Have you no morals?

February 1, 2010 · 69 comments

I tweeted on Saturday about an article I read over at The Motley Fool. I am pretty frustrated with the article and think it is worthy content to bring up today. If nothing else, it should at least stir a little bit of controversy in the comment section below. You can find the full article here, but here’s a quick excerpt…

For many of the underwater homeowners in today’s market, paying down their mortgage isn’t really in their best financial interest. Particularly in states like Arizona — where mortgages are nonrecourse, meaning the lender can’t go after any of the homeowner’s assets other than the property itself — it makes little sense to continue paying a large mortgage on a devalued house when comparable rental rates are far below the monthly mortgage payment.

This article made my blood boil. Have you ever seen a ninja’s blood boil? It’s not a pretty sight. I totally disagree with hate this article for a few reasons…

First, and most important, it’s totally immoral. So you may be $100K underwater on your house. But if you can still afford the mortgage, you have every MORAL obligation to keep paying. To be clear, I don’t have an issue with someone walking away from their house if they have no ability to pay their mortgage (i.e. can’t put food on the table, can’t afford gas to get to work, have become unemployed, etc), but to recommend that people walk away, even when they can comfortably afford the mortgage is ludicrous. Sure it may not be illegal to walk away, but that doesn’t mean it’s the right thing to do. Just because your home decreased in value, doesn’t mean it’s acceptable to back out of your end of the contract. Remember, when you purchase a home, you VOLUNTARILY accept the risk that comes with it.

Quite a few people that commented on the article made comments like… “Banks screw us all the time, this is just our chance to get back at them.” Ummm excuse me? If you think that is an acceptable reason to back out of your mortgage contract than please do me a favor, quit reading my blog, and go read Im-A-Big-Dumb-Head.com. Now I’m not saying banks aren’t shady, ’cause we all know they can be, but why does that suddenly give you the right to be an equally douchtastic individual? This is such a juvenile thought-process, I can’t even comprehend why someone thinks this is a reasonable excuse. Yes banks can be evil, but you walking away from your home, makes you just as terrible.

The third and final reason I can’t stand this article is because it would cause the end of the world, okay maybe not the end of the world, but the entire economy would collapse if people actually followed this advice. A commenter said it best….

so let me get this straight…the plan is for people seriously underwater to just walk away…

…. followed by a further decline in home values……then those people who WERE just slightly underwater become seriously underwater….. but thats OK they can just walk away too…..

causing another wave of declining values….eventually even those that have equity will be underwater too….but thats OK they can just walk away with the rest of em……..

If people follow the author’s advice, the amount of foreclosures would skyrocket, thus causing a downward spiral in home values nationwide. An increase in foreclosures is NO BUENO in my opinion.

I have so many other things I want to say about this article, but instead of rambling on, I’d rather hear what you all have to say. Does anyone else find this article concerning? What do you think would happen if people actually started taking this advice? What matters more, your “best” financial interest, or your morals? Is there anyone out there that can try and make sense of how this could possibly be a good thing for America? Ugh, this article makes me depressed with humanity.

1 StackingCash

If you owed 300k on a 100k house would you pay up? It's not being moral, it's being intelligent. I'm still going to blame the greedy banks for allowing the housing bubble to happen. Wait till the commercial real estate bubble pops. I see many more banks folding under FDIC protection. Sigh.

2 Jamie

If someone goes into a bank, and lies about their income and assets, and the bank gives them a loan without checking their actual income rate, who's fault is it? Yes the bank was wrong in giving out the loan, however it was the home buyer who broke the moral code and lied in order to get the mortgage.

No bank put a gun to someone's head and said if you don't take this mortgage we are going to kill you and eat your family. People came to the bank under the assumption that housing values would forever increase and they could continuously refinance their mortgages to make use of the appreciation.

The banks deserve some fault, but most should fall on the ignorant people trying to live above their means.

3 PunchDebt

Why shouldn't I pay up? I knew how much the mortgage was when I signed up, I knew what my monthly payment was going to be (which doesn't change), and I knew that my house could go up in value or down in value. Money shouldn't become before one's personal morals in my opinion.

4 Investing Newbie

You actually did't know the value of the house could decline. Remember the whole reason why the housing bubble became a bubble was because it was inflated on the thought that a House was Fool-proof Investment. People actually believed that housing prices would never decrease!!!!

I'm actually on your side Ninja, but if people are still in the mentality that housing prices can't decrease and this is just a very bad dream, then they are going to just walk away.

