance to the prevailing rate. I don’t want a write-down of principle, I don’t want an A/B note, I don’t want anyone else to pay my debt. But I’d like to be able to get these great rates I’m hearing about. The banks are just terrible. I have documented phone calls with our mortgage carrier, gone through the process, and by the time they add on their fees and the premium on the rate, it just doesn’t make sense.
By lowering rates for responsible homeowners, banks would discourage “strategic defaults” (that’s lipstick on a pig if I’ve ever heard it), reward responsible homeowners, help neighborhoods to maintain their value, keep families in their houses, and prevent themselves from having to deal with foreclosures, which have to be a pain for them. I can’t understand why an across the board rate decrease, or at least working with responsible homeowners to lower rates, isn’t being considered.
The existing government programs don’t work. They just don’t. Let’s stop pretending that they are anything but nice words. I get my hopes up every time one comes along, and it’s just another empty promise.
In my suburban neighborhood, there have been many strategic defaults. They then sit idle for months, while the banks try to figure it out. Meanwhile, the former owner has gone on with their lives. NV is a recourse state, but you only have 6 months after foreclosure. And banks are not going after anyone right now, because they (apparently) don’t have the capacity. Every time one of these houses goes into default, MY house value decreases. The bank shares that responsibility.
By the way, in the Las Vegas Sun newspaper today there’s an article that states that almost 25% of the homeowners in Vegas that “strategic default” are able to pay the mortgage. That’s WAY different than defaulting because of illness, job loss, or other unexpected expenses. The article is worth a Google.
What a terrific discussion this is. A great website, and this is one of the most interesting comment sections I’ve seen. I wish it wasn’t so interesting to me, since I’m living it, but I’m glad that these kind of discussions are happening.
IF walking away from a Bad Investment (that is not worth what is owed) is a good thing then everyone I know that makes payments on a car that is upside down should walk. I see many sides to this problem The banks made it cheaper to buy then to rent (no down payment and paid closing cost) / (a full months rent Deposit,first month and last month rent) and people thought that was great. They had no problem getting equity loans to spend on STUFF as the real estate increased in value. (Lots of smiles) The banks are not the only ones who made a killing out of rising real estate prices the sellers did to, and many of the ones that are crying now are the ones that did back flips when they made huge profits off the home they sold to purchase the one they can’t pay. The ones who are walking away are mostly the ones who used the system to make huge profits, now that the gravy train has crashed they are taking their profits and running. Everone wants to blame someone, but no one held a gun to their head and made them sign. Most did more homework reseaching a new TV then they did on their loan and home purchase. I have seen the mad people the bank turned down, they never thank the bank for not allowing them to get in over their head. We just had article on here about a couple who was thinking of buying their (Dream Home) when they were not ready, who will they cry to when they have a child or an unexpected expense and they cannot afford their home?
No one wants to stand up and shoulder the blame. In the depression in the 1930 no one blamed anyone or looked to the goverment to save them. they just worked to fix it and get by the best they could.
It is all about MONEY no morals anymore, and that’s why we’re in the mess we are in. So go ahead and blame the banks if it makes you feel better but down deep, YOU KNOW BETTER.
We built a home at the top, but we have paid really hard on the loan cutting the term in half since we took out the loan. Is the home worth what we paid for it to be build? Maybe/maybe not but frankly I don’t care it’s our home not an investment property that I expect to make money on. You did it, not the banks so grow up and act like an adult not a little child.
We have renters that try to rent from us, and we will not rent to them because they cannot afford it. Are they happy when we tell them they cannot afford it, NO!!!! they tell us that it is not our place to decide as long as they think they can pay we should reat tothem, But if we rent to them against our better judgement and they cannot pay their rent. and we kick them out we are the bad, mean, Landlord.
I’ll join the Nicole crowd of bored by the predictability of the discussion. Religion, politics and mortgage defaults?
Reading the highlighted comments (and ones JD replied to) here has been very interesting. I loved chickybeth’s cell phone contract analogy, but more so lil’s car loan analogy. An important distinction from the cell phone situation is that here we have a secured loan where the remedy for default is foreclosure and pursuit of a deficiency judgment. Presumably, the house is now valued at a lower amount than at the time of purchase, and the chances of actually collecting on a deficiency are low, so the bank’s recovery is variable and relatively low. On a cell phone contract, there is no collateral, but instead you have agreed to fixed, liquidated damages (that is, the cancellation fee), and in a small enough amount that having it charged to your credit card, the carrier is pretty much guaranteed payment. Also, the cell phone contract gives you the option to cancel and pay a fee, whereas the mortgage calls for you to make timely payment, with foreclosure coming into play only upon DEFAULT. I think the car loan analogy is more apt. Again, I’ve really enjoyed reading the highlighted comments here today.
I frankly don’t have much to offer on the moral argument that hasn’t been made already, but this is both interesting morally/emotionally and from a nuts and bolts point of view as well.
We are underwater by about 40%. We bought the house about 2/3 of the way in what I would call the price escalation period. I clearly remember thinking after it had climbed another 20% after we bought that this was irrational and could definitely drop…..gasp….maybe 10%. Whoops.
I haven’t lost my job and we can make the payments. I don’t plan on defaulting or pursuing a short sale, however, I would like to put our mortgage into a 30 year fixed rate loan at current rates (or slightly above due to it being upside down). Our loan is actually a 7 year adjustable so in 2012 it will go from a fixed to adjustable rate mortgage. Having a fixed rate loan would give me the flexibility to move for work if needed and I could rent in my new location while I rented out this home until it recovered. (I calculated it will take approximately 13 years with normal inflation from today’s value).
Enough background. What I found fascinating is that the bank is completely uninterested in talking with me. When I pursued refinancing options with them, through a branch, the original loan officer, and their 1-800 number, they sent me every form for a short sale procedure even though I was very clear that I didn’t want to short sale and was not asking for a principal reduction. Note: I do understand I’m underwater, but was asking for a refinance from the same bank so I thought they really have no more risk due to a “new” un-collateralized loan.
I don’t want to name the bank as I don’t have all the facts yet, and want to make it clear that I have not independently verified the following information, so please note that. One of the loan officers at the bank admitted that because the bank that I took the mortgage out with just services the loan now (they sold it after I closed), if I short sale or even foreclose they would essentially get a large one time serving fee and then be done. In short, they wouldn’t make as much money as if I’d pay my mortgage for 30 years, but they would make substantially more money sooner. The only people out are the holders of the note. Again…I have not verified that since I don’t have the contract between my bank and the purchaser of my note.
I’ve been pursuing the paper trail to figure out who actually owns my mortgage so that I can contact them. While I think my chances are slim that I could actually negotiate something with them for a fixed rate, I’m now just fascinated that I make a payment every month to Bank A and they either don’t know or won’t tell me where the money goes.
I get correspondence every so often as a result of half a dozen phone calls, but to date they won’t send me the information I’m requesting or tell me that the can’t/won’t. I’m giving it another round of calls, but will have my attorney write the next letter. I do feel as if they are trying to wear me down so I go away. The more I dig into my situation the more interesting it becomes. From the responses to this article I can see regardless if folks are underwater or not a lot of people find this topic interesting.
I think many commenters are ignoring the word “strategic” in “strategic default”. There isn’t some epidemic of folks walking away just for kicks- that’s not strategic. There is no benefit to destroying your credit and incurring thousands in fees and still being required to pay the 2nd mortgage and taking tons of time to do mountains of paper work. It’s strategic because it’s the best choice in the situation-and the situation has to be pretty dire for all the hassles and expenses of foreclosure to be the better option.
Anyone who goes through this, does it because they feel they have to. Commenters keep saying that it’s only moral in situations x,y,z. Who are you to decide what the only acceptable situation is, without having lived in someone else’s shoes? Every single person has a story and a situation and you don’t know their story, even your best friend or your cousin or your best friend’s cousin’s neighbor. These comments amount to nothing but rumor and gossip. There is always more to the story.
