Homeowners! You Have Nothing to Lose But Your Mortgages!

November 30, 2009 6:05 PM

The Moral Dimensions of Ditching a Mortgage: University of Arizona law professor Brent T. White has written a provocative new paper (pdf) that urges homeowners with "underwater" mortgages" to walk away by strategically defaulting on their mortgage debts.

White argues that most "underwater" homeowners don't default on their mortgages, because "social control agents," ranging from the housing industry to President Obama, enforce an "asymmetry of norms" that makes it immoral if an individual homeowner walks away from a debt, but allows banks to walk away from debt with impunity. Meanwhile, other economic research appears to confirm White's argument that main barriers to homeowners engaging in "strategic default" are moral and social, not economic and legal.

posted by jonp72 (164 comments total)

an "asymmetry of norms" that makes it immoral if an individual homeowner walks away from a debt, but allows banks to walk away from debt with impunity.

Yep. And we'll likely see more of it in this thread. The ironic part is it's often the very same people saying that business "exist to make money" who argue that it's "immoral" to defy capitalist leeches.
posted by DU at 6:08 PM on November 30, 2009 [15 favorites]

There are a lot of assymetries -- why can a possession of a small quantity of drugs get you years in jail, while even large-scale white-collar crime usually gets a lot less?

If some people walking away from bad mortgages is what it takes to make the mortgage companies start negotiating in good faith, I'm all for it. It's clear that Obama's administration isn't going to apply any real pressure on their own, so why not provide some push to a deeply unfair situation?
posted by Forktine at 6:19 PM on November 30, 2009 [8 favorites]

Hey, get with the program. What's "immoral" for you and me is "sound business practice" for Donald Trump.
posted by localroger at 6:20 PM on November 30, 2009 [2 favorites]

"Assymetries" sounds like something you might pay money to see at a peep show, doesn't it?
posted by Forktine at 6:20 PM on November 30, 2009

The asymmetry of norms link says:

Homeowners have the contractual right to walk away from an overly burdensome mortgage in exchange for giving back the house

Huh? Really? What am I missing here?
posted by selfmedicating at 6:22 PM on November 30, 2009

A war on the middle class deserves guerrilla resistance.
posted by Joe Beese at 6:23 PM on November 30, 2009 [9 favorites]

previously

A mortgage is a contract made between the homeowner and the lender within the bounds of the laws of one's state. The part about giving up the home to the lender in the event that the homeowner no longer is able or willing to keep making payments on the mortgage is part and parcel of the contract. If the lender does not want to deal with the burden of trying to unload a repossessed house, the lender can renegotiate the terms of the mortgage with the borrower: something that a mortgage lender of a primary residence has the exclusive right to do and that a bankruptcy judge cannot force him to.
posted by deanc at 6:27 PM on November 30, 2009

As we keep looking at buying a home, my partner and I have been talking about this, with respect not only to house purchases but all economic behavior made by individuals:

Kroft observes to real estate agent Kevin Moran. "There was a time, I think, when people felt really bad about not paying off a debt."

"Yeah, I think in those days, loans were made by your local banker or building and loan associations or savings and loan," Moran replies. "They were guys you saw in the grocery store. They were on the little league team with you, the PTA, the school. And I think as mortgages became securitized and Wall Street became involved, they became very transactional and there was no relationship built with the borrower and the lender. And I think that makes it easier for someone to see it as an anonymous party at the other end of the transaction and just walk away from it."

"Just a business decision," Kroft says.

Implicit in this segment is that families are not entitled to make "business decisions." But you know who is entitled? Why, businesses of course. When businesses laid off 1.5 million workers in 2007, it was purely a "business decision." When Wall Street banks "wrote down" more than $100 billion in losses in 2007, it was purely a "business decision."

Look for families to become more comfortable making "business decisions" of their own in 2008.

Our parents would have probably killed themselves before declaring bankruptcy or foreclosing on their house.

Nowadays, leaving aside for a moment the matter of house purchases, we considered music piracy and why it is so widespread, and what the similarities were, if any.

Economies lift themselves up by their own bootstraps. In a sense, music piracy has its own economy. People will outlay money for hard disks, high-speed network connectivity, etc. to illegally copy music they can buy legally from the local music store.

Why is this? We considered that the music industry control over both cost and distribution channels made their product prohibitively expensive — or, rather, that people's valuation of what was value-for-money changed once the cost scale for storage and broadband networking dropped, and the distribution method became too inflexible.

It was then suggested that Fannie Mae and the rest of the mortgage companies were relying on the same psychological model, to some degree, as the music industry: Customers would continue to pay for the product based on the valuation and ethical guidelines set by vendor, and not based on their own valuation. With the economy changing, people's valuations are changing.

Much as the music industry begins to make inroads into repairing their cost and distribution structures, to be able to sell music again, I wonder if the consequences of this bubble will result in mortgage companies changing commonly-held notions of risk, and the types of products they will have to sell, in order to stay in business.

Instead of the buyer assuming all of the risk in a mortgage, what if the mortgage took upon itself some responsibility for the market conditions in property valuation and rates? For example, by creating mortgage products that take into account the change in the equity the customer is trying to build, as market conditions change?

We also discussed a larger cultural shift in which employees no longer expect to work for one company for life, but instead expect to have their pensions gutted, their benefits lifted, and to be fired the next day, suddenly and for no reason, with no social safety net in place to provide any security for children and spouse.

In a society where you and your family are treated like expendable garbage by Wall Street, as a "business decision", why should only corporations be allowed to make "business decisions" that hurt you? Why shouldn't individuals be allowed to commit the same economic violence done to them on a regular basis? These are the questions people are now starting to ask.

Larger than foreclosures is the idea of what is the American social contract. That contract is changing and it's perhaps important to watch how America will change with it.
posted by Blazecock Pileon at 6:28 PM on November 30, 2009 [93 favorites]

Capitalism isn't immoral, it's amoral.
posted by borges at 6:39 PM on November 30, 2009 [11 favorites]

I should add: "Act accordingly."
posted by borges at 6:47 PM on November 30, 2009 [1 favorite]

My mom walked away from her mortgage last year. Best decision she's ever made, "morals" notwithstanding. There comes a point when it's a business decision, not an ethical one. There was no way she'd be able to pay back that mortgage, she was waay underwater. I doubt the value of the condo she walked away from will ever return to the amount for which it was mortgaged.

Eleven years ago, I walked away from my own mortgage. $40,000 piece of crap house in a $42,000 comp neighborhood, and the house needed $25k in sewer work to be even close to code. Meaning I couldn't sell it without disclosing the sewer work and reducing the value of the house by the cost of the repair. At the time, I had about $20k in equity. So: Invest $25k and lose it because the neighborhood comps made it unsaleable, or reduce the value of the house by $25k and lose it directly.
The decision wasn't moral, it was simply that I'd never get the investment out of the house no matter what I did. The same lesson that is true today.
posted by disclaimer at 6:47 PM on November 30, 2009 [2 favorites]

Welcome to Pottersville, George Bailey.
posted by squasha at 6:51 PM on November 30, 2009 [5 favorites]

In "no recourse" states, handing over the keys to the house completely satisfies the obligation of the party that took out the mortgage. I think that's right. The banks are the real estate "experts," after all. If they want to make a loan with the knowledge that if it ever defaults they're going to lose their shirts, that's their problem.
posted by maxwelton at 6:52 PM on November 30, 2009 [9 favorites]

I thought the major social control here was the risk of forever screwing your credit rating? Is that not important to people anymore?
posted by Kraftmatic Adjustable Cheese at 6:57 PM on November 30, 2009 [1 favorite]

I thought you only hosed your credit score for 3-5 years?
posted by kaseijin at 6:57 PM on November 30, 2009

I advise clients to strategically ditch underwater mortgages every day. By the time most people admit that they have lost their economical gamble, their credit is probably whacked anyway, so why not cut your losses. The real tricky part is the junior lienholders. Many states follow the 'choice of remedy' model where a foreclosing primary mortgagor picks the house and then walks away from arrearages. The second (and third and fourth) mortgage holders usually don't have this option, and are forced to sue. Which then leads to the bankruptcy filing, and lots more debt default.

On the other hand, the creditors rigged the system to profit from usurious rates; the means test weeds out many Chapter 7 candidates due to the credit industry's 2005 amendments to the bankruptcy code, and the lenders getting punished by mortgage defaults now inflated the real estate bubble themselves with horrible underwriting and outright massive fraud. The bursting of that bubble screwed my clients more than it screwed the bankers. I have said it before and will again: we should have let those fuckers fail. That we did not have the guts to let horrible companies fail, who did terrible things that hurt lots and lots of normal people, virtually ensures they will do it again.
posted by norm at 6:59 PM on November 30, 2009 [33 favorites]

There comes a point when it's a business decision, not an ethical one.

See, that's the thing. Business decisions are ethical decisions. Good business is done ethically. It's insane to talk about making business decisions in the absence of ethical guidance. I realize the modern capitalist culture denies this, and I know that many mortgage lenders acted unethically in the last few years. But I still believe in personal ethics. (Don't mean to pick on you, disclaimer, and I'm sorry for your mother's financial situation.)

Prof. White is quoted: "one can have a good credit rating again -- meaning above 660 -- within two years after a foreclosure."

I'd say that right there is the problem, from the anethical capitalist perspective. Credit scores, for better or worse, are our proxy for "is this borrower ethical and responsible". There needs to be more institutional memory than two years, and real personal penalties for walking away. I suspect the situation is more complex than that one score, though, the foreclosure event is going to stay on the credit history a lot longer.
posted by Nelson at 7:01 PM on November 30, 2009 [2 favorites]

So then, if one were to strategically default on, say, an 80/20 loan with two lenders...the 80% lender would pick up the property, and the 20% lender would then sue the homeowner who defaulted?

I can't imagine that being a sound decision for anybody... court costs and bankruptcy ensuing, and all.
posted by kaseijin at 7:02 PM on November 30, 2009

There IS no morality anymore.

Those who control the political and economic base have NONE so why should anyone?

Morality is for SCHMUCKS!
posted by HTuttle at 7:03 PM on November 30, 2009

White was interviewed earlier today on CNBC.
posted by netbros at 7:04 PM on November 30, 2009 [2 favorites]

I thought the major social control here was the risk of forever screwing your credit rating? Is that not important to people anymore?

*shrug* What does it mean, exactly, to forever screw your credit rating? Obviously buying a house will be very difficult or impossible for the next 5 to 10 years -- but renting shouldn't be a problem except for perhaps a higher initial deposit.

You'll have a harder time getting credit cards, of course. This isn't really a problem in my mind, especially since Chase (?) recently jacked all their cards up to 29.99%.

The worst thing about having a bad credit score, I guess, would be the difficulty in buying a new car. You'll have to settle for used or public transportation in the meantime.

In other words, a bad credit score means you'll have trouble getting more credit, which is the foul demon that put us in this bind in the first place. The whole FICO scheme is like a drug dealer telling his client "Hey, if you don't pay up I'm gonna cut off your supply of smack." The junky is naturally terrified, but we (the sober, non-addicts) understand it's probably the best thing that could happen to him.
posted by Avenger at 7:05 PM on November 30, 2009 [22 favorites]

Someone really needs to put this sentiment into the form of a catchy hiphop song.
I'm just thinking of the infinite lulz if not paying debts became cool.
posted by Damienmce at 7:13 PM on November 30, 2009 [2 favorites]

Well not cool per se but not shameful.
posted by Damienmce at 7:13 PM on November 30, 2009

Our mortgage is horribly underwater.