5 Matt Maas

You also knew that you would have the option of walking away from the home at any time. If it ever becomes in your best interest to do so, and it is legal to do so, why not do so?

6 Sherry

If you owed 30k on a 10k car would you pay up? People do that all the time. It is not intelligent, but not many people tell them to stop doing it. (stop taking out the loans to begin with I mean.) I think it's more important to be moral than to be intelligent.
Interestingly, making un-intelligent decisions seems to leads to making more intelligent decisions in the future. Whereas, making immoral decisions seem to lead to making more immoral decisions in the future.

7 StackingCash

True, but 200k is different than 20k for most people.

8 Sherry

Then shop lifting is good because it is in your best fincial interest and a low value, but bank robbery is bad because it is a high value? I don’t think the value determines whether it is morally right to do.

9 ImAfuziPlatypus

Sherry,

I don't think money determines what is morally right to do. Was it morally right for the previous owner of the home to sell you his property at an extremely inflated value? When did morals and money become one in the same? If you follow capatalism, Gordon Gekko would say "greed is good". I agree. If you follow more socialistic or communistic models you would never have this problem because the property would be owned in part or full by the state and you would be renting it basically.

This is why many successful companies are bred from the bankruptcies of other unsuccessful companies. People take risks, it's what we do; and if they fail with flying colors they reset.

Do you expect people to kill themselves (via stress or bullets) because they will pay 5 years worth of their salary to phantom equity?

I hope not.

10 Sherry

I don’t think the previous owner of the home was morally wrong. They set a price and the buyer agreed to it. If they knew the value was inflated, the buyer should have been able to know, also. (Unles it was a scam and there were some type of hidden problems with the house.)

Really, you think I want people to kill themselves? I thought the discussion, as stated by Debt Ninja, was about people who could comfortably pay their mortgages. If they can comfortably pay their mortgage, I think they should. Whether the value is still in the house or not.

I think people forget the bank actually gave someone else money at the time they bought the house because they never saw money change hands. The bank gave someone else the principal value of the mortgage at the time of closing because the buyer agreed to pay it back. Whether the value of the proporty goes up or down does not change the fact that someone else gave money on your behalf. The value of just about everything else we borrow money for goes down in value. Still, we agree to pay the money back. No one ever seems to have a problem with that. I don’t think they should have a problem with agreeing to pay back loans. I think they should have a problem with taking the loan in the first place.

11 Sandy L

It's also cheaper to move into an apartment, only pay your landlord first and last and then have a few months free to wait to get evicted. There are lots of people who sponge off others, and it absolutely does not make it right. It shouldn't matter if the shyster is taking advantage of a faceless company or a little old lady.

How would it feel if things were reversed? You lent money to a friend or family member and because paying you back doesn't affect their credit score they decide it's okay to default. Ugh.

12 @chicagowanderer

The Consumerist recently ran an article on their blog that may give some food for thought. It points to a NY Times story that indicates that borrowers in non-recourse states pay about $800 extra in closing costs for each $100,000 borrowed as compared to in recourse states. Essentially, the bank recognizes that not having recourse means that the loan is riskier, and is charging the borrower for that risk. The borrower's other assets (including earnings) would have provided additional collateral in a recourse state.

Lenders take risk anytime they lend. The non-recourse borrower pays more in fees and interest because the bank recognizes and is making an allowance for this incremental risk. Put another way, it's like the bank is charging you to insure against your own default.

http://consumerist.com/2010/01/does-morality-keep

13 StackingCash

Private mortgage insurance is usually required unless 20% is put down on a house. The banks have insurance still. Is that how Goldman Sachs avoided the TARP because they used AIG to insure their losses?

14 PunchDebt

Imagine this though. If the only people that defaulted were people that legitimately couldn't afford their mortgage anymore, and not people that said "Meh, my house is underwater, I don't want to keep paying" then the mortgage insurance fee would be less since fewer people would be defaulting.

15 @chicagowanderer

That is an interesting idea. The underlying source of the problem seems to be that people are underwater on their mortgages. In theory, owning should be cheaper than renting, because there is one less "mouth to feed" so to speak in the transaction. Consider a situation where everyone owns. We all pay our own repairs and do more maintenance ourselves. In the opposite situation, with everyone renting, we will all call for repairs to be done (costing the landlord) and this will raise the amount of rent he has to charge. The question in my mind is: why is rent considerably cheaper at the present, even before free repair is taken into account?

