Hi Trent,

Understand that it is unethical…but what if you’re really broke? Is there a work-around in that situation?

Regards,
Sam

Financial hardship aside (which clearly isn’t the case here), I agree completely — the move is highly unethical. Furthermore, I can’t imagine she wouldn’t get sued for what she would still owe.

I also agree that the Federal government bailout is just a bad idea. If I thought the government would pay my bill if I bought I house I couldn’t afford, I might have done that too! (Ethical questions aside.)

Eh, I don’t see how it’s any less ethical than a short sale.

In a short sale, you say, well, the XBox is only worth $300 now. How about I give you that, and we call it even?

If you walk away, they can (and do) sue you for the shortfall and get everything you owe.

That’s absurd. What was the purchase price? On a 300k house, you’re talking about walking away for 30k?

At least try for a short sale. Or wrap the 30k up in the new house.

It’s just such a small amount of money to be walking away from. You can have that paid off quite quickly if you work hard at it.

I must say that at first when I read this title I thought that it could be pretty cool to just walk away from a mortgage. I mean aren’t banks unethical taking all your money away from you with home loans and especially credit card debt.

But the way you fut it like a friends xbox makes me completely re-think the situation. Do you get a bad credit rating by walking away from the mortgage? Do you go bankrupt?
What are some strategies of things to do when your house is actually worth less than your mortgage and how you can get out of the situation without losing too much money. Any tips would be great.
I can’t afford a house yet as I am a struggling entrepreneur but one day in the future I will.
Thanks for the post

Trent i think you arnt really taking a moment to walk in Lindsey’s moccasins. As the son of a mother who fell upon hard times, i can see how easy it is for something to spiral out of control for an individual who had worked very hard to keep/purchase what they had. Now it is another thing that Lindsey is going to purchase another home in cash, and why she wouldnt just pay off the home she has, wait it out and sell it via her stock option is beyond me but im assuming she has kids/family and is doing the move for peace of mind and like many people was probably offended via your piece of mind. people that make mistakes generally know the properties of the mistakes they are making and i know a lot of times it isnt appreciated when someone sticks my nose in it as if i didnt know what was going on.
i love the blog and your advice, but try to be understanding and not an authority on the issue and dont lose a friendship over something like this.

Why is it unethical?

The borrower and the lender both signed a good number of pages several times stating with in significant detail exactly how the loan should be repaid and what forms of recourse are allowed the lender in the case of default. The loan document is almost always provided by the lender and written by the lender’s lawyers protecting the lender well above the borrower. If that document states that the recourse available to the lender is the seizure of the collateral (the property for which the loan was made in most cases) and reporting the default to credit bureaus — then that is exactly the recourse to which both parties agreed.

Lending money, even a mortgage, is not a risk-free investment. If it was intended to be risk-free then the interest rate should be a heck of a lot less. The lender accepts a portion of the risk in extending loans. It is unethical that the borrower who is already paying a premium to accept the risk of the real-estate investment has to shoulder 100% of the risk as well as pay a premium to do it.

What is unethical is that Banks, commercial enterprises, can make record profits for a decade using deposits on which they paid a horrible rate and tax-payer funds. Yet, now they can’t handle the inevitable risk side of the investment. Sounds like these banks should have “banked” a bit more of those outsize profits that any reasonable person expected would likely be offset sometime in the future by outsize losses; it is just the way investing works.

Simply put, it’s not ethical. When you signed the mortgage contract, you bound yourself to the terms of the agreement.

Rationally, I understand why people might walk away from a mortgage, but that doesn’t make it ethically acceptable to do so.

Randy

I completely agree with your permission. It is not a good idea to walk away just because it is a “bad deal.” Ultimately it is the responsibility of the buyer to evaluate the loan when they purchase it, and once you agree to the terms, no matter how unreasonable they may be, you have agreed to them. Period.

We made a bad loan decision in 2005 and have been tempted to just walk away. Our financial situation in the short term would be much better, but as you said the long term would be toasted! Plus the ethical factor is the highest consideration, in my opinion. If you don’t have personal integrity, then nothing else matters. Your word is your bond, even when it is not convenient.

Thank you for standing up for an unpopular idea.

