Underwater

February 3, 2010 7:29 AM

Benjamin Koellmann paid $215,000 for his apartment in Miami Beach in 2006, but now units are selling in foreclosure for $90,000. “There is no financial sense in staying,” he said.
posted by four panels (167 comments total)

Somehow I doubt he paid $215K. He borrowed it.

The real cost of a $250K home is probably $500K or more once a person has paid off the mortgage.
posted by Sukiari at 7:33 AM on February 3, 2010 [3 favorites]

In a bit of synchronicity, I was just listening to one of the latest Planet Money podcasts that was about strategic defaults on underwater mortgages.
posted by Drastic at 7:37 AM on February 3, 2010 [1 favorite]

This is a good thing. When you sign a mortgage, you sign an agreement to pay off the loan, -OR- give over the property in foreclosure. For a long time, the "OR" part was definitely a bad idea compared to just keeping the payments flowing. However, there is nothing morally wrong with walking away from the mortgage.

Simply put, the banks made stupid loans on these properties, betting that property buyers would be too stupid to realize that the "OR" option was an option at all. Homebuyers should not be chastised for refusing to be stupid.
posted by explosion at 7:37 AM on February 3, 2010 [57 favorites]

Expect legislation to criminalize this behavior.
posted by Joe Beese at 7:40 AM on February 3, 2010 [27 favorites]

This is a good thing. When you sign a mortgage, you sign an agreement to pay off the loan, -OR- give over the property in foreclosure. For a long time, the "OR" part was definitely a bad idea compared to just keeping the payments flowing. However, there is nothing morally wrong with walking away from the mortgage.

Well, it depends on the actual contract, sometimes mortgages are recourse loans and they can come after you for whatever they don't get selling the house, I think.

But yeah. What's hilarious is all these wallstreet types, where chopping up and selling derivatives kept talking about how there was a "Stigma" about losing a house and people would keep paying. They thought the American people were suckers who would keep making payments for no reason whatsoever.
posted by delmoi at 7:43 AM on February 3, 2010 [16 favorites]

Some people survived the Titanic. And then we got a great movie out if where we got to see Kate Winslet's nipple. So, optimism!!
posted by spicynuts at 7:45 AM on February 3, 2010 [23 favorites]

They thought the American people were suckers who would keep making payments for no reason whatsoever.

This strikes me as one of the more justifiable false assumptions Wall Street's made lately.
posted by enn at 7:46 AM on February 3, 2010 [1 favorite]

I'm currently underwater on two homes, the one I live in, and the one I own half of (with my ex-wife). Both were in the $200-$250k area three years ago, both had 30 year loans, both had at least some equity. All of us involved in this mess are employed, good jobs, and at least decent credit (at least for now!)

At this point they are both in the $125k price range, thousands of $$'s less than what is owed, value of either will not recover to what is owed in my lifetime.

The absolute best move that could be made now would be for my current wife and I to default and move into a less expensive home (monthly cost for a nice house could easily be 1/3 to 1/2 of what we are paying now) we could even go smaller now that the kids are out of the house, and to encourage my ex to do the same, with similar cost savings.

My plan is to make any significant purchases that need to be made now (new homes, car, etc, anything that would need to be purchased in the next 10 years), and make the move...

It just makes sense, especially in a state like Michigan.
posted by HuronBob at 7:46 AM on February 3, 2010 [6 favorites]

Most of all, though, he struggles with the ethical question. “I took a loan on an asset that I didn’t see was overvalued,” he said. “As much as I would like my bank to pay for that mistake, why should it?”

Once a sucker, always a sucker.
posted by anti social order at 7:48 AM on February 3, 2010 [10 favorites]

What's hilarious is all these wallstreet types, where chopping up and selling derivatives kept talking about how there was a "Stigma" about losing a house and people would keep paying. They thought the American people were suckers who would keep making payments for no reason whatsoever.

That's where credit ratings come in though. If you default or otherwise become delinquent on your loan then you get blacklisted to some degree for getting future loans from anyone in the banking industry, or even jobs that involve handling money. I'm not sure if it's possible to quantify the value of a high credit rating for any given person, but for most mortgages that's the main financial reason why someone might walk away and let the bank take the loss rather than continuing to make payments.
posted by burnmp3s at 7:51 AM on February 3, 2010 [1 favorite]

"I took a loan on an asset that I didn’t see was overvalued"... I don't see it that way, he took a loan on an asset that was selling, at that moment, at market value (I assume), how is that considered "overvalued"?
posted by HuronBob at 7:52 AM on February 3, 2010

19. Dysfunctional Two-Party Political Bomb. Polarized partisanship increasing: Every day both parties show zero interest in cooperating for the public good. Instead they fight viciously, resisting everything and anything proposed by opponents. Only goal: Score political points, make the other side look bad.

Why should parties cooperate? That's not how it works in most countries. The party that wins gets to run things (or form a coalition with one or more other parties). But for some reason here in the U.S. there's a "Beltway consensus" that bipartisanship is good for some reason. It's stupid, given the fact that the republican party completely discredited itself.

The reason they want beltway consensus is to serve the elites and corporate interests. If the republicans and democrats can team up against the American people and pass things that benefit the corporations, that's great for those same corporations who sponsor elections. But if the parties take different views on issues, then they need to actually appeal to the voters on an issue.
posted by delmoi at 7:53 AM on February 3, 2010 [12 favorites]

Guy D. Cecala, publisher of Inside Mortgage Finance magazine, says he does not hear much sympathy from lenders for their underwater customers .... “The banks are damned if they will help.”

That about sums it all up right there. Short and sweet.
posted by blucevalo at 7:54 AM on February 3, 2010 [1 favorite]

"I took a loan on an asset that I didn’t see was overvalued"... I don't see it that way, he took a loan on an asset that was selling, at that moment, at market value (I assume), how is that considered "overvalued"?

Because the market was wrong? You may have noticed that happens from time to time.
posted by delmoi at 7:54 AM on February 3, 2010 [6 favorites]

> “Since the beginning of December, I’ve advised 60 people to walk away,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope. They don’t qualify for modifications, and being on the hamster wheel of paying for a property that is not worth it gets so old.”

I wonder how many of those people he had tried to talk out of securing a mortgage before the bubble burst.
posted by ardgedee at 7:54 AM on February 3, 2010 [8 favorites]

This story is completely stupid, it ignores the most important consideration for tangential ones (that only the dullest people couldn't resolve; Namely the moral imperative to repay a mortgage. Hint, you have none, that's why the bank makes you pay interest and will eventually take the property away from you.) The largest issue of walking away from an underwater property is future ramifications to your credit.

"Walking away, he knows, is not without peril. At minimum, it would ruin his credit score. Mr. Koellmann would like to attend graduate school. If an admission dean sees a dismal credit record, would that count against him? How about a new employer?"

Ruin his credit score? More like not be able to get another mortgage for a long long time. And being a 23 year old that's a heavy burden to bear. Thta's the only reason to maintain the residence, to ensure future credit worthiness.
posted by Keith Talent at 7:56 AM on February 3, 2010 [1 favorite]

> "I took a loan on an asset that I didn’t see was overvalued"... I don't see it that way, he took a loan on an asset that was selling, at that moment, at market value (I assume), how is that considered "overvalued"?

Because the market was wrong? You may have noticed that happens from time to time.

And, he also had the option of NOT buying a house at that price. Just like I didn't.

We will set aside for the moment the reality that I couldn't AFFORD to buy a house at that, or any, price at the time.
posted by EmpressCallipygos at 7:56 AM on February 3, 2010 [1 favorite]

Most of all, though, he struggles with the ethical question. “I took a loan on an asset that I didn’t see was overvalued,” he said. “As much as I would like my bank to pay for that mistake, why should it?”

Once a sucker, always a sucker.

Yep. Lawyers for banks will like to use morality equivalencies here, but I hope this thread doesn't turn into some kind of argument (as threads here have before) that signing a mortgage is like giving your word and you should stick to it because it's the right thing to do. It's basically a business contract. When terms are no longer unfavorable to businesses they renegotiate them. The fact that the prevailing narrative seems to suggest that this is somehow morally unacceptable for home buyers do also do so is something that needs to be publicly exposed and refuted.
posted by Burhanistan at 7:56 AM on February 3, 2010 [46 favorites]

I wonder how many of those people he had tried to talk out of securing a mortgage before the bubble burst.

Judging by the industry's SOP at the time, most probably "none", why?
posted by vivelame at 7:57 AM on February 3, 2010

That's not how it works in most countries. The party that wins gets to run things (or form a coalition with one or more other parties).

Yes, but many countries have parliamentary systems that (more or less) smoothly permit such arrangements. Our system is not engineered that way.
posted by blucevalo at 7:58 AM on February 3, 2010

I guess the walking away makes a lot of sense if you view your house/apartment/condo as primarily an investment. If, however it is where you want to live, and you can afford it, and agreed to the price then it doesn't make sense to me. We buy cars and they depreciate immediately, but few people get upset about that. Personally I think the wide spread practice of buying a house and then flipping it is/was a big part of the problem. Most people concentrate on the banks fault in this, and to be sure they bear a lot of the blame, but there where an awful lot of private individuals looking to make a quick buck involved as well.
posted by edgeways at 8:01 AM on February 3, 2010 [6 favorites]

Did he originally buy the condo as a place to live or as an investment? If it was as a place to live that he thought was worth $215K to him then he still has that and has lost nothing. If it was a real estate investment then he over-leveraged a volatile asset and is paying the price. I have little sympathy for people who take risks and lose.
posted by rocket88 at 8:02 AM on February 3, 2010 [1 favorite]

Ruin his credit score? More like not be able to get another mortgage for a long long time. And being a 23 year old that's a heavy burden to bear.

How much of an issue is this, really? I suspect most people who lost more than 50% of the value of their property in just a couple of years are probably not going to be very interested in buying again for a while, if ever. Moreover, so many people are going to end up with foreclosures on their records that the banks are going to have to choose between treating them more leniently or dramatically curtailing lending for a generation.
posted by enn at 8:04 AM on February 3, 2010 [4 favorites]

Between banks locking down their lending and credit card companies locking down new customers and jacking interest rates, why does FICO matter anymore?

Used to be you needed a credit score to get credit. Looks like nowadays, unless it's backed by the government, normal folks don't get credit anymore.
posted by Lord_Pall at 8:07 AM on February 3, 2010 [10 favorites]

When the topic initially became news I was a little iffy on how I felt about it but I think I've come around. If your contract allows you to surrender the deed in lieu of continuing payments what's the moral issue? Even if you were speculating you're acting within the terms of your contract that both parties agreed to.
posted by ghharr at 8:07 AM on February 3, 2010

[comment removed - comment bombing considered harmful.]
posted by jessamyn at 8:08 AM on February 3, 2010

The line that jumped ut at me was this one:

It would cost about $745 billion, slightly more than the size of the original 2008 bank bailout, to restore all underwater borrowers to the point where they were breaking even, according to First American.

So, for about the same cost, we could have reset the value of all underwater property in the country, instead of giving it to the banks? Yeah. This is why we hated the bank bailout.
posted by rusty at 8:08 AM on February 3, 2010 [34 favorites]

19. Dysfunctional Two-Party Political Bomb

Why should parties cooperate? That's not how it works in most countries. The party that wins gets to run things (or form a coalition with one or more other parties).

I think the problem is that in the US there is basically little choice because you ONLY have the two huge monolithic oligarchic parties. I do realize that in other countries, U.K., Canada, Ireland, there are also basically two parties, although in all of those countries, a third party has, in living memory, become strong enough to be one of the two parties, or make a big impression. And in most parliamentary systems, you sort of have to make some sort of coalition. There are downsides to that too, look at Israel's notoriously bizarre deal-making where really tiny pressure parties get to influence legislation, but nothing is perfect.