I would say that it is due to outsize demand for buying housing caused by too much available credit at low interest rates, which allowed borrowers to pay a larger dollar amount for homes a few years ago. They bid up housing since the bank was essentially subsidizing the purchase through attractive financing. This allowed home prices to spike. As interest rates have risen with banks now recognizing the risk, affordability has declined for people who would normally buy homes at this point.

I believe that the only way for liquidity to return to the housing market (people who want to sell can sell, those who want to buy can buy) is for housing prices to fall to a level where they are competitive with rent. The support for housing prices comes from the residential mortgage-backed securities market, where FNMA and GNMA are willing to purchase (and now own a majority) of the securities that the mortgages are sold into. And there's the rub: the banks are willing to lend at low returns because the government is subsidizing the rates by undervaluing the risk of owning mortgages.

FNMA and GNMA are directed to do so by the government, which we pay for through taxation (see link below). So, what I am saying is that we have fueled and are fueling our own bubble in real estate prices, and returning to equilibrium will require that we let out a lot of air. This could happen by home prices staying flat until rents can inflate, or could be quickly corrected by further home price declines.

Sorry for the novel there… if you'll believe it, that's the first time I've written something that sounds vaguely like a conspiracy theory…

Link to NY Times article about 1999 lending standards for FNMA
http://bit.ly/aSVdRm

16 Katie

It was our base mortgage price falling to the cost of renting a 1 bedroom apartment around here that caused us to make the decision to buy our house. I know a lot of young professionals (including 4 in the past year) who have come to the same realization and bought a single family house or town home.

17 Red

Just to add perspective, from a renter – Our apartment pays for a maintenance man full-time. He's there every day, instead of them having to call someone in anytime there's a complaint. Though he is given overtime for weekend emergencies, I would imagine it's cheaper for the complex to hire a maintenance person full-time. That way, an increase in maintenance needs, doesn't mean an increase in landlord costs.

18 Mrs. Micah

I think if you can pay, you should. You bought it, you agreed that the price was one you'd pay. Just because it's not a competitive price now, or it's underwater, doesn't mean you don't have an ethical obligation to pay for it.

You agreed to take on the risk of depreciation when you signed up for the house.

I think too few people remember that because everyone has treated houses as a commodity for the past 20 years or so. But that's part of the bargain.

19 quarterlife girl

"If you owed 300k on a 100k house would you pay up? It's not being moral, it's being intelligent."

Mathematically, sure, that makes sense….but don't forget that they "agreed" that the house was worth $300k in the first place.

If your $100k house suddenly went up to a value $300k does the bank have a right to change their minds on how much you should be paying? NO, because you agreed what on what you thought the value was on your house, and what you thought it was "worth paying for." If you thought $300k was too much, you shouldn't have gotten the mortgage in the first place. I completely agree with Debt Ninja, and while it's unfortunate when people lose their jobs leading to drastic financial changes, this isn't what we're talking about here, and it really pisses me off too.

20 Larry

On top of which, the value of the house could return in time. If you are not planning to move, there's no reason to walk away. Speaking personally, I bought my condo in 1987 for $85K with a down payment of $35K. (I had some help with that.) Five years later the same unit was selling for $40K, but today the fair market value is $150K. Real estate is volatile like stocks, with the difference that if you have no reason to move, I'd say you should pay the amount of your loan since the value may go up again. And over the long period of a mortgage you're paying with ever-cheaper dollars because of inflation.

21 Investing Newbie

It's always tough to discuss morality in business…which is why business ethics is a prime example of an oxymoron and a joke of a class at most institutions of higher education.

That said, I am with you Ninja on what is RIGHT. But when money is involved, morality does get a little distorted. Retribution is the only thing that matters right now for many people as they feel as though they are victims of false advertising. Sadly, this is true. Many people just weren't aware of the RISK involved in buying a house.

But now that this is clear, I still don't think that gives any person the right to walk away. If you can't afford it, I'm sorry, but you will have to roll with the punches. Like any investment, there are some good days and some bad days. It happens.

22 guest

what about the morals of feeding your own family and providing for their future. throwing good money after bad is just stupid. morals cant be considered in a business decision

23 PunchDebt

Did you not see the part where I said it's only immoral for those to walk away if they can comfrotrably afford to pay their mortgage? I clearly excluded those that can't eat, get to work, or have lost their jobs. Of course they then need to walk away.