Just thought i would share my thoughts. My friend from work bought a home during 2005 in Florida. At a time when homes were drastically over-valued. Her husband just got a new job and they want to move. There home is worth about 100,000 less right now. When they went to talk to their mortgage company, i won’t say which one, two different people instructed them to get approved for another mortgage and just walk away from the old mortgage. When my friend told me this i couldn’t believe it, they are just trying to worsen the mortgage crisis. Thankfully my friend has decided to rent their home and pay the difference instead of walking away entirely. That doesn’t mean i haven’t heard many complaints about how unfair it is that they can’t afford a new home. I’m kind of on rant right now but i think it is ridiculous that people complain about a situation they got themselves in.

Hey trent, could you change the word permission in my comment to position. I don’t know what my brain was doing!

Not only is what she’s considering doing unethical, but where’s the personal responsibility?

Once again, I’m seeing how, if you don’t want to deal with something difficult, you can just walk away as a solution.

Invariably, it comes back to bite you in the a**, in the form of bad credit for years!

I totally agree with you Trent. Plus, it’s just bad Karma.

I understand that foreclosures do unfortunately happen when people lose a job, become seriously ill, etc. However I agree that it is highly unethical to walk away from a mortgage that you are able to pay simply because the property has lost value. I think there should be serious penalties for someone who just decides that they are going to dump the property on the bank, not due to hardship. That will only make the housing crisis we are currently experiencing even worse. This mindset is apparently becoming a trend, which is really a sad statement on the moral condition of this country. Where will we be if more & more people adopt this attitude?

It may not be ethical but it is not unfair to the lender - lenders price the likelihood of such events occuring into the rates that each borrower is offered.

I agree that there are certainly people who knowingly got in over their heads with mortgages. However, I think that some people are naive, like myself, and assumed that there was some oversight of the mortgage industry to prevent them from offer loans with unethical options, like a pre-payment penalty. I am educated and consider myself knowledgeable but I don’t think anyone can know everything about how the financial industry and markets work. There is an element of personal responsibility but in my opinion, there is a responsibility on the part of the government to either 1. educate the populous on financial matters and/or 2. prevent companies from coming up with products that they know full well could harm their customers. We don’t allow drug companies to sell drugs that are known to cause harm so why do we let mortgage companies sell products that do?

I totally agree - It’s def. unethical, regardless of whether it’s financially smart or not. Sure some circumstances may fall into a gray area, but if you’re gonna bail out because you no longer “like it”, that’s just pathetic.

To be honest, I think a lot of people these days are just plain lazy when it comes to solving problems. They’d rather cop out and take the easy route, regardless of it’s consequences.

Walking away from an upside down mortgage appears to becoming a trend.

UNDERSTAND THAT SUCH AN ACTION WILL IMPACT YOUR CREDIT SCORE AND ABILITY TO OBTAIN FUTURE LOANS.

Fannie Mae and Fredie Mae both have guidelines in place that penalize this practice for up to 7 years. Even after that they will look for a sizable down-payment and a FICO of 680 plus.

Fair Isaac the FICO developer, notes that walking away is a major event similar to bankruptcy. WITH NEGATIVE CONSEQUENCES FOR ALL LOANS, INSURANCE AND EMPLOYMENT.

Before anyone goes down this path, look at all the alternatives!

Though I agree that everyone has a personal responsability, we must not forget that your friend is not the only one with responsability for this situation. I do not live in the USA, but from what I’ve heard banks in the USA have massively given high mortgages to people they knew could not afford it, just to make some money.
In your XBox360 example: if I borrow that money to a friend knowing he’ll most likely not be able to pay me the 30 dollars a month, than I feel I do share a responsibility for that situation.

I don’t know that I agree. A moral obligation to a banking institution? I don’t know that any bank has made a loan based on a moral contract. You default on the loan, forfeit the property, take the hit on your credit. That’s the way it works. Call me cynical, but when you talk of a borrower “dream of accepting” bad faith behavior from a lender… It doesn’t seem to me that borrowers are ever really in position to hold lenders accountable one way or the other… Lenders take a calculated risk. As do borrowers. If you’re willing to pay the consequences, I honestly don’t see the problem.