The fact that in the US, the two parties have made for an ossified dinosaur political infrastructure. And I don't see any raptors growing feathers to evolve into birdies either.
posted by xetere at 8:09 AM on February 3, 2010 [1 favorite]

Federal debt limit was just raised almost 100% with Obama's 2010 budget, to $14.3 trillion vs. $7.8 trillion in 2005.

Fucking little limp-dicked lies like this make me see red.

Read this. It's from the White House.

Obama DIDN'T raise the limit by 100%. Bush raised the debt limit from 7,384 billion in 2004 to 11,315 billion in 2008, in gradual increments. In fact, when Bush took office, the debt limit was 5,500 billion. Therefore, Bush raised the debt limit over 100% during his presidency.

Obama raised the debt limit from 11,315 billion to 12,104 billion, a measly 7% increase, less than 10 times the amount in your claim. Get your facts straight, and if you're going to get them from someone else, at least make some kind of effort to think for yourself instead of just parroting the screed.
posted by splice at 8:12 AM on February 3, 2010 [86 favorites]

If it was as a place to live that he thought was worth $215K to him then he still has that and has lost nothing. If it was a real estate investment then he over-leveraged a volatile asset and is paying the price. I have little sympathy for people who take risks and lose.

He didn't take a risk and lose. He found a bank that was taking a risk, and rather than letting their loss trickle back to him, he walked away.

Regarding what he "thought" was worth $215K, that was the going price for houses then. It just, plain, didn't matter. If you're forced to rent an apartment for $1500 a month because that's the going rate in your city, and then rents drop to $1000, you end your lease and find a new place. There's nothing morally different. The bank gives you a "walk away" clause, and you use it.
posted by explosion at 8:14 AM on February 3, 2010 [3 favorites]

Also: They “signed contracts, and as adults should also be held accountable,” he wrote.

Indeed they should be. If they choose not to exercise the "pay back the loan over a long time with interest" option of the contract, they must instead exercise the "give back the property" option.

It's like this whole article started with the premise that no one involved knows what a contract is. Not paying for the house, and trying to claim you own the house? That would violate the contract, and would become a legal, and possibly ethical, problem. Not paying for the house and giving the house back to the lender, as explicitly specified in the terms of the contract? There is no ethical or moral angle to that whatsoever, any more than there is to paying back the loan.

The only problem with it is our credit reporting system, which penalizes people for exercising one of their contractual obligations but not the other. Congress might should look into that.
posted by rusty at 8:16 AM on February 3, 2010 [13 favorites]

Mr. Koellmann was 23, a management consultant new to Miami.

My sympathy just went underwater.
posted by orthogonality at 8:18 AM on February 3, 2010 [7 favorites]

“The banks are damned if they will help.”

Here's what I think is happening. The banks are playing a game here. They know that if they send any information into the market that says they'll negotiate on loan values, that's the end of people treating that loan value as sacred. Everybody will want to negotiate down. And then what? Their mortgage asset portfolio loses maybe 1/4 of its value across the board. So basically they're calculating that it can't get worse than that in terms of number of defaults if they just hold firm.

This is one reason I think it's a shame we didn't do the right thing and just have an out-and-out state takeover of the failed lenders. Among other things it would have been a lot easier to revalue mortgages in a coordinated manner for both consumer and market-wide benefit.

So now we have the ultimate democratic test: will consumers force the issue themselves? There are some moral aspects to the decision... not everybody holding a mortgage is an evil bank, some of them might be pension funds or charity endowments. And a wave of defaults is likely to cause banksters to write their future contracts differently at a minimum, and maybe even push for policy legislation against this, so there's social fallout future borrowers would have to face. But on the other hand: banks clearly have an opportunity to meet consumers halfway and are being pretty amoral, cold, and calculating about their decision not to. Given that tit-for-tat feedback is generally understood as the way to get such actors to play cooperatively, it not only makes sense for consumers to play the same way, you could argue that such a decision works as a moral contribution toward a cooperative society.
posted by weston at 8:19 AM on February 3, 2010 [6 favorites]

Most of all, though, he struggles with the ethical question. “I took a loan on an asset that I didn’t see was overvalued,” he said. “As much as I would like my bank to pay for that mistake, why should it?”

Once a sucker, always a sucker.

So basically anything you buy, if it depreciates, you should stop paying for?

I'm assuming you never buy computers, cars, or basically anything else in the world?
posted by blue_beetle at 8:22 AM on February 3, 2010

So basically anything you buy, if it depreciates, you should stop paying for?

I'm assuming you never buy computers, cars, or basically anything else in the world?

We're talking about houses and property here. After the bubble burst, no one is going to say that they are going to keep appreciating, but as long as they are well-kept they should at least continue to hold their value. It's really not even worth comparing a house to a durable good.
posted by Burhanistan at 8:27 AM on February 3, 2010

Except sometimes the bank refuses to let you walk away. It's been over a year since I last made a house payment, and they haven't foreclosed. A foreclosure would be rotten on my credit score, sure, but the second it hits my credit starts improving again. This repeated reporting that I am not paying? That is hurting worse than a foreclosure would.

I don't live in the house. They can't legally take anything except the property. They know this, of course, which is probably why they won't foreclose - they can't sell the damn thing either. It's just fantastic. We spent two years telling them that we were trying to sell, and asking what help they could provide. They responded with "None, because you are current on payments." The minute we stopped paying, they were calling us daily asking how they could help - sure, wait until it's too late, then offer? Thanks. Especially as the "help" didn't apply to anyone not living in the home, and largely consisted of short sale opportunities - for which you would need a potential buyer, which we never had. The bailout money was a waste. The banks took it as a sign that they hadn't done anything wrong, and business as usual could continue.

(They did change the locks. I'm curious. It was my understanding that they can't do this unless they have taken possession of the house. By the contract language - pay up or give us the property - wouldn't this mean that they have essentially agreed that we're now even? I didn't pay, and they did take the property as collateral. All I find online are ways to STOP a foreclosure. I want to FORCE the damn thing, because I'm sick of the endless phone calls.)
posted by caution live frogs at 8:28 AM on February 3, 2010 [13 favorites]

If the government is even considering bailing out underwater homeowners, I completely give up. Whatever happened to suffering the consequences of your actions? Did that go away with the bank bailout?
posted by letitrain at 8:29 AM on February 3, 2010 [1 favorite]

The whole it's-in-the-terms-of-the-contract/it's-not-in-the-terms-of-the-contract thing is a red herring. The modern publicly-traded global corporation is an inanimate legal convenience. The individual people who are its nominal owners have no ethical interest in its affairs — indeed, that's largely the point. As an inanimate thing, the only legitimate considerations in dealing with it are legal and practical; ethical and moral considerations no more inhere in the arrangements into which it enters than they would in a contract I sign with my dining room table.
posted by enn at 8:30 AM on February 3, 2010 [6 favorites]

caution live frogs get a lawyer.
posted by cjorgensen at 8:30 AM on February 3, 2010 [10 favorites]

Also, the experience lately has firmed my resolve to never do business with a bank again. Credit union or nothing. The banks and their "me first, and screw you" policies can go to hell. It still shocks me that people willingly put up with financial institutions that charge their own customers money to take cash out of their own ATMs. And that's the least of their offenses.
posted by caution live frogs at 8:31 AM on February 3, 2010 [6 favorites]

Whatever happened to suffering the consequences of your actions? Did that go away with the bank bailout?

I think it went away with the development of the social grouping.
posted by enn at 8:31 AM on February 3, 2010

No one says defaulting on a contract is pretty or that, in a perfectly functioning society, defaults would be the rule. But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth.

Similar NYT article from last month.
posted by Burhanistan at 8:32 AM on February 3, 2010 [1 favorite]

and yeah, caution live frogs there are probably lawyers in your area that make that sort of thing their bread and butter. Good luck.
posted by Burhanistan at 8:35 AM on February 3, 2010 [2 favorites]

Anyone else feel like we have this argument once a month on the blue?
posted by jckll at 8:38 AM on February 3, 2010 [5 favorites]

So basically anything you buy, if it depreciates, you should stop paying for?

I'm assuming you never buy computers, cars, or basically anything else in the world?

As mentioned above, most mortgages are non-recourse loan, which means that the lender is explicitly taking on the risk that the collateral will not cover the loan balance if the borrower defaults. It's legally different from normal types of loans where the borrower is responsible and can be sued for the difference between the collateral and the amount owed after the repossession. So there's basically an agreement from the start that the borrower can walk away and leave the bank holding the bag, but that the bank will report the default on the borrower's credit report to make it less likely that they will be able to make similar agreements in the future.
posted by burnmp3s at 8:38 AM on February 3, 2010 [2 favorites]

caution live frogs,

If you want to have a sense as to what is going on, I'd suggest listening to the previously mentioned Planet Money podcast that describes the frequency of what you are going through. You might also want to check this out over at Rortybomb, where there is an indication that foreclosures are being completed at a slower rate (and some indication as to what they are thinking by doing this).
posted by Hypnotic Chick at 8:39 AM on February 3, 2010 [1 favorite]

Whatever happened to suffering the consequences of your actions?

Consequence of WHAT actions? If people bought these houses with cash up-front, they'd have lost value. That is not what's happening here. Instead, they bought houses with mortgages from banks that gave them the ability to hand over the house instead of continuing to pay.

Banks are not forced to give out mortgages. They can check out the house and say, "No way are we lending $250K for that P.O.S. building." They can say, "it's risky, we'll lend you the money, but strike the walk-away clause." Most banks did not do that. They gambled hard and fast, and it's they who should be suffering the consequences of their actions.

This guy who walked away from his mortgage? The loss of use of the house IS the consequence of his actions. It's not like he stopped paying and is still living in the building.
posted by explosion at 8:42 AM on February 3, 2010 [20 favorites]

Considering I feel like my bank pulled a bait-and-switch on me when I bought my home, and out and out lied, as well, I wouldn't feel bad about walking away if I thought it would save me money, and be easier in the end than just selling it.

I had $10,000 for a downpayment. I went in stating I wanted a 30 year fixed with $10k down. But since I qualified for !00% financing they kept pushing me toward that. They also kept showing me the monthly payment I'd have to make on that (it was reasonable).

In the end I stupidly conceded since I was tired of living like a college kid. So congratulations to me, I now have $6,000 in furniture that I am essentially paying off for the next 30 years. Also the PMI was way different for 100% financing. So that monthly payment that looked reasonable didn't include PMI or escrow payments. These have adjusted as taxes go up, the property value increases (yeah, right), and the insurance goes up, to the degree that I am paying $250 more a month than what I was shown on paper.

I'm what you would call "house poor." I have less disposable income than I did when I was in college working 3 part-time jobs.

The real kicker here is this loan officer has struck out on her own and keep sending her former clients letters asking for referrals. (Set aside the ethics of that, since I never entered into any kind of relationship with her other than as an employee of the bank.)

This all said, I have little sympathy for anyone on either side of this debate.

I hate the idea of bailouts. It makes no sense to me why any of my tax dollars should prop up payments for people who got into houses they couldn't afford. Move. I know it's not that simple, but it's not like I'm not dealing with the same thing. I was just smart enough to get into a 120K house that has lost 10K in value, not a 500k house that is now worth 250k.
posted by cjorgensen at 8:43 AM on February 3, 2010 [1 favorite]

So basically anything you buy, if it depreciates, you should stop paying for?

I'm assuming you never buy computers, cars, or basically anything else in the world?

Well, generally I'm finished paying by the time it becomes worth less then I "owe", in that I usually only pay once. But even then, why wouldn't you dump your car or house if you had an option to do so?