"Morals can't be considered in a business decision"

What? Why the heck not? That's the stupidest thing I've ever heard.

24 Matt Maas

As a non-homeowner, I would love to see "a downward spiral in home values nationwide", because then I might actually be able to afford one.

25 StackingCash

I think bankruptcies are more disturbing than strategic defaults. Living in Las Vegas I see way too much both. If you lived here I think you would get a heart attack, Ninja.

26 California

The banks caused the real estate crash intentionally. If the Regular Joe on the street could see what was happening two years before it actually did, then what is the point of the financial industry paying all those economists and financial analysts from MIT to come work for them??? The banks cooked up the scheme and the government participated by pushing, for example, 'home ownership for everyone, including you Mr. Low Income'. Pretty much the only home loan available to those with less than perfect credit was the now infamous option ARM, a lousy 'product' pushed by Wall Street. Now that the housing industry has fallen on its a$$ thanks to overinflated values and super lax lending practices, let this be a lesson although I doubt anyone will learn from it because it's just another repeat in an endless cycle. And would I keep paying on an option ARM mortgage on an overflated house? No I wouldn't. And I didn't.

27 California

Oh, and I forgot to mention the hedge fund lies propagated by said Wall Street. The bundles and bundles of repackaged and re-sliced-n-diced securities sold off to unsuspecting investors. Why do you suppose so many brokerages went bust?? Because they were selling little slices of NOTHING to investors – pensions and 401(k) were invested in this crap for crissakes. Why do you suppose the inflated returns of retirement accounts (not to mention the stock market as a whole of course) popped alongside the housing market resulting in retirement pain for so many people??? Come on! The whole debacle was a scam and YOU expect people to keep paying for it?? I totally agree about your perspective as it pertains to an ever decreasing housing valuation price point and resultant loss of property value but you have to remember that MANY of the people currently paying through the nose on Option ARMs couldn't get any other 'product'. Lenders didn't want fixed rate mortgages on the books – they wanted adjustable mortgages ONLY to further feed the flames.

A house is shelter first. It's not an investment in the truest sense of the word. It's a place to shower, sh*t and shave. The attitude of the lending industry is that of arrogance. Right back atcha.

I commend you on your moral high ground but I wonder what tune you'd be singing if YOU were paying $4000 a month adjustable rate on a $300K house valued at only $100K with no chance of ever again seeing such an insane housing run-up (in overbuilt desert states for example where water is becoming scarcer) and thus never being able to so much as break even. Be real.

28 Andrew L.

With all due respect Ninja I have to ask you, what does it matter to you if people walk away? Would you be as outraged if people were walking away from car loans instead of home loans? My guess would be no because it doesn't affect the value of your current or future car. I'll be honest, I'd be pissed too if everyone on my block started foreclosing because it'd affect my home value, but I realize that's a completely selfish way to look at it. Wouldn't it also be "morally wrong" to tell your neighbor he should go against his financial self-interest solely for the benefit of yours?

That said, I partially agree with you on principle, but the fact is both parties made an agreement, accepted risk, and knew the rules. Foreclosure is just one of the rules built into the system (don't hate the playa, hate the game)

Full disclosure, my wife and I recently bought a foreclosure. We're in our mid-20's and 3 years ago thought we'd never be able to afford a house. When the collapse came, part of me cheered on the inside because I knew it meant we'd probably have a shot at home. Does that make me a morally bad person?

29 ImAfuziPlatypus

Just a point of order: If everyone walked away from their Lexus LS 460 loans, banks would require higher down payments on LS 460s and fewer people could afford them. In-turn, Lexus would lower the price of LS 460s to bring buyers into their market, and our LS 460 would be worth less because of that depression in price.

Just like with homes.

30 StackingCash

I hope you don't kick me with all my posts but lately I've been feeling the same way, this country's morals is falling apart, from individuals to huge corporations. This article in the Huffington Post is a good comparison between big business and the little guy, http://www.huffingtonpost.com/2010/01/31/tishman-

31 tom

you think that's bad? Check this out:

http://www.dallasobserver.com/2010-01-21/news/bet

This idiot is intentionally defaulting on contracts just to lure debt collectors to sue them. He started doing this because he tried to flip houses at the height of the housing bubble and lost everything!

32 ImAfuziPlatypus

Now that is funny.