Bravo. I have never understood the nonchalant attitude that people have regarding their financial obligations. Not paying your credit card bills is just commonplace now, and “to be expected”. No one seems to be embarrassed about their terrible credit anymore.

We definitely are a nation that has lost its individual accountability.

I would argue that the situation is amoral.

Breaking a contract you signed with a company is different then breaking an agreement you had with a friend.

A contract is simple. You know what’s expected of you and you (should) know the consequences of failing to meet those expectations. It’s not personal.

Breaking an agreement with a friend introduces a lot more issues. Hurt feelings, etc.

I’ve got a friend who has done the same thing recently. Walk away while moving into a nicer place… All I can do is shake my head at how wrong it is.

Some just don’t see the mortgage agreement as a, well, two-sided agreement.

I hadn’t thought of the role reversal with the bank like you have — maybe next time the sore subject comes up, I’ll use that example to try to explain what I mean…

You are much better off to have her not respond. To play “jingle mail” when you are broke sucks, but when you have the cash to buy another home and you just stick it to the bank, you are a bad person.

Good for you for speaking your mind!

Trent,

When we purchased our house, we looked for houses within our budget so that we could afford our fixed monthly mortgage payments. Being quite conservative and expecting to stay in this house for the long-term, we would not have looked for a mortgage that lowers the monthly payments temporarily (interest only, adjustable rate, longer terms). Some of the problems today are a result of market conditions, as well as the use of these temporary mortgage features along with “liberal” lending practices.

The problem I have with the situation you have described as well as others is how should the burden of problem (lack of equity, rising payments, etc.) be shared between the homeowners and the lending institutions? For as many instances similar to the one you describe (that appears to be a person willing to abandon their obligation because it is convenient for them), there are others where the homeowner may have been fooled by the lending institution, appraisers, etc. into believing the mortgage was affordable and the housing market is a win-only proposition. In this second scenario, one can certainly argue that the homeowner should have known better, but all of the greedy other parties were stacking the deck in their favor to ensure that they could make their $ (fees, commissions, etc.).

Amen. It is unethical and people who made poor decisions should not be bailed out as it penalized the responsible among us.

My husband’s aunt owned a home in a very trashy neighborhood in Cleveland.The house was built in 1895 and was falling apart around them. Some genius at the mortgage company made her a loan (she’d already filed bankruptcy 3 other times) for the total value of the house, $40,000 and then she quit paying the mortgage. She took several trips to Vegas and Atlantic City and bought a new Cadillac. The home was foreclosed on and she moved to a nice suburb where she was able to purchase a NEW home with financing for low income people. It is beautiful! My husband and I are scratching our heads over how this is even possible.

I will say first of all that it really annoys me that all these concessions are being made to home”owners” who took out loans they can’t pay back for houses they couldn’t afford.

However, as much as it pains me to say it, if your friend had a non-recourse loan, then I don’t think ethics has anything to do with it. She’s just playing within the rules of how non-recourse loans work: If the borrower defaults, the lender can seize the collateral (the house), but can’t seize any other assets from the borrower to make up the balance of the loan. As I understand it, this is written into the terms of the loan, so the lender knew (or should have known) what they were getting into. So in that case, the only relevant question for your friend is “Is voluntary default a good deal for me?” That is, does the benefit of not having to pay back the loan outweigh the cost of the hit to her credit score? If it doesn’t, then obviously your friend is acting foolishly. But if it does, then the lender was acting foolishly by issuing a loan for which voluntary default could be the best course of action.

On the other hand, if she had a recourse loan but is hiding other assets to prevent them from being seized, or if she qualified for the loan under false pretenses, then there are certainly ethical issues there. (The cases where lenders instructed borrowers to provide false information about their income and assets are a gray area - I think that there, both parties acted both foolishly and unethically.)