I know I’m late to the party here, what with 180+ comments already on the board. But as one of those “Strategic” defaulters myself, you should understand my position.
When I bought the house I have defaulted on, my wife and I both made ok, but not great, money. I was in the middle of putting myself through school and we had just had our first child. So why did we buy?
Because at the time (2005) property values were skyrocketing. Every month home prices would go up 10%. We looked at some new development and they would hold drawings for lots, and cross out the prices on the flyers and hand-write in the new price. We figured it was either buy now or be renters forever (a technical renter, not a semantical one.)
So we bought a townhouse at 66% of the maximum loan we were approved for. Which would come in handy much later.
I did graduate from college with a good degree and got a good job, and am currently earning about what my wife and I earned together. Which is a good thing, because we now have three children, so my wife stays at home.
Well, with our monthly debt obligations, other bills, and the mortgage, we were left with about a $40 cushion each month.
Let me tell you, that’s not a very large amount of money. It meant we could not afford life’s little pleasures, save for retirement or contribute to a college fund for any of our children.
But since the mortgage payment fell under the magical 31% mark, I knew the bank would not do anything for me.
I did, in fact, try to negotiate at least a lower interest rate with the bank, reasoning that they’d rather do that than foreclose.
Nothing. Nada. The bank’s position is that “If you can afford the mortgage, you will receive no concessions.” Fair enough.
Fortunately, the mortgage has language specifically concerning default.
So, last year, I purchased another house with what would have been the other 33% of the maximum amount I was approved for back in 2005. Then I simply stopped payment on the first home. It is to be sold at trustee’s sale next week.
Thanks to the state I live in, and the type of loan, the lender has no recourse to collect the deficiency. This is a reset of my life. This allows me to have money every month to accelerate the payments on my other debt.
But do the math with me. By my most recent estimates, my original home is worth about 1/3 of what I bought it for. In the five years I owned the home, I paid off about 5% of the principal balance.
Assuming normal housing appreciation, and assuming housing prices will start to recover this year, I would have had to wait 12-15 years to sell the place and just break even on the mortgage. And the home itself quite possibly will never appreciate back to the purchase price, at least not in my lifetime.
I made the smart move. A mortgage is a contract. It is not a blood oath, I didn’t swear on the Bible when I signed it. It clearly states what happens if I stop paying. It does not say I have to have any reason to stop payment.
As for the author:
A Strategic Default is when the borrower can afford to pay the mortgage, but chooses not to.
Lenders won’t consider Short-sales or Deed-in-Lieus with borrowers who can technically afford the mortgage. No way, no how.
That leaves default, strategic or otherwise, as the only way out of this mess for a whole lot of good people – and smart people – who can see that pouring money into a black hole is a waste of money.
As JD has said, in the whole mortgage mess, there’s plenty of blame to go around. But for homeowners stuck in a negative-equity position with no way out, hard choices need to be made, and sometimes it’s choosing the least bad choice.
As I have heard strategic default summed up elsewhere: “I could also throw my money out the car window, but that’s not a good use of my money either.”
A few additional comments:
It’s interesting that so many people are worried about the market value of a home. This either means that people expect homes to be a far more liquid investment than they really are or that individuals purchase homes expecting to stay in an area for a long time when in reality they should probably have rented.
I wonder if that means policy in the country should move towards encouraging shorter mortgages. 5-10 years should be the max, with a hefty down payment. That should encourage individuals to weigh the risks of a larger exposure in the investment as well as their likelihood of staying in the location.
Overall though, falling house prices are a boon for new individuals entering the market. Government policy should not be targeted towards propping up home prices, which benefit sellers as opposed to buyers. The danger in that is that more individuals will be incentivized to strategically default, causing massive bank losses and even more government bailouts, which are unfortunately hugely unpopular in the eyes of the public, even though the public largely caused the bank losses by starting the cycle of defaults.
I am perplexed.
On one hand “two wrongs don’t make a right” (banks lending to people who can’t afford a house & people who take on more than they can afford)
..and the old saying “try walking in my shoes” (people who lost their jobs, etc)
..bottom line: “there are two sides to every issue”. I appreciate the comments and i am just trying to learn so I don’t make mistakes in the future.
First I’d like to thank JD and Sierra for this article. Although you’ve both taken a lot of criticism, the amount of misinformation in the comments and the horrible experiences some people are having with their lenders shows that this issue is not a dead horse that’s been beaten to death.
I do, however, think the criticism that Sierra painted too rosy a picture of working out a deal with your lender is fair. Here’s a suggestion to the folks trying to get help:
Contact a foreclosure counselor through NeighborWorks (http://www.nw.org) (JD, I hope you’ll check out the link from this nonprofit and leave it in the comment).
While Kevin(#73) and Jackie (#122) suggested contacting a HUD-certified housing counselor, you might get better help by going through NW’s foreclosure counselor search. These counselors are also HUD-certified but they have gotten additional funding and training in doing loan work-outs.
Specially trained counselors have relationships with the lenders and have solved some of the worst glitches in working with hundreds of homeowners. That said, it’s still an amazingly difficult and high-stress process. So do some yoga, take a deep breath, and try again to get some help.
(full disclosure, I am a HUD counselor with a NW organization but you won’t find my name on the list of foreclosure counselors because my agency did not choose to participate in this training and funding.)
I also found that many of the comments only alluded to the fraudulent activities that contributed to this crisis. Lil (#101) said the housing prices are simply a reflection of the Free Market System. Well that’s not quite true.
Many appraisals were fraudulent to begin with. That’s why we have a bunch of new laws stating how appraisals can be done and requiring lenders to pick an appraiser at random. And many of the states with the worst foreclosure rates are sunbelt areas with lots of new construction. So builders were part of the fraud as well.
The new HUD-1 form that debuted last January? That was in response to lenders who literally switched people’s loan terms at the closing table. I’m sure there are people here who would say, “Why didn’t you just walk away when you found out your mortgage was an adjustable rate at higher interest than than what the broker disclosed to you?”
I answer, “Are you sure you’d walk way from a bad deal if you had given up your apartment and had everything you owned sitting in a U-Haul on the street with your kids and grandma?”
In addition, lenders made riskier loans because they had investors to sell them to. When Sierra says that your lender doesn’t want to lose money so they’ll work with you, she’s probably accurate if you’re talking about a local lender, especially one who keeps a lot of their loans in their own portfolio instead of selling them to investors.
But many of these horrible loans were made by gigantic banks who packaged the loans and sold them on Wall Street. And the people who made lots of money off these loans were the folks who knew they were rotten and invested in insurance that the loans would go bad and pay them off.
Naomi (#71) mentioned Michael Lewis’s Big Short. It’s an excellent, and very readable, discussion of the maneuverings on Wall Street that contributed to the mortgage crisis.
Finally, I live in one of the cities with the lowest foreclosure rate in the nation (http://www.nytimes.com/2007/11/04/weekinreview/04fess.html).
A stable economy and realistic housing prices are part of the reason.
But our biggest mortgage lender is a small credit union and its closest competitor is a 175 year old local bank. Very few mortgages are made by the behemoth lenders and very few people go into foreclosure–those who do are usually facing a severe personal setback like a job loss or medical problems.
For those of you who like quoting Adam Smith and think the “Invisible Hand” of the market will cause equilibrium so that private businesses’ desire to make profit will prevent them from committing fraud should actually read Adam Smith. One of Smith’s major themes was that a business person’s standing in the community would suffer if they perpetrated fraud on their customers. He was talking about local banks and credit unions, not Wells Fargo and Bank of America.
Adam Smith would be appalled by the allowances made in his name for corrupt business practices.
155 KS said “We’re putting about $8000 into the house to fix it up for sale.”
Don’t bother, just lower your price and sell as is. My ILs followed the advice of their real estate agent to recarpet an entire house for resale, spent over $5,000 and months fretting over keeping the new carpet clean. The 1st thing the new owner did? Rip out all the new carpet and install tile….