In the stock market you can buy a "put" option which gives you the right to sell assets at a specified price. Generally, you buy them as a hedge in case the value of your assets declines too much. Mortgages, at least non-recourse ones have a built in put option. Not exercising it would be stupid.
posted by delmoi at 8:44 AM on February 3, 2010 [1 favorite]

So basically anything you buy, if it depreciates, you should stop paying for?

As others have said, he's got a contractual out (foreclosure) of this legal agreement. He's a sucker for not using it and throwing good money after bad. If he was a CEO of some company, he'd be fired for this.


I'd be more inclined to accept some sort of moral gray area where people had an obligation to repay if the banking sector had ever made non-payment and foreclosure a moral issue. Anyone ever seen a bank decide to accept a ~$100k loss because it's the 'right' thing to do?
posted by anti social order at 8:45 AM on February 3, 2010 [1 favorite]

It's a bit ridiculous to think a property is "never" going to return to, or even exceed, the original purchase price. Certainly not longer than the typical 20 or 30 year terms of most mortgages. So just stop with that nonsense. At some point, certainly not now and probably not soon, the property values will eventually rebound. It's your contract, you made it with the bank and welching out on it is just bad form. That you "can" get away with it certainly doesn't make it right. Just don't expect the rest of us to buy into the lame-ass justifications for bailing on your obligations. You made bad decisions, you're stuck with living through them. Deal.
posted by wkearney99 at 8:46 AM on February 3, 2010 [1 favorite]

I can remember an expat talking about how, if the gas prices rose above 2$/gal, the militants would rise, and the people would follow in revolution. And that he would smugly sit up here, where someone ("ANYone, God-damnit!") would insure a guy with a bum heart, even if he had to pay that price already.

I can remember when hordes announced that they would leave to Canada if "that #^&*er Bush got elected again- no for the first time! haha!" Yet I didn't see much, if any statistically significant rise in US emigration.

I can remember when the American public cried out for Change, because anything was better than the stultifying present. When they compared the presidential candidate to founding fathers and Kennedy, I thought, 'the king will come again. Poor man, he'll try so hard, and break himself pushing the entrenched men of government while the howls of the fickle public hound him.'

Now, I wonder if the governments of democracy have become old, and strong enough to resist the people they are supposedly representing. After all, we all know we can change the system if we raise the money and run for dogcatcher through mayor through senator to ruling head.

Still, they must be doing something right- the bread is appropriately safe, and the circuses safely appropriate.
posted by LD Feral at 8:48 AM on February 3, 2010 [1 favorite]

I do have sympathy for those like this man, who behaved responsibly by most measures and wound up getting screwed by the market. But I also feel there is a moral aspect to walk/don't walk debate. It's naive to dismiss this as just the banking industry's problem. If enough people default on their mortgages the entire economy will take a hit. I'm not sure what the critical mass mark will be, or if the 17% underwater default rate the article cites is at that mark.

Oh, and for those of you saying Benjamin Koellman is 23, he was 23 when he bought his condo four years ago, which makes him 27 now. Still quite young of course, but even at that age who wants to walk away from the $43,000 he put down on it, plus whatever he's paid off in four years.

And I know this is happening to people who bought all kinds of homes, but the word "condo" is really standing out to me from this man's story. The condo I owned before I bought my house was not a good investment. I did end up selling it for more than I paid for it, but thinking about how much better off I'd be if I just rented a place for the 5.5 years I owned it makes me crazy.

Also, I keep thinking about someone I know who bought a one-room loft condo for only about 30K less than I paid for my three bedroom semi-detached. No, her place isn't in a better location — if anything, my place is in the better location. She was so sure it was a good financial step for her but I fear for her. How could her place not be overvalued?
posted by orange swan at 8:48 AM on February 3, 2010

Whatever happened to suffering the consequences of your actions?

You mean like banks losing money on predatory loans? Come on. Expecting one side of the deal to "take responsibility" for it while demanding no integrity from the other side is insane. The person you made the deal with has already sold the mortage off to wallstreet. Why on earth should you slave away in order to provide free money for rich people who made poor investments? It would be insane.
posted by delmoi at 8:49 AM on February 3, 2010 [9 favorites]

It's your contract, you made it with the bank and welching out on it is just bad form. There is no welching if it is non-recourse, it is an action allowed by the contract. "Good form" is not worth paying an extra $100,000 over 30 years or whatever.
posted by ghharr at 8:49 AM on February 3, 2010

but even at that age who wants to walk away from the $43,000 he put down on it, plus whatever he's paid off in four years.

That money is gone. Not "walking away" just means throwing more money into a black hole.
posted by delmoi at 8:50 AM on February 3, 2010

I should have been more clear. explosion: you and I are in complete agreement. The homeowner no longer has use of the house and the bank eats the loss.

The part that got me was the estimate of bailing out all the underwater homeowners. Fuck that - I've had enough of this capitalism for profits and socialism for losses.
posted by letitrain at 8:51 AM on February 3, 2010 [1 favorite]

delmoi, I am in complete agreement. Just don't want the government to even consider bailing out either party.
posted by letitrain at 8:53 AM on February 3, 2010

It's your contract, you made it with the bank and welching out on it is just bad form.

Do you really not get this? Did you not read the thread at all? The contract includes the option of not paying and surrendering the property. It's very simple.
posted by Perplexity at 8:54 AM on February 3, 2010 [4 favorites]

It's your contract, you made it with the bank and welching out on it is just bad form. That you "can" get away with it certainly doesn't make it right. Just don't expect the rest of us to buy into the lame-ass justifications for bailing on your obligations. You made bad decisions, you're stuck with living through them. Deal.

This kind of sentiment means that that terrorists banking lobbyists and PR firms have won. You're not swearing a sanctified blood oath to uphold something noble, you're signing a hugely usurious contract that is heavily weighted in favor of the bank. Please rethink your equivalency.
posted by Burhanistan at 8:57 AM on February 3, 2010 [16 favorites]

MMm. Zillow says my house is $30k under what I paid for it 6 years ago. Eepraisal says my house is $50k under. Here's hoping Zillow does better projections! Eeee.
posted by cavalier at 8:58 AM on February 3, 2010

I'm assuming you never buy computers, cars, or basically anything else in the world?

We're talking about houses and property here

More accurately, we're talking about property purchased with a loan guaranteed by that property.

Anyone who hasn't listened to the Planet Money episode that Drastic mentioned above, should. Really, you should listen to all of them. While they have a bit of the business-side bias that infects all our media now they're better than most, and the particular episode about strategic default is way better than most.

I haven't seen anyone mention it here, but I did see an interesting article not long ago pointing out that consumers in these situations are victims of a very significant power imbalance when it comes to this "moral hazard" of walking away from a home. The lenders are making purely business decisions; by applying this emotional moral judgment against the borrowers we put them at a significant disadvantage.

It's likely that same cold calculation that causes them to not foreclose on folks like danger live frogs. The Planet Money episode points out that until the foreclosure the borrower is on the hook for taxes and association fees, which is in some ways a subtle pressure the banks can exert. Not against folks who have already walked away, but perhaps to put some fear in other people considering the same move.

There's also the more immediate interest, which is minimizing the number of foreclosures in an area. If that bank is facing taking on a dozen homes in that area they want to do it slowly rather than all at once. Foreclosures are public record and people considering buying homes in the area are going to be put off by more of them. And it'll drive down the price of homes, some others of which the bank may own as well.

And caution live frogs? I'd suggest you talk to a lawyer in MN for the details, but I strongly doubt the bank has any right to lock you out of that home until they take legal possession. If you really want to force their hand so they foreclose and get it over with you might consider finding out - that really sounds to me like an illegal deprivation of property. I'd wager you could get the local law to let you back into the house.

Personally I'd suggest to the bank that if they don't move things along I'm going to get the sherriff to let me back in, explore my options with regards to restitution for their illegal action, and look around for local places where I can sell the appliances I still legally own for a good price.

Keeping you from doing the last was likely why they'd do the lock change.
posted by phearlez at 8:59 AM on February 3, 2010 [3 favorites]

It's your contract, you made it with the bank and welching out on it is just bad form

Gaaah, this is what's driving me crasy lately.. They're NOT welching out, they're choosing the *OTHER OPTION* described, included, spelt out, in the *F'IN' SACROSAINT CONTRACT*. By the way, it's an option the very same banks don't hesitate to take. It's legal, is *WRITTEN IN YOUR CONTRACT*.
posted by vivelame at 8:59 AM on February 3, 2010 [2 favorites]

most mortgages are non-recourse loan,

I sure wish that were true in Pennsylvania.
posted by leahwrenn at 9:03 AM on February 3, 2010 [1 favorite]

That money is gone. Not "walking away" just means throwing more money into a black hole.

I'm not so sure of that. Suppose in ten years' time this guy could sell his apartment for what he paid for it. He'll get his 40K back plus whatever he's paid off on his mortgage in 14 years of payments, which might be 60K or so. So he'll clear $100K after the sale, less the cut the realtor takes and all that. Alternatively, suppose his other option is to rent a place for $250 less a month. In ten year's time, he'll have saved $30K. Staying could still be way better than leaving.
posted by orange swan at 9:08 AM on February 3, 2010

Because the market was wrong? You may have noticed that happens from time to time.

the market is never wrong, like God and the weather, it just is.
posted by philip-random at 9:12 AM on February 3, 2010 [4 favorites]

This story is completely stupid, it ignores the most important consideration for tangential ones (that only the dullest people couldn't resolve; Namely the moral imperative to repay a mortgage. Hint, you have none.

Yeah, but when these god damned terrorists threatening debt collectors' basic freedoms to illegally threaten people with consequences they can't actually deliver, phony moral imperatives are practically the only weapon lenders have left.
posted by nanojath at 9:12 AM on February 3, 2010 [1 favorite]

Meanwhile, for lefties like Krugman who insist regulations need to be restored--they were removed by both parties in Congress--and economists like Stiglitz who also say time to put back regs, there is this most recent update on what bankers internationally are saying

http://www.ft.com/cms/s/0/be5b72a4-0e85-11df-bd79-00144feabdc0.html?ftcamp=Late_headline1/NL/USFeb2010/Vanilla_dvos10/0/
posted by Postroad at 9:15 AM on February 3, 2010

Did I miss a link? Delmoi quoted a Paul Farrell piece in Marketwatch ("the two-party political bomb" bit), and then a few others also quoted it. But I couldn't see the original link to that piece in this thread. (I've read the piece ... someone had e-mailed it to me previously. I'm just wondering when/where it got introduced to MetaFilter.) Where's the link to that? Am I just blind? If there's another thread on that piece, I'd love to see it.
posted by Alt F4 at 9:18 AM on February 3, 2010

It got deleted, Alt F4.
posted by Floydd at 9:22 AM on February 3, 2010

Really, you should listen to all of them.

I try, but Alex Blumberg, Chana Joffe-Walt and David Kestenbaum seem really, really determined to discourage me from doing so. Yammering yammerers.
posted by Alvy Ampersand at 9:22 AM on February 3, 2010

It got deleted, Alt F4.

Yeah that's the one jessamyn deleted above.
posted by burnmp3s at 9:22 AM on February 3, 2010

delmoi, I am in complete agreement. Just don't want the government to even consider bailing out either party.

A bit late for that. Banks have gotten a considerable amount of our tax dollars for this whole fiasco.

Staying could still be way better than leaving.

Of course the game is rigged. Don't let that stop you--if you don't play, you can't win.
posted by anti social order at 9:23 AM on February 3, 2010 [2 favorites]

It's a bit ridiculous to think a property is "never" going to return to, or even exceed, the original purchase price. Certainly not longer than the typical 20 or 30 year terms of most mortgages. So just stop with that nonsense. At some point, certainly not now and probably not soon, the property values will eventually rebound.