The leniency in bankruptcy laws, and the lack of ethics in people, has allowed this housing crisis to happen. Banks have been eating up profits for years when housing was good, people paid on time, etc. Builders made out like bandits from the housing bubble. And homeowners made out from low ARMs and living off equity. Now, when times aren’t good, people cash out their ethics and take the easy road — banks take away perfect-paying mortgagor equity lines, builders drop everything and run to different states, and buyers walk from properties. Of course the housing market is going to crash when no one is responsible for their commitments!
My fiance’ and I are in the process of buying a new house. We purchased it very early, signed the closing contract a year later, and have saved everything we’ve made so that we could afford both places in case the house we’re in now doesn’t sell. And it hasn’t. And we’re not walking. We’ll deal with two payments until it ever does sell, because it was our CHOICE to do what we did. Only in very rare circumstances (illness, no family, job loss, etc) does walking away from a mortgage make any sense, and it’s still wrong. You shouldn’t be living paycheck to paycheck in the first place. I know it can be argued that some people don’t have a choice, but the amount of people that fall into this category are VERY small.
I agree with you, Trent. Especially when only talking about people that aren’t in serious financial trouble, walking from a house is just plain wrong, irresponsible and selfish.
It’s like those people on the expressway going 45-50 instead of the posted 70mph, or those that go 100mph… or those people who ride the merge lane all the way until the end and cause mindnumbing traffic for EVERYONE. Stop caring about only yourself!!

Wasn’t it unethical for the mortgage company to give her a mortgage on a home that was way overvalued in the first place. It also sounds as though it was zero-down as well. “barely makes financial sense”? If the house was $500,000 and she’s 10% upside-down then it make perfect financial sense to me.

I think it is somewhat unethical, but isn’t it allowed by terms of the loan? I also think a lot of unethical stuff went on in the housing market over the last several years, from wall street, to brokers, to NINA (no income, no assets) loans. It has been a mess.

People walking away is part of the risk the bank took on. By not being careful with who they lend money to, they are stuck holding the bag in this situation.

“The american dream” of home ownership and all the tax perks of owning encouraged many people to buy houses that really just couldn’t afford it yet. I’m not talking people who just bought giant houses–I’m saying someone like me, who couldn’t even afford the cheapest house in town (L.A. area), jumping into a mortgage just because I was “throwing my money away” renting.

Sorry for the rant. It isn’t that the “little people” like your friend are blameless, but people seem to condemn them more quickly than the giant faceless banks.

I hate banks, SP :)

The lender is no less at fault for loaning against a value that was based on thin air. The loan is also written that a buyer may walk away with the bank getting the house as collateral.

Your friend, if she is in a once hot market, could see the price of her home plummet by a lot more in the coming years.

The analogy to the stock is wrong, because with the stock, you have to take the loss no matter what (unless you want to hold on and hope for it to go back up). With 0 down and being underwater with a house, the only thing that gets hit is your credit score.

Another thing is that the money for the loan shouldn’t have existed in the first place - it was created out of fractional reserve banking, which means the money didn’t exist before the loan. The last thing the bank should ethically be doing is collecting interest out of money created out of thin air, but that is exactly what they do in the vast majority of cases.

My bet is if your friend tried to sell, she would discover that the ‘market price’ is not 10% but 20% or 30% what she paid for the home. Even if she could afford that kind of hit, it wouldn’t be worth it from a purely financial analysis, bad credit be darned. (after all, she could take that money ’saved’ and go buy a car outright, or pay off her credit cards, etc, etc)

This walkaway phenomenon has just begun. As the ALT-A resets hit from 2009 until the end of 2011 and prices begin to return to their long term fundamental values (a multiple of income or rental income), walking away from one’s mortgage will become more and more common. Whether it’s moral or not it’s coming.

If you think it is immoral, realize that the only way to stamp out this and the many other forms of the financial pillaging of America is to do away with fractional reserve banking, the privately owned Federal Reserve, and go back to sound money, which is the foundation of a sound & moral country & people.

“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.”

- Woodrow Wilson

“The bold effort the present (central) bank had made to control the government … are but premonitions of the fate that await the American people should they be deluded into a perpetuation of this institution or the establishment of another like it.”

- Andrew Jackson

“Banking establishments are more dangerous than standing armies.”

- Thomas Jefferson

“All the perplexities, confusion and distress in America arise not from defects in their Constitution or Confederation, nor from want of honor or virtue, so much as downright ignorance of the nature of coin, credit, and circulation.”