I think this was a great article … when the system led people to believe their house was worth 180K but in reality th ehouse was worth 110K who is to blame? I think more people should foreclose/short sale/walkaway from their home. It is not fair for people who busted their behind in college and graduated early or those who started work right out of high school and started to contirbute to society to get stuff with an anchor of a house worth 40-50 percent less than what they paid for it…. while all the deadbeats who screwed around in college for 8 years to get a 4 year degree or lived with mom and dad till they were 30+ …now they can walk into an amazing deal.. then point fingers at everyone else???? Cmon people get a clue…
Post 182 made it very clear what is wrong with the country today. Our grandparents would never walked away from a (contract) deal sealed with a handshake let alone a signed 20 page contract. YOUR WORD WAS YOUR BOND. If the value of your property would of tripled in value you would not of gave it back. It should never be about money. Greed is the root of all evil. Thanks and I hope I never do business with you.
J.D. – I think Amanda at #164 makes a valid point, although she has maybe worded it a bit too strongly.
I read the blog regularly (and comment from time to time) and you often end up with criticisms re. lack of detail (particularly in the ‘readers’ story’ articles).
I appreciate that with those types of articles, they can’t be exhaustive and the authors have a right to some basic privacy. At the same time, however, it’s a bit hard to be impressed at how someone paid off their student loan using ‘x system’ when they miss out key bits of information (such as their salary, what their partner earned etc.)
These omissions are often cleared up, but it sometimes takes the author two or three supplementary posts to do so.
As the blog owner you edit submissions and in a few occasions you could be a little more pro-active at chasing details and specifics. At the end of the day, the quality of submissions from staff writers/guests impacts upon your reputation.
Hopefully this will be taken in the constructive manner intended. I enjoyed this post, although Sierra should perhaps have been prepared for the firestorm that ensued!
J.D.,
I like your involvement and your comments. Chickybeth makes an interesting point, but here is why I think a cell phone contract is different: in my cell phone contract, the contract itself contemplates me breaking the contract and imposes a $200 fee for breaking it. So I can break it if I want to pay the fee.
In my mortgage, I see nothing that says my liability to walk away from a mortgage is limited to only the current market value of the house. If my house had an initial market value of $200K (which the seller receives) and the bank loans me $200K for the house, why does my obligation suddenly drop if the market drops or if my house is damaged (by fire or any other problem) and the market value of my house is now only $100K? If this is a situation where the home owner has no money and enters bankruptcy, I understand that the bank can’t go after the homeowner–that is the reason for bankruptcy and the court will determine the debtor’s obligations.
The article seems to encourage people with resources to drop their obligations because it’s unfair for them that the market dropped. But a secured loan does not mean that the damages from a breach of contract (i.e., walking away from the mortgage) is automatically capped at the security. If a person has resources and can pay but doesn’t want to, I think the bank can go after the difference between the amount left on the loan and the price for which the property was sold, unless the person declares bankruptcy. In other words, if you have a home loan for $200K and the house only sold for $100K, the borrower still owes the bank $100K and the bank can still pursue the debtor for that debt.
I have a friend who had two pieces of property and decided to “let the other piece go” because she thought everything would be even if she turned it over to the bank. But now she may loose her primary house because the bank is suing her for the difference and she still has some assets (i.e., her primary residence).
However, laws differ SOOO much from state to state. Some states have laws which do cap mortgage liability at the current market value. Our state is not one of those states, though. I think the article may be relied upon to put some debtors in a REALLY bad position–encourgaing them to make a bad decision without informing the debtor that they need to contact an attorney or similar person who can provide all of the ramifications for the decision in that reader’s state. Misinformation is worse than no information at all.
I think the way the underwater car analogy is being applied here doesn’t make a lot of sense.
Walking out on your car loan because you owe more than the car is worth, is legally (and morally) the same thing as defaulting on your mortgage because you are underwater.
The difference is the amount.
Unless you financed a Ferrari with zero down, you are probably not far enough underwater on a regular car to make it worthwhile to walk away.
Why would any reasonable person walk away from their car loan because they are underwater $2k or $5k? It doesn’t make sense financially. Plus you won’t have a car if you do this.
Someone who owes $100,000 more than their house is worth will face the same penalties (ie credit rating hit) as the person with an underwater car loan. But the chance to improve their net worth by $100k might be worth it.
It is a moral issue. It is wrong to simply walk away from a promise you made because it no longer makes financial sense. I just cannot believe how people could think it is anything BUT a moral issue. Yes, there are rare occasions where medical bills or something like that put people in such a position where they simply cannot pay, but if you just decide to walk away because it no longer makes financial sense for you it is WRONG. No-one made you sign that mortgage. No-one negotiated the purchase and made you buy it. If you chose it, you need to live with the consequences. I say this even as my husband is in another state with his new job and we have a house that may be hard to sell. We have had one showing in two months on the market. It does not matter. We chose to buy this house. We also chose to accept the job in another state. We are responsible for our decisions. Our country was stronger when everyone understood this. This is not the type of article I expected to see on this site.
In hindsight, I wonder if the title of the article is misleading. It says “When to walk away from a bad mortgage”. Which sounds like it would provide counsel on the conditions in which a person ought to walk away from a mortgage that was “bad”, e.g. unfair, predatory, or too expensive for the holder in current conditions. If I heard “bad” I would not think “underwater but able to pay”. That would be more of an “Okay”.
But Sierra says: “In fact the whole point of the article was to show people who are considering doing something as drastic as mailing the bank their keys and walking away that they do have other options.” Which sounds more like it should have the title “What You Can Do If Your Mortgage Is Underwater” or “Alternatives to Walking Out on a Mortgage”.
1st time responder. This article hit close to home. My wife and i bought a home equal to 1x our income in 2006 and put 20% down. As of October 20010, our mortgage was 2x the value of the house, even with the 20% down. The mortgage note I signed stated that if I did not pay, the bank would reclaim the collateral on the loan – the house.
I called the bank and offered to write a check for the current value of the house. They could keep the downpayment and all of the mortgage payments. They declined. We gave them the house.
My question to the moral police is why. Why would I not give back the collateral? Why would I pay 3x the value of an item? Why would I handicap my family with this burden when I have an option?
Not exploring all of your options in life will lead to making some bad decisions.
There’s no doubt about it, there are pros and cons to walking away. It comes down to each borrower’s individual situation and if they’re willing to live with the consequences that come with walking away.
If you’re interested, I wrote an article on HSH.com titled “The Pros and Cons of Walking Away from your Mortgage“.
Interesting comments everyone. Thanks,
Tim
One more analogy that I do not think has been made (although I’ll admit no analogy can get it quite right). Let’s say a bank owns a share of Google, which is currently selling for $500. A Bank sells me the share plus an option to sell the share back to the bank for $400 (the cost of the share plus the option is, say, $510). Of course the bank hopes that the price of Google will not fall below $400, so that I will not exercise my option (and the bank gets $10 profit for nothing). But when the price of Google falls to $300, should I not exercise my option and sell my share to the bank for $400, based on someone’s idea that it is immoral to force the bank to pay me more than the stock is currently worth? How is that different than a mortgage contract in a nonrecourse state? Under my contract with the bank, I agree either to pay back the loan plus interest or “sell” the house back to the bank for the balance due on the loan (the cost of this option is included in the fees and interest payments I make to the bank). Of course the bank hopes the value of the house never falls below the balance due, but when it does, why is it wrong for me to sell the house back to the bank at the agreed upon price (the amount of the outstanding balance on the mortgage)? Even if the option is not expressly written into the contract, the bank operates under the assumption that the option exists and prices the mortgage contract accordingly. If the price of my house stays the same or goes up, I pay the bank a LOT of money under the contract. If the price of my house falls, the bank may lose some money. That is the risk the bank takes. Part of what I am paying for under the contract is to shift some of the risk of falling prices from me to the bank.
Comparing home loans to car loans does not make much sense to me. Banks KNOW cars will not be worth as much as the balance of the loan. Therefore, no car loan contract (that I am aware of) includes the option to sell the car back to the bank for the balance of the loan, nor do any states’ laws provide this option by default (like nonrecourse states do for home loans). The borrower is personally liable for the car loan, which is not the case for home loans in nonrecourse states.