Says who? You lay this down like it's God's law, whereas it's really just an assumption; hopeful, optimistic, informed by historical trends, but still just an assumption.

It's your contract, you made it with the bank and welching out on it is just bad form. That you "can" get away with it certainly doesn't make it right.

By "right", do you mean legally, ethically or morally? All three, two of three? It's certainly not wrong legally to walk away if the contract stipulates that you can. Ethically wrong? That would depend on one's ethics. Let's just say that on this particular issue, your ethics and mine diverge. Morally wrong? Morality and banking have no point of connection. They just don't

Just don't expect the rest of us to buy into the lame-ass justifications for bailing on your obligations. You made bad decisions, you're stuck with living through them. Deal.

The assumptions that motivate a statement like this are narrow, judgmental and heartless. I hope that you're at least conscious of this.
posted by philip-random at 9:27 AM on February 3, 2010 [6 favorites]

"Most of all, though, he struggles with the ethical question. “I took a loan on an asset that I didn’t see was overvalued,” he said. “As much as I would like my bank to pay for that mistake, why should it?”

Back when I was taking ethics in college, I learned about what seemed to be a good method for determining if an action was ethical: Kant's categorical imperative. It states "Act only according to that maxim whereby you can at the same time will that it should become a universal law."

When you apply this to the current situation, walking away is simply not ethical. We all saw what happened in late 2008 when people started defaulting en masse. Lots of people lost their jobs & a good chuck of their 401k. Sure you can try to justify it to yourself by saying it was the banks fault for giving you that loan, but it doesn't change the fact that your actions - if it became universal - would collapse our economic system and everyone would be worse off.
posted by upplepop at 9:31 AM on February 3, 2010 [2 favorites]

Question for the more knowledgeable amongst us - I note that there's a lot of option ARM resets coming this year. Will this make the whole mess worse?
posted by DreamerFi at 9:31 AM on February 3, 2010 [1 favorite]

"Still quite young of course, but even at that age who wants to walk away from the $43,000 he put down on it, plus whatever he's paid off in four years."

Instinctively, nobody does - but instinct is wrong here.

You don't base future investment decisions on what you already spend - you base them on what you are likely to get from this point forwards.
posted by TravellingDen at 9:39 AM on February 3, 2010 [1 favorite]

When you apply this to the current situation, walking away is simply not ethical.

We're living by Kant here? People walking away from mortgages in 2008 was a symptom, not the cause of the banking crisis. The banks got bailed out and then some.
posted by Burhanistan at 9:40 AM on February 3, 2010 [1 favorite]

And then what? Their mortgage asset portfolio loses maybe 1/4 of its value across the board.

HA! A quarter!? More like half their portfolio. And fuck their portfolio.

I've got a job. I've been renting my whole life, because I knew (like any idiot with half a brain) that home prices were vastly, horrifically over-valued.

So, now's my time to shine, right? NOPE. Because there's jack shit on the market. Where are all the foreclosed homes in the paper? Where's all the good deals? Nowhere. Because the banks aren't foreclosing. They'd be setting fire to their balance sheets if they did that. So they sit, and they wait.

But how can they possibly afford to just hold on to property they aren't getting any money from?

So where's the incentive to sell? Only when a critical mass of people that are underwater in their loans decide to stop paying will we ever see those properties go back on the market.

welching out on it is just bad form

…And as long as we have idiots like this, it's going to take a looong time for that to happen.
posted by Civil_Disobedient at 9:40 AM on February 3, 2010 [21 favorites]

upplepop,

I don't understand your statement. Included in a mortgage contract is language that describes the process of foreclosure. The fact that the banks did not properly insure themselves against the possibility of numerous foreclosures is their own fault.

The fact that many lenders pushed, cajoled, bullied consumers into poor products...that is unethical. I don't see how a consumer selecting a contractually-allowed alternative is unethical. As an example, if I put a deposit on an expensive bicycle and then change my mind on purchasing it, would I be violating an ethical norm? Does the possibility of a bunch of people do the same thing suddenly make it unethical?
posted by Hypnotic Chick at 9:42 AM on February 3, 2010 [1 favorite]

When you apply this to the current situation, walking away is simply not ethical.
Is it ethical when corporations or banks do this?

I'm not being snarky, but I believe we have a double standard. Individuals are held to a higher standard than the corporate personhoods our culture has created. That's not a sustainable model.

I think as an abstract, the rescinding of these contracts would be unethical, as would the tactics used to sell them, strategies to guarantee financial success for the banks regardless of indiivdual repayments, etc.

But it's unreasonable to apply ethics to the consumer end of the equation without application throughout the rest of the chain. Consumers typically don't have the financial leeway to make an ethical choice in regards to their finances. Consumers are stretched down to the last dime right now and what you qualify as an ethical choice is in fact one of cold hard mathematics.

Do I walk away from a house that I will never pay off and start to rebuild my life, or become a permanent debtor, anchored to an ever depreciating asset.

There are edge cases, there are cases of abuse and corruption. But I believe that for the majority of people out there, it's disingenuous to categorize this as a focused ethical issue.

Societal ethics, perhaps, but individual ethics alone? Utter bullshit.
posted by Lord_Pall at 9:43 AM on February 3, 2010 [2 favorites]

Whoa, whoa, whoa upplepop. I don't think the categorical imperative means if something is right then if everyone did it the outcome would be beneficial. You are mistaken in interpreting it as some sort of crazed definition of collectivism. If everyone did any one thing surely the results would be destructive.
posted by symbollocks at 9:44 AM on February 3, 2010

walking away is simply not ethical

If you can't afford something, how is it not ethical to stop paying for it? Please help me understand, for I am but a simple man.

You act like the banks are just giving away money, and that those loans should be repaid.

You forget that the banks charge interest on the loans. The banks made their money. In fact, the repayment schedules are heavily weighted in the banks' favor for the early part of the loan.

How is that ethical?
posted by Civil_Disobedient at 9:44 AM on February 3, 2010 [1 favorite]

The part that got me was the estimate of bailing out all the underwater homeowners. Fuck that - I've had enough of this capitalism for profits and socialism for losses.

The thing is, we had that: we've socialized the losses of a small number parties who essentially created the situation, without a broad social easing of burdens.

If we'd chosen to bail out underwater homeowners instead of the banksters, it'd still be socializing losses, but at least the upside would have been broadly instead of narrowly socialized.

That isn't necessarily what the policy would have been if I were magically king of the world (as I stated earlier, aggressive if temporary nationalization of failed but systemically important institutions along with negotiated rather than bailed-out mortgages would probably have been my approach), but I think it's clearly superior to the socialized loss approach we chose instead.
posted by weston at 9:49 AM on February 3, 2010 [2 favorites]

Sure you can try to justify it to yourself by saying it was the banks fault for giving you that loan, but it doesn't change the fact that your actions - if it became universal - would collapse our economic system and everyone would be worse off.

And if everyone closed their bank accounts and put their money under a mattress, all of the banks of the world would go under, so you should never close your bank account. And if everyone quit their jobs to raise their kids, the whole economy would collapse, so no one should quit their job to raise their kids. And if everyone stopped having kids humanity would cease to exist, so not having kids is unethical. Etc.
posted by burnmp3s at 9:53 AM on February 3, 2010 [20 favorites]

If Tishman Speyer can do it, so can I. About time the Invisible Hand started giving the Invisible Finger to the Market. Consumers are just waking up to the reality that they are legally entitled to make the same amoral ruthless business decisions that are forced upon them by banks, financial institutions, etc.

This is going to be one of hell of a market correction. I'm getting my lawn chair and six-pack so I can sit back and watch.
posted by KingEdRa at 9:54 AM on February 3, 2010 [7 favorites]

I don't think anyone in this thread is excusing banks for their predatory practices or corporations for defaulting on their debts. And I certainly agree they've been getting away with way too much garbage for way too long. But the solution to that problem doesn't lie in a wave of consumers defaulting on their debts.
posted by orange swan at 9:54 AM on February 3, 2010

welching out on it is just bad form.

While we're talking about bad form, you might consider that using a word believed to be predicated on the idea that a particular ethnic or national group is mendacious by nature, counts.
posted by OmieWise at 9:56 AM on February 3, 2010 [5 favorites]

HA! A quarter!? More like half their portfolio.

I'm assuming that what the banks would probably do if they were to negotiate would be to meet borrowers halfway. So, on houses that have lost around half their value, they'd renegotiate down by 25%, and I think if I were a borrower with that offer, I'd probably accept a split like that as more or less fair. I suppose there are other value loss and negotiation scenarios, though.

And fuck their portfolio.

Indeed.
posted by weston at 9:56 AM on February 3, 2010

You made bad decisions, you're stuck with living through them. Deal.

This exact same thing can be said of banks that loaned money to people who obviously couldn't repay it, and agreed with them to a contract that had ways out other than repaying it.

Bad decision, bank. You're stuck with living through it. Deal.
posted by Flunkie at 9:59 AM on February 3, 2010 [6 favorites]

But the solution to that problem doesn't lie in a wave of consumers defaulting on their debts.
No, but it is the solution to the "I'm paying $1500 a month to live in a space that's worth $750 a month" problem.
posted by Floydd at 10:00 AM on February 3, 2010 [2 favorites]

upplepop: I disagree. I think walking away -- when it is rational, in the manner of a "strategic default," as corporations do all the time -- ought to be a universal law. If you have a non-recourse loan and you're underwater and think you could get better housing for lower monthly payments, and you've written off your down payment, then you should do it.

The net effect of this, in the long run, would be that banks would tighten down on their lending. Which is a good thing. The core of our current problem is that the banks lent out money poorly. They should take the hit for that mistake; it shouldn't be borne by borrowers who were given contracts which in many cases have walk-away provisions (and who paid for those walk-away provisions in the form of higher interest rates!). In the future, they'll be much more careful in their lending, both in evaluating borrowers and in valuating the underlying assets that they're lending out money to purchase. That is as it should be, and it's the only way that we won't find ourselves in this same situation, in another generation or two.

The current situation, where individuals are held to artificially high moral standards that corporations simply don't follow, because they don't have the wetware to even know what "morality" is, creates a destructive power imbalance. Saying that that power imbalance ought to be maintained to prevent some short-term economic pain is shortsighted.
posted by Kadin2048 at 10:01 AM on February 3, 2010 [4 favorites]

Honestly, I figured the 1-2 of defending banks plus using the gonna-make-someone-comment term 'welch' was just trolling.
posted by These Premises Are Alarmed at 10:03 AM on February 3, 2010

"Still quite young of course, but even at that age who wants to walk away from the $43,000 he put down on it, plus whatever he's paid off in four years."

-------------------------

Repeat after me: Suck costs should not influence decision-making.

The only relevant numbers here (and everywhere else) are the prospective benefits/costs associated with walking vs. staying, i.e. rent for a new place vs. the remaining mortgage payments, and future market price of the house. Also the impact of credit-score damage.
posted by fatehunter at 10:04 AM on February 3, 2010 [2 favorites]

While we're talking about bad form, you might consider that using a word believed to be predicated on the idea that a particular ethnic or national group is mendacious by nature, counts.

You're gypping the discourse of its flavor if you insist we be scotch with our use of ethnically-derived slang.
posted by explosion at 10:04 AM on February 3, 2010 [1 favorite]

But the solution to that problem doesn't lie in a wave of consumers defaulting on their debts.