I can't speak for the morality of big business and banks, but I don't think I should need to use them as my moral compass so whatevs. For me it's an intensely moral issue - I've made a commitment to pay for this house, so as long as I have the ability to do so I'll pay for it. I gave my word that I would.

We bought our house knowing full well just how damn expensive it was.

We carefully calculated our income vs. what mortgage we could reasonably afford. We didn't blindly jump into something with the assumption that we could sell it for a profit in several years. If you bought into that whole bubble you only have yourself to blame for not being fiscally conservative in such a major decision (note, I bought into the bubble too - but not with an intention to sell... so I owe what I unfortunately owe.)

We are responsible for our choice - just because it hasn't worked out as a potential profit maker doesn't change the fact that it's our home. It's our whole life.

Although we have no plans to move, we understand that we can't sell our house right now. I suppose someone in a different situation that HAS to move would see things differently, but we just know in the back of our minds that we needed to put our stakes down here and ride things out. We have an emergency fund should Mr. Matty or I lose our jobs that can float us along for several months.

I guess what I'm trying to say is that buying a house is a MAJOR commitment that apparently many people just see as any other monetary transaction. Maybe that's old fashioned of me, but I see your home as your castle - the thing that grounds you and your family.

If you signed a mortgage, YOU OWE THE MONEY. Quit whining, work hard, and pay your commitments off.
posted by matty at 7:16 PM on November 30, 2009 [13 favorites]

Capitalism isn't immoral, it's amoral.

Capitalism isn't Sweeney Todd; it's Mrs. Lovett.

Tis what I calls enterprise
Popping pussies into pies.
posted by dances_with_sneetches at 7:18 PM on November 30, 2009 [1 favorite]

Where is the immorality in relinquishing ownership of the mortgaged property? That's one of the options available under the contract.

Apparently the people who find this morally objectionable have no problem with the morality of a lender profiting off of an asset bubble by making loans that inflate that bubble.

The relinquishment option is a feedback built into the system that should keep lenders from making loans on inflated assets. If they don't recognize it, that is their problem.
posted by Jimmy Havok at 7:19 PM on November 30, 2009 [21 favorites]

If you signed a mortgage, YOU OWE THE MONEY. Quit whining, work hard, and pay your commitments off.

Speak for yourself.
posted by borges at 7:25 PM on November 30, 2009 [16 favorites]

Borges, I am.

Everyone has their own unique condition and experiences which I can't pretend to understand, but for ME - I owe the money, so I need to pay it.

I don't live my life and conduct my affairs based upon the example set by the lowest common denominator.
posted by matty at 7:27 PM on November 30, 2009 [5 favorites]

Where is the immorality in relinquishing ownership of the mortgaged property?

Exactly - some of these clowns believe that you can't break a contract.
posted by borges at 7:28 PM on November 30, 2009

matty: "

I guess what I'm trying to say is that buying a house is a MAJOR commitment that apparently many people just see as any other monetary transaction."

It IS the same as any other monetary transaction.
posted by dancestoblue at 7:29 PM on November 30, 2009 [5 favorites]

I've made a commitment to pay for this house

Did you, Matty? Or did you make a commitment to honor the terms of the contract you signed, which specifically provides for the possibility of your not paying? I respect your choice. But I assure you that the other party to the contract will hold you to the letter of the agreement, not to the spirit of it. So I look at it in the same way: We've agreed, the bank and I, to hold to a written contract. I expect nothing beyond that from them, they should expect nothing more from me.
posted by tyllwin at 7:29 PM on November 30, 2009 [26 favorites]

I owe the money, so I need to pay it.

The mortgage is secured against the property. When you walk away, the mortgage is paid, through the foreclosure sale.
posted by borges at 7:30 PM on November 30, 2009 [17 favorites]

Much as the music industry begins to make inroads into repairing their cost and distribution structures, to be able to sell music again, I wonder if the consequences of this bubble will result in mortgage companies changing commonly-held notions of risk, and the types of products they will have to sell, in order to stay in business.

Arg.

OK, I understand why someone might think that way. But this is not analagous. Real estate bubbles are common and go way, way back. We'll see this one come around and get back to normal, and we'll see other ones in the future. People are not going to stop buying and selling land, but they may stop speculating on their own homes for a while. On the other hand, the music industry is riding on a business model which is no longer relevant.
posted by krinklyfig at 7:30 PM on November 30, 2009

I don't live my life and conduct my affairs based upon the example set by the lowest common denominator.

To the bank, this is a business decision, without any sentiment attached. That is exactly how you should see it. There is no value in sentiment. You should never cling to it if your ass is on the line and the bank is on the other end of the deal.
posted by krinklyfig at 7:32 PM on November 30, 2009 [9 favorites]

Tyllwin - I think I understand what you're saying... but it works for me.

They expect me to honor the terms of the contract I signed, which is to pay off the money they lent to me. I understand that the contract has conditions that apply to the 'letter' of the contract and not the 'spirit', but why shouldn't I honor that to the best of my ability? If you walk away from a loan even though you can still afford to pay it - that's just something I can't comfortably do.
posted by matty at 7:33 PM on November 30, 2009 [1 favorite]

bankruptcy can be a better option in a lot of these cases. you surrender the property to the lender, they're prevented from seeking further damages from you, and in 80/20 or other similar situations your liability is also discharged. it also may result in a shorter timeframe (foreclosure vs bk on your credit report) until you're able to purchase a new home. should you decide to jump into that fuckin mess again.

plus you get to discharge unsecured debt as well. i think most people facing foreclosure will also have hefty CC debt, at least in this day and age.

fuck morality. do the math, talk to a lawyer, and make a sound financial decision that works best for you. the bank doesn't give a fuck about you, so why are they owed that same courtesy? they are making decisions concerning your loan that work best for their business. and if your credit score is already fucked, filing bankruptcy should be viewed as a responsible way of dealing with a harsh financial reality.
posted by ninjew at 7:35 PM on November 30, 2009 [12 favorites]

There is no value in sentiment. You should never cling to it if your ass is on the line and the bank is on the other end of the deal.

That's an excellent point, and I whole-heartedly agree - which is why you go into a deal knowing whether you can actually afford it or not. No one is responsible for your financial situation but you.

Keep in mind that this post was about those who walk away from their mortgage even though they can still afford the payment.
posted by matty at 7:36 PM on November 30, 2009 [1 favorite]

By the way, I say this as someone who was once a very bad credit risk, but I paid my debts off entirely, even those which were ready to go past the statute of limitations. I did it to get the guilt off my back as well as start to repair my credit, though we're talking a few grand, which is nothing compared to a mortgage.
posted by krinklyfig at 7:39 PM on November 30, 2009

Matty - one of the points made in the article is the asymmetry between lender and borrower. There's also the issue of good faith. Was there good faith on both the lender and borrower's side? What if the borrower was the victim of a fraudulent appraisal? This isn't just a hypothetical - many people were the victims of appraisal fraud.
posted by borges at 7:39 PM on November 30, 2009 [2 favorites]

I suppose someone in a different situation that HAS to move would see things differently.

There's a whole lot of people that, yes, HAVE to move, and do see things differently. It's a little difficult reconciling that statement with your last sentence, which basically castigates people for looking out for themselves. Congrats. Your situation, staying put makes sense. A lot of other people, not so much.
posted by ofthestrait at 7:40 PM on November 30, 2009 [1 favorite]

you go into a deal knowing whether you can actually afford it or not. No one is responsible for your financial situation but you.

Yes, and there are some who are determined to prove a point about their character by clinging to horrible deals, to their detriment.

Keep in mind that this post was about those who walk away from their mortgage even though they can still afford the payment.

I know.
posted by krinklyfig at 7:41 PM on November 30, 2009

If you signed a mortgage, YOU OWE THE MONEY.

So? Plenty of businessmen have quickly defaulted on loans and surrendered interest when it became obvious that the deal would never be profitable. And do you know what happened to them?

They were rewarded for not throwing good money after bad.

See, the deal -- I will pay the bank back -- was broken when housing stopped being about a place to live and started being an investment for the future. People were told, repeatedly, that the right way to do this was to borrow a bunch, buy something you couldn't really afford, wait for the price to go up, and sell.

Housing stopped being about homes and started being about money. People were taught to stop thinking of them as homes and start thinking of them as investments.

Well, people listened. They stopped thinking of housing as homes and started thinking of them as investments. And what they should do if they have a seriously underwater house is to walk away from it.

This is doubly true if they actually have jobs and a cash cushion -- rather than sacrificing that income and that cash cushion on a house that will never pay off as an investment, they should abandon it, rather than lose that cash if they try to keep the payments up if something happens to the income stream. You are far better off having jobs and a cash cushion when you lose access to credit, rather than losing the job first, spending the cash, losing the house anyway, and then you have neither cash nor credit. You also start the clock -- it'll be 7 years before that clears your credit record -- and the better off your cash position is when you do so, the better off you'll be when you finally do get access to credit again.

See, that's what people were told to do. Stop being sentimental. Start being smart about money. If you're paying a $600K mortgage when the house next door just sold at $300K, it is inane, on a financial level, to keep making the payments.

If the money people don't like it, maybe they shouldn't have taught people to act like they do. See, if we were buying a home, the payoff is the home, not the amount of money we'd be able to sell the house for, and thus, paying off an underwater mortgage would make sense.

But, in a world where the value of that house is a big factor in how you live when you retire, it is a serious mistake to treat a house as a home first. If you're seriously underwater -- 10+ years to get back out -- you need to walk away now, and not pour all of that money into a non-compounding hole.
posted by eriko at 7:41 PM on November 30, 2009 [24 favorites]

why shouldn't I honor that to the best of my ability?

Because the bank won't. Only one of you is acting in good faith. You're submitting yourself to an unfair relationship. You're willing to pay so long as you have strength to do so, while they're willing to raise your interest rate, or even to snatch your property outright if they have any technical grounds to do so. Tell me: if the bank has the legal right to adjust your interest rate upward, knowing that it will bankrupt you, and leave them with th eproperty, will they hesitate even a moment? If I'm dealing in sentiment and they're dealing in cold law, I'll be forever a sucker to a cold-blooded, amoral game.

I'd be right with you if I had a mortgage with George Bailey. When the only game in town is a mortgage with Potter, I'll play the game that the dealer calls.
posted by tyllwin at 7:42 PM on November 30, 2009 [17 favorites]

it is inane, on a financial level, to keep making the payments

Truly, it is.
posted by borges at 7:43 PM on November 30, 2009

I don't live my life and conduct my affairs based upon the example set by the lowest common denominator.

Exactly - some of these clowns believe that you can't break a contract.

Walking away from a non-recourse mortgage is not breaking a contract, it's exercising a contract option to return the house to the lender in exchange for forgiveness of debt. You are charged for this option in the form of points on the loan or an increased interest rate. Any guilt you feel for exercising the option is entirely due to your own idiocy in failing to understand the nature of the contract. Any shame you feel is probably due to a mistaken assumption that the house the bank owns is in some fashion yours just because you live there.