I’m more than a bit concerned by the comments made by some about how the banks “did nothing wrong”. There are many resources out there- from investigations to books to lawsuits to judgments- showing that a large percentage of the loans made to high risk/low income borrowers involved a very high degree of deceit, coercion, and/or lies by omission. At the very least they involved willful irresponsible lending practices that overlooked huge warning signs for massive default.
I am NOT saying that everyone who defaulted was fleeced in some way by the bank. But I am certainly saddened by the lack of education on the issue of the responsibility the banks have been proven to have had in all of this. It wasn’t just a bunch of depraved, greedy, irresponsible house hungry people demanding loans. The banks have been found guilty of numerous deceitful practices, but that was all lost, of course, in the drama of the bailouts- which, predictably, also wrongly focused on how it was “poor, stupid, greedy people” who were solely responsible for the crisis in the first place.
Please, instead of relying on the stand by of shaming those who were actually victims of the system, do some research that isn’t tainted with American bootstraps/Horatio Alger myths about how “good decent people finish first and lazy, immoral people rightly get punished”. Life, and certainly not this issue, is not that black and white.
Morality police, you need to back off a bit. A hundred years ago, it was considered irresponsible to take credit out for much of anything other than a house. “Morality” is a moving target, drug around the playing field by the “more-moral-than-thou”.
Doing business means taking financial risks. The bank and the insurance company took a risk right along with you when you all agreed to the terms of the contract, including the terms laid out for giving up your home. The lender is covered if the house isn’t worth what you owed — by the insurance and by tax write-offs.
You probably don’t have insurance on your credit cards or electric bill or the loan for the big screen tv — but you bought insurance on your mortgage, which is in case you aren’t able to pay. And you backed your loan with collateral. Read your mortgage papers… they specify the terms for exchanging the owing of money for the collateral. It’s part of the contract, which makes it both a legal and morally-neutral option to consider in DIRE circumstances.
Law professors and even business ethics professors are finally coming forward to not only say that it isn’t illegal or unethical to turn your collateral in, but, because you insured it, IT’S UNETHICAL FOR THE LENDER TO REPORT YOU FOR A BAD DEBT.
Here’s an interesting perspective: http://www.sacbee.com/static/weblogs/real_estate/SSRN-id1494467.pdf
I’m late to the party, but I want to build on what Money Smarts Blog (#192) said about why the car loan analogy doesn’t work. The reason why people don’t strategically default on car loans isn’t out of a sense of morality. It’s because defaulting on a car loan is almost never to your advantage. The hit you take to your credit, the likelihood that the lender will come after you for the balance of the loan, and the likelihood that you’ll have to buy another car anyway all outweigh whatever benefits you might gain by defaulting on the loan. So: Defaulting on a car loan on purpose isn’t immoral. It’s just stupid.
That’s why I think the cell phone contract is the better analogy to strategic mortgage default: They’re both cases where breaking a contract, and accepting the agreed-upon consequences of breaking the contract, can sometimes be to your advantage. The contracts themselves are very different, and the amounts of money involved are very different, but the principle is the same.
I am in the mortgage industry (private lender who received NO government bailout funds) and it disgusts me to see people walk away from their houses when they have the means to make payments. Even worse is the people who come crying for a loan modification when they’re still well off. I see far too many stories with people who “used to make 9,000 a month, now they’re down to 6,500 a month with a 2,500 mortgage payment- but all the bills they have for cable, internet, phone, netflix, gym memberships, sams club, 3 car payments, book club, ebay purchases, etc etc add up to nearly as much as they make per month.” A lot of the time people are just too dumb and/or ignorant to realize that if you cut out the unnecessary expenses, your life suddenly becomes a lot more affordable. The biggest issue is what people are willing to give up. They’re willing to renig on a promise to a bank they made 5 years ago, but aren’t able to let go of their blackberry and internet on their phone. The priorities of most of these people are WAY off base. How about that BMW payment you are making? If you don’t put a decent down payment on a car, the second you sign the papers it’s probably worth less than the loan on it. But there isn’t a crisis about that is there?? Because Americans are short sighted. 5 years of paying on a car worth less than the loan isn’t as bad as the 25 years left on that mortgage is it?
When someone applies for a mortgage modification, they have to submit their most recent month’s bank statement. Seeing Starbucks debit daily on the account papers doesn’t exactly endear me to your situation. And believe me, this is more the norm than the exception.
I understand there were a lot of sleazy brokers and sleazy banks out there lending to folks who can’t afford it. But I’m sorry, if the only way for you to afford a house was an interest only loan (making NO principal payments the first 3-5 years) then you clearly don’t understand how the world works. Relying on your house value to increase and your income to increase in the future to make your future payments is just ridiculous. And the person is just as responsible as the bank for thinking they could buy a $200,000 house on a $20,000 yearly salary.
And the person is just as responsible as the bank for thinking they could buy a $200,000 house on a $20,000 yearly salary. Thats what you said.
So why are banks not negotiating with buyers. Some buyers were sucked in by banks to buy homes by not charging closing costs and our Government provided incentives like offered $14k when buying your first home. If these “enticements” weren’t available the now home owner might not have bought the home with only $2,500 down on a $135k home that was $235k. Now the home is worth $75k as banks try and sell off homes that are in default.
I have seen several comments about owing tax on the forgiven mortgage debt, but no mention at all of The Mortgage Debt Forgiveness Act. Through 2012, there is no income tax whatsoever on the first million of acquisition debt of your primary residence.
Also, the writer of the article obviously did not research short sales at all. My ex-husband tried to sell his house via a short sale. He had an offer of 114k which his lender accepted. Months into the process, the lender demanded 122k and the buyer agreed. When it finally came time to close, the lender demanded 133k and the buyer walked. This story is not atypical in the least. You can unearth thousands of them instantly with a search engine. If you’re not willing to make an effort to become informed when writing about a topic, then perhaps you should stick with topics about which you are already informed.
#37 here: They are walking away, but they were only going to be able to make it a few more months before they were foreclosed on, probably. They knew the people who were selling the trailer they bought, so they knew it was going to come up for sale.
They decided to stop making the house payments so they could pay cash for the trailer and the small piece of land it sits on. Since it’s in a different tax district (with no distant view of the lake), the taxes will be well within their means.
#39: Their home is on a piece of property from which, if you stand on the roof, you can see a fairly nice, reasonably large man-made lake. It is also in an area with tons on winter sports, ski resorts, snowmobile trails, etc. The local government was facing an income shortfall several years ago and elected to re-classify property in their area as resort property, which allowed them to change the tax rates on that property. I’m not sure of the exact percentages, but they didn’t just go up 1 or 2 percent. More like 3 zeros. And since the husband’s father is a contractor and wood worker, the house is beautiful. The floors are quartersawn oak, with cherry moldings. Built-in hand made wood china closet. These things make their house assess higher than some of the other houses in their area. I guess they over-improved. But it was supposed to be their forever house, and they wanted to make it as nice as they could. There’s no sub-zero fridge, no walk-in closets, no granite countertops, just beautiful woodwork. And so the tax value of their home, combined with their property tax rate, is obscene.
They considered trying to sell it, but real estate agents told them they couldn’t get what it was worth (on paper), and that houses with the super fancy stuff that appeals to the resort crowd weren’t selling, so they just decided to walk.
I feel sorry for the bank, honestly. But not an ounce of pity for the tax district.
(We did COMPLETELY JOKINGLY discuss tearing out the things that make the house assess as high as it does, then have the tax appraiser come out to reappraise. We would then put it all back. But somehow…)
I’m sorry, but I’m not going to go into a financial transaction with an unlevel playing field. The banks will walk away from a bad investment in a heartbeat, no qualms, no questions, no if ands or buts about it. Yet I’m expected act differently, and continue to throw good money after bad, because it’s a “moral” issue? Not going to happen. It’s business, pure and simple.