33 duddes02

I don’t see the correlation between the mortgage payment and the home value. My parents have the old school attitude when it comes to their mortgage. They don’t look up the appraised value of their home every month when they make their payment. They promised the bank they’d pay each month and they just pay it. They probably could ballpark the value of their home but have no reason to. They just plan to keep making payments until it’s paid off. .

(It’s interesting because I was working for a mortgage company when my parents refinanced. Their appraised value was about 375K and they owed about 90K and literally every party involved with the refi (lender, loan officer, title co) asked why they weren’t cashing out their equity. Back then (2003) it was very unusual to do a rate/term refinance (and pay out of pocket for closing costs so their balance wouldn’t go up)

So in conclusion: I agree 100% with debt ninja :)
.-= duddes02´s most recent blog ..Out looking for astronauts =-.

34 Allen

I believe that if you agree to pay $300,000 for a home, you should pay $300,000 for a home, regardless of what it is worth. That home might just be worth $450,000 in a few years. Should your monthly payment increase when the value of your home does??

35 Frugal Lawyer

I also live in Vegas and I know a number of people who are walking away in order to do short sales. I recently heard the story of a couple who had originally paid about $850,000 for their home, which is now being short sold for about $400,000. The parents of the owners are buying it and they will pay the lower mortgage.

I’m about $166,000 underwater on my house. I have a crappy loan and I made some really stupid decisions on how to finance it. I like my house and I’m not walking away, but when budgets are tight and you are walking a tight line, I can understand why people are doing it. The housing market isn’t going to turn around here for a really long time. And, sadly, the banks WILL NOT NEGOTIATE with you until you are in default. That is one of the biggest reasons people are simply walking away. The banks don’t want to listen to the early warning signs.

36 Katie

I'm of two minds here. On one hand, people who COULD pay off the mortgage and just don't because they couldn't sell the house at a profit at the end are just jackasses.

On the other hand, there are people who really did get screwed over and have no hope of paying their mortgage off and will spend the next 5 years living hand to mouth trying to save their home until a minor emergency pushes them into even more debt and eventually bankruptcy. For those people, walking away may not be the most moral thing to do, but it's the most appropriate for their family.

37 Sara

I disagree with the fact that it is immoral. You and the bank together accepted some risks and made an agreement.

"You agreed to take on the risk of depreciation when you signed up for the house"

No — what you agreed to was whatever was written in the contract. if you are legally able to walk away, then you and the bank agreed to a contract that allowed that.

This is not a morality issue.

Many banks/states have recourse loans that don't allow you to — they'll come after you for the difference, and you'll have to declare bankruptcy to get out of it.

38 ImAfuziPlatypus

I agree. Everyone signed a promisory note. That document called for a promise to make payments or give up the collateral. You chose option B. Not a moral issue.

39 Anon

@Tom
"When you or I make a mistake, they say, 'Hey, tough nuts, be smarter next time, you know, bad luck, didn't work out for ya," he says. "When the fat cats on Wall Street make a mistake, they say, 'Oh, national emergency! We've got to bail these guys out."

Where was the banks 'morality' and 'good intentions' when they were fleecing the investor on the street? Pay back is a bitch.

40 ImAfuziPlatypus

Anon,

It is a national emergency. Guess who owns "Wall Street"? You do! Anyone who owns stock in mutual funds, owns Wall Street. It's everyone's problem at the same time – that's why it sucks. We did it to ourselves and everyone else.

41 tom

@Anon,

Payback? Really? Payback? This has nothing to do with Wall Street getting theirs. This has to do with you walking away affects me as a customer of financial institutions. Banks are passing on their risk to the customers in the form of stricter loan requirements and higher fees, the Fed is keeping interest rates low to attract people into buying homes (which they can't get loans for), which makes high-interest savings accounts seem like a joke.

So…get off your high horse about bailouts and payback and get a clue about the real consequences of walking away. Dare I say… The Main Street consequences.

42 ImAfuziPlatypus

First off, this idea was originally written about by a college professor in Chicago. He used Donald Trump as a prime example for someone who cuts the cord when it gets too tight. His thesis revolved around the idea that businesses go bankrupt all the time when they make bad bets. There are entire industries built around this idea. However, individuals can have a tendency to stay in bad debt much longer than a business case would allow because of phantom *moral* obligations.

I am a banker by trade, and I would hate to have my clients walk away from debt that is underwater, but that is a reality. It is why deals are structured the way they are. If they were not structured to protect form this, I would assume the company is being paid above market rates for its accepted risk, or they are out of business for managing money poorly.