I'm curious why you think this would be such a bad thing for the economy. I'd think if a homeowner were able to free up half their mortgage payment by defaulting and renting a cheaper place, that money is likely to go toward consumer goods — and that seems better for the economy and employment than if that money continues to go toward further enriching the financial sector.
posted by enn at 10:05 AM on February 3, 2010 [2 favorites]

I'm really missing something in this whole argument. Here's how I decide what I'm going to spend: I look at my income, decide how much I can afford in each category of spending (housing, transportation, food, etc.), and develop a strategy to maximize my utility for that amount in each category. Now, I rent, but I decided on my current rental arrangement by deciding how much I could afford and shopping around for the best apartment for that price. The risk I take by renting is that, now that I'm out of lease, my landlord might raise my rent and I would lose control of my housing budget.

If I were to buy (and I'm not going to, because I have better things to do with my money, like invest it), I would set a budget, find a place that fits in that budget, and buy it. The great thing about buying is that it hedges against inflation, right? If I get a fixed loan, my housing costs are more-or-less predictable out to 30 years. Why the hell do I care if the market value of the house drops in that time? I'm still getting what I paid for, at a price I can afford and that I decided was reasonable, and I'm protected against housing price inflation. It's a great situation. How does the market value of the house even affect me? Why would it be rational for me to "walk away", since I've already made the decision that this is the budget-appropriate price that I'm willing to pay for housing?
posted by mr_roboto at 10:05 AM on February 3, 2010 [3 favorites]

Oh I was going to add a 'gypped' joke but then got distracted!
posted by These Premises Are Alarmed at 10:05 AM on February 3, 2010

You're gypping the discourse of its flavor if you insist we be scotch with our use of ethnically-derived slang.

you're taking the mickey out of me, aren't you?
posted by toodleydoodley at 10:06 AM on February 3, 2010

Call me crazy, but my father taught me that the primary purpose for investing in real estate isn't to make money. It's to have a place to live and to raise a family.

Houses are not supposed to deliver spectacular returns on investment. They are, however, supposed to create equity. And what people like Koellman are experiencing right now is negative equity, which is truly demoralizing. Reasonably-minded people, taking out conservative loans relative to their pay, losing 75% of their investment 3-4 years later due to a market plunge. Amazing. If this guy had made a cash purchase on his condo in 2006, he wouldn't have a lender to transfer his loss to. He'd have to chalk it up to bad timing.

However, the banks are to blame for creating an enormous bubble in the housing market through overspeculation and credit default swaps; for allowing for unprecedented lending flexibility that fed money into a non-transparent system of irrational risk-taking with little or no incentive for regulation, and consequently artificially driving up the price of housing. Individual investors both should have, but could not have, seen this one coming.

(As a side note, I think what has sparked this idea that "walking away" from a mortgage is unethical is the fact that one is doing so in today's market because the collateral has lost its value, and not because one can't pay the mortgage; and this is an unusual situation, because by walking away you are essentially making it "someone else's problem," notably, the entity that fronted you the money in the first place. Traditionally, in a world where properties maintained their value, one would foreclose only because one could not afford to make payments, and at the least the bank would get a valuable asset back. Not having the money to pay seems like a less unethical reason to default on an agreement than "I have the money but this is a terrible investment, so take the house, it's worthless anyway.")
posted by phaedon at 10:06 AM on February 3, 2010 [2 favorites]

Can't you all see? The banks were the victims here! Unscrupulous real estate speculators like HuronBob and his ilk took advantage of the poor widdle banks and their low standards for lending in an already hyper-inflated market. How can you all be so callus? Next you are going to demand that they pay back the billions in handouts the government gave them and that they restrict employee bonuses to employees that actually perform their jobs effectively and rationally!
posted by Pollomacho at 10:07 AM on February 3, 2010

Using all taxpayers dollars to subsidize the select homeowners that will be utilizing the bailout, not one of whom was forced to buy a house in a market whose collapse has been widely predicted for many years is reprehensible. It is just another version of "Too big (of a financial and voting bloc) to fail".

"While the administration wants a sweeping program that would prevent millions of foreclosures, it doesn't want to be seen as rewarding the greedy or reckless."^

Not wanting to be seen as rewarding the greedy and the reckless by rewarding the greedy and the reckless. Awesome.

Getting it in one end from the banks simultaneous with getting it in the other end from a portion of the population without so much as a "Thanks baby, I'll call" makes me feel so cheap.

tl;dr Corporations are an evolving amoral entity which rather than employing the hit-and-miss of natural selection has access to data and thus evolves in a more targeted and efficient manner.
posted by vapidave at 10:08 AM on February 3, 2010 [1 favorite]

wkearney99: "It's a bit ridiculous to think a property is "never" going to return to, or even exceed, the original purchase price."

Thank you for illustrating the kind of thinking that got us into this mess in the first place.
posted by mullingitover at 10:08 AM on February 3, 2010

Not sure if this has been linked here yet, but here is an interesting discussion of this topic on Talk of the Nation

I'll admit up front that math and economics are not my strong suit, so I have no doubt that people much smarter than me may understand the reasoning for this far better than I ever will, but I still don't comprehend why banks aren't willing to renogotiate loans for the realistic current market value when the alternative is having the buyer default, in which case they will be forced to sell at the current market value anyway.

In my case, I bought my house in early 2006 at a price that was actually a great deal at the time considering what other homes in the area were going for, but has decreased in value nearly 50%. At this point, I think we are one of three families who remain on our block from when the tract first opened, the rest having fallen victim to foreclosure. As this area was all new construction, it was a haven for all of the bad loans/predatory lending you hear about, causing values to drop dramatically as foreclosures started to pile up.

So at this point I'm left with the option of spending the next 26 years paying more for a house than it's actually worth due to some misguided sense of being "honorable" to my commitment or protecting my family by getting out of this mess and taking whatever credit hit that entails.

Because I like the house and don't particularly want to move, I'd be more than willing to work with the bank on a new loan for what the house is actually worth, but until they are willing to do that it doesn't leave the buyer with many good options. There is definitely a sense that with the bailouts, the banks were given a reprieve, while the little guys were left holding the bag. That's what gets frustrating when I hear people make comments along the lines of, "You made a bad decision, you should have to deal with the consequences of it". Yes, I did, but so did the banks but they were given a way out while those of us who bought weren't.
posted by The Gooch at 10:14 AM on February 3, 2010 [5 favorites]

There is definitely a sense that with the bailouts, the banks were given a reprieve, while the little guys were left holding the bag. That's what gets frustrating when I hear people make comments along the lines of, "You made a bad decision, you should have to deal with the consequences of it". Yes, I did, but so did the banks but they were given a way out while those of us who bought weren't.

Socialism is for the rich and capitalism is for the poor.
posted by phaedon at 10:20 AM on February 3, 2010 [4 favorites]

Not having the money to pay seems like a less unethical reason to default on an agreement than "I have the money but this is a terrible investment, so take the house, it's worthless anyway."

Well, then the banks shouldn't write non-recourse mortgages, shouldn't they? Because that's the difference between a recourse loan and a non-recourse one.

A non-recourse loan lets you "mail in the keys" and give the property back, rather than continuing to pay, even if you're Donald Trump. A recourse loan doesn't; if you stop paying, as part of the foreclosure proceedings, the lender can go after the rest of your assets (subject to bankruptcy law -- there are some minimal assets they can't take, generally).

In some states, you can get either one, and the non-recourse loans cost more. In other states, they have decided as a matter of law that only non-recourse loans are legal, and everyone simply pays higher interest rates as a result.

If you have a non-recourse loan, you have paid extra to have the option to walk away. You are a rube if you don't use it when it is advantageous to do so. It's like purchasing a fire insurance policy and then not filing a claim when your house burns down. (In non-recourse states, that de facto 'insurance' wasn't optional, but you paid for it anyway.)

Of course, phaedon does bring up a good point. There are lots of situations where you might have negative equity, but you're still making the payments and really don't care about the moment-to-moment "value" of the house. The calculation is a cash-flow one; is the house worth the monthly payments that are being made on it, relative to the alternative (moving, renting a place, possibly having the rent raised in a few years rather than having it locked in for 30, etc.). I suspect that for many non-speculative homeowners, even if they're currently underwater, a strategic default might not make sense. I'm in no sense saying that everyone who's underwater ought to default and walk away; everyone needs to consider their long-term housing needs and budget. But it's a purely financial calculation, not a moral one.
posted by Kadin2048 at 10:21 AM on February 3, 2010 [6 favorites]

I'll never understand how people can pay hundreds of thousands of dollars for what is essentially an apartment.
posted by zzazazz at 10:24 AM on February 3, 2010

There is definitely a sense that with the bailouts, the banks were given a reprieve, while the little guys were left holding the bag. That's what gets frustrating when I hear people make comments along the lines of, "You made a bad decision, you should have to deal with the consequences of it". Yes, I did, but so did the banks but they were given a way out while those of us who bought weren't.

The bank bailout was an enormous theft of taxpayer money, but more than that, it gave rise to arguments like this one. "The banks got bailed out, why not me?"
posted by letitrain at 10:33 AM on February 3, 2010

I'll never understand how people can pay hundreds of thousands of dollars for what is essentially an apartment.

What do you mean? Even a cheap apartment in a big city will cost over $1000/month, so you would wind up paying $100,000 in less than eight and a half years. In many cases, rental is a much better cost proposition than purchasing a property, though it is a poor hedge against inflation. "Hundreds of thousands of dollars" is what housing costs.
posted by mr_roboto at 10:34 AM on February 3, 2010

Why would it be rational for me to "walk away", since I've already made the decision that this is the budget-appropriate price that I'm willing to pay for housing?

Wow, it must be wonderful to have never been fired from a job or had a medical emergency you couldn't pay for. What a wonderful, charmed life you must lead.
posted by Civil_Disobedient at 10:45 AM on February 3, 2010

Wow, it must be wonderful to have never been fired from a job or had a medical emergency you couldn't pay for.

This discussion isn't about people who have been forced to foreclose because of financial emergencies; it's about people who have chosen (or are considering the option) to foreclose because of a change in the market value of their properties.

How would you account for the prospect of a financial emergency in a buy-rent decision? Properties aren't generally sheltered from bankrupcy, right? So buying represents a sunk cost that you lose completely upon bankrupcy. I might be wrong about that... How does bankrupcy generally work with property ownership in the US?
posted by mr_roboto at 10:50 AM on February 3, 2010

How does bankrupcy generally work with property ownership in the US?

Varies dramatically from state to state. Texas is well-known as a state where you can keep your house upon declaring bankruptcy leading to a [possibly apocryphal] perception as Texas being a state of bankrupt people living in multi-million dollar homes.
posted by jessamyn at 10:52 AM on February 3, 2010

it's about people who have chosen (or are considering the option) to foreclose because of a change in the market value of their properties

My apologies for the snark, I read your comment too quickly.

How does bankrupcy generally work with property ownership in the US?

You don't lose your house. That's the big thing.
posted by Civil_Disobedient at 10:53 AM on February 3, 2010

Why would it be rational for me to "walk away", since I've already made the decision that this is the budget-appropriate price that I'm willing to pay for housing?
Let's say you found a nice apartment, rent is $1500. a month. You sign a 30 year lease with the stipulation that you can break the lease but you lose your deposit and last months' rent and your credit takes a ding. Five years later you find a virtually identical apartment for $750 a month. Would you stay in the $1500 a month apartment, since, after all, you've already made the decision that this is the budget-appropriate price that you're willing to pay for housing?
That's what I thought.
posted by Floydd at 10:54 AM on February 3, 2010

letitrain: The bank bailout was an enormous theft of taxpayer money, but more than that, it gave rise to arguments like this one. "The banks got bailed out, why not me?"

To clarify, I'm not arguing for a homeowner bailout; simply expressing my frustration with the attitude some have expressed here and elsewhere towards homeowners of, "You need to indefinitely suffer for the bad decision you made to buy a house at the wrong time" when the banks have not been held to the same standard. I don't think homeowners deserve to be shamed for taking the one option available to them to get out of a bad situation.
posted by The Gooch at 10:55 AM on February 3, 2010 [1 favorite]

Would you stay in the $1500 a month apartment, since, after all, you've already made the decision that this is the budget-appropriate price that you're willing to pay for housing?