The reasons for going into foreclosure are many shades of gray, but the mortgage contract? It’s black and white. Foreclosure is accounted for within the contract. You stop making/can no longer afford payments, the bank gets the house. Nothing moral about it, it’s in the agreed upon contract that BOTH parties signed.
For what it’s worth, we’re upside down by a good 20-25K. Have we talked about a strategic default? Of course. But we aren’t going to do it. Not because we feel there’s some moral obligation. We’re staying because it’s the right move for us. We can afford the payment, renting a comparable place would likely run more than our current note, we really like our location, the kids are happy with their schools and most importantly, the house wasn’t bought as an investment, rather as a place to live.
But if a bad mortgage was hurting my family and my future, I’d walk in a split second…just as businesses do with any bad investment.
I’m not going to pass judgment on someone who decides to do a strategic default. As they say, for but the grace of God/Allah/Buddha/Zeus/The Flying Spaghetti Monster, go I.
We walked away and I don’t regret it a bit. Best decision EVER. We tried deed-in-leiu but the house was in such a bad neighborhood the bank didn’t want it! In fact it took over 2 1/2 years AFTER we left for the bank to get around to forclosing.
The apartment we rent now is 4x better and $400 per month cheaper. Now we have excess money to pay down debts, buy a used car outright and untwist that knot in my stomache. The banks got their $ from me when I paid my taxes and the gov’t bailed them out
No matter what is said no one forced you to purchase the property. You made a dumb investment and now you want someone else to pay the price, and its fast food companies who made us fat. I have no college and I’m smart enough to figure out if I can afford my new home, But if not its the banks fault so I can buy a million dollar home if I want if it drops in value, give it back, if it doubles in value keep it. With the value where they are today, I think I’ll gamble and go for it, even though I only make a small income, if only I could find a bank stupid enough to trust me to pay it back. How about one of you loaning me the money so I can blame it on YOU when I cannot pay , and I give YOU the property that is worth half what you loan me . YeHa
We’re talking about my mortgage, my finances, my bank, my future, and here’s my take on all this.
A mortgage is a _secured_ loan, with a contract written entirely by the bank, entirely in their language, entirely on their terms, and entirely to their liking. And that totally standard mortgage contract basically says that they bank will be (more or less) equally happy to take either my mortgage payments for thirty years OR my house and land as repayment of the money they were loaning me. They’ll take my payments, or they’ll take the underlying asset. In writing the contract that way, they’re placing a bet that the value of the house won’t ever decline to below the outstanding remaining balance on the mortgage, and thus they come out ahead either way.
However, in this case, their bet came up bust: the market value of the house has declined below the outstanding balance on the mortgage. They placed their bet, they lost, and I’ll be damned if I’m going to pay off the bank’s gambling debts out of my child’s college fund.
Now don’t get me wrong: I’m going to try to work with the bank to get out of this as cleanly, and simply, and positively as possible. Much rather sell the house, or have a short sale, or pretty much anything else other than “just walk away.” Seriously. But when the bank wrote a mortgage that said “Your payments or your house!”, they were literally offering me a choice, and I see no moral or ethical problem with exercising the choice they themselves wrote into the contract. They’re extremely sophisticated investors; they knew exactly what risk they were taking with the real estate market.
I’ll let Sierra know how things progress with the bank and the house; maybe she’ll write a follow-up when I tell her what the bank says.
Yes…5 years ago I agreed it was morally wrong. We lived in a house we could afford very easily. Then I had a baby and my husband lost his job. We moved 5 hours away and moved in with family while we tried to sell a home we could no longer live in. ON the market for 2.5 years and I can’t get $100,000 for it when I owe $187,000…There have simply been too many foreclosures and too many bailouts in our nieghborhood. All because of BANKS. They loaned people money in our neighborhood who were making $10 an hour at Walmart…Should they be in a $250,000 house? I don’t know what to do but I don’t think we should judge.
I think Big AL #204 makes a good point:
“The banks will walk away from a bad investment in a heartbeat, no qualms, no questions, no if ands or buts about it. Yet I’m expected act differently, and continue to throw good money after bad, because it’s a “moral” issue? Not going to happen. It’s business, pure and simple.”
Why should we have a double standard for the individuals versus the banks?
If you expect individuals to treat their mortgage payment as a moral obligation then we should expect banks to act morally and ethically with regards to how they handle mortgages as well. I really don’t think that standard of expectations for ethics and morals exists of the lenders.
Thank for a rundown of the options, it is appreciated.
I started a renovation on a beautiful 1920’s house but today I am forced o put this into foreclosure because of 3 factors.
Factor 1. My builder (Flawless Finish Tile and Construction) robbed me off thousands of dollars of work that wasnt done and material that was stolen.
Factor 2. The FHA inspected never inspected the property to make sure the work was done instead taking the contractors word and signed off on the inspections handing money over to him
Factor 3. Peoples State Bank gave $20k from my construction loan to the builder without authorization from me and no evidence the work was done.
So here I am out thousands of dollars with 50% of the money gone from the 203k rehab project and only 19-20% of the work complete. And all the banks wants is there money, they ever pushed their lawyer onto me and CEO forcing me to continue or and I quote “We will sue you for everything”
I had no choice but to foreclose and I hate it and seems like no one out there wants to help me.
There should be looks of shame on the faces of these defaulters. They bought more house than they could afford, and now want to walk away from their responsibility, increasing the costs for everyone else.
The only way this would be “fair” is if these people, had the housing market gone up instead of down, agreed to give back all their profits! Is it “fair” that they could have reaped all the rewards and now walk away from the downside?
As it is, they bought more than they could afford, hoped to get a big speculative return, and when the risk they took didn’t work out, they want to default. Lovely.
I know of a couple who had walked away not because they can’t afford the payment anymore. They made a “bad investment” by purchasing the house and they simply didn’t wanted to hold that investment anymore so they walked away. And went to a different town and purchased a new house, similiar to the previous home but at half of the price. They purchased it with cash, a personal loan from their parents. This is so wrong because as a tax payer, somehow down the road, I will have to pay for their mistakes. And as long as they can continue to get personal loans from their parents, they don’t have to worry about credit.
Also be aware that if you walk away from debt like this, the IRS can consider that wiped debt as income. So if you owe $200K on a house, and you walk away from that house and the associated debt, you just “made” $200K (that’s how the IRS will see it) and the IRS will tax you on that income. It might not be this simple, but definitely get educated on this possibility beforehand.
I think that a great post is one that generates a lot of comments, and this is a very hot topic.
I am no expert on anything, but I have been a mortgage loan originator for 21 years and I have seen firsthand at what I feel was the core of the problem with the housing market whereas many are quick to point their finger at the closest scapegoat. Fannie Mae and Freddie Mac, which were put in pace by the Feds, was suppose to be a place where lending institutions could sell their long term debt, (mostly 30 year fixed rate mortgages)and lower their exposure to market fluctuations so that banks could offer 30 year fixed rate mortgages. Prior to Freddie and Fannie you had to have a 20% down payment and a variable rate mortgage. The problem started, I think, when Freddie and Fannie started acting like a business instead of a home ownership tool. They somehow felt the need, (or were instructed to with political influence), to try and compete with the subprime mortgage market by offering highly risky loans like no down payment, no income or asset verification loans. Just as recently as 2008 they had a NINA loan, (no income, no asset)which basically said that if you had a 720 score, 5% down payment,and a job, you qualified for a loan amout up to $417,000!!!
WHAT WERE THEY THINKING!!! The banks and mortgage companies were following Fannie and Freddie guidelines on these loans, and if I did not do the loan, the customer would go to the next lender and get the loan. I think another core problem is that Wall Street had too much influence over Fannie and Freddie because they were saying,”Hey, we have investors that will purchase these loan types, so we will buy all that you can send to us”. It was a house of cards that was 20 miles tall and when it fell, it could be felt around the globe. I am of the opinion that wall Street, the government, and of course individuals all contributed to where we are today in the state of the economy and all have some level of accountability. Someone has to learn from the mistakes of the past, or we are destined to repeat it.
