Walk Away From Your Mortgage!

[SOS]

From the New York Times Magazine, January 10, 2010
by Roger Lowenstein {edited to conform to DU rules, full article at link)

Walk Away From Your Mortgage!

John Courson, C.E.O. of the Mortgage Bankers Association, recently told The Wall Street Journal that homeowners who default on their mortgages should think about the “message”
they will send to “their family and their friends.”
Courson was implying that homeowners — record numbers of whom continue to default — have a responsibility to make good.

Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings.
Morgan Stanley purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral.
But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials.
Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator
— and one who is not honoring his obligation.”
(Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

The moral suasion has continued under President Obama, who has urged that homeowners follow the “responsible” course.
HUD-approved housing counselors are supposed to counsel people against foreclosure. In many cases, this means counseling people to throw away money.
A family who bought a three-bedroom home in Salinas, Calif. in 2006, with no down payment, could theoretically have to wait 60 years to recover their equity.
On the other hand, if they walked, they could rent a similar house for a pittance of their monthly mortgage.

In a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices.
Every hedge fund that speculated against a bank signaled skepticism about the bank’s creditworthiness.
We are all economic pinballs, insensibly colliding for better or worse.

Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property.
The borrower isn’t escaping the consequences; he is suffering them.

http://www.nytimes.com/2010/01/10/magazine/10FOB-wwln-t.html

[SOS]

1. Unrec in 10 seconds

Some people read fast!

[hfojvt]

2. this same dreck has been posted on DU numerous times.

[SOS]

3. Really?

The article is dated January 10.
And is it "dreck" when Morgan Stanley walks away from it's investments?
Or simply good business?

[elocs]

11. Actually, yes. It was posted here Thursday afternoon.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x7415468

But then news is not really news here at DU unless it gets posted for 3 days.

I'd say to anyone advising to walk away from your mortgage: You first.

Of course, that doesn't mean I would have to follow the advice afterwards.

[MattBaggins]

18. Nor should you if it isn't in your best interest

We as the working class schmucks of this country have had our collective heads pounded with the mantra "it's not personal, it's just business.". It would be wonderful if we could go back to that gilded age that never existed; where everyone honored their obligations; but that is not reality. I have friends who were told that their employers had decided not to honor their pension obligations, and that it was just an unfortunate business decision. That is considered a "too bad so sad" business scenario; yet those same people are immoral heathens if they returned the favor and looked out for their families first?

If someone is so underwater that continuing to pay a mortgage would take decades to recover the loss, why should someone be so stupid to keep paying if they have an option to recover in less time, and rebuild for retirement?

It would be nice if we had a better system with honesty in business; but we do not. I see no reason for the average Joe to feel some moral obligation to a bunch of bankers that would laugh in his face at such antiquated notions if the tables were turned.

[laughingliberal]

22. +1000

[davidwparker]

33. +1

[elocs]

34. It was the title of the OP itself that reminded of the attitude of some here

who expect that others should have the courage of their convictions and be willing to make the sacrifices that they make.

I remember specifically of one instance--Walmart. They proudly proclaim with an attitude of moral superiority that they would never set foot in a Walmart, implying that those who do are some kind of failures as Progressives or Democrats and are not as good as theyare. I applaud those who are willing to make a stand, but there are others who have to do what they have to do just to get along. Maybe Walmart is the only place in town and other places to shop are miles away. Maybe they cannot afford to shop anywhere else. That's a kind of personal choice that I would not condemn others for making even if I would not.

Advising people to walk away from their mortgages when they are in over their head is certainly not a one size fits all proposition or even necessarily the right thing to do for most. If one is going to destroy their credit by walking away from a mortgage they may as well do it properly and declare bankruptcy, discharging some other big debts they may well likely have incurred along the way.

I have some friends in the Chicago area whose mortgage is hurting them, but it is because they have incurred some huge medical bills. They might be better of going through bankruptcy because the husband could retire in 10 or so years and they would be out the other side. The kids are gone now and they are new empty-nesters and they have chosen to rent out the bedrooms to a couple of college girls to make some extra money.

The bottom line is that all of this is an individual and personal decision.

[gristy]

13. Posted comment regarding unrec in only 2 minutes.

That's fast!

[SOS]

35. Chronology of events

1. Posted NYT article
2. Noticed unrec within 10 seconds
3. Went to kitchen to get snack
4. Returned to post observation.

Nice try though. The unrec did not read one word of the article.

[gristy]

38. The thing is, folks unrec just to irritate people. By posting as you did, you

gave the unrec'er his jollies.

[hedgehog]

4. Even if people surrrender their houses, aren't they still liable for the difference

in the current value of the house and the amount owed?