A few blogs ago, I commented that you must have two things to make a good loan: 1.) ability to pay, and 2.) willingness to pay. This article hits on the willingness to pay. Just because you don't have a willingness to pay doesn't make you immoral.

43 ImAfuziPlatypus

Moral is the wrong theme here. It is not immoral to "work-out" of debt that didn't pan out. Why do you think banks charge different interest rates to begin with? Aside from profit, which could be had through many other avenues such as profit sharing, we are evaluating risk. So if a bank is evaluating risk when making a loan, shouldn't you evaluate risk when repaying a loan?

Let me ask you this. If I bought a $500,000 house with 5% down ($25,000) and now that home is worth $250,000, what is my moral obligation to stay? I have committed and lost at least $25,000; why should I pay another $200,000 just to break even.

The solution to the problem is equity. If homeowners were required to put at leats 25% or more down on the purchase of a home, you wouldn't have this problem. It's called skin in the game. Good lenders find skin. Bad lenders are not motivated or incented to find skin.

44 ImAfuziPlatypus

What is the moral obligation of the previous home owner who sold me the inflated house? How about the appraiser, the lender, the tax collector, the regulator? How about you Ninja? Would you be surprised if "six degrees of seperation" showed that you are presonally responsible for the housing collapse? Just being funny there, but maybe not ;).

45 PunchDebt

You still have not reconciled how this would be a good thing for the economy. Sure it may be good for an individual, but if everyone follows suit then the whole economy would suffer (see point 3). Solutions?

46 Andrew L.

With all due respect Ninja, I think point 3 is a "sky is falling" attitude. I sincerely doubt every sing John/Jane Doe across the nation is going to walk away from a mortgage just because it's underwater at the moment. While there are pockets of severely underwater homes, the majority may still see appreciation, albeit at a much slower pace.

Don't get me wrong people can be greedy and self-interested, but they also like a roof over their heads and won't give it up easily.

47 ImAfuziPlatypus

Fist off, everyone isn't going to walk away. However, in the alternate universe where they did, you would see prices contract and normalize to the point where first time home buyers could enter the market with a significant down payment. Prices would continue to rise and fall with inflation, and home ownership would become more goal oriented than privilage oriented. The end result would be similar to what we think of a normal housing market and economy. However, there are always unintended consequences, and I don't have the brain power to think them up at the moment. They are sure to be numerous; but my point is we land somewhere more honest than today.

Unfortunatly the solution to inflation is deflation. That is where we are now. The fundamental problem with fixing this type of situation is capitalistic economies always want growth. Anything other than continued growth stalls the system because everything created tomorrow is built on everything created today. If you figure out the way to fix that thought process in 330MM people, I'll tip my hat to you and congratulate your nobel prize win.

48 WellHeeled

Hmm… I think this is an interesting question, but I have a different perspective than you do.

When a contract is made, both parties determined that it is in their best interest to accept the contract. I.e the lender thought it is to their advantage to lend you the money to buy a particular home, and you thought it is to your advantage to borrow the money to buy that home. Now, because circumstances change and contracts are broken, there are already rules in place for what happens when a contract is broken. In the case of a nonrecourse loan, you would give back the house. That is a condition that has already been stipulated to BOTH parties when they signed the contract. Nothing immoral there.

Now, banks have a legal obligation to their shareholders to do what is financially appropriate. Along those lines, I believe individuals have an obligation to themselves and their families to do what is financially appropriate for them. This might be a question of should companies and individuals be held to different standards, and the answer may very well be yes. But I don't think that it's "immoral" to walk away from a financially ruinous decision. In might be a very smart decision over the long run.

49 lory

do you have any like-minded (single) ninja friends in tennessee? :)

50 Josh

Is this really right? In some part of the US people can just walk away from a house they're purchasing that they now consider is a bad deal, and the house is the only security that a bank can go after?? It must leave a pretty big red cross on your credit score though.

I'm surprised the majority of commenters have said to walk away, of course it's morally wrong to do so. Really people shouldn't be allowed to walk away. Why do some states even allow it?

51 ImAfuziPlatypus

FYI, States do not dictate what contractual paths we choose to follow. The reality is you are agreeing to pay for collateral or surrender it. That option is up to you, and in commercial lending it's one of the largest underwriting challenges to address.