On the other hand, declaring bankruptcy or walking away from a recourse loan may be a different matter morally, but there is a tremendous social cost involved in forcing people to try and pay debts off that they will never be able to. A state of perpetual insolvency would probably just guarantee that those people drop out of our economy. There's no point in trying to participate in a system that allows no way for you to succeed.
posted by BrotherCaine at 7:44 PM on November 30, 2009 [15 favorites]

BTW, here's what a good judge thinks about bad faith.
posted by borges at 7:44 PM on November 30, 2009

ofthestrait - I understand. I've been in that situation before and learned the hard way. I learned that I need to build up my emergency fund before anything else. An emergency fund obviously doesn't cover all the awful crap that can happen to people, but I'd like to think it's a start for many. For what it's worth, when I said YOU are responsible, I was referring to the 'royal' you - aka how I see myself. I'm not going to judge someone who is in a shitty situation, but I AM going to judge someone who walks away from their upside down mortgage even though they CAN afford the payment.

borges - judgments of good faith on the lenders (or appraiser's) part isn't the topic of the post. It's about the morality of those who walk away from a mortgage which has become underwater even though they can still afford it. I say to each his own, but for ME it's something I couldn't do.
posted by matty at 7:47 PM on November 30, 2009

There needs to be more institutional memory than two years, and real personal penalties for walking away.

I'd like to see a sort of reverse credit score: unethical corporations and banks should have to put some kind of mark of Cain on all their business materials, advertising and storefronts for a fixed period. Like, on every piece of their damn letterhead it should say "MegaBank was convicted of unethical business practices and breach of trust in 2008", and the same on their fucking skyscrapers. Enough with branding the consumer, there should be branding for the corporation too.
posted by Rumple at 7:49 PM on November 30, 2009 [45 favorites]

I have never understood why some people consider walking away from a mortgage immoral. Trying to cast it in the worst possible light, imagining it as a deal I made with a good friend (yes, yes, I know the bank is Not My Friend, I said I was trying to cast it in the worst possible light) -- if my friend said, hey if you can't pay me back the money do X instead, and I couldn't pay back the money and did X instead ... why would that be a problem? How is that immoral? And if it's not immoral to do it to a good friend, how on earth is it immoral to do it to a bank?
posted by kyrademon at 7:51 PM on November 30, 2009 [1 favorite]

the terms of the contract I signed, which is to pay off the money they lent to me.

There's more than that option available, which is the whole point of a foreclosure. If you try to keep the property without paying the loan off, that would be morally problematic. Handing it back to the lender is a valid execution of the contract, and one which, as I pointed out above, is there to keep the lenders (as well as the borrowers) honest.

There's a curious situation which has arisen recently where lenders foreclose, but then don't claim the deed, usually because the upset price isn't met at auction, so the property is left in the name of the borrower, who is therefore still responsible for the taxes and other liabilities.
posted by Jimmy Havok at 7:53 PM on November 30, 2009 [2 favorites]

"There's a moral dimension to this as homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community." says Fannie Mae spokesman Brian Faith.

I'm pretty sure that the health of neighborhoods and communities weren't represented in the spreadsheets Fannie Mae execs used to justify their fat salaries. Suck it, Fannie. (And you too, all health insurance companies.)
posted by RobotVoodooPower at 7:55 PM on November 30, 2009 [9 favorites]

Because my father proudly refused bankruptcy when his business tanked -- probably the last American to do so -- there was no money in our household as I was growing up; it all went to paying off every last dime he owed. That was laudable, and grand, and great, and good, get out the American flag and some apple pie and lets all celebrate, right, hip hip hooray! and all that shit. Gosh, I'm still warmed, just thinking about it!

Meanwhile, in his home, he, his wife, and his children had almost nothing during those long years. That would be me, for example. I had absolutely nothing decent until I started work myself, at age 13. The worst dental care. Shit food. Shoes from KMart; have you ever worn shoes that hurt your feet? Crap clothing, junk clothing that didn't fit.We lived in a dump, a rent house to boot -- he had to let go the house we'd owned to service all these debts. We lived from crisis to crisis, it's just how it was.

Why? Because my father refused to exercise his right -- his right -- to hire an attorney, and declare bankruptcy.

Those laws are written that so a man can take his beating, shake his head, catch his breath, and start over again. We don't have debtors prisons, we don't lock people up if they've made mistakes. We don't have poor houses, and I'm surely glad of that. But I surely didn't live in a 'rich house' and neither did my siblings, or my mother, or my father.

Matty, maybe you'll get a chance to watch your children suffer because of your pride, because you won't exercise your right under the law to say "Hey, I've made a mistake. I'm in over my head. Please don't let me drown." Maybe you'll suffer privations yourself. I hope you don't. Please -- don't judge others who are making what they see are the correct decisions, for themselves and their families.
posted by dancestoblue at 7:56 PM on November 30, 2009 [77 favorites]

Look, matty, I can understand totally why you may not want to walk away from your underwater mortgage, but hear me out ...

Suze Orman, of all people, has started to advocate for this. I'm not kidding. Do you know who she is? She's the no-no finance advice woman on tv who is always telling you to be responsible and no you can't afford it, and she knows her shit inside and out. She's actually pretty much a bad-ass all around if you read that wiki link. Anyway, when Suze tells you to do it, it's time to rethink what's really important here, because it's not your sense of determination.
posted by krinklyfig at 7:56 PM on November 30, 2009 [1 favorite]

I thought the major social control here was the risk of forever screwing your credit rating? Is that not important to people anymore?

White covers that in the WaPo link:

Sure, credit scores get whacked when you walk away, he acknowledges. But as long as you stay current with other creditors, "one can have a good credit rating again -- meaning above 660 -- within two years after a foreclosure."

Better yet, you can default "strategically." Buy all the major items you'll need for the next couple of years -- a new car, even a new house -- just before you pull the plug on your current mortgage lender. "Most individuals should be able to plan in advance for a few years of limited credit," White said, with minimal disruptions to their lifestyles.
posted by mediareport at 7:57 PM on November 30, 2009 [1 favorite]

Yes, and there are some who are determined to prove a point about their character by clinging to horrible deals, to their detriment

I'll assume that you're saying that continuing to pay my mortgage, even though it's upside down, is to my detriment? I should just shuck it and walk away from my home just because it's in the red at the moment? EVEN THOUGH I CAN STILL AFFORD TO PAY FOR IT?

I think the sentiment I'm seeing in this thread is more about anger reflected at corporate greed than it is about personal responsibility.

If some decide to treat their financial obligations that they gave their word on as mere contractual whims then that's their right (hey, it's even spelled out in the contract!). Those that are in dire straights because of a lost job, spouse, or anything more horrible is an entirely different story. AGAIN - this is about those walking away from mortgages that they can still afford.

For me... I signed up for it, I owe it. As long as I can pay for it, I'm not ditching it.
posted by matty at 7:59 PM on November 30, 2009 [3 favorites]

There's a moral dimension to this as homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community.

As if crippling debt and poverty don't destabilize the neighborhood and community. Good grief!
posted by borges at 7:59 PM on November 30, 2009 [1 favorite]

I've spent the day pondering my house. With it's bad wiring, crumbling foundation and a kitchen so drafty the pipes sometimes freeze. I've been wondering if I can talk anyone into buying this house, so that my husband and I can relocate to a home we've inherited. Or would I have to take out a loan on the inherited house just to do the repairs needed to sell this house. And continue to pay the first mortgage as the house sits empty. And worry about it being damaged as it sits empty. And then worry that even if I get a buyer, it will be a short sale.

I think I'd be willing to take a hit to my credit report if I could just walk away one day and not think about it again. But it is an emotional issue, I can't imagine my husband being willing to walk away. I'm sure he'd be ashamed to tell his parents, or relatives, that we just mailed the keys to the lender. But I'm going to do some research, because it seems like strategic default could be a much more practical solution.
posted by saffry at 7:59 PM on November 30, 2009 [9 favorites]

Krinklyfig... I watch Suzy Orman from time to time... as best I know she's never promoted walking away from a debt you can still afford.
posted by matty at 8:02 PM on November 30, 2009

Exactly - some of these clowns believe that you can't break a contract.

Hell, those are probably the same maroons that even believe wedding vows mean "til death do you part", rather than "until a better prospect comes along". What a bunch of suckers!
posted by happyroach at 8:03 PM on November 30, 2009 [2 favorites]

Damn, saffry, I didn't know you lived in my house.
posted by tyllwin at 8:03 PM on November 30, 2009

Remember when property was the family home not an ATM or piggy bank?
posted by Talez at 8:09 PM on November 30, 2009

Pepperidge farm does.
posted by Talez at 8:10 PM on November 30, 2009 [21 favorites]

I'll assume that you're saying that continuing to pay my mortgage, even though it's upside down, is to my detriment? I should just shuck it and walk away from my home just because it's in the red at the moment? EVEN THOUGH I CAN STILL AFFORD TO PAY FOR IT?

Yes. You gain nothing by it. I'm serious. If you're just a bit in the red, not a big deal. If you're "horribly underwater," I don't really see the point. You're not helping yourself at all by paying it off. You're stealing from your retirement and whatever you pass on. The bank doesn't care about you or your character.

Krinklyfig... I watch Suzy Orman from time to time... as best I know she's never promoted walking away from a debt you can still afford.

You haven't watched her recently. She did a whole segment about it. She's not sentimental. Her advice to someone who was severely underwater was to walk away. It's because of the reasons this post brings up.

By the way, she also advises people not to pay debt which is beyond the statute of limitations, even though collection agencies will still try to collect as long as you let them.
posted by krinklyfig at 8:12 PM on November 30, 2009 [2 favorites]

If you're in a non-recourse state, you have the absolute right to mail the keys back, and it's perfectly moral for it as you've paid for that right. If you paid for insurance, it's not immoral to exercise it. The risk of foreclosure is priced into your mortgage, that's why you pay interest. Paying for that risk is no different than paying for a "Put Option" contract. If you didn't pay a higher interest rate for that risk, then yes, it may be immoral, but as you've already paid for that right (and that right is plainly agreed upon in the contract), it's perfectly fine to do.

The fact that this right is bundled with your mortgage to pay for interest as well as the payment for the risk premium for the possibility of default, doesn't change anything. It's as if your car company offered you a loan for the car and provided an agreement to return the car at any time. You'd be paying slightly more, but it wouldn't be immoral to exercise that right.

If you believe that the rate should've been higher and the Put Option was severely mispriced, it's not your problem, that's the banks problem — just like how it's not your problem when stuff is on sale in the supermarket produce isle.
posted by amuseDetachment at 8:16 PM on November 30, 2009 [9 favorites]

Hell, those are probably the same maroons that even believe wedding vows mean "til death do you part"

I'm thankful that I live in a country where I can break both mortgages and marriages. And how about those mortgages that break marriages? Hey now!
posted by borges at 8:17 PM on November 30, 2009 [1 favorite]

Krinklyfig:

The bank doesn't care about you or your character.

I do. And that's what matters to me.
posted by matty at 8:17 PM on November 30, 2009 [2 favorites]

If you signed a mortgage, YOU OWE THE MONEY.

... or the house. Did you not read the mortgage you signed? It's a loaned secured by the real estate. You pay or they get the house back.
posted by spaltavian at 8:20 PM on November 30, 2009 [5 favorites]

You know, matty, the banks balked at taking a haircut for the sake of making sure the economy didn't totally fucking tank. Think about that. We bailed those fuckers out because they didn't want to deal when the chips were down. The housing market is still all screwed up because of it. The valuations aren't down to normal yet, but we're getting there. This sort of thing is holding it up.
posted by krinklyfig at 8:21 PM on November 30, 2009 [3 favorites]

I'm really struck by the attitude described above that walking on a mortgage and letting the bank foreclose is a legitimate, moral act well described and paid for in the mortgage contract. I've just never thought about it that way. Is it really true? Is there some great article explaining this in detail?

The part that stops me is that mortgage contracts are asymmetric risk. The homeowner gets all the benefit if real estate prices go up, the lender gets all the risk if real estate prices go down (and the homeowner defaults). That seems insane, looked at that way, and I'm surprised lenders put themselves in that position. Maybe it's the whole problem.