You might, if the $750/mo apartment only offered a one-year lease instead of the 30-year lease you had at $1k/mo, and you reasonably expected rents to increase during the period of time you'd be living in the area. There are lots of circumstances where the security of the long-term lease would make sense; businesses pay extra for long-term leases like that all the time. (Some commercial RE leases are 100 years.)
posted by Kadin2048 at 11:01 AM on February 3, 2010

I'd be more than willing to work with the bank on a new loan for what the house is actually worth

You make it sound like having 50% of your mortgage erased is some kind of noble gesture on your part.

What about the guy who didn't buy a house because other people bid up the prices to unsustainable levels? What does he get?
posted by diogenes at 11:03 AM on February 3, 2010 [4 favorites]

You don't lose your house. That's the big thing.

That's not universally true. Here in Georgia, you can lose your house and any cars you own. Basically, if you have more than $10,000 in home equity, the bankruptcy trustee will usually order the property to be forfeited and sold and the proceeds (except the first 10,000) disbursed to creditors. Same goes for cars - the limit is 3500 there.
posted by deadmessenger at 11:05 AM on February 3, 2010

diogenes: You make it sound like having 50% of your mortgage erased is some kind of noble gesture on your part.

What about the guy who didn't buy a house because other people bid up the prices to unsustainable levels? What does he get?

In this area at least, he can buy one of the many affordable foreclosed homes currently on the market at rock bottom prices.
posted by The Gooch at 11:07 AM on February 3, 2010 [1 favorite]

What about the guy who didn't buy a house because other people bid up the prices to unsustainable levels? What does he get?

he gets to pay cash in the neighborhood he wanted in the first place for the money he had saved for a down payment.
posted by toodleydoodley at 11:09 AM on February 3, 2010 [1 favorite]

Jinx, The Gooch, let's have a purple cow!
posted by toodleydoodley at 11:10 AM on February 3, 2010 [1 favorite]

Watch out for deficiency judgements coming to a town near you soon.
posted by Xurando at 11:11 AM on February 3, 2010

Watch out for deficiency judgements coming to a town near you soon.

to be quickly followed by a new insurance product - gap coverage, like you get when you're upside down on your car loan.
posted by toodleydoodley at 11:13 AM on February 3, 2010

numbers below come from using this mortgage calc and turning on the amortization schedule.

That money is gone. Not "walking away" just means throwing more money into a black hole.

I'm not so sure of that. Suppose in ten years' time this guy could sell his apartment for what he paid for it. He'll get his 40K back plus whatever he's paid off on his mortgage in 14 years of payments, which might be 60K or so.

You're basing your assumptions based on a very common simplification - ignoring the real costs of a mortgage an the typical amortization schedules. Sukiari actually mentioned this real cost right in the very first comment. He may get that back, but he'll spend a lot to get there.

I'll leave the finger-pointing for why we do this to others, but in my experience almost nobody thinks about the costs of a mortgage in total dollars. We almost always speak about them by saying things like "purchasing a $500,000 home with $100,000 down at 5% interest." Nobody ever says "I'm going to buy this half a million dollar home for $873,000 by paying $100,000 up front and then an additional $773,000 over the next 30 years."

And nobody ever follows that up with "and after the first ten years I'll only own 35% of it, even though I'll have already spent $361,000."

But that's the way this works, with your total cost being a huge amount and your early years being mostly interest payments. It's why it's SO advantageous for some of those people to walk away from under-water properties. Sticking it out for another 10 years till you hope the market has rebounded? Might work for Koellmann but remember there's a lot of people in Florida in particular who had interest only loans, or some of these option-ARMs where they didn't even have to make the full interest payment before the reset.

Let's run Koellmann's numbers.

A 215,000 property which he put down 20% on means a total borrow of 172,000. The NYT doesn't reveal his interest rate, only that it's a fixed rate loan, but we can look at the numbers for that year and take a number in the middle, let's call it 6.5%

The NYT says his monthly is $1500, not $1087 as the mortgage calculator says, but he's probably got taxes and condo fees rolled up into that. We'll use the $1087 even though we should probably consider the others as sunk costs.

After his 120th payment the remaining principal on his loan will be $145,517.15. He will have made $130,000 in payments plus the initial $42,000 down payment. He will have paid $105,000 in interest.

We can, for the sake of argument, make some assumptions about his income, future tax brackets and the continued deductability of mortgage interest in first and second homes. So say he gets to write that off and call it the 28% bracket, allowing him to recapture $29,400 of that interest.

If the apartment is back to $215,000 he sells it for that price (and we'll ignore the 3-5% real estate commission) and after paying back the $145,000 he's got $70,000.

Getting there cost him $130,000 +$42,000 - $29,400 = $142,600.

And that's based on a lot of assumptions. I used 10 years, not 14, requiring the property to go from $90,000 (other foreclosed apt in the same building according to NYT) to 215,000 in 6 years.

If the rule of 72 says 72 divided by a percentage rate results in the number of years it takes an investment to double then we can invert it. 72 divided by 6 years means the housing market would have to improve at 12% a year. Ten years means 7.2%

Koellman would have a place to live for that amount of time in exchange for that money, true, but he's also have a place to live for that amount of time if he could find someone to make him a loan and buy one of those $90,000 properties across the hall before he walks away from this one.
posted by phearlez at 11:14 AM on February 3, 2010 [22 favorites]

Here's hoping Zillow does better projections!

I'd be real wary of anything Zillow or any value projector program says, due to the huge inventory of homes banks are sitting on. I just ran my place through Zillow and it says it's worth like 40% more than the current ad valorem assessment, which I might believe in a seller's market but not now, especially when my ad valorem has just plummeted the last two years. furthermore, when I clicked "for comparisons", it couldn't produce *any*. that tells me, at least for my area, zillow is just plugging in my land size and house size and expanding the search across at least a couple of counties.
posted by toodleydoodley at 11:35 AM on February 3, 2010

It's a bit ridiculous to think a property is "never" going to return to, or even exceed, the original purchase price. Certainly not longer than the typical 20 or 30 year terms of most mortgages.

After the 1929 crash and 1930s depreciaition in house values, it took until the 1950s until many regained their former value.

Not everyone has this long before they have to move.
posted by jb at 11:37 AM on February 3, 2010

I'm assuming that what the banks would probably do if they were to negotiate would be to meet borrowers halfway.
[...]
What about the guy who didn't buy a house because other people bid up the prices to unsustainable levels? What does he get?

If the banks renegotiate the loans, the prices for those homes drops. If the prices for those homes drop, the new buyer has a realistic chance of buying a home for what they should be worth. As opposed to the current system, where we only have the opportunity to buy homes at the pre-bust, over-inflated, bank-fantasy rate.
posted by Civil_Disobedient at 11:40 AM on February 3, 2010 [1 favorite]

Did he originally buy the condo as a place to live or as an investment? If it was as a place to live that he thought was worth $215K to him then he still has that and has lost nothing. If it was a real estate investment then he over-leveraged a volatile asset and is paying the price. I have little sympathy for people who take risks and lose.

The same argument can and should be made for the bank. They made a loan based on the market value of the house at the time. They did this anticipating that they would win in either possible scenario. If the purchaser pays the mortgage then the bank earns the compound interest. If the purchaser defaults on the loan then the bank takes ownership of the house and whatever the purchaser paid into it.

If I'm not to have sympathy for the person buying the house, I have even less sympathy for the banks.
posted by substrate at 11:52 AM on February 3, 2010 [1 favorite]

Zillow is useless. I'd love to sell my house for what Zillow says it's worth. Wanna buy it?
posted by fixedgear at 12:02 PM on February 3, 2010

I don't like FPPs that have nothing more than one link to one NYT article in them. that's not enough meat.
posted by krautland at 12:08 PM on February 3, 2010

If the banks renegotiate the loans, the prices for those homes drops. If the prices for those homes drop, the new buyer has a realistic chance of buying a home for what they should be worth. As opposed to the current system, where we only have the opportunity to buy homes at the pre-bust, over-inflated, bank-fantasy rate.

Say someone takes out a 500k mortgage, stops paying, and gets their mortgage renegotiated to 350k. Someone else gets a 500k mortgage, keeps paying, and their mortgage stays at 500k. Why would the guy with the 500k mortgage keep paying?
posted by diogenes at 12:10 PM on February 3, 2010

I don't like FPPs that have nothing more than one link to one NYT article in them. that's not enough meat.

The discussion seems to suggest otherwise.
posted by diogenes at 12:11 PM on February 3, 2010

Say someone takes out a 500k mortgage, stops paying, and gets their mortgage renegotiated to 350k. Someone else gets a 500k mortgage, keeps paying, and their mortgage stays at 500k. Why would the guy with the 500k mortgage keep paying?

I want to ask are all other conditions equal? but most of the time they're not. did either of them make a down payment? what are their respective neighborhoods like? etc, etc.

and anyway, why can't the other guy get his mortgage renegotiated? precedent and all that.
posted by toodleydoodley at 12:20 PM on February 3, 2010

"he gets to pay cash in the neighborhood he wanted in the first place for the money he had saved for a down payment."
You neglected to include "...as well as a portion of his income to bail out the banks and homeowner for the consequences of their actions."

I understand that we are in a bad situation here and I'm not suggesting what I judge to be the economically unpalatable prospect of no government action. Though unhappy I am not in a rage about my money being spent on what amounts to correcting the results of actions with causes that range from bad luck to poor judgment to sociopathic greed in which I took no part. I would however like to see everything possible done so that we don't find ourselves in this situation again. I mean again again. Or perhaps again again again.

Actually I might be in a bit of a rage, but not at any particular non politician or banker.
posted by vapidave at 12:24 PM on February 3, 2010 [2 favorites]

I don't like FPPs that have nothing more than one link to one NYT article in them. that's not enough meat.

You have a choice to continue on with the discussion under those terms or walk away.
posted by mazola at 12:25 PM on February 3, 2010 [5 favorites]

and anyway, why can't the other guy get his mortgage renegotiated

Because the banks would be insolvent if they renegotiated every mortgage to current value.
posted by diogenes at 12:29 PM on February 3, 2010

that's been covered

anyway, banks'll do it as long as it's a way to make some money vs no money. when better money starts coming in from other sources again, they'll quit.
posted by toodleydoodley at 12:34 PM on February 3, 2010

Why would the guy with the 500k mortgage keep paying?

Exactly! Why, indeed?
posted by Civil_Disobedient at 12:37 PM on February 3, 2010

How does bankrupcy generally work with property ownership in the US?

I don't practice consumer bankruptcy and I won't be offering legal advice on anyone's particular situation, but I generally want to correct some misstatements on this topic that have come up. First of all, you can absolutely lose your home when you declare bankruptcy if you have a mortgage and you can't afford to stay current on it. A primary mortgage, the one you initially get from / grant to a lender when you buy a property, is known as a "purchase money security interest" (PMSI) and generally speaking, it is invincible in bankruptcy. While you will get a brief respite (known as the "automatic stay") to get your affairs in order after petitioning, the holder of a valid PMSI will be able to lift the stay and foreclose on the property if you are not current on the loan. In fact for most purposes, the holder of any security interest will be able to do this, but purchase money is regarded as especially sacrosanct.