I have heard the argument that “They knew what they were doing when they bought a home they couldn’t afford.” and I am going to take issue with that.
First I’m all for personal responsibility. But let’s look at it from another angle…
What about the “personal responsibility” of the loan officer who purposely talked a financially inexperienced person into an adjustable rate mortgage knowing that in three years the payments would be more than they could afford?
What about the “personal responsibility” of the mortgage company who lent my chronically unemployed (and part-time when she worked,) neighbor the money for a condo?
Could it be because they received a higher commission for the ARM?
Could it be because they knew the mortgage would be packaged and sold in a bundle and they wouldn’t have to worry about consequences?
You don’t play “Three Card Monte” with the guy on the corner because he knows the game and you don’t – he is considered a con-man. But when people who know the mortgage business take advantage of people who don’t…? That’s just “business?”
Make the financial decisions you can live with, divorce your emotions from this whole house issue and do what is best for you. Be assured the banks look at it that way.
And a comment about credit – you can always get credit, and sooner than you think. The banks are addicted to it. The card offers will continue to come, just avoid the ones with 89& interest (true offer)
Finally, it baffles me how anyone can defend banks that pay ONE QUARTER OF ONE PERCENT INTEREST (that’s .25%) on savings accounts and charge 14%, 18% or 24% interest on credit cards. AND give you 1% cash back if you use the card.
Geez, it’s a suckers game and the banks make the rules. Go to cash.
I felt compelled to add my 2 cents here. My husband and I just received approval on our jumbo loan being modified this month. It has taken over year. We were also swindled mid last year by someone who purportedly could negotiate the terms for us.
Later, we tried to go through a local organization to help. We did not qualify because “we made too much $” and “we were on time on our payments”!
We finally approached the Bank ourselves. We were successful but only after showing SERIOUS FINANCIAL HARDSHIP. In additional we have a second loan that we are still trying to work through that bank with. The willingness is dependent on the bank and the customer service rep. We are also trying to do the same for my parents, they have been recommended to re-fi but they simply cannot afford it.
I WOULD RECOMMEND A SEPARATE SERIES OF ARTICLES ON LOAN MODS. The variables out there make it nearly impossible to provide enough information. It has taken us 18 months since we started this process and we are not done. In the end we want to live in our house and raise our kids there, but not draing our 401k to pay for it.
Tim Murphy @ 214, Please see the following:
http://www.irs.gov/individuals/article/0,,id=179414,00.html
The person in your example would not owe a single cent to the IRS.
There’s another way to avoid what used to be called negative amortization: sell the house for just what’s needed to cover the mortgage plus sales expenses. Sometimes the realtor will accept a lower commission, just to rack up the sale. You have to do this before your house is really underwater or your buyer won’t be able to get a mortgage on your house.
Who is the bigger fool, the lender or the borrower? It really is so simplistic who’s at fault for the financial crisis, those greedy lenders.
Those who complain are those who cannot take advantage of the situation. Moral high ground? More like jealousy.
@207
“And that totally standard mortgage contract basically says that they bank will be (more or less) equally happy to take either my mortgage payments for thirty years OR my house and land as repayment of the money they were loaning me.”
Do you honestly believe this? If so, you must also believe the bank would still have agreed to make the loan if you had told them during the application “I’m going to pay the loan for X number of years, after that I’m walking away and giving you back the house.”
Taking a house back isn’t an option banks are “equally happy” with. It is a method to encourage people to pay back their loan.
“However, in this case, their bet came up bust: the market value of the house has declined below the outstanding balance on the mortgage. They placed their bet, they lost, and I’ll be damned if I’m going to pay off the bank’s gambling debts out of my child’s college fund.”
This comment can easily be flipped around on you. You placed your bet, you lost, and now you are expecting the bank to pay off your gambling debts.
It seems you are trying to justify your decision not to live up to your end of the bargain.
J. D. : You say that you have trouble viewing walking away from a mortgage as a moral or immoral decision.
How would you view choosing not to pay for your rent? The contract that you sign allows you to not pay (penalty is being kicked).
From an egocentric financial viewpoint, it makes perfect sense not to pay for your rent. I mean, you get rent free for a couple of months before you are kicked out. Then, you get to do it again! However, you and up hurting the community around you.
I would like to have your opinion on this.
Full disclosure: english is not my first language
JD,
Thanks for all of your hard work highlighting comments. I would certainly have no patience for reading all 200+ comments, but after skimming for the highlighting (and your notes), I feel as though I have.
I love the contentious discussion. I may have missed something, but I didn’t notice any comments by Sierra. I would really love to hear the author defending her own work.
In my humble opinion, I think Tyler K. should be highlighted by default. I love looking for his comments. You should hire that man!
Thank you for keeping an unruly discussion in such a logical framework through the highlighting.
All the best,
JKC
I’m disappointed in this article.
There is no moral concern with walking away from your mortgage. It’s a business contract and it spells out what happens if you stop paying: you lose the property, and you don’t get back the money you already put in. It’s just a business contract! It’s not stealing and it’s certainly not immoral to walk away from your mortgage. Your credit score is a number invented by other people and typed into a computer. Your stress and related blood pressure, on the other hand, are very real.
And this article is inaccurate in at least one respect:
“The mortgage company can come after you for the money they lose on your property when they’re forced to sell it below market value as a foreclosure. That’s the bad debt you were trying to walk away from, coming back to haunt you.”
This is not always true. In many states the banks can NOT do this (such as Washington) because the statute defines mortgages as non-recourse debt. And in states where they can come after you, there are ways to dodge it.
My advice? Talk to a lawyer. A sour mortgage is an incredibly stressful situation and talking to a lawyer can help you map your situation and lay it out in analytical terms. It’s not expensive either — a few hundred dollars for one 1-hour meeting which could save you tens of thousands or more.
“Before walking out on a mortgage, Gumbinger says you should call your mortgage company. Lenders don’t want you to default on your loan – and stick them with an unwanted house – any more than you want to destroy your credit. They’ll talk to you. “You should be able to get a reasonable response,””
Hahahaha good one! Everything I’ve read and experienced shows that banks just like playing kick-the-can, tempting you with various “aid programs” that you never get qualified for or that they lose the paperwork for. They will NOT talk to you.
In my opinion, strategic default is one of the *best* options out there right now.
Also, if you live in Washington, Scott Weiss has a good blog about real estate, foreclosure, and strategic default in the Seattle area: http://realestatelawwa.blogspot.com/
As a mortgage lender, I applaud GRS for delving into this contentious topic (and for the record, I think strategic default is a valid and important too for many borrowers). However, I question the research done for this article:
“You’ll be stonewalled by the mortgage industry for seven years.”
That’s just factually incorrect. You’ll probably be facing higher interest rates, but a borrower with a short sale or foreclosure is eligible for new FHA financing after three years.
I am facing a decision on a house that has been on the market for nine months come February.
I bought the house just before property values started declining. It was well within my means. The mortgage payment is roughly 1/3 of my take home pay.
Since buying the house in 2008, I have gotten married, and my wife also “owns” her house. Her’s is the house we decided to live in.
In nine months, I have had one person look at my house. I have priced it just above what I still owe on the house. However, the comps in my area are how listing for about $20,000 less than I owe. Rental houses in my area are renting for less than my mortgage payment.
I haven’t yet missed a payment or been late with a payment, but it gets harder and harder to write the check each month. Maybe in 28 years, I will hold the deed to a house I haven’t lived in for all that time?
I will say that renting is looking like a more and more appealing option for the future. Let someone else assume the risk. God forbid we had to move, we would then be left with 2 mortgages and still have to find a place to live.
@ 207:
Sparky, exactly what provision in your mortgage does your bank say that you must either pay your mortgage OR give them the house back and you are free and clear? Where in the contract is the provision that limits your obligations to pay back the mortgage only up to the selling price of your home? And what does it matter if the bank wrote the agreement? Your credit card company wrote the agreement in that loan, but it does not mean the company is evil and you get a free pass because of it. Did you want to hire your attorney and pay for that person to draft a contract? What provisions in the mortgage are “unfair” to begin with?