Enough with branding the consumer, there should be branding for the corporation too.

FWIW, Rumple, I agree with you entirely here. The greedy fucks who issued mortgages knowing their borrowers couldn't pay deserve a good branding. A lot of banks have acted hugely unethically and I fully support punishing them for it.
posted by Nelson at 8:22 PM on November 30, 2009

Is it really true? Is there some great article explaining this in detail?

This is how all secured loans have been since the end of time. I don't understand people acting like this is from Mars. Have you never heard of the word "collateral"?
posted by spaltavian at 8:25 PM on November 30, 2009 [9 favorites]

A lot of people bought into an idea of housing and debt that has given them nothing (if not less than nothing) in return. The real surprise is not that some are choosing to turn their backs on it, but that there is anyone left defending it after the way the banks (and their supporters in government) have behaved.

I'm not out to destroy the banks or smash capitalism or something, I just believe that it's a bad idea to keep pouring loyalty into organizations that have shown no desire to return even the slightest amount of it. All relationships, even business relationships, have to be reciprocal or they'll end up dysfunctional, and the reciprocity between mortgage holders and banks is almost nil at this point.
posted by Copronymus at 8:25 PM on November 30, 2009 [3 favorites]

Matty, I commend you for being brutally honest, both with yourself and with us. And I want to be clear that I'm not adding to the pile-on that's happening. Just trying to clarify how walking away from a mortgage can indeed be the right financial decision.

You're in the same position as someone who's bought their furniture through a Rent A Center. Metaphorically speaking, you're halfway through paying $5,000 for a dining room set that's worth less than $1,000. You may as well be flushing your money down the toilet.

Fortunately, your contract gives you the latitude to say "Wait, I made a mistake, this is stupid. Here, take your furniture back. You can keep $2,500 I already paid for it."

If you do that, you are saving yourself $2,500 which would otherwise have been wasted. Returning the dining room set was a wise financial decision, because you're no longer throwing good money after bad.

In the case of a mortgage, even when you can afford the payment, there are other things you can spend it on. Maybe you can find a rental for half the amount of your mortgage, and put the rest into savings. Or downsize to a smaller house, where your mortgage is the same, but the cost of the (post-bubble) house is actually reasonable.

Based on your comment about having an emergency fund first, I gather you may be a fan of Dave Ramsey. The Davester frequently talks about sunk cost, and that is the factor I think you are overlooking here.
posted by ErikaB at 8:25 PM on November 30, 2009 [7 favorites]

Sentiment can be worth something. Usually I have clients that want to keep their houses despite being underwater. I try to pin down that cost. I've found that sentiment tends to be worth between $50 and $75k. For sone people sentiment can be worth $100k. I have literally refused to file a case where a client wanted to file bankruptcy yet reaffirm a house that was $200k underwater. Why get a fresh start if you're guaranteed to fail?

I very honestly don't understand the 'too proud to declare bankruptcy or get foreclosed on' attitude. I've met some of these people too. They are not too proud to screw over their marriages, kids, or future. But hey, no foreclosures or bankruptcy! As has been amply and tediously pointed out, these banking corporations (which are getting more consideration than loved ones) don't give two shits about you and your honor. They deserve your contempt and should be destroyed. They hire lawyers to squeeze every last legal advantage out of every situation. Why not treat them the same?
posted by norm at 8:26 PM on November 30, 2009 [16 favorites]

The homeowner gets all the benefit if real estate prices go up, the lender gets all the risk if real estate prices go down (and the homeowner defaults).

Much of the appreciation in the value of a house is illusory; it's just inflation. The banks get something much better than that, they get compound interest in the principal. And when you sell that house to somebody else, they get a piece of that too. Trust me, the banks do just fine.
posted by borges at 8:27 PM on November 30, 2009 [6 favorites]

Good on you matty. I like a man of principle.
posted by nola at 8:27 PM on November 30, 2009 [3 favorites]

Even if the principle is wrong.
posted by borges at 8:30 PM on November 30, 2009 [4 favorites]

matty, the problem you have is that you're not paying for the value of the house anymore ... you are simply paying the price of poor speculation in your neighborhood. continuing to pay your mortgage is feeding inflation--you are paying money for value that no longer exists.

when the bank signed the contract with you, they were partners in the investment you were making on your home. they were planning on making money off the value of the home--just like you were expecting once you were done with it. the situation has now changed; your investment opportunities have been ruined due to no fault of your own.

yet you are still willing to bear this burden. it's not just yours to bear, buddy. if nothing else, it's time to negotiate. you can call them and ask, but they probably won't listen. they will once you stop paying.
posted by lester's sock puppet at 8:30 PM on November 30, 2009 [4 favorites]

If matty skips a mortgage payment, I totally know that the CEO of Wells Fargo is going to lock himself in the bathroom in tears and eat a whole cheesecake.
posted by dr_dank at 8:32 PM on November 30, 2009 [25 favorites]

I'm really struck by the attitude described above that walking on a mortgage and letting the bank foreclose is a legitimate, moral act well described and paid for in the mortgage contract.

There is no morality clause in the contract. There are only terms. It's very important to see contracts this way, otherwise you get screwed.
posted by krinklyfig at 8:32 PM on November 30, 2009 [10 favorites]

Even if the principle is wrong.

Look, he said he's not holding anyone to his standard he has his own way and his own views on what he agreed to. You might just as well talk Fitzcarraldo off his mountain. And good luck to you.
posted by nola at 8:34 PM on November 30, 2009 [1 favorite]

At first i cringed at the prof's argument but after reading some of the comments, i've changed my mind.

The bottom line is when you take out a mortgage you've made a promise to repay the loan or give up the house. That's the promise, it has two clauses.

Therefore logically, only the negation would be unethical: if you don't repay the loan and try to keep the house.

If you don't repay the loan and give up the house, you've lived up to your promise.
posted by storybored at 8:34 PM on November 30, 2009 [4 favorites]

Nelson: It's not so insane for four main reasons. First, they know more than you do about property values and they don't think it'll go down (while they hold the paper), or they'd ever agree to it. Second, they charge enough interest to cover that risk and still make money over a large enough group of borrowers. Third, they count on the fact that many borrowers will act as if the bank is their local friend vs a multinational corporation, and thus pay even when it makes no financial sense to do so, and they have no legal obligation to do so. Lastly, they hope to sell the paper off to some other sucker who doesn't know the details of the risk.
posted by tyllwin at 8:36 PM on November 30, 2009 [3 favorites]

Nelson: That's the financial definition of "debt". In capitalism, you can borrow and lend in the form of debt or equity. Nearly all financial transactions run under this rubric (ignoring crazy Islamic Sukuks and complex Mezzanine blah-blah-blahs). As a borrower, you have the house in your balance sheet but owe debt, if it goes up, then you retain all the equity (not the bank). This is no different than Ford issuing debt — if ford magically makes $10 Billion dollars, they don't pay out any more of their debt. If the lenders of those bonds (debt) believe they're getting ripped off, then they should've lent at a higher price or bought Ford equity. Equity (i.e. stocks) lets them take a part in any upside.

Many banks don't just run debt with your home mortgages, they also play the equity game buy buying equity in REITs and other forms of Commercial Real Estate.

The reason that the banks aren't getting ripped off with debt is because they are one of the first to be paid with any bankruptcy. When you can't pay your house, they get to keep the house. If a factory shuts down, it goes to the bank. Investors (equity) get nothing — they get infinite upside but almost nothing in bankruptcy, while debt has limited upside while getting the collateral in bankruptcy.

This is all fair. If the bank wanted the upside, they'd buy a mall or housing development. Instead, with your mortgage, they wanted debt with collateral. The fact that a borrower exercises that right is already priced in to our economic structure, financial contracts, and ultimately the mortgage payments. If there is some kind of misunderstanding of the function of debt vs. equity, or more likely, a lack of differentiation, then I can see where there can be contention on the morality of foreclosure.
posted by amuseDetachment at 8:36 PM on November 30, 2009 [10 favorites]

OK, look, you gain no equity while you're paying off the part in the red, and you continue to accrue finance charges. You're paying off something you will never get back and paying for the privilege on top of it. That's a really awful way to manage finances.
posted by krinklyfig at 8:38 PM on November 30, 2009 [1 favorite]

"There's a moral dimension to this as homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community." says Fannie Mae spokesman Brian Faith.

Who had the bright idea of picking a Mr. B Faith for the spokesman job at that particular institution?
posted by Phatty Lumpkin at 8:50 PM on November 30, 2009 [3 favorites]

Don't confuse non-recourse loans (entire loan secured by property) with recourse loans (borrower still owes whatever is left on the loan balance after foreclosure sale proceeds). In CA refi loans and equity lines are often recourse. Another gotcha is that for tax purposes, forgiveness of debt can count as income.
posted by BrotherCaine at 8:50 PM on November 30, 2009 [1 favorite]

If I stop paying on my mortgage just because it's underwater, even though I CAN afford it, we'll eventually have to move. Jeez you guys are so right - what a waste!

I'll lose my house - which is the place where we planted a row of hydrangeas last spring. Can't wait to see how they grow next year! Or not... it's just plants.

I've mowed that lawn a thousand times (I know every inch of it), each time my partner looking at me through the bedroom window on a weekend and waving at me as he makes the bed. I'm damn sure gonna fertilize like I know I should and maybe this year I'll get that Creeping Charlie weed under control. Or not... it's just a fucking yard.

In the spring, we'll open the pool back up. We don't have kids - we're gay and my partner just doesn't want them. I'm resigned to that fate - but we open up the pool to the neighborhood kids and their families. Or not... screw 'em, we're underwater more than they'll ever be!

Over the summer we'll have BBQ's and parties - all the stuff that makes my life just a little bit more like I was always raised to enjoy. Or not... maybe I should just keep in the back of my mind that at this one little singular point in time my house isn't worth what I paid for it.

Yeah... my house is MORE than just a financial transaction.
posted by matty at 8:51 PM on November 30, 2009 [11 favorites]

Maybe this might make sense ...

All in all, of course you should live up to your obligations. Perspective is important, however.

If you get into a business deal, or a loan, or something involving money with any of your relatives or your close friends, then it becomes a moral obligation to live up to the terms. Well, depends on how you feel about them, but it probably should be important. If you enter into a contract with a lender like a bank, you do not have a moral obligation with them as you might with your family. You can't turn your back on people you care about. You should always remember you can walk away from a bad business deal, and buying your house at a high valuation might be considered a bad business deal, all in all, and you're wasting your money which could provide for you and your family. I'd consider my family more important than some business deal gone bad.
posted by krinklyfig at 8:52 PM on November 30, 2009

Someone really needs to put this sentiment into the form of a catchy hiphop song.
I'm just thinking of the infinite lulz if not paying debts became cool.

If you havin loan problems I feel bad for you son
I got 99 problems but a mortgage ain't one
posted by armage at 8:54 PM on November 30, 2009 [5 favorites]

matty: If you view your purchase as consumption, then those are luxuries. You are paying for something that is unnecessary. A summer BBQ is not a right (even though it should be). If you can't afford those luxuries, or those luxuries are too expensive and a ripoff, it makes sense for an individual to bail out and go somewhere else. If you fly first class on American Airlines all the time and they jack up prices, it's not unreasonable to go to another carrier if you can get the same service for cheaper. If you have a sentimental reason to stay with a certain air carrier because you have a personal relationship with them, then you're unnecessarily paying more, and it makes absolutely no financial sense, but hey, if you've got the money, go ahead.