This is the rule. There are other rules and exceptions that may blunt its impact somewhat in some situations, given the structure of Chapter 7 (liquidation) bankruptcy. Conceptually, Chapter 7 is equivalent to throwing your hands up, declaring that you simply can't pay back your debts, and surrendering everything you own to the creditors in partial satisfaction. This is regarded as especially harsh for obvious reasons, and so the bankruptcy code recognizes state law exemptions from collection, which can limit what is eligible to be seized and liquidated in this process. Note that this only applies to the unsecured portion of your debt, though: the creditors with a security interest get to take the collateral, period. So, there's the mitigating factor, if you want to call it that: you might not be forced to lose your home in bankruptcy by way of, e.g., massive credit card debt that is not related to your home, depending on state law.

Jessamyn: Varies dramatically from state to state. Texas is well-known as a state where you can keep your house upon declaring bankruptcy leading to a [possibly apocryphal] perception as Texas being a state of bankrupt people living in multi-million dollar homes.

This is technically incorrect. As above, the mortgage holder can always foreclose on their collateral - even a primary residence, even in Texas. But, Jessamyn is correct that Texas collections law does exempt homesteads with no dollar limit (the size of the allowed exempt property, in acres, varies depending on if it is rural or urban). Therefore, if you are current on your mortgage, you cannot lose your home in Texas if you declare bankruptcy to discharge credit card debt or other unrelated debt. But if you are delinquent on your home loan, you can absolutely lose the home, bankruptcy or not.

deadmessenger: Here in Georgia, you can lose your house and any cars you own. Basically, if you have more than $10,000 in home equity, the bankruptcy trustee will usually order the property to be forfeited and sold and the proceeds

This represents another approach to exemptions from collection. Some states, apparently including Georgia, limit the homestead and other exemptions to a dollar limit. Essentially, if you have property in certain categories, typically a primary residence, an automobile, and "tools of one's trade," they are exempt up to a certain dollar limit. Let's use $10,000 on primary residences - if the debtor has more than $10K in equity, the property may be liquidated, but the debtor will be credited $10,000 which he may keep. If there is less than $10K in equity, the debtor would get to keep all of it and so as a practical matter, no creditor would try to seize it.
posted by rkent at 12:38 PM on February 3, 2010 [6 favorites]

What about the guy who didn't buy a house because other people bid up the prices to unsustainable levels? What does he get?
posted by diogenes at 11:03 AM on February 3

Well, for one, what he gets is not purchasing an overvalued property, and now he can buy a whole mess of undervalued properties.

Back when I was taking ethics in college, I learned about what seemed to be a good method for determining if an action was ethical: Kant's categorical imperative. It states "Act only according to that maxim whereby you can at the same time will that it should become a universal law."

When you apply this to the current situation, walking away is simply not ethical. We all saw what happened in late 2008 when people started defaulting en masse. Lots of people lost their jobs & a good chuck of their 401k. Sure you can try to justify it to yourself by saying it was the banks fault for giving you that loan, but it doesn't change the fact that your actions - if it became universal - would collapse our economic system and everyone would be worse off.
posted by upplepop at 9:31 AM on February 3

Hey, I'm no fancy pants big-city lawyer but I am pretty sure that when you act according to the terms of a contract it's explicitly not a motherfucking breach of contract. Goddamn someone get LeVar Burton in here because people ain't readin for shit
posted by Optimus Chyme at 1:00 PM on February 3, 2010 [2 favorites]

You neglected to include "...as well as a portion of his income to bail out the banks and homeowner for the consequences of their actions."

Yeah! And let's not forget the portion of my income that's going to Temporary Assistance for Needy Families and food stamps! What, just because I can afford housing and food means I should get screwed?
posted by Pope Guilty at 1:00 PM on February 3, 2010 [1 favorite]

But if you are delinquent on your home loan, you can absolutely lose the home, bankruptcy or not.

Thank you for the correction.
posted by Civil_Disobedient at 1:28 PM on February 3, 2010

Another argument in favor of renting.
posted by grubi at 1:30 PM on February 3, 2010

Another argument in favor of renting.

Really more of an argument for not buying at the top of a bubble. Surely lots of people did their homework and were just unlucky, but the guy buying a $215,000 studio in Miami Beach sorta should have seen it coming.
posted by jckll at 1:36 PM on February 3, 2010

I know SO many people saying "Now is a great time to buy," that I'm willing to bet this is just a lull before the BIG drop.

When people buy these foreclosures and can't rent/re-sell them, we'll see another BIG wave down.
posted by Running Sandals at 1:51 PM on February 3, 2010

but the guy buying a $215,000 studio in Miami Beach sorta should have seen it coming.

I dunno. Should he? (Not being snarky - I don't know anything about Miami real estate.) Maybe my view is skewed by years of living in San Francisco. The "bubble" here has allegedly burst, or so I've read, but prices don't seem all that different to me than they were at the top of the bubble, which is to say, crazy. This page, for instance, tells me that I can buy an 850 sq ft condo for $529K. That sounds completely mental to me, but not out of bounds for what a nice unit in a nice building in a nice neighborhood can fetch in San Francisco.
posted by rtha at 1:57 PM on February 3, 2010 [2 favorites]

To Kant walking-away is unethical but that's not really the model we are bound to in capitalism. Capitalism absolutely requires utilitarian decisions, we must "maximize utility." Utilitarianism allows when calculating "the greatest good for the greatest many" consideration of the personal financial suffering of years making payments on an upside-down loan.

i see two possibilities: either its zero-sum, the bank, their shareholders and other local homeowners gain value identical to what you lose one inflated mortgage payment at a time, or more likely by walking away you are harming less than you would have been harmed otherwise.

the banks as institutions, their shareholders, and every other home owner in your neighborhood whose home value will slip a little simply had it coming.
posted by dongolier at 2:05 PM on February 3, 2010

What about the guy who didn't buy a house because other people bid up the prices to unsustainable levels? What does he get?
posted by diogenes at 11:03 AM on February 3

Well, for one, what he gets is not purchasing an overvalued property, and now he can buy a whole mess of undervalued properties.
posted by Optimus Chyme at 1:00 PM on February 3

If only that were true. The market is artificially high due to TARP and things like the new tax credit. So property values aren't as low as they would be otherwise, which hurts the many people I know who prudently(?) waited until now to buy. A lot of them are still waiting.
posted by RikiTikiTavi at 3:11 PM on February 3, 2010 [3 favorites]

"Yeah! And let's not forget the portion of my income that's going to Temporary Assistance for Needy Families and food stamps! What, just because I can afford housing and food means I should get screwed?"

When the poor qualify for mortgages and grant themselves 6 figure bonuses and bankers go hungry and live in tenements your comment will be vindicated. I wouldn't hold my breath though.
posted by vapidave at 3:24 PM on February 3, 2010 [3 favorites]

Meanwhile, if the guy in NYT article walks away from his condo and has to pay rent he won't be able to take a mortgage interest deduction on his taxes. He might end up with less money to spend if his income remains the same.
posted by mareli at 4:08 PM on February 3, 2010

When the poor qualify for mortgages and grant themselves 6 figure bonuses and bankers go hungry and live in tenements your comment will be vindicated.

*woosh*
posted by Pope Guilty at 4:44 PM on February 3, 2010

“ “I took a loan on an asset that I didn’t see was overvalued,” he said. “As much as I would like my bank to pay for that mistake, why should it?” “

Well, cuz the banks caused it in the first place with these goofy mortgage packages that led to you being hosed?

“Just don't expect the rest of us to buy into the lame-ass justifications for bailing on your obligations. You made bad decisions, you're stuck with living through them. Deal.”

If she’s wearing that kind of dress she totally deserves it.

The only ethical question here is giving banks tax money to lend to people going underwater. And the banks aren’t doing it.
Which means more foreclosures, which means more people go underwater as the neighbor’s house gets foreclosed (or the bank sits on it) which means yet more.

Which means – I dunno, I’m not a money guy.
But far as I can tell by not selling or lending the banks are pretty much driving the market into the cellar and an ultimate nadir regardless of individual homeowners actions. Doesn’t sound very ethical to me.
Banks are not in the money business. They’re in the debt business. They’re essentially slavers. I’m usually full of hyperbole, but on this, no, the behavior pattern there is same as what modern slavers do.

You seriously think we were ever going to recoup our financial expenditures from invading Iraq? War debt was not a side effect, it was the goal (someone said “War is a racket,” I forget who, hmm).


The French guillotined the people taking their tax money and feeding it to the banks and jacking up the interest rates. Here, pfft, no, it’d be wrong not to pay ‘em.
Bad form would be setting the place on fire.

“It is to the property of the citizen, and not to the demands of the creditor of the state, that the first and original faith of civil society is pledged.” – Burke

“Oh I was going to add a 'gypped' joke but then got distracted!”

Because you’re an Indian giver.

Kant had some interesting things to say about the coercion against one’s freedom and obeying the laws we make for ourselves.

“No one is under obligation to abstain from interfering with the possession of others, unless they give him a reciprocal guarantee for the observance of a similar abstention from interference with his possession. Nor does he require to wait for proof by experience of the need of this guarantee, in view of the antagonistic disposition of others. He is therefore under no obligation to wait till he acquires practical prudence at his own cost; for he can perceive in himself evidence of the natural inclination of men to play the master over others, and to disregard the claims of the right of others, when they feel themselves their superiors by might or fraud. And thus it is not necessary to wait for the melancholy experience of actual hostility; the individual is from the first entitled to exercise a rightful compulsion towards those who already threaten him by their very nature.” – Science of Right
posted by Smedleyman at 5:28 PM on February 3, 2010 [3 favorites]

if the guy in NYT article walks away from his condo and has to pay rent he won't be able to take a mortgage interest deduction on his taxes

That deduction really needs to go away. It decreases labor mobility by encouraging people to buy more than they should, tying people down to homes they can't afford and can't sell in places where there aren't enough jobs.
posted by one more dead town's last parade at 4:41 AM on February 4, 2010

That deduction really needs to go away.

I might agree with you, but good luck implementing that. You'd probably be better off just creating a similar deduction for renters, up to perhaps some limit based on the median rent in an area, rather than trying to take the deduction away from homeowners. Just make it a general housing deduction, for a primary residence, rather than a mortgage-interest one.
posted by Kadin2048 at 7:32 AM on February 4, 2010

Stephen Colbert: Your honor was so precious to the banks that they bundled it with other people's honor and sold it to Wall Street honor speculators.
posted by A dead Quaker at 8:14 AM on February 4, 2010 [1 favorite]

You'd probably be better off just creating a similar deduction for renters

That would be good enough, because it would still remove the incentive for people to lock themselves into a particular location.
posted by one more dead town's last parade at 8:34 AM on February 4, 2010

Just ducking in to try and correct this impression that most mortgages allow you to give the bank the house to satisfy the mortgage, and enable you to walk away. Generally, if you don't make payments, the bank has the option to foreclose on the house, take possession, put it up for sheriff's sale, and take the proceeds of the sale and apply it to the balance of your loan. If they sell it for more than the loan, you get the overage (like that ever happens now). If they sell it for less than the loan, you're still personally liable for the balance, and my memory is a bit fuzzy, but that judgment against you sticks for at least 10 years. The hoops they need to jump through to collect on that judgement is another kettle of fish.

As for the deduction debate, the IRS has incentiveized home ownership for a very long time. Lots of reasons why, most of which I don't understand but presume are somewhat attached to the idea of the american dream.