[Robb]

12. It depends on the state

In some states, no. In some, the bank can sue you for the difference. In most of the latter, they must get a court judgment, which is (sometimes) more expensive to them than simply writing off the debt.

At which point they issue a 1099 to the former homeowner, who is then obligated to pay tax on the "income" represented by the forgiven debt.

But again, in a few states, it's rather a walk-away-and-forget-it kind of equation. Needless to say those laws are constantly being challenged by the banks.

[girl gone mad]

39. The Mortgage Forgiveness Debt Relief Act...

allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, also qualifies for the relief.

It was just extended through 2012.

[snot]

40. Tax exclusion does not equal debt forgiveness.

I mean, the tax exclusion is nice, but doesn't mean the lender can come after you for the deficiency.

To avoid liability for the deficiency, you need to file bankruptcy and get a court order discharging the debt.

[midnight]

5. Great details that I'm bookmarking for the coming info. wars about why it is that

homeowner in mortgages that are underwater cannot receive a bailout, but banks that drive such failure do...

[hedgehog]

6. Here's another example of the doble standard: people are supposed to be loyal to

their employer and responsible about not leaving the company in the lurch by quitting without notice. Yet employers treat employees like so much used kleenex!

[FreakinDJ]

7. Why not - Corporations have "No-Fault Bankruptcies"

the rules only changed for the little guy

[Warpy]

8. People need to think about it very carefully

because walking away can have some very serious consequences in the absence of declaring bankruptcy. They can be hounded for the difference between what they owed and what the house sold for and that can go on for 20 years.

Also, they need to look at their market and what rents are doing. If they will pay 75% or more in rent for a comparable property, they're nuts to walk away, no matter how much they owe that the property is no longer worth on the market.

Finally, they need to consider that they're still building some equity in the property over time and that its value will never drop to zero, while rents are money completely into someone else's pocket.

Obviously, people who bought houses they couldn't afford with iffy mortgages that contained time bomb payment provisions on the promise that prices would continue to skyrocket and that an automatic sale in a few years with a hefty profit was assured are in a serious bind. However, they do need to consider what they're doing before they just send in some jingle mail and walk away. It's not as simple or as final as it seems.

[Xithras]

10. Depends on the state.

Here in California, for example, lenders cannot pursue suits on purchase money mortgages. Unless you were one of the idiots who kept refinancing to pull cash out, there is no debt left over after walking away.

[laughingliberal]

23. Nevada-no obligation beyond surrendering the house.

Hope they enjoy it now worth $50,000 less than what's owed on it. Vultures the lot of them.

[Phoebe Loosinhouse]

9. I read this the other day and thought it was a really interesting article

that made a lot of good points.

"Moral hazard" seems to only apply to the little guys.

If I were in a situation, as many are, with an upside down mortgage, stretched beyond belief, I would absolutely do a cost benefit analysis, just as businesses do, and see if I wouldn't be better off by walking away and taking my lumps - whether it be to foreclosure, credit rating, bankruptcy, etc.

No one has really helped these folks in any meaningful way. There's a thread around here talking about the one program that might have helped - the one that addresses negative equity and second mortgages hasn't gotten off the ground because no banks have signed up for it.

Real estate is not improving. Not only are the current foreclosures dragging down the market, there are layers and layers of foreclosures to come. And then there is the coming commercial implosion.

[frazzled]

14. Just because your mortgage is upside down doesn't mean you should be stretched beyond belief

Unless, of course, you lose your job. Then it doesn't matter if your mortgage is upside down or rightside up. You can't afford to pay your mortgage, period. That's a kind of borrower I have sympathy for.

But say you bought a house for $350,000 a few years ago. Presumably, you were qualified to buy that house, didn't get some kind of nutsoid mortgage, and could afford the monthly payments and taxes on it.
You haven't lost your job or had some other disastrous life intervention (divorce, illness, etc.), and that house is only worth $275,000 now. It's upside down. You owe more on it than it's worth. Your monthly mortgage payment hasn't changed one bit. If you stay in that house 30 years (or even ten or twelve years), it won't make a bit of difference. If you wanted or needed to sell it tomorrow, it would.

But to walk away from that mortgage just because the value of the property fell, when you have no extenuating circumstances beyond your investment not being worth as much on paper: I think that's wrong. You are not only shirking an obligation but dragging down the values of your neighbors' houses even further. You know, I bought some fancy-ass coffee maker on "sale" for $179. Most I'd ever spent in my life on a small appliance, but I'd heard it was good and I like coffee (it wasn't that good). Six months later they were giving it away for $99. My loss.