It's still perfectly moral to ditch them and go somewhere else, though.
posted by amuseDetachment at 8:55 PM on November 30, 2009 [1 favorite]

OK, well, if you really want to live there. Course, might be possible to get the same or very similar place a lot cheaper ...
posted by krinklyfig at 8:56 PM on November 30, 2009

Matty, I totally understand it if you're willing to pay some underwater money because you love your home and want to keep it. That's very different from paying it just because you feel that you're morally obliged to give the bank more effort than you contracted to give them.
posted by tyllwin at 8:57 PM on November 30, 2009 [3 favorites]

krinklyfig: This is why when families lend to each other, they don't tend to charge interest (or interest significantly below a fair market-priced risk premium). They know that the odds of payment are significantly higher because you have a familial social contract. Breaking that social contract is a big no-no and can be defined as immoral. You have no such social contract with the bank, and they therefore charge you interest.
posted by amuseDetachment at 8:59 PM on November 30, 2009

In ye olde days of sane housing prices and sane lending practices, banks would carefully appraise a house and would lend you 80% of the value, or less. They did this because:

1) It showed you had the wherewithal to save the down payment.
2) 20% is roughly what it would cost them to take possesion of the house and sell it, enabling them to profit even if you gave the house back.
3) Houses kept a fairly constant value, overall, roughly keeping up with inflation. There wasn't much risk to the lender.

For the folks taking out the loan, the underwriting practices acted as a safeguard, though the bank really could care fuck-all about them. If the bank refused to grant you a mortgage on a property even though you could afford the payments, it meant the bank, vastly more experienced in this than the average consumer, thought the house was a poor value for the money, or had a significant flaw. If they thought it was too much for you to afford, again, they're inadvertently helping you from making a big financial mistake.

People tended to stay put for a decent amount of time, and when it was time to become a "move up" buyer, the house itself wasn't looked at as part of the income needed to do that; better jobs or other outside income would make the move possible. Because of the constant value of homes, you'd probably get just about your down-payment back, the mortgage you had paid in the meantime was "rent" (unless you had been there for a really significant amount of time to the point where your principal was paid down).

In a bubble with lax lending standards, as mentioned up-thread, you get people who view houses as "investments" (which is to say income) and as such are willing to tak much bigger gambles than otherwise might be prudent. Bankers, always these days thinking of short-term quarterly results rather than long-term investment, are more than happy to radically lower or even eliminate good lending standards, gambling that they won't be the ones left holding the bomb when it goes off.

Realistically, if you could pay, say, $3000 a month for two years, $64K, with the "absolute guarantee" that you can turn that into a $200K cash (or more) profit and get somewhere to live in the meantime, why wouldn't you, if you could float that 3K a month in the meantime?

Of course, you only needed to think for more than a second before you realized that the guarantee was bunk, but it's awfully hard to resist temptation when your friends are all buying and selling and making money hand-over-fist. I don't have a ton of sympathy for those who were greedy, but I can easily see how they succumbed to temptation. I have absolutely fucking zero sympathy for the financial institutions who made the bubble possible. Walk with your head held high if it's what you need to do.
posted by maxwelton at 9:07 PM on November 30, 2009 [6 favorites]

This is why you should avoid business deals with and never borrow from or lend money to relatives: because at some point, someone is going to have to make a cold-hearted, by-the-numbers, "it's just business" decision about the agreement. Sometimes you have to cut your losses.

I don't want to pile on matty here: he doesn't sound like he's hurting anyone but himself, and even then he's not "hurting" himself as much as going without certain other luxuries that he would likely purchase if he had the extra disposable income he would have if he weren't overpaying for a mortgage on his house.

But I promised myself I would never be "house poor." I plan to fulfill that goal by never financially stretching myself when it comes to buying real estate. Still though, when you're underwater by hundreds of thousands of dollars -- more than you can possibly expect to pay back and more than perhaps the amount you planned to have for retirement -- you have to take care of your own issues. There's a saying that goes "pay yourself first." Things like your retirement savings and your children's needs come first. Your "obligation to the bank" is to either make payments on the mortgage or surrender the house to the bank.
posted by deanc at 9:07 PM on November 30, 2009

They assume the odds of payback are higher.
posted by BrotherCaine at 9:09 PM on November 30, 2009

Oh, wow, and the first link has a quote at the very bottom from Lewis Ranieri, of all people. I just re-read Liar's Poker, and I almost yelped audibly upon seeing his name and his audacious comments about "tearing apart the very basis of mortgage lending". I do suppose that if anyone would know about tearing apart the basis of mortgage lending and the attendant moral hazards, it would be the man who turned mortgages from a way to finance the purchase of a home into a Wall Street commodity.
posted by Copronymus at 9:21 PM on November 30, 2009 [2 favorites]

Who is more likely to walk away from a house and a mortgage - a person with super-prime credit scores or someone with lower scores?

Hint: It's probably not who you think. New research using a sample of 24 million individual credit files has found that homeowners with high scores when they apply for a loan are 50 percent more likely to "strategically default" - abruptly and intentionally pull the plug and abandon the mortgage - compared with lower-scoring mortgage borrowers.

There's another link I can't come up with, but it pointed to the fact that the poor are much more likely to go to lengths to pay off debts, even when "underwater", than the wealthy, who will declare bankruptcy and work the system to walk away from debts the moment the numbers say "walk".

The poor seem to have a higher standard of honor sentimentality than the wealthy regarding their debts and the obligation to pay them off.

The very idea that soul-less corporate America, the ones who left us with a big economy-shaped smoking hole in the ground after they put everyone's retirement funds on red at the Wall Street Casino and the jacked up everyone's interest rates, are playing on people's sentimentality and spinning the You have a moral obligation above and beyond the legal terms of our contract line to ensure their bottom line would be laughable if it didn't seem to be so effective.
posted by Pirate-Bartender-Zombie-Monkey at 9:24 PM on November 30, 2009 [13 favorites]

This is why when families lend to each other, they don't tend to charge interest

Yes, exactly.

Funny thing. My grandfather charged my mom and dad interest on the loan on their down payment for their first house. Nice guy ... but none of us charge each other if we have to borrow money, just that guy did.
posted by krinklyfig at 9:26 PM on November 30, 2009

Storyboard-- and that assumes that the people foreclosing on you actually have the right to, as the holders of the note. Often that is not the case.
posted by wuwei at 9:28 PM on November 30, 2009

matty,

But now you're making and conflating two different arguments:

"I will hold on to this house even in debt because it means a lot to me"

and

"I will hold on to this house even in debt because I have a moral obligation to do so"

No one would argue the former. What we're trying to show you is that you are wrong about the latter. If you love your house dearly and want to keep it, that's your decision. But if you think you have some sort of sacred oath to keep paying off the house, you are mistaken, which is what people are trying to tell you here.

It seems like you're confusing the two, and are a little unclear on what exactly the agreement you entered into (with your word, as you say) with the bank is.
posted by Sangermaine at 9:53 PM on November 30, 2009 [3 favorites]

Real estate and investments are not a license to make money. Sometimes investments go bad. Simply investing in something doesn't mean that you deserve to make more money (or even retain your original investment). Does your house cease to exist suddenly? Is it no longer a viable place to live? Must you sell? If the answer is no, then shut up and stay in the damn place. You agreed to pay a price for something. Pay it.

Next time I go to dinner, halfway through I'm going to declare it's not worth what's on the menu and try to renegotiate.
posted by incessant at 10:00 PM on November 30, 2009

You agreed to pay a price for something. Pay it.

Or, hand the keys over and walk away -- which you agreed to do if you stopped paying. I think that's the entire point of the article and the discussion that's followed.

It's not like walking into JC Penneys with a year-old sweater and saying, "Here -- I want my money back." If the contract that was signed allows that, walking away and letting the bank keep the house is precisely what everyone agreed to. It's not like the bank let that particular loophole slip by and you're pulling a fast one on them.
posted by verb at 10:10 PM on November 30, 2009 [3 favorites]

You also pay for the right to strategically default with higher interest rates.
posted by amuseDetachment at 10:14 PM on November 30, 2009

Next time I go to dinner, halfway through I'm going to declare it's not worth what's on the menu and try to renegotiate.

That's the point: this is not 'renegotiating' -- it is abiding by the terms of the contract that everyone agreed to.

Imagine the hypothetical restaurant did not sell you dinner, but a tapas bar that charges you a per-minute fee to sit at the table and eat. You run the numbers and decide that it adds up, and you and some friends go and start eating. You're swiping your credit cards every minute, but 20 minutes into dinner the service starts slowing down. Suddenly, you're waiting 5, 10 minutes to get refills on your drinks. You order the next round and it's an hour before it appears.

At what point do you stop swiping your card, and walk away? At what point do you say, "Wait a minute. I didn't order dinner: I paid per-minute for access to dinner, and that dinner is decreasing rapidly in value."

Analogies are never perfect, but pretending that a collateral-secured loan with specific contractual provisions for returning the collateral and ceasing payment is like stiffing your server? That's probably one of the worse I've ever heard.
posted by verb at 10:18 PM on November 30, 2009 [1 favorite]

Simply investing in something doesn't mean that you deserve to make more money

No, but there's no reason to dump money down a hole if you have a different option.
posted by krinklyfig at 10:21 PM on November 30, 2009

You run the numbers and decide that it adds up, and you and some friends go and start eating.

Oh man, see, this is why I never go out. I can't keep track of all that and get everyone organized ...
posted by krinklyfig at 10:24 PM on November 30, 2009 [1 favorite]

... or the house. Did you not read the mortgage you signed? It's a loaned secured by the real estate. You pay or they get the house back.
posted by spaltavian

a point that bears repeating, ad infinitum. let them have it back, and then they can deal with the process of reselling an overpriced, undervalued asset. let them wright it off their books. let them deal with the financial consequences of their malfeasance.

especially, as has been mentioned, if you don't reside in a non-recourse state.

me, i'd do everything possible to protect myself, my interests, both financial and personal. that includes not throwing money down a hole to spend the next 10 years trying to dig out of said hole. i'd much rather give the bank the keys (eventually, and make them pay me to do it), drag out the court processes as long as possible, and then instead spend the next 10 years learning from my mistakes and rebuilding my life.
posted by ninjew at 10:35 PM on November 30, 2009

I should just shuck it and walk away from my home just because it's in the red at the moment? EVEN THOUGH I CAN STILL AFFORD TO PAY FOR IT?

I'm sorry - I simply fail to understand your ethical basis even a tiny, tiny amount - and I'm someone who spends a lot of time worrying about ethical and moral issues.

You have a contract. It spells out what you are and are not allowed to do and what the bank can do. If it allows you to walk away from the property, then you have every right to do so, morally, ethically and legally and you should if it's to your advantage.

There is no implied social contract between you and the bank. Indeed, you have every assurance that the bank will always operate to maximize its profits, no matter what the cost is to you.

You have paid for the right to walk away in increased costs upfront - you should take advantage of that right if it benefits you and yours.
posted by lupus_yonderboy at 11:05 PM on November 30, 2009 [4 favorites]

I entirely agree that making an investment does not necessarily grant a right to a return... especially for mortgage lenders and brokers who fail to maintain lending standards and do due dilligence.
posted by BrotherCaine at 11:07 PM on November 30, 2009

Someone really needs to put this sentiment into the form of a catchy hiphop song.
I'm just thinking of the infinite lulz if not paying debts became cool.

Droppin' off my keys in the jingle mail,
Fuck an industry that's too big to fail.
Folks all uptight about equity
I'm chillin' in my rental with a 50" TV.
posted by porn in the woods at 11:12 PM on November 30, 2009 [5 favorites]

Someone really needs to put this sentiment into the form of a catchy hiphop song

i think someone already did, except for that hiphop part. and his name is Kenny Loggins.