52 Dave (twoyoung.com)

That is something the states should fix. People will exploit that loophole regardless of their financial situation. Hopefully the hit on their credit score will be enough incentive to prevent people from doing so.

Honestly, I don't know what I would do if I was stuck in a situation like that. I at least know that I would try my best to make the payments until something had to give. What would my priority list look like? I really don't know.

It's easy to preach, it's hard to practice what you preach.

53 Anon

@Tom
Those 'financial institutions' you crow about are the same ones that got us all in this bloody mess to begin with. Instead of bawling out the end user (customer) why don't you ask this one simple question:
Where were the gatekeepers (lenders) to begin with? Sorry that the fact that people walk away from ridiculous mortgages that should never have been made to start with doesn't sit well with you. Don't blame them. Blame the dumb circumstances that put people into mortgages they couldn't afford right off the bat – adjustable rate mortgages that were unaffordable to start with. Human nature is human nature. People in general want the good life even if they can't afford it. The gatekeepers are supposed to say NO, not the other way around. You know why? Because people have applied for loans they couldn't afford since the beginning of recorded time and that ain't gonna change. And yes it has everything to do with Wall St. getting theirs when Wall St. was the root of the damn problem. Too bad Wall St. played monopoly with everyone's money however (including mine).

54 tom

@Anon,

No no no, Homeowners got us in this mess. They signed the contracts, they chose to take a 3 year interest only option ARM with 0 down. Sure the banks should have said no, the rating companies shouldn't have said A+ and AIG shouldn't have issued credit default swaps, but it all started with Main Street!

Human nature? That's no excuse for making giganticly stupid financial decisions. You want the good life? Make more money!

Main Street is the root of the problem, Wall Street just added fuel. The pedulum swings both ways.

55 tom

To all of you who think there is nothing wrong with walking away:

It's your own fault! You're the idiot who bought the house when it was worth $300K at the height of the bubble and now only worth $100K. Maybe you should have continued to rent or maybe you shouldn't have been greedy! It's also your own fault that you got an interest only ARM, and your rate has sky rocketed. Accept responsibility for your own mistakes, and pay up. You bought it, you could "afford" it, so pay up. If you cannot pay because of an extreme situation (lost your job, became disabled, etc.) then look for a loan modification, a short sale, or pay something to your mortgage, anything! Fix your own problem, don't blame the big-bad banks, you signed the contract, no one put a gun to your head. The lenders may have ben shady, using bait and switch tactics, but do some damn due diligance, run the numbers for yourself. Mortgage calculators are all over the web.

56 @chicagowanderer

No, I haven't defaulted, but I have done the math.

My rent is $1,600. It includes home owner's association ($200/mo) and property tax (between $2,000 and $3,000) that my landlord pays. Two bedroom, 1.5 bath condos in my building similar to the one I live in sell for about $350,000. Assuming a 5% interest rate on a 30-year mortgage (20% down leaves $280,000), my monthly mortgage payment would be about $1,500. Adding $400 in property taxes and fees, my monthly outlay would be about $1,900. This is $300/month more than I pay now, not including maintenance. On a $60,000 down payment (20%), I would lose 6% annually by purchasing the home, assuming no appreciation or depreciation. I believe I am better off keeping $70,000 and continuing to rent.

In order for me to break even and earn no return on my down payment, I would need to pay $280,000, including closing costs. This represents a 20% decline from current prices. This is why I have not bought a home.

57 tom

Good for you! We needed more people like you to actually do the math, figure out their current and potential future payments, and make informed, smart decisions.

58 tom

It is a morality issue becuase the more people who walk away, the more fees, interest and restrictions are imposed by lenders on consumers (isn't that obvious by now?). All of the risk gets passed on to us. So when you walk away, I have to pay for it. So maybe all the responsible homeowners should punch them in the face.

59 ImAfuziPlatypus

How many people on this blog sold property between 2003 and 2006? Of those people, how many feel they have acted imporoperly because they sold their property at an inflated value? This is the inverse "moral" issue, so I am curious to see what some of you think.

Personally, I did not sell any property at that time.

60 Anon

@Tom – I won't bother pointing out the obvious to you because obviously you don't listen to anyone.