It sounds like you are looking for a way to pretend that the bank is so evil and it must be the bank’s fault in order to justify a wrong choice. If one cannot afford a mortgage based on a change of circumstance, there is no bad intent there. The mortgagee WANTS to pay but cannot because of a lost job, etc. Then one enters bankruptcy and the courts take over how much is owed to whom.
Under your scenario, you’ve made a secured loan MORE risky than an unsecured loan because you’ve created the false illusion that damages for the breach of contract are limited to the current market value of the home. Under a typical secured loan, you still owe the full amount but the bank can take a house to offset the initial loan and still come after the mortgagee for the difference. (If the house is worth MORE than your mortgage, then the bank pays off the loan, the legal fees, and the mortgagee gets the remains.) Under an unsecured loan, the business comes after you until the loan is completely paid off or you’re in bankruptcy. However, under your scenario, the bank is now engaged in a gamble like the stock market and its loan is only as high as current market value (with the risk of defaults as well as current market value in play). If you live in a state where the law limits a mortgage to the price of a current market value, then giving the house back to the bank and walking away free and clear is an option. But in that case, the interest rate should have been higher priced because that law makes it more risky for a bank. However, if you don’t live in such a state, you received lower interest because it is the loan is supposed to be low risk, with the only risk being that some people may lose a job, die, be disabled, etc, and thus unable to pay.
MutantSuperModel,
You being “young, inexperienced” when you made a bad decision does not justify you walking away from it. I enjoyed your perspective in your comment, but I always find that those who have walked away from their mortgage almost ALWAYS blame the mortgage companies while just acknowledging they themselves were ‘young and inexperienced”. When you are buying ANYTHING in the price range of a home, you do your homework. You spend months, if not years, studying. You visit an accountant or an attorney to talk it over.
I certainly am not judging you as a person, but I am judging your characterization of the situation. Like I said, I enjoyed your comment, but I simply don’t know how you or anyone else can claim they were swindled because they were approved for a loan they shouldn’t have been. And I do not understand how anyone can shed the responsibility of knowing their own finances and what they are capable of handling. Perhaps the banks should not have loaned as much as they did — I get that. But, perhaps people should approach such a large decision by doing their homework to remove “inexperienced” out of the equation.
It’s easy to blame big business, but you are responsible for your decisions. Now, as a responsible tax payer who has avoided debt problems like yours, I am responsible for paying this debt to the banks (through our gov’t spending on TARP, QE2, etc).
I’m considering strategic default. I bought a small condo outside of Atlanta in October of 2007. I did everything right. I saved, put money down, and did a 30 year fixed. My how have things changed. I can still afford it with no problem but I feel the need to leave. Foreclosures are rampant through the community. I owe 90K and some are selling for 10K, 15K, and 20K and these condos are larger than mine. Also the association who takes care of the property is broke and the place is falling apart with no help in site. Realtor’s bring people to look but they turn away when they see the shape the property is in. What do I do? I never wanted to be in this situation.
After reading the article followed by several pages of replies, I am absolutely disheartened by what I have learned about our system.
I am one of the lucky ones, I guess… my wife and I have somehow managed to pay all of our debts, mortgages and utility bills on time. We sold and bought a house in 2008, taking a loss on the sold house (nearly 40k) while subsequently putting 20% down on our newly purchased house. We then had to move again in 2009 and became absentee landlords, knowing we could not afford another large loss as the market continued to plummet.
And no, we do not make more than 250k/year, we don’t even make 1/2 of that number – we’ve saved, lived within our means and just tried to be cautious, mostly.
In 2010 when we decided to buy again, we jumped through more hoops than ever in order to obtain our mortgage, our credit is still very good. Today, we still have 2 houses, are absentee landlords with fantastic tenants. We’ve done whatever it took – even working for the census for extra income last year – in order to make ends meet and frankly, neither of us would have it any other way. We have a lot to be thankful for.
While I am not sitting on a judgement throne, it’s just really hard to hear about all the re-fi’s and modifications and walk aways. In some situations I can see there is no other choice, in others I question the integrity of the parties involved, both lender and lendee.
I recently met someone who has a house, a condo, another house, a boat, credit card debt etc etc etc… They rent one of the houses and the condo and keep all of the rental income! They still are not paying the mortgages – the mortgage companies have not taken the house/condo so they are “making their lost equity back”. Both loans were apparantly part of the predatory lending practices so they still have the properties while lawsuits are ensuing. The banks are even paying the insurance and taxes during this time!!!
He collects unemployment, works under the table and/or runs his hired side jobs through a business they have set up. Because he is “unemployed”, they now get a reduction on the mortgage of the house they actually occupy, are taking advantage of free medical care for both of them and their kids. Are technically eligible for WIC, fuel assistance, food stamps but aren’t taking advantage of that system – yet.
These people actually are in the “angry with the bank and we deserve this” category. Would you say that this is taking advantage of the system or is it a sound business decision?
For all of those who say that walking away from your mortgage debt is stealing: How do you reconcile the fact that most financial institutions who participated in this economic, world wide mess, acted as swindlers and criminals with the most disregard to otherwise-decent and honorable families? Why do financial institutions deserve to keep their reputation and tax-payer-bailed-out business while American families suffer the consequences of a concerted crime? Shouldn’t the shame be put on those who concerted this financial mess? Shouldn’t those financial institutions be paying back their debt as well, by at least offering refinancing options to homeowners? They got bailed out and they are sitting on that pot of money making it produce more money at the expense of the citizenry. We should be outraged! And if you want to be morally right, start with the immoral perpetrator of a crime.
It’s tragic when a nation like the USA lets thieves and con men take over its financial institutions. Thousands of young families lives have been ruined – perhaps for generations while these miscreants live the good life off the taxpayer dime. Greed and deception have replaced industry stewardship while the government willingly stands by and lets these activities happen. I’m afraid the USA is on an unreversable decline toward becoming a broke 3rd world nation.
What you don’t consider is the fact that some people are responsible, hard working citizens who get hit with massive amounts of financial turmoil. I have perfect credit but recently ran into several unfortunate situations. My house is a money pit and I have been sinking about $10,000 into repairs annually and the appraisal is $40,000 less than it was when I bought it. Suck it Up? Irresponsible, Loser? I think not. I work 80 hours a week I have four college degrees and I’m broke. I also have been mandated by my township to hook up to the city sewer system and that’ $20,000.
Unfortunately, it takes two to tango.
Before the height of the bubble and its burst, the lenders enticed borrowers to borrow and approved whomever, and every borrower, even slightly credible was getting in on the investment pyramid.
Reality TV shows flip this house etc… were number one and the novice housing investors were kings and queens. The folks who couldn’t dream of affording down payments for a home, found a way to purchase a residence in what seemed to be a last chance effort to even remotely afford the increasingly sky rocketing prices.
So the flippers who caused artificially inflated market values are now long gone, took the loot with ’em, and left the first time home buying dreamers holding the debt bag.
If homeowners couldn’t afford them, the banks shouldn’t have lent them. Efficient markets and interest rates adjust, so should the bankers as well.
Rewrite (adjust) interest rates down to today’s prices without extending loan terms. Make existing homes affordable instead of ruining people’s lives by counterproductively exploiting yesterday’s mistakes with legal action. Alternatively, banks should reach out to homeowners with unrealistic contracts to fix the issues (high interest rates of yesteryear). It’s called corporate social responsibility…perhaps homeowners (not flippers) would reciprocate responsibly with a sense of commitment and not walkaway.
However, if it is just business as usual and only corporations get bailouts with individual’s money for their mistakes, why should individuals act responsibly if business entities do not? I think if enough banks get screwed, they’ll modify their remedy tactics (and loan interest rates)and we’ll all start behaving like a society responsible for each other (not just for investors’ profits).
Put your comments in perspective.