You got to know when to hold 'em, know when to fold 'em.
Know when to walk away, know when to run
posted by ninjew at 11:32 PM on November 30, 2009 [1 favorite]

Folks all uptight about equity

If you still feel bad about it, think about this.

The economy will shift to relate to what should be the valuation of your home, whether you walk away or not. This means the economy will shift to support salaries which buy homes at the price your house is worth now, not what you paid for it. This could be a serious problem if you find yourself unemployed somehow, particularly if your house is still underwater.
posted by krinklyfig at 11:51 PM on November 30, 2009

Kenny Loggins?

You just flew right into the danger zone...of not knowing your pop singers.
posted by maxwelton at 11:52 PM on November 30, 2009 [13 favorites]

matty: "For me it's an intensely moral issue - I've made a commitment to pay for this house, so as long as I have the ability to do so I'll pay for it. I gave my word that I would."

Yes, and the woman whose husband comes home every night and beats her black and blue made a commitment to stay with him for life, and so she shall.
posted by alexei at 12:13 AM on December 1, 2009 [7 favorites]

Yes Kenny Rogers gives sage advice.

I'd say not walking away from an underwater mortgage is immoral, you're just making life worse for future homebuyers.
posted by jeffburdges at 1:39 AM on December 1, 2009 [1 favorite]

You have a contract. It spells out what you are and are not allowed to do and what the bank can do. If it allows you to walk away from the property, then you have every right to do so, morally, ethically and legally and you should if it's to your advantage.

People keep saying this, as if the contract is straightforward and simple, but it's not. I have a graduate education and am generally not a total dunce, but I just (really just, like two minutes ago) reread my mortgage contract cover to cover, and I'll admit that I'm not much more informed than before I read it. Maybe other states are different, but my contract does not say something as simple as "If you want to mail in your keys and return your house, the possible consequences will be X, Y, and Z."

My interest in this is only academic -- I'm not upside down and am not interested in mailing in my keys. And I suspect that access to doing this is going to depend enormously on what state you live in, and maybe even what jurisdiction within that state, in terms of how potential lawsuits might be handled.

But obfuscatory language aside, I think that sometimes walking away can be the smartest possible move, just as sometimes continuing to pay an underwater mortgage can be the right thing, too. And if we are going to keep holding homeowners to a high standard of moral correctness, that moral standard needs to begin to be applied to the behavior of the banks, too. One standard for them and another for us is stupid.
posted by Forktine at 4:35 AM on December 1, 2009

Yeah, just to clarify:

*I* walked away from an upside down situation and I gave my house back, and I could have made the payments, which would have been devastating to my and my partner's financial situations - we were in the middle of a breakup. In my mind, it made no financial sense to do so. I "broke" Matty's contract, according to his moral code. I certainly don't see it that way and I certainly don't see myself as some kind of lowest common denominator, whatever *that* means.

*my mother* walked away from an upside down situation for two reasons, the first being that my late father had mortgaged the condo into an untenable monthly payment - she couldn't afford to keep it. This devastated him because he believed in the moral contract of which Matty speaks.

When you are flush and have an emergency fund on hand, and you know that your underwater mortgage is a temporary situation, it's really easy to nail the argument in black and white terms and take a firm stand.

When you're living a lot closer to the poverty line - I am currently below it and so is my mom - these decisions and judgments become a lot more gray, and the moral decisions tend to not matter so much as attempting to keep your bank balance in the black.
posted by disclaimer at 5:55 AM on December 1, 2009 [6 favorites]

And continue to pay the first mortgage as the house sits empty.

saffry, you have another option. You can turn your current house into a rental property, so its not sitting empty and is generating some income for you.
posted by anastasiav at 5:58 AM on December 1, 2009

What this article doesn't mention (that I saw any way) is any method of forcing a foreclosure. I want to walk away. I moved because of a job change. I stopped payment after 2 years of trying to sell a house I didn't live in, in a non-recourse state, because I had to choose between paying my mortgage or paying for daycare. Gee, tough decision.

But the bank won't foreclose. They just keep calling me. Pisses me off. I have the right to walk away, and aside from the credit hit it won't hurt me, but they know as well as I do that the house won't sell (despite the $10,000 in improvements I put in while living there). I would love to force them to foreclose, to stop the repeated bad credit reports for non-payment. But the bank knows it costs them less to keep harassing me than it does to just foreclose. I used to talk the the person on the phone, explaining the situation and asking what help was available. After a while I stopped explaining. Now I just reject the call immediately. There isn't any help. There was no help before we got behind on payments, when it would have done some good. Now that we're behind, there is no help for us because we don't live in the house.

We made a decision to buy a house that we could afford. The job didn't work out. We moved. And we got screwed not by bad business decisions on our part, but by bad decisions on the part of the lenders. We bought just before the market collapsed, and were trying to sell when it was going downhill rapidly.

One thing I have learned from this: I will never place my money in a bank again. Ever. Our credit union has never let us down, and doesn't seem to care about our formerly stellar credit going downhill because of this house fiasco. Banks can suck it. They caused this situation, they profited from it, they were bailed out, and they are still passing the costs on to everyone except themselves.
posted by caution live frogs at 6:10 AM on December 1, 2009 [6 favorites]

saffry, you have another option. You can turn your current house into a rental property, so its not sitting empty and is generating some income for you.

Mm, not necessarily as easy as it sounds. The rental market has been depressed also which makes it harder to rent a property out without suffering a shortfall.

Check out this Ask Mefi : http://ask.metafilter.com/127228/Is-there-help-out-there-for-landlords-who-want-to-avoid-foreclosure
posted by plep at 6:32 AM on December 1, 2009

If all my neighbors walk away from their mortgages, prices will plummet further than they already have, and I'll be even more underwater than I already am.

Screwing the bank may be OK ("it's just business!"); screwing your neighbor isn't ("devil take the hindmost!").
posted by notyou at 7:24 AM on December 1, 2009 [1 favorite]

Your neighbors have no responsibility to keep your property value overinflated. The part that's screwed up is when the lienholder lets the landscaping die and the house get run down.
posted by BrotherCaine at 7:34 AM on December 1, 2009

Well if this thread has taught me anything, it's that my poverty during the last boom did me a real favor by keeping me a renter.

But I do think I'm going to send this to my friend who is struggling and has a mortgage. I don't know if she's in this situation, but maybe it can give her some options.
posted by emjaybee at 7:39 AM on December 1, 2009 [1 favorite]

Maybe other states are different, but my contract does not say something as simple as "If you want to mail in your keys and return your house, the possible consequences will be X, Y, and Z."

People have mentioned in this thread, if you're considering this you should talk with an attorney and maybe a financial advisor, too.
posted by krinklyfig at 8:20 AM on December 1, 2009

saffry, you have another option. You can turn your current house into a rental property, so its not sitting empty and is generating some income for you.

Yeah, there is going to be a lot of that going on. Depending on the market and neighborhood it may or may not be easy or even possible to rent.
posted by krinklyfig at 8:23 AM on December 1, 2009

People have mentioned in this thread, if you're considering this you should talk with an attorney and maybe a financial advisor, too.

Read the very next sentence -- it's not something I'm interested in, much less considering. My point was that the language of the contracts is pretty impenetrable, so the assistance of an attorney or other qualified adviser would seem pretty much mandatory. I just happened to have a copy of my mortgage contract in the drawer next to me, and it was interesting to reread it in light of this thread.
posted by Forktine at 8:26 AM on December 1, 2009 [1 favorite]

matty, thanks for putting yourself out here and explaining your personal take on the article.
posted by Nelson at 8:47 AM on December 1, 2009 [2 favorites]

Of course my neighbors don't have a responsibility to keep the price of my house "overinflated." They have a responsibility to not "overdeflate" the price of my house* -- whether by parking cars in the front yard, ignoring the maintenance, or by adding another foreclosed home to the local comps.

Otherwise it really is Pottersville, and who but sociopaths want to live there?

----------------
*and their own, as well.
posted by notyou at 8:47 AM on December 1, 2009

They have a responsibility to not "overdeflate" the price of my house* -- whether by parking cars in the front yard, ignoring the maintenance, or by adding another foreclosed home to the local comps.

One of these things is not like the other...
posted by lalex at 9:33 AM on December 1, 2009 [1 favorite]

One's responsibility to keep a house off the foreclosure rolls is just as much as my responsibility to buy up all the produce at the supermarket so they don't lose money.

In other words, absolutely none. Propping up an artificial market will create serious price distortions. It would encourage builders to build even more homes (as they can extract a tidy profit if the market was overpriced), thereby creating massive environmental waste, economic dislocations, and ultimately bigger recessions.

I would argue that in certain specific circumstances, it is deeply immoral to artificially prop up a market unnecessarily — it breeds corruption and waste.
posted by amuseDetachment at 9:43 AM on December 1, 2009

I'm with Matty. I think there is a moral imperative to say: "I take responsibility for my actions." I bought the house at a price I agreed to, I promised to pay this much money for it, and I should follow through with that.

Lots of circumstances can make you act differently (e.g., I have to move, and I can't sell it. Write it off an move on.) And that is why the law is there to protect us and allow us to create a clean slate. Nothing prevents you from taking advantage of this.

But, at the end of the day, don't you think there should be some personal responsibility attached to your actions, and a twinge of shame when you need to renege?
posted by mtstover at 9:59 AM on December 1, 2009

I bought the house at a price I agreed to, I promised to pay this much money for it, and I should follow through with that.

This tends to create seriously underperforming markets. When you have societies which do not allow for bankruptcy and ignoring of debts, you create disincentive for the lender to care about the performance of the underlying-asset/business-plan/etc. You're removing another check in the system. Credit checks, underwriters, and appraisers exist because people can declare bankruptcy.

Investments imply risk, the bank decided to play with debt. If they wanted something risk-free, they should've bought 30-Year U.S. Treasury Bonds. You've paid for the interest on the risk of returning the underlying collateral, if you could not exercise that right, then you shouldn't be paying that higher interest rate anyway.

The bank should have understood the systemic risk of mass foreclosures. Economies are reflexive. If they understood the fact that by lowering the interest rates to an unreasonable level (and therefore making it much more affordable), then many more people would've taken on loans. This effect is recursive and distorts the market. The only way to prevent this from happening again is making sure that these institutions get screwed hard. Mass foreclosures are a way to prevent the bank from doing this again. By preventing this natural occurrence by appealing to false morality, it's tantamount to encouraging another bubble, from a long-term systemic perspective. If banks understood the risk of foreclosure, they'd be a whole lot choosier about their underwriting process. They are only understanding this with the foreclosure crisis, and markets are only now beginning to be fairly priced, foreclosures give a clearer picture of whether the market may be overpriced and forces it down. Morality is really complex in economic markets, by "doing the right thing", you may be helping to create another crisis. Sometimes, higher interest rates and a more anal retentive appraiser is better for society.

I see no reason for those that wish to foreclose to have any shame whatsoever, they're not skimping out on your friend's interest-free loan here. They're acting upon an agreed contractual relationship that is governed by state and federal law.

Sentimentality is not morality. The personal responsibility extends insofar as to is returning the home to the bank in a reasonable condition.
posted by amuseDetachment at 10:18 AM on December 1, 2009 [4 favorites]

But, at the end of the day, don't you think there should be some personal responsibility attached to your actions, and a twinge of shame when you need to renege?