One ray of hope for some homeowners is that the companies that were bundling and selling these mortgage-backed securities often did very sloppy work. Oftentimes, when they're bundling and selling the loan, they're also selling the right to foreclose on the house if you default. Because this was happening so often, some of the big shops would get sloppy with the paperwork, and either never get around to actually transferring the loan, or transferring the loan only after you defaulted and they realized that they can't pin down who actually owns the loan and has the right to foreclose on it. If that's the case, when the bank walks into court to foreclose a loan, people have had some mixed success requiring the bank to prove they actually own the loan, and having the bank come up short. Admittedly, because these fights are usually had in front of a judge, if you run into a judge that doesn't understand the issue, the borrower can be screwed. It's a possible back door though.
posted by craven_morhead at 10:23 AM on February 4, 2010

*sigh*

I am, more or less, this guy. only i've been unemployed for a long time (mostly on purpose, more on that in a minute). way back in 2004, i was in my mid-twenties, working a GREAT job, and living with a dickface roommate. I had decided i needed to move, so I started looking. I found apartments I liked, and apartments I didn't. I was really only looking at renting a space on my own. in Chicago, finding a rental isn't hard. but i really didn't find anything i liked, and i was taking note of what my rental price range was looking like. i wanted to stay in the neighborhood i was in.. close to work, safe(ish), and i just liked being there.

after looking for a month or so, my family decided i should be in on the bubble and gave me the down payment to buy a place. so i found a realtor, a mortgage broker, got approved and started looking. att this point, my credit was close to 760. i, again, found a lot of crap, but some good ones. i had set myself a reasonable price range. i had done the math on the payments, and with my decent income, i could stretch a bit and afford it. and when the mortgage interest deduction was factored in, it worked. plus, i knew that my money was going into my home, and not just disappearing into my landlord's pocket. and if i couldn't afford it, i'd surely be able to sell it. the mortgage looked to only be a few hundred more than rent, and i was also assured i'd have a little help should i need it. i think i looked at over 20 places. i had my eyes open. not ONE place I looked at seemed overpriced given where the market was. and i looked ALL OVER the city, not just in the area i really knew i'd stay in. the price increases over the years seemed reasonable. and anyways, the place i finally did find was 6 blocks from Wrigley Field, a 10 minute walk to the lakefront, and directly next to a major mass transit line. i paid attention to the real estate "location" maxim, and this place was 100% on the location. even if i had to leave, there'd be no shortage of people who'd also want to live here. i figured i could even rent it out, should i want/need to move.

so i signed the mountains of paperwork, threw in my large stack of borrowed money, and closed on it. it was mid-2005. i had serious reservations about the entire thing. but i did months of homework, and had decided that i found a good place at a reasonable price. the home was in a desirable location in a great neighborhood. no overnight tract development here. this building had been there since the 20s. i was being qualified for a FIXED RATE, 30 year mortgage. at 6 percent!! nevermind that the broker stated my income at double. he didn't care, and i trusted that he was just doing this to get me the right mortgage. he did try to get me on an interest-only product, but the idea of a big-man mortgage made it seem like i was doing the right thing, and being a legitimate GROWN UP. and, like i said, i figured that i could always sell/rent and move if things got unreasonable for me.

and i held it together. i paid the bills. i bought furniture. i even borrowed some money to upgrade the appliances in the kitchen, something i knew would help resale, but also make the place more liveable while i was there. and then the broker called. he explained how he'd refinance me into a new mortgage, with a slightly lower interest rate. it would also pay off my credit card debt (really just rolled it into the new mortgage). but i'd get that interest deducted at tax time, so it did make some sense. he'd have to have it appraised, of course. after a year, the way the market was moving, a roughly 8% bump seemed.. reasonable. so, again, i signed more paperwork. my payments dropped a bit, and i still had a bit of equity in the place.

at around this time, my great job started being less great. i was approaching 30, and i had become fed up with management. i started looking for a way out. i started asking around for a little bit of help, as i felt like the place needed a little bit of help to be 100% for a new buyer. i saw the edge of the cliff coming, believe it or not. i knew the market was reaching a point that things would either slow dramatically or stop (nevermind go off the side of the mountain). i had been starting to fall behind on a bill here, a bill there, and once you hit that point, it moves VERY quickly. and i had a high salary for the work i did.. even with any job it was going to get harder and harder. i had to act quickly to save myself. this was late 2006. this time, though, no help was coming. when i moved into my place, it had this configuration where it could have been a one bedroom or a two, depending on one wall. well, i decided that the wall needed to be there (someone had made it a 1br from the 2br it originally was at some point in its history). my brother and i did the work, i think i spent less than $1,000 and turned it back into a more desirable 2br. and listed it. i listed it at exactly the same price as another unit that had SOLD in the building. and nothing. by now, i was unemployed. i made sure i got unemployment benefits. a YEAR went by. not ONE SINGLE OFFER. we dropped the price close to 30%! by this time the world had already fallen apart. prices tanked. credit disappeared.

i started not to give a fuck. i struggled to make payments at all. it wasn't gonna sell, and i didn't know what the hell to do. i was completely unable to find new work, and the idea of continuing to work to put myself behind on a place i was starting to feel the full weight of resting on me had grown tiresome.

so i stopped paying at all. stopped all the fuckin bills. i kept the lights and the heat on, and that was it. i LET GO. and it felt great. once my credit was suffering and i knew there was no way to sell for what i owed, it didn't matter anymore. a short sale would ruin my credit. a foreclosure would ruin it. a deed-in-lieu would ruin it. btw, i tried short sales, it didn't happen. i tried GIVING IT BACK TO THE MOTHERFUCKING BANK. deed-in-lieu means you give them the deed, they release you from liability, deal done. it sucked, but what could i do? it seemed like a MORALLY RESPONSIBLE way to handle a bad deal. well that process got so bogged down, it pretty much stopped once Countrywide (my mortgagor) died.

my mom's sick. my dad was starting to not be able to handle it all at home. so i knew i was needed there (they live about 30mins away). so i turned my back on the mess. i started moving stuff, and my life, back there to help out. i travelled a lot for a year, and spent a ton of time with family. i was HAPPY. i ignored the collection calls. i didn't give a FUCK. my family was my priority now.

and now.. well the condo association wants to evict me. the foreclosure is in process. i'm declaring chapter 7, because IL is a recourse state and I want no part of the fuckin liability. that i get to write off all other debt is just a nice bonus for me. i'm not only not upset by having to do this, i'm HAPPY. it's going to feel GOOD to fuck over the system, in my small little way. i'm using the law, as it's intended, to clean up my situation. i am doing a RESPONSIBLE thing by filing. fuck MORALITY. i made a business decision that continuing to throw money into a hole was not going to help me or anyone else. i have a protected income, a place to live, and a desire to start over.

I did the RIGHT THING. I tried all reasonable avenues available to me. I continually called the bank to work with them. But it was all too late. in a reasonable market, i'd have been able to walk away even, move home and pay off my other debts and have a normal life. instead, i'm 33, broke, unemployed, and a bankruptcy and 2+ year gap in my job history will have long lasting consequences. but at least i won't trying to be rescue a ship that had sunk long ago. what ever money i earn from now on will be mine. when i move out again, i'm renting and throwing anything above that amount into a dark savings hole. and in less time (probably 10-15 years less time), i will have better credit and some cushion to have a better life. if i tried to do the 'morally right' thing? not even close.

i realize i got myself into this mess. but not without looking straight at it. and you know what, it all seemed completely reasonable, at the time. and looking back, it STILL DOES. a home still seemed like it should have been a reasonable investment. but even if i hadn't refi'd, i doubt my place would even sell for $25,000 LESS than what i originally bought it for. or even $40,000 less. do you know how long i'd have to pay a mortgage to move the principal $40,000?!?!? FUCK. that would have wiped out any equity i would have had with a REAL DOWN PAYMENT. fuck the system. never again.
posted by iwishtoremainanonymousforobviousreasons at 11:04 AM on February 4, 2010 [13 favorites]

It's a bit ridiculous to think a property is "never" going to return to, or even exceed, the original purchase price. Certainly not longer than the typical 20 or 30 year terms of most mortgages. So just stop with that nonsense. At some point, certainly not now and probably not soon, the property values will eventually rebound.

From the 2006 peak? More like 70 years.
posted by BrotherCaine at 1:32 PM on February 4, 2010

Tough story wishtoremainanonymous. I started off in a similarly reasonable position. Went to law school in a quasi-rust-belt city, where the big university kept rents high but the rest of the rust belt economy kept property values low. Managed to buy a 3 bedroom house for the price of an SUV, and rented out 2 rooms to other law students. Their rent paid my mortgage and most of the utilities. The plan was to live there for 3 years, sell it for what I bought it for to sell it on time, and live rent-free while boosting my credit.

Of course, then things crashed and the real estate market was flooded with houses. Even though I had cleaned up the house and even though we slashed the price, we couldn't move it. Tried a deed-in-lieu, but the bank didn't want any more houses on its books. At the time I was working for a legal aid clinic working on predatory lending practices. We were seeing homes that were being foreclosed on, but then the banks weren't putting them up for sheriff's sale since nothing was moving, leaving the owners in a kind of limbo where they were still getting fined by the city for their grass being too long while they could get tossed out at any point.

We eventually cut the price by 30%, and got one offer after 6 months for 40% under what we paid for it. Indiana is a recourse state, so it was better to eat the difference rather than go through foreclosure. My saving grace was the fact that the house was so cheap to start with, I could handle the swing without being completely broke. Most weren't so lucky.
posted by craven_morhead at 2:00 PM on February 4, 2010 [1 favorite]

From the 2006 peak? More like 70 years.

National median prices are a pretty useless statistic here. Some markets are 50% off the peak, some are 10% off, some have barely nudged away from it. Real estate, after all, is all about location....
posted by mr_roboto at 5:02 PM on February 4, 2010

Real estate, after all, is all about location....

Yes, the places where the bubble wasn't as big will recover faster. But at least in California those locations also have fewer non-recourse underwater mortgages (a lot of refi's become recourse here).
posted by BrotherCaine at 5:37 PM on February 4, 2010

If they sell it for less than the loan, you're still personally liable for the balance, and my memory is a bit fuzzy, but that judgment against you sticks for at least 10 years.

Holy hell, man, ignorant AND too lazy to read the preceding comments is no way to go through life. You don't need to be up on the facts and the law but you can at least not make blanket statements that are over-simplified AND wrong.

Some states are recourse states, like PA, where after foreclosure the bank can pursue you for the difference between what they sell it for and the note. Someone above detailed their experience with this situation in PA and spelled it out explicitly.

Other states lack recourse, or only allow it for certain kinds of foreclosure. States like that allow the borrower to walk away and not be pursued for the difference.

In both of these cases we're talking about first mortgages; the water is even muddier when it comes to second mortgages, which a lot of people got during the bubble to allow them to purchase w/o the full 20% down payment.

As far as a judgment, that's something that you can have against you in any situation where you're found legally liable for something; could be because of mortgage, could be an unpaid power bill, maybe it's because you broke your neighbor's chainsaw and he sued you.

Their duration varies by state, though they are usually in the 7-10 year range, and in most cases are fairly simple to renew. Consequently you don't get off free just because the period ends - the holder might opt to do to the paperwork and pay the fees to renew if they thing they might have a shot of collecting later.
posted by phearlez at 10:59 AM on February 5, 2010

Thanks for pull-quoting me phearlez. As I said earlier, I was attempting to correct the faulty assumption that some were making above, that seemed to apply that everyone had a non-recourse mortgage. I never said, as you imply, that all states are that way, that civil judgments don't crop up in a wide variety of cases, or that they can't be renewed.
posted by craven_morhead at 12:24 PM on February 5, 2010

i linked it before, but there's a great interview w/ SRW on this (among other things) here: "I think that the moral thing for most borrowers to do, under present circumstances, is to default on loans when it is in their financial interest to do so."
posted by kliuless at 2:22 PM on February 7, 2010

Frustrated Owner Bulldozes Home Ahead Of Foreclosure
posted by homunculus at 8:53 AM on February 21, 2010 [1 favorite]

Take THAT fat-cat banks!
posted by mazola at 9:15 AM on February 21, 2010