People pay on upside-down notes all the time: cars being the most common example. If you get a 60-month car loan, chances are your car is going to be worth less than you owe at some point. People don't just go leaving their cars on the street and walking away from their loan.

There are some people, hit by the recession, who truly need the mortgage adjustments. There are others who should never have bought that house in the first place. 100% financing was wrong, wrong, wrong.

There are a million stories in the big city ... not all of them are the same.

[noamnety]

16. Eh, I don't see it that way.

If you view it as an investment, people walk away from those all the time. We buy stock. We sell it again, regardless of whether that makes the value of other people's stock go down. I don't believe I have an obligation to hang onto a bad investment just to protect someone else's bad investment. If your concern is that it's dragging down the value of someone else's property ... well, by your own logic they can afford their place (or not), so the market value shouldn't matter to them as long as they are staying there.

Contracts are contracts, and none of them - even employment contracts or marriage contracts - obligate us to stay in one that is destructive. If we sign a 2 year employment contract and get a better offer, we tend to move on unless we are emotionally invested in the job (unless it's more than employment, in other words) - even if it hurts the company we're leaving, even if it has a negative effect on the other employees because their company has to invest in training someone new. If we're in a marriage and it's harming us, we opt out.

It's true people don't just leave cars in the street and walk away from them once the car loses value - but that's not for the ethical reason you described. It's for a more practical financial reason. We can't get a loan or lease for a new car under those circumstances because it screws up our credit, so we stick with the existing car rather than do without needed transportation - and we know that it will be paid off within a few years, at which point we have a free car. The best investment is to keep a car for at least ten years, but even if we wanted a new one every few years, walking away from existing car loans removes the option to continue doing that. It's for our own self-interest, not some moral code you are chalking it up to.

If a bank owns my house for the purpose of them making a huge profit off my interest payments, why is it a moral imperative that I am the one to assume all the risk if it loses value? Why shouldn't they and I both experience a loss on our investment if the value goes down?

[louis-t]

19. One comment. 100% mortgages were not invented by borrowers.

They were not invented by Barney Franks (repug pet peeve). They were invented by people who stood to make a lot of money on a huge risk if it succeeded but were not penalized when it failed. Commercial banks and investment banks should NEVER have been allowed to comingle.

[frazzled]

25. I agree with you on that ...

They were wrong and lured a lot of ignorant people into buying. But it doesn't really change my argument all that much. If you still have your job and thought you could pay that monthly nut at the time you purchased, the fact that the value of your house went down should not be a factor in deciding to walk away from it.

There are times when I think people SHOULD walk away. That is to say, foreclosure isn't bad for everyone. In that sense, I agree with the article. I just disagree with the premise that because your mortgage is under water you de facto are "struggling."

[louis-t]

42. Agreed, I have had friends ask me if they should walk away

simply because they are upside down. That is the dumbest reason to walk away. I think it bothers people when they are paying high payments and someone else is paying a lot less for the same house.

[MattBaggins]

20. Who cares if you think it's wrong

The family in your scenario have may have kids to concern themselves with. It is their personal business decisions and what the neighbors think is irrelevant. That family needs to examine all their factors and decide what will best secure their financial future, not yours or mine.

It is exactly what any bank, employer or corporation would do; except when they do it, it's sound business and not immoral.

[laughingliberal]

24. Yep! America, welfare for the uber rich, personal responsibility for the rest of us. nt

[Gormy Cuss]

28. You're right that not all people with an underwater mortgage should walk away

but the example you gave of a residence purchased for 350K a few years ago and now worth 275K may be an example where it makes sense for the owner to move on. Fact is, very few owners stay in a residence for 30 years. The way to judge whether it makes sense to wait for the market to come back is first to estimate how long you plan to stay in that residence and then to assess whether it's likely or even possible that the local market will return to the prices when you purchased the place. Assuming that 275K is the bottom price it would take five years at 5% annual appreciation just to be able to sell it for your purchase price. At a lower rate of appreciation it would take even longer. If you plan to stay only three to five years and the local market does not show signs of bottoming out, it may make sense to cut your losses now. Either way though, this isn't a decision to be made lightly.

[laughingliberal]

30. Plain common sense

If the mortgage is, essentially, in line with rent in the area and the person has time to ride it out, no reason to walk away. On the other hand if they are youngish, didn't plan on this being the last place they ever lived, and rent in the area is substantially cheaper than the mortgage payment, walking away and banking the difference each month may well be the better plan. Credit rating should recover at some point and there will be a nice down payment saved to buy a home in a saner market. Nothing immoral about it. Banks thought nothing of cutting those credit lines on the HELOCs when the value dropped. Why is the private citizen expected to show more moral fortitude than the institutions with which they do business?