Market is tanking and you invest in a home. The value of the home was $225k and now $135k. Banks and the Government entice you into taking the home. Government gives you $14k (don’t have to repay it) and there is no closing costs. They tell you it is a great deal!!!! You don’t have to put much down, just $2,500. So you get sucked in and buy your first home.
2 year later the homes in the hood are worth $75k according to several banks who are trying to sell homes they now own.
You have a home now worth $75k, and have $2,500 equity and a mortgage plus community fee of $1,400/month.
Bad investment? yes. were you suckered into buying, well yes. You call and the bank won’t talk to you unless you lost your job. No deals.
Two things, the first, you pay PMI- insurance – protected against default.
Second, agreement between the parties say that should you stop making payments the bank gets the home.
Why should you not walk away? Businesses would walk away. Contracts are broken all the time when catastrophes strike.
I bought a home 3 years ago for $200,000 it is now worth $130,000 according to zillow. I got a job transfer and don’t even live in the home anymore. I try to rent it out but everyone else in the town is trying to rent as well and I can barely get a fraction of my monthly mortgage payment renting it out. I have a place to stay at my new location with my fiancee. It just makes absolutely no sense to keep paying a worthless mortgage eventhough I can afford it. Like it was said before, multiple houses on my block have foreclosed becuase they were given loans and they shouldn’t have been, no I have to suffer? BS, the banks can take the hit and I can’t. I’m doing this, sounds like a great idea to me.
I was researching these options for my family and happened upon this web page. I in no way can see where not being able to pay your mortgage should be a moral decision. Choosing to pay it for the month and then shorting my kids on groceries in the house is morally questionable in my opinion. Yes! These are problems and choices people in America are having to deal with today.
We bought a home in 2006 and I had perfect credit at the time, my husband did not. They put my name first on the loan. His income was four times more than mine. Payment was suppose to stay much lower too. Thanks escrow. We have acquired not one new debt since buying our home. My husband still makes good money today but we were surprised with another child and my paycheck vs day care proved to be a waste of my time so I stay home with the baby. Take that and gas prices almost double, grocery prices going incredible high, utility increases, and every other bump in the road life throws at you and we are a sinking ship. We live paycheck to paycheck.
We are one life changing event away from losing our home and don’t know what to do to fix it. We have used up all our savings and we can not get ahead in today’s economy.
We do not buy expensive things, I do not like to shop, we have one vehicle, which we bought outright two years ago for under $3000, I sold the other one to have Christmas. We can’t afford vacations or even a trip to the movies with all three kids. So I really wonder what is the better option here?
We could not predict the future when we bought this home, if we had known we would of walked away then, before purchase. We were living in one before that was very small but it was paid for. Land and all, which was used to help purchase the new house. I’ve wanted the old house back for years now.
I think the majority of you people work for a bank. Heartless, trying to shame people into keeping a crumbling house with a bad mortgage. How many times do you pay for an inspector who tells you your house is fine and then when you sign your name on the dotted line, they give you the keys, and two months later you have just found out you have bought an over priced lemon? I have seen landlords burn down their own homes,just so they don’t have to pay taxes. Leaving big cities looking like the apocalypse . No one goes after them. The homes remain and there is no penaltiesdo. Families who have been duped should have an easier way out of there mortgages. The banks can do so much to help. Switch mortgages to renters and stay in the same home. These banks have too much power and no one is watching the banks and penalizing them. The worse thing that happened was bailing out the banks for lying and stealing from American families.
These stories must always embody the state that the home is in. the results for the recipient ar thus totally different betting on whether or not it’s a non-recourse state or not.
It conjointly bears on the ethical question. The loaner is aware of the legal atmosphere during which they’re creating the contract — i feel it’s virtuously fine to mail within the keys in these states.
I cannot believe how many people in this world are so damn judgmental and have so many opinions!! There are so many circumstances out of your control that several Americans are facing and to judge someone for their decisions for walking away is just disgusting.
what happens when u let a foreclosure on one but own another. is there a lean attached
Let me ask all you morally sound folks a question. Why would any business continue to invest money in a failed concept? The mortgage is the same. Business personal but a business. No way out amicably except for to make the banks wallet thicker is the absolute worse idea or reason to keep paying. If the banks wanted to sincerely help these type of folks all would be well. Blame the banks!
When a commercial property was purchased in 2007 with property taxes being at $6400.00
and 7 years later at $25000.00 and despite attempts to appeal the taxes. Value of building is less the half then what was paid for it, and I had no problem paying the mortgage but the high taxes just drove me out of the space. and forcing me to foreclose.
Joe
Not sure if many know what has been happening in the mortgage/real estate industry and I’m not sure how common my story is. I looked at a home that was listed for 280,000. I called because the price wasn’t listed and the ad stated they would swap homes. I informed the agent that my income would fall short about $4000 a year to qualify for the mortgage. Real estate agent said they would not let $4000 stop us from getting the mortgage. I stated I needed to sell my home. He said no problem, they would purchase my existing home. I stated I had about $20000 in debt that would make the mortgage unaffordable. He offered to pay $25000 more for my existing home to help with the debt. My ex was unemployed at the time, so I thought with the extra $25000 and my ex would get a job, I thought we could swing the $1900 monthly mortgage. Unfortunately my ex did not find a job, we split up, not due to finances. I was unable to sell or rent the home to cover the mortgage, so I walked away. I have not shared this story with anyone, except my immediate family due to shame. My credit has been in the high 700’s all my life and in just a few years it has been ruined.
I take total responsibility for my actions, but the real estate industry has their responsibility as well.
Ok you judgemental people…..I am trying to be responsible. I have had some awful things happen in the last 3 years from health issues to both my husband and I losing jobs due to our employer shutting the doors. My morgage is 9.9% and upside down. I am paying $1500 a month for an average ranch which is way too much of a payment. I have asked repeatedly for a loan modification or anything to help us. The investors wont budge. So what am supposed to do?
Hi Sue,
The first thing you should do is find out if you are in a recourse or a non-recourse state. If you are in a non-recourse, have you done anything to make your loan recourse? For example, in my state (California) only the original deed of trust is non-recourse. If the mortgage has been refinanced, it is no longer non-recourse.
It doesn’t do you much good to walk away if they are going to come after you for the shortfall anyway. And, banks are starting to do just that.
The next thing I would do is contact a local mortgage broker and see if they can help you. Do you qualify for Harp? If you don’t know, find out.
I’m sorry for the pickle you are in. I know firsthand it is a horrible feeling.
For those who judge the borrower take this into consideration. When my husband and I bought our starter home we were recently married and w/o children. We both had nice paying jobs and could afford our mortgage. We signed an agreement in good faith. 5 years ago we had our second child, Annie, who has cerebral palsy. She is 100% dependant on home care. I quit my job and am a stay at home mother. My husband works 3 jobs to support the 4 of us. He is never home and we are living meagerly. We have also tried over and over again to work something out with the bank but along with getting the run around we are scared to death of losing our home with 2 children. Our home is worth 50,000 our Mortgage is now 110000.
What are we supposed to do? What other options do we have. We are not bad people nor are we looking to commit a crime.
I had a question about me owning a house and owing on the mortgage and if I gave it away as a gift is that considered a crime!
I have tried to work with the bank in my small town that I have banked with for 42 yrs. I am upside down on my mortgage. My husband lost his job and had to move 450 miles away. We have tried to sell the house and the banker(my friend for 52 yrs) won’t even consider a short sale. I have no choice but to walk away.
If you are in a non-recourse state, you can absolutely walk away and you do not need an Lawyer or to file bankruptcy. Go to loan safe.com forum and and or after foreclosure.com and read the forums. You are protected in a non recourse state so that is the first thing you need to figure out. Then if you are, you need a plan. Where will you live, secure that first, then start packing and then it’s a long process until the house forecloses and it’s still in your name until it is actually sold or taken back by the bank. In the mean time, you need to still maintain the home so that it does not get broken into, things don’t fall apart, etc. Good luck but I do encourage you to do your research and don’t listen to anyone that criticized you. Big business – e.g. JP Morgan, Chase bank, CTI, they walk away from properties all the time that wind up being a bad investment.