Of course. But walking away from a house is not reneging, it's fulfilling the terms of the contract.
posted by breath at 10:21 AM on December 1, 2009

If you have an emotional attachment to your home-with-underwater-mortgage, you have to ask yourself how much that emotional attachment is worth. $50,000? $100,000? $250,000? Because you are paying for it, whether you realize it and want to be honest with yourself or not.

The money you are throwing into your mortgage's bottomless pit because you like your flower bed and your garden (as if there aren't more of those out there, at fair-market values) could be a vacation, a new car, an education for you or a loved one, or extra income in retirement.

If you're willing to forgo all of those things for a row of hydrangeas, or some misplaced notion about morality (which is wrong to begin with), then go ahead. But you may as well take hundreds out of the ATM and set them alight.
posted by jckll at 10:55 AM on December 1, 2009

Amuse / Breath - a question: do you think it would be morally right to buy a car using GMs 60 day money back guarantee, and then return the car 60 days later just because you could (not because you were actually dissatisfied?)

You of course would be just fulfilling the terms of the contract, but not the intent.

Do you think there is a difference between legality and morality? Not trolling actually just curious.
posted by mtstover at 11:01 AM on December 1, 2009

mtstover: You're not paying interest and depreciation for those days that you are "renting" the car. Therefore, no, you are being a drain on the dealership. If they had the agreement where you can return the car at anytime minus the price of the payment for that month, I see no problem in doing so.

With foreclosure, it's completely different, the homeowner has been been paying for interest on the home (and a house don't realistically deprecate at any significant level). The loss the lender takes from the foreclosure has been "paid for" by the higher interest rate above LIBOR and the contractual understanding of the foreclosure process in that state.
posted by amuseDetachment at 11:09 AM on December 1, 2009 [1 favorite]

Yeah - I'm not disagreeing with you at all on the economics or the legality or even the need to do this when circumstances call for it. I just think it should not be casual and I don't think it should be guiltless.

The way I see it, fundamentally you are paying interest on a LOAN, not a HOME. The foreclosure process (as I understand it) is for a breach of contract on that loan. The bank says: "If you stop paying me, we'll take your home. But that is a last resort and we don't really want it." Which is different than saying: "We own your home, stop paying us anytime and we'll just take over." That would be called renting.

You enter contracts with the expectation of fulfilling them. "I am borrowing this money, I should pay it back." You should feel bad when you can't.
posted by mtstover at 11:21 AM on December 1, 2009 [1 favorite]

mtstover: "Amuse / Breath - a question: do you think it would be morally right to buy a car using GMs 60 day money back guarantee, and then return the car 60 days later just because you could (not because you were actually dissatisfied?)

You of course would be just fulfilling the terms of the contract, but not the intent.

Do you think there is a difference between legality and morality? Not trolling actually just curious."

Although this wasn't aimed at me, I'm going to answer it anyway. I just took a quick gander at the FAQ for the GM program you're referring to and I don't see what the problem is. You're paying for what is essentially short-term insurance. Looka-here:

Q3: Is there an alternative offer if the customer is not interested in the Satisfaction Guarantee program?

A: Yes. In lieu of the 60 day Satisfaction Guarantee, the customer can elect a $500 cash incentive at the time of vehicle purchase.

If I buy a GM and I don't elect the $500 cash incentive, I am paying GM $500 for the right to return that car. For any reason. Morally, legally, ethically.
posted by jckll at 11:26 AM on December 1, 2009 [4 favorites]

Kenny Loggins?

You just flew right into the danger zone...of not knowing your pop singers.

yes. plus i misspelled 'write' as 'wright' in my other comment. the zing was well-deserved, friend.
posted by ninjew at 12:56 PM on December 1, 2009

Do you think there is a difference between legality and morality? Not trolling actually just curious.

Excellent question there! The answer is that there is absolutely a difference, having to do with circumstances and intent.

The GM example is a good one. If you took the car for 60 days and returned it as a deliberate scam to get 60 days of free car ownership, I'd call that legal but morally dubious. But if you took the car for 60 days with the honest intention of owning it, but decided you honestly didn't want it, I think we can all agree that it's both morally and legally fine.

In the same way, if you bought a house with the intention of giving it back to the bank in order to somehow profit, that would be legal but morally dubious. If, however, you purchase a home with the best of intentions but then unforeseen events like a housing collapse means that it's much better for you to default under the terms of your contract, then again there is nothing morally or legally wrong with it.

There's a separate component involving your relationship with the counterparty. When I'm doing business with friends, I go out of my way to point out problems in their side of the bargain and fix them up before we start, and I might well later do things above and beyond any contract. If I'm doing business with an individual who is a stranger, I still feel a responsibility to reveal any issues, but I don't feel I necessarily have to rub their noses in them. I still will tend to overdeliver to a contract - if I were a landlord, I'd find it difficult or impossible to evict someone sick or old, for example - but less so than if it were a friend or family member.

When we get to corporations, I feel my moral obligation is even less. They have the lawyers, they have the money, they write the contracts, they write the laws for God's sake! You know that they would show you not the slightest mercy if the situation were reversed, that they do things that are not only immoral but downright illegal all the time. You know if you went broke they wouldn't give you a dime, but when they went broke last year they extracted over a trillion dollars from us - about $4000 from each man, woman and child in the USA - and gave us back nothing at all.

I still feel I should take the moral high ground - that I have to do better by them than they would by me - but that certainly does not include refusing to exercise any advantageous legal rights I might have.

I'd actually claim that you are morally in the wrong NOT to walk away from a house whose mortgage is underwater because of some bizarre moral obligation to a bank - that you are immorally taking money away from people you have great obligation to, your family, yourself even! and giving it to a powerful organization that has set itself in an adversarial relationship to you, has extracted huge amounts of money from We The People, and would hesitate not one instant to see you and yours crying in the street if it could make a few dollars from it.

Of course, there are tons of other good reasons to stay in an underwater mortgage. IMHO, people should be buying houses as a place to live, not an investment, so the underwaterness or not of your mortgage might be unimportant to you if you're not planning to move. But feeding the poor starving banker's children is not one of those reasons.
posted by lupus_yonderboy at 1:20 PM on December 1, 2009 [6 favorites]

"and gave us back nothing at all."

Hyperbole - some small portion of this money has already come back and the theory is that most of it is coming back - though there have already been bankruptcies so we know it isn't all coming back. I should have said something like, "We got no compensation for making these loans, still less for the inevitable losses which are already occurring".
posted by lupus_yonderboy at 1:28 PM on December 1, 2009

If it makes fiscal sense for your neighbors to walk away from their mortgages, then the value of your home is self evidently overinflated. If your neighbors are doing it when it doesn't make fiscal sense for sheer spite, or you don't live in a state with non-recourse loans, then I'd agree there is a moral component.

I'm sorry to harp on this, but I'm angry at a lot of my neighbors and clients who seem to think that home ownership is some kind of right. They've constantly overbid home values with insane unworkable mortgages and now they want some kind of government bailout. If everyone crunched the rent vs buy numbers ahead of time I'd have probably been able to afford a home by now because the market wouldn't be so overinflated (still).
posted by BrotherCaine at 2:32 PM on December 1, 2009 [1 favorite]

I'm with Matty. I think there is a moral imperative to say: "I take responsibility for my actions." I bought the house at a price I agreed to, I promised to pay this much money for it, and I should follow through with that.

What? No. Mortgages are not moral imperatives, they are legal contracts. The laws governing such contracts offer a specific set of options and consequences for both parties in a default scenario. Trust me, banks are quite aware of every regulatory nuance involved, and they make their lending decisions will full knowledge of the spectrum of potential outcomes.

Seriously, the entire model of financial institutions is based on making informed bets about risk and return. Sucks for them that their math was bad this time around, but there is absolutely no moral component involved whatsoever.
posted by lalex at 2:45 PM on December 1, 2009 [3 favorites]

There's certainly a lot of grey area here. My inlaws seem to think defaulting on loans for homes, vehicles, boats, and trailers is sound financial policy when they don't want them anymore instead of going through the hassle of trying to sell them. And then wonder why they pay so much for their car loans and complain about their credit score.

I find it interesting that both my husband and I were raised by people who treat credit cards as free money and we both HATE having any kind of debt. (Right now I think we owe about $300 total.) And, yes, we feel this makes us morally superior. Not that it means we are, just that it makes us feel good.
posted by threeturtles at 3:12 PM on December 1, 2009

You enter contracts with the expectation of fulfilling them. "I am borrowing this money, I should pay it back." You should feel bad when you can't.

Everyone that has to foreclose will feel bad, I guarantee that (whether they are willing to admit it or not). However, I don't think they should feel bad, as it's not immoral to return the home. They expected to fulfill the contract, and found out it's a bad deal and are allowed to get out. They get out, no big deal. If you get into a car accident, you'll probably feel bad that you're costing your insurance carrier money, but it's not immoral (you paid for the insurance).

Let's look at a world where everyone is allowed to get out of their home at any time (horrors!). In this situation, nearly all the banks out there will properly insure themselves against default by requiring a down payment of around 20%, to create incentive for you to stay in your home. If you mail the keys back, you lose the 20% you paid. They would also do more than check your credit, they'd check your income, savings and your ability to pay it back through the life of the loan, not just the first month. Lastly, they would hire real appraisers, that can price the value of the home fairly, and know that if at anytime you foreclose, even in the first month, they will still make a profit, as you've already paid 20% down and it's enough of a cover.

The reason we had some markets drop 50%, was because the mortgage market didn't do any of the above. Again, economies are reflexive, by insuring against a 20% loss, they make sure that a 50% loss wouldn't have happened (as there would be much less risky borrowers, and housing developers would not have incentive to build massive McMansions).

The threat of returning the keys at any time is good for the market, we just need to make it like it was 10 years ago, when the borrowers would never do this, as it's always a better deal to sell the house than to mail back the keys. Understanding the history of the American mortgage market is crucial, it's always been okay to mail back the keys in many states because this was understood as a stupid move for the borrower. Just because the lenders got lazy doesn't make it suddenly immoral.
posted by amuseDetachment at 3:59 PM on December 1, 2009 [4 favorites]

Nelson: Credit scores, for better or worse, are our proxy for "is this borrower ethical and responsible".

Actually, credit scores are just a proxy for "how likely we are to get the promised stream of income." Unfortunately, credit scores are calculated from data that does not include enough information to discern whether past failures to pay were due to strategic concerns, moral failings, income constraints or flow problems, laziness or forgetfulness, or just plain spite. So when a bank pulls your credit information, all they see is that you failed to pay your mortgage, and most are unsophisticated enough just to assume that means you'll be more likely to default on future obligations.

Others have pointed out that the strategic default option is generally priced right into the points or interest rate of a mortgage, and that in non-recourse states, mortgage obligations are entirely satisfied by turning the house over to the holder of the mortgage. But at this point, it is important to remember that there are other important considerations in deciding whether to default beyond just the question of whether the mortgage is "under water." Credit costs can be significant, and so can moving and transition costs. Be strategic, but think about all of the relevant costs.
posted by dilettanti at 4:48 PM on December 1, 2009 [3 favorites]

The night of the fight, you might feel a slight sting. That's pride fucking with you. Fuck pride. Pride only hurts, it never helps.
posted by ooga_booga at 7:41 PM on December 1, 2009 [4 favorites]

There's certainly a lot of grey area here. My inlaws seem to think defaulting on loans for homes, vehicles, boats, and trailers is sound financial policy when they don't want them anymore instead of going through the hassle of trying to sell them. And then wonder why they pay so much for their car loans and complain about their credit score.