It was and is the banks' duty to screen applicants and make loans based on true ability to pay. Were you asleep at the wheel while the 'liar' loan was making its rounds? Ever heard of it? The 'liar' loan was a wonderful work of art conceived and nurtured by ….. LENDERS!! What is a liar loan you ask? Well, basically any Tom (heh), Dick (heh) or Harry could apply for a mortgage without providing one iota of evidence as to whether or not they even had a J.O.B. Based on this non provision of consumer information, banks made thousands of dollars worth of loans/other peoples' money (investors) to itinerant workers here in California who didn't have the money to rent let alone buy a $650 house but – hey – it happened. Fred in the beat up pick up truck who picked strawberries for a living was moving himself and equally poor extended family into McMansions. Ridiculous.

Don't you get that this whole situation is a game perpetuated by the banks??? Just as the artificially inflated housing boom was engineered by lenders, now too is this new 'stricter' method of making loans. Yeah, you get to pay more fees, interest or whatever but that's all part of the new crooked game. People walk away from houses because (a) CEOs like Countrywide's Angelo Mozilo get paid bonuses of millions of $$ based on fraudulent lending practices (and deservedly wind up in prison), (b) the President of the United States thinks nothing of groping women and getting his d*ck sucked under the desk, (c) banks dream up cons to shatter not just the national US economy but that of the entire planet.

This entire country is wallowing in a total lack of personal responsibility, complacency, obsession with celebrity and a sense of over inflated self entitlement. BUT. Until those who are supposed to be 'running' the asylum show evidence of a stricter moral code, why the hell are you coming down on the backs of those who just wanted the lifestyles of the rich and famous that get shoved down their throats every day on TV?? Never mind about punching those who walk away from their mortgages in the face. How about you go after the a$$holes who made it happen?? This is disutopia, friend, and you're living on another damn planet.

61 StackingCash

Excellent response :) I second that! It really is that simple. I was wondering how the heck people in Las Vegas were buying super inflated homes, it was the banks that were approving unqualified people so they could earn their closing costs, create CDO's, and sell them off to unsuspecting investors. Finally, someone who sees what really happened. If enough people realize this maybe a change will occur for the better. There is so much corruption going on in this country, from government to corporations. I wonder if a revolution is coming.

62 tom

I know all about the liar loan, i know all about the fools who bought McMansions while making minimum wage or no wage, I know about all of that BS. Not one liar loand would have been successful if the BORROWERS didn't make a CHOICE to sign the contracts. It all starts with the BORROWERS!

I completely agree with "This entire country is wallowing in a total lack of personal responsibility, complacency, obsession with celebrity and a sense of over inflated self entitlement". Completely agree, but everything is still a choice and until people start owning up to their stupid mistakes, this financial crisis (we are still in one) will continue. The complete lack of personal responsiblity is the biggest factor.

63 tom

You probably get spam in your email about making millions by sending money to some African prince right? Do you fall for that garbage? I would hope not, but this is the same thing. If it's too good to be true, do some due research and you'll find out it probably is.

As for punching the a$$holes who made it happen… the people who walked away made it happen! I completely agree that banks share part of the blame, but the borrowers made a choice, not only to take on a stupid mortgage, but walkaway. The banks only offer stupid products when a lot of stupid people want! Supply and Demand!

64 tom

We both are cemented to our opinions, and can go back and forth all day long, but isn't this fun?

I'll concede to you that lenders deserve to get f-ed in this situation as they share some of the blame, if you admit that the consumer is an equal participant.

65 Anon

I absolutely take your point and I do see where you're coming from.

But you have to realize that the average consumer is no match for cleverly executed advertising and promotion programs as shoved down their/our throats by these damn banks. The consumer is NOT responsible for the dispersement of other peoples' money. That job was entrusted to the banks. And look what a fine job they did.

You keep saying that the consumer has a choice and indeed they do. Let my tap my finger against my temple for a few seconds and I'll tell you how the average, scraping-by consumer is going to think when offered money for nothing to buy a 'dream' home, egged on by realtors:

"I'LL TAKE IT!!!!"

The evidence is in the crash of the real estate market and the global economy, caused by lenders who made hundreds of thousands of loans making loans that never should have been made. End.

66 tom

Banks are on to the strategic default game even in non-recourse states:

http://money.cnn.com/2010/02/03/real_estate/forec

67 Monevator

It is fantastical to me from here in the UK that anywhere should allow you to walk away from a mortgage. It seems like all reward and no risk, especially in today's world where people feel shame for about 3 seconds.

Here in the UK they can come back after you for something like 11 years, if you send the keys back.

Perhaps that's one reason why our house prices never fell so far, despite being arguably as overvalued as the US.

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