[frazzled]

36. I think the era of using a house for a quick stepping-stone is over

I guess I'm just from a different generation. When we bought our first house, it was much less than we desired, and even at that we had to get a special city-run "equity participation" loan to get into it. It was in a nice neighborhood, but it was small. We brought up two kids in a 1400 square foot house with one full bathroom. (Years later we find ourselves in a condo with 2 1/2 baths and only 2 people. We have to go around peeing in them just to keep them running.) We always wanted to move, but the economics wouldn't allow us: even as the value of our property went up, so did the value of everyplace else, and we just couldn't make that next step. In a lot of ways, it was a great house, because of the memories.

We were taught that you should never plan to stay in a house less than five years at the very minimum. People are going to have to return to that mentality ... and chuck the idea of flipping your house to get the mcmansion.

[Gormy Cuss]

37. People move for other reasons, mostly frequently jobs.

That's another change from a few decades back when most people hoped to find a good job and stay with it until retirement.

Not all people planning to move after a few years are flippers. There are those who buy a small 1 bedroom condo before kids and want to trade up when the kids are school age, for example. There are also those who are living in an area but eventually want to move to another, maybe where they grew up or where there are better schools for the kids.

It tickles me to think that 1400 SF houses are now considered small. I grew up in one smaller than that with 8 to 10 people, and truly the only way it felt small was the one bathroom. My parents added a second toilet (not a bathroom.) I do know what you mean about the luxury of having much more space after that. My house is under 1800 SF but having two full baths makes it feel huge to me.

[Greyhound]

17. "Morality" has always been reserved for the "useless eaters". The parasite class,

embodied by the parasite that coined the term, believes itself to be beyond such trivial distinctions.

We have an entire economic sector working in concert with "our" government to dissuade the dim and the gullible from doing what is in their own best interests because if id enough of them choose the best course for their own well-being, the parasite's game collapses.

All that is being done today is the parasites in power are using our money to prop up their market so they can get out and leave us holding the bag.

There are only two fixes for the housing mess, wages have to substantially increase or prices have to fall, and either one of these hurts our status and reveals just how bad our economy (the real one that you and I live in) really is.

[laughingliberal]

29. I know it would cause a lot of disruption in lives for a while but I can't get over the thought

of the reaction of the ruling class if the whole working and middle class just walked off and refused to play anymore. Walk on the mortgage, bankrupt the credit cards, open a vegetable stand on the side of the road and never go back to your job. Unrealistic as hell but damned fun to think about.

[tularetom]

15. There are many valid legal and financial reasons not to walk away from a mortgage

But what really pisses me off is when the thieving banksters attempt to use moral arguments to dissuade people from doing so.

If I was underwater on my mortgage, I wouldn't lose a minutes sleep worrying about the message I was sending to my family and friends.

But I guess that argument plays well with hyper religious Americans out in jesusland.

Once again, morals and religion are used to fuck the middle class.

[laughingliberal]

21. Yes, they never seem to worry about the message that watching a bunch of Wall Street crooks walk off

with the national treasury free and clear might sent to our family and friends. The message from that is clear. If you're going to steal, steal a lot.

[dixiegrrrrl]

26. and if you are going to steal a lot, be sure to bribe the lawmakers

and watchdogs so you can get away with it.

[laughingliberal]

27. +++1000 nt

[davidwparker]

31. I would only walk away if I had no job. Then, I would have no problem

doing it. I would keep my house otherwise.

I'm not sure if I'm upside down on my house. I'm going to have it appraised when I get my taxes back and then see about a mortgage under the credit union that I joined yesterday.

If I read things correctly at their site, the month payment for a 15-year fixed is less than I'm paying now.

[subterranean]

32. The bankers should have thought about this before they did away with lending standards.

In many cases, walking away is the most economically sensible thing to do. I know a family who bought a house in the Bay Area for no money down in 2005, near the peak of the bubble. They were stretching their budget to make the monthly payments, and the value of their house plummeted to less than 50% of the purchase price -- meaning it would now have to rise 100% just for them to break even. It wasn't an easy decision, but they walked. They now rent a larger house in the same neighborhood for less than half what they were paying before.

[leveymg]

41. This "walk away" meme masks the fact that there are millions who can neither afford to pay or to

leave because of widespread hardship, failed economic policies, and corrupt lending practices. There has been no serious effort by the Obama Administration and Congress to put pressure upon the mortgage banking industry to modify those loans so regular people don't go into foreclosure and into the streets.

This article reinforces the banking industry message that the mortgage crisis is just a commercial calculation by rich people with underperforming investment properties protecting their net wealth.

Shame on them. Shame on those here who don't seem to understand the meaning of that message.