Well, that's just dumb. Ruining your credit score on a bunch of bad-faith agreements is not moral or advantageous beyond a very short period. Walking away from an underwater mortgage can be a matter of six figures, and it's not done lightly at all, but if you're $200,000 in the hole, where does that get you by paying it off? It doesn't automatically mean you're trying to run some scam by defaulting on debt. That's a rational decision, at least when made by rational people who are looking at the situation and the consequences clearly.
posted by krinklyfig at 11:47 PM on December 1, 2009

I can understand that people take up the option to give back the house to settle the debt - the consequences are minor.

What I don't understand is why are the consequences so minor? Why does the bank give you the option to pay back a $200K loan with a $100K house at all? Why would they make an offer which exposes them to such risk in the case of a downturn?

In Australia (and most other countries) there is no such thing as a non-recourse loan - you have to repay your debts, in full, or declare bankruptcy. Why is the US different?
posted by dave99 at 3:53 AM on December 2, 2009

US law varies state to state. Not all states require non-recourse loans. In California, only loans used for purchase money are non-recourse (refi loans may or may not be considered non-recourse, and IANAL). There are multiple reasons for California to force the mortgage industry to use non-recourse loans, including protecting borrowers from predatory lenders, forcing the industry to use stricter financial controls, especially in the wake of the S&L crisis (obviously didn't work all that well considering), and preserving limited judicial resources (defaulting on a non-recourse loan being generally simpler than a bankruptcy).
posted by BrotherCaine at 4:58 AM on December 2, 2009

Why does the bank give you the option to pay back a $200K loan with a $100K house at all?

Because they screwed up. See, the point of a mortgage is that the loan is backed by the property. But, because mortgagers failed to do due diligence, they loaned $200K on a $100K house.

This didn't happen when banks held the notes themselves -- they made sure you had a slice in it (that's the 20% down payment) and they made sure you had the three C -- Credit (proven history) , Capacity (the ability to pay the loan) and Collateral (that the house was worth at least as much as the loan.)

When they forgot that, and starting making unpayable loans, the equation changes. Since anybody could get an unpayable loan, they did. This drove demand up, which drove prices up -- which is what originally made it all work, because when your loan recast or reset to an unaffordable payment, you sold the place, at a profit, and did it again.

This drove prices through the roof. And, in the end, it broke down, because even unpayable loans became too expensive. This crushed demand, so when the unpayable loan reset or recast, then, well, you couldn't sell at a profit to close the loan. So, foreclosure, and now, the bank has a $200K loan on a $100K house.

Lather, rinse, repeat. Welcome to 2009.
posted by eriko at 6:03 AM on December 2, 2009 [2 favorites]

fwiw, there's some pretty good negative equity stats here:

Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity... The distribution of negative equity is heavily concentrated in five states: Nevada (65 percent), which had the highest percentage negative equity, followed by Arizona (48 percent), Florida (45 percent), Michigan (37 percent) and California (35 percent).

The bulk of ‘upside down’ borrowers, as a group, share certain characteristics. They:

• Financed their properties between 2005 and 2008, with 2006 being the peak year where 40 percent of borrowers were in negative equity
• Relied on adjustable rate mortgages (ARMs)
• Bought less expensive properties... an average value of $210,300 [and are] upside down by an average of nearly $70,000. The aggregate property value for loans in a negative equity position was $2.2 trillion, which represents the total property value at risk of default, against which there was a total of $2.9 trillion of mortgage debt outstanding.

[CR adds: "Most homeowners with negative equity will probably not default, but this does show that there could be several hundred billion more in losses coming from residential mortgages."]

also btw here's household percent equity (owner's equity as a percentage of household real estate) of which those with mortgages have only around 20%, cf. Record No. of Americans Pretending They Own a Home (speaking of prescient ;)
posted by kliuless at 7:56 AM on December 2, 2009 [1 favorite]

A short payoff is when a lender agrees to accept less than the total owed in exchange for releasing the mortgage as a lien on the property. A lender does not have to do this. If you walk away from your house and the bank cannot sell it for more than the money you owe, you might legally owe the difference. If the bank does forgive the debt, the IRS treats the forgiven debt as taxable income. Default on a $100k debt, expect a $30k tax bill.
posted by malp at 8:45 AM on December 2, 2009

So after reading this thread, I did some estimating about my mortgage, and realized that if we went underwater by 25% (we're not, thankfully) and we walked away, the money the bank made by selling the home at 25% less than we owe + the money they've received through interest and principal on the mortgage so far would add up to more than the money they loaned us, for a significant net profit to the bank.

Now, mind you, we've been paying our mortgage for more than five years and we didn't pay too much for it, but it certainly resets my view of walking away -- essentially we and the bank would both be better off. The equity we had in the house would already be gone, so we wouldn't be walking away from it, and the bank would only lose the profits they'd receive in the future if we hadn't walked, but would still have made a profit on the whole deal.

Looks like I need to recalculate my worst-case-scenario financial plans a bit, after finding out if we'd be legally on point for the difference between monies owed and the final sale price.
posted by davejay at 5:34 PM on December 2, 2009

Er, sorry, we and the bank would not both be BETTER off than if we'd kept paying, but we would be better off and the bank would still make a profit regardless of whether we stayed or left.
posted by davejay at 5:35 PM on December 2, 2009

Looks like I need to recalculate my worst-case-scenario financial plans a bit, after finding out if we'd be legally on point for the difference between monies owed and the final sale price.

If you're going to lose the house in the end, you need to look at opportunity costs. How much money would you have if you invested that money rather than making house payments on a house you're going to lose?

If the bank does forgive the debt, the IRS treats the forgiven debt as taxable income. Default on a $100k debt, expect a $30k tax bill.

No, expect $30K to be added to your total income, which will *not* result in additional $30K in federal tax. But yes, you are exactly correct that a forgiven loan becomes income. Think of it this way -- they gave you $100K to buy the house, and you paid them $70K back. What is the remaining $30K? Income -- the bank gave it to you.

This should never be changed, unless you think CEOs and the like are paying too much taxes. If you change this rule, they'll get paid $1, and lent $50M -- which will be forgiven at the end of the year, and they'll happily file the tax form to show that they're making $1 a year.
posted by eriko at 6:27 PM on December 2, 2009

Actually, it's a bit more complicated than that eriko, there are exceptions to forgiveness of debt income for insolvency, bankruptcy, and some farm loans. Additionally, non-recourse debt is not considered income, but rather the outstanding balance of the loan at foreclosure is considered the selling price of the home for capital gains purposes, so depending on your basis in the home there may or may not be tax due.
posted by BrotherCaine at 7:54 PM on December 2, 2009

Christ people this isn't askme
posted by tehloki at 9:52 PM on December 2, 2009

It's funny how much this conversation sounds like an abortion debate.

Especially the idea that it's okay to do it if you really really need to according to my ideas of need and value, but only if you feel sufficiently guilty and remorseful about it.
posted by Salamandrous at 6:42 AM on December 3, 2009 [1 favorite]

"but renting shouldn't be a problem except for perhaps a higher initial deposit."

I have never understood this, because it has NEVER worked out for me. I had a FICO score that was hovering around 600. No credit card debt, no car payment, and nothing negative had been added to my report in a couple of years. I did a voluntary auto repo a few years previous, and that's what tanked my score.

I had a hell of a time finding a place. For a while, NOBODY would rent to me. The first thing that they'd do is take my $35, run the credit check, circle the negative stuff and then tell me that my application has been declined. This was in the Silicon Valley/SF Bay Area too. I offered higher deposits and was still declined. I offered one place three times the deposit in cash plus first/last months rent up front. STILL declined. Their 'corporate policies' wouldn't allow it.

Credit reports are the first thing that apartment managers pull up. My good paying job didn't matter, neither did previous apartment references. They saw "bad credit" and dropped it into the trash can. I did eventually find a not-so-great apartment complex that would rent to me, but it took quite a while and I ended up throwing away a lot of money on those stupid credit checks. I tried bringing current copies of my credit reports from all three bureaus but each time I was told that they could not accept those and they had to run their own.

I hate the FICO game. Living cash-only sounds great until you take a hit like the repo. Then you're absolutely screwed if you need something that requires credit.

Now we have a mortgage in another state, and even the FHA Streamline refinances are tightening up and becoming more difficult. Countrywide says that they'll happily refinance us but we have to pay title fees/closing costs again (expected) but mysteriously those have gotten way more expensive. Hmm..
FHA Streamline will now require an appraisal and thanks to another homebuilder in the same subdivision going price-slashy on their houses, we're screwed again. Appraiser said "Larger houses in same division are going for lower price point and insufficient data on resales in the area." We went with the higher rated builder and added a few upgrades. A nearby subdivision with a lower quality builder has also suffered a larger than average number of foreclosures - and a bunch of these 'strategic defaults.' So, thanks "Mortgage Walkers" for helping to screw over those of us that are actually paying our bills. :|
posted by drstein at 8:15 AM on December 3, 2009 [1 favorite]

Actually, it's a bit more complicated than that eriko, there are exceptions to forgiveness of debt income for insolvency, bankruptcy, and some farm loans

Bankruptcy/Insolvency aren't forgiveness of debt, they're discharge of debt, which is a different thing. Discharged debt is treated as a loss all around -- the lender will never be repaid, the borrower loses all assets (with certain exceptions) and since everybody loses, the tax implications are very different.

Or, if you will, bankruptcy courts discharge debt. Lenders forgive debt. There may be cases where a forgiven debt may not be treated as income, but they're rare. Discharged debt almost never is -- certainly debt discharged in a Chapter 7 bankruptcy.

Farmers and Fishermen can file Chapter 12, which is a more advantageous version of Chapter 13 bankruptcy, but this is very rare. So far in 2009, there have been about 370 Chapter 12 filings, compared to 370,000 Chapter 13 filings.
posted by eriko at 9:08 PM on December 3, 2009

drstein: ""I had a hell of a time finding a place. For a while, NOBODY would rent to me. The first thing that they'd do is take my $35, run the credit check, circle the negative stuff and then tell me that my application has been declined. This was in the Silicon Valley/SF Bay Area too. I offered higher deposits and was still declined. I offered one place three times the deposit in cash plus first/last months rent up front. STILL declined. Their 'corporate policies' wouldn't allow it."

Hm-- I think your issue was with trying to rent from places with corporate policies. There still exist plenty of independent landlords who are generally pretty flexible.
posted by alexei at 4:44 PM on December 4, 2009

Amuse / Breath - a question: do you think it would be morally right to buy a car using GMs 60 day money back guarantee, and then return the car 60 days later just because you could (not because you were actually dissatisfied?)

It's a lot later on but I just saw this. No, I don't think that's immoral. Sellers know that generous return policies entice people to buy a car that otherwise might not have, because the return policy gives confidence. Most of the people for whom the return policy was the primary impetus will not actually use it; simply using a product for a while makes people like it. This is one of those marketing psychology things. Here's a crappy article, and a journal article that I can't read and you probably can't either, and a pop article, about this phenomenon. So if they've done their math right, it's a net win in car sales.

I would draw the line at being dishonest to claim the return; that's immoral. But GM's policy is "no questions asked", and that means intent is irrelevant (NB: I haven't actually looked at the agreement, so it's possible that it's not quite so simple). They knew going into it that some people might just return the cars, but they decided that the benefits are likely to outweigh the risks.

There is nothing immoral about following agreements to the letter when the entity writing the agreement had adequate preparation (which is always the case for companies that have legal departments); in such cases the letter of the agreement is as close to the spirit as humanly possible.
posted by breath at 1:16 AM on December 7, 2009 [1 favorite]