- John Adams

Trent, I read your blog every day and, from reading it, I know that YOU know that not everyone is as financially savvy as yourself. When you took on a mortgage, you did it the right way IMO. I wish that I had done the same. I didn’t and I’m living the situation that you describe above - killer ARMs.

I’m not walking away from my commitments but I AM trying to make those commitments workable because it’s the only and best thing that I can do. I cannot conjure up $8K for a monthly mortgage payment even if I wanted to. Who granted me that dumb mortgage?? On to the lenders. Like it or not, the lenders are the gatekeepers of the financial system and they knowingly gambled the US economy on the backs of subprime borrowers. ‘Subprime’ is just a fancy way of describing a person who doesn’t pay their bills on time, a category that I fit into myself just over a year ago. That didn’t stop the lender I worked with from taking my pulse and giving me hundreds of thousands of dollars in loans to buy properties I shouldn’t have been allowed to buy. That same lender had a fiduciary duty to save ME from myself, let alone the investors whose money I was playing with, but they chose to give me a slice of that $12trillion pie that was looking for “low risk, high return”. Ha. Good luck with that.

Is it ethical to walk away from a mortgage? Probably not. It doesn’t feel good, not to me anyway, which is why I’m steadily working things out. A huge amount of responsibility still lies with the lenders who allowed illegal immigrant strawberry pickers to take on a $700k mortgage on a 7 bed 4 bath McMansion.

Personal responsibility is all well and good but, let’s face it, the average american is knee deep in debt with a pitiful grasp on personal finance. So MANY of us didn’t even receive the basics on financial education when we were still living at home because our parents were even more ignorant than we are today. Combine that with “weeeee-heeeee!!” lending and it’s no surprise that there are 4 foreclosures right next to me on my single street alone.

If it comes right down to it in the end and I have to make a choice between worrying myself sick over a mortgage that I have no hope of repaying, I will be reversing that moving truck up the driveway. I’m not there yet.

First of all, you don’t just walk out on a mortgage. They will come after you and get everything they can from you.

I actually know someone who is planning to walk away from a mortgage in the near future, but the circumstances are quite different. Last fall, there was a divorce. One of them lived in the house until it sold, while they both continued to make the payment (neither of them could do it alone). The house sold in the spring, was off the market waiting to close (in 60 days), the buyer’s had to postpone the closing date a few weeks, then ultimately the buyers were unable to get financing. Someone, somewhere, never should have let those people “buy” the house. Either the realtor didn’t do due diligence to make sure the buyer was qualified to buy such a home, or some banker told them they could get a loan when they couldn’t. Ultimately, the couple selling the home can no longer make the payments because they both now have other housing, which means the house will be foreclosed on.

Another case of banks offering people things they never should accept. The problem is on both sides. I know there are cases where it’s one way more than the other - either the buyer or the bank is more at fault - but unless I know the details (which I don’t usually try to find out), I don’t feel sorry for the buyer or the bank. It’s one thing to mean well, it’s another to take unnecessary risk.

I hope your friend already has a job in Iowa. Many companies will run a credit report as part of a background check. Not only will her rates on all of her credit cards go up, she might not be able to get a job.

Trent,

The way I see it your friend ask you for some information, you wrote back, she divulged her personal goings-on, but she may not have been asking for your feedback, only sharing.

When your friend wrote you back telling you what she was going to do, did she ask for you opinion?

Getting married, buying/selling/walking away from a house, having a kid - these are MAJOR life decisions. Please consider the possibility that you had Trent “The Simple Dollar” hat on; maybe a different hat was more appropriate.

Serious financial hardship aside where you were FORCED to walk away, a contract is a contract is a contract. Don’t sign one if you’re not prepared to have the integrity to stand behind it.

I agree - where is the personal responsibility?

We carefully gauged our income and expenses before deciding on a price range for our home. But now everyone who went out and bought a house they couldn’t afford is being rewarded by government bailouts, or simply cutting their losses by walking away from an upside down mortgage.

In my opinion, this will just further the lack of personal responsibility we are seeing in this country. And each time the media writes a story about the “increase in walk outs,” more people will decide that it is okay.

How can your friend just walk away from a mortgage, and buy another house with cash ( did I read that correctly)? I should hope that the mortgage co would go after her for every cent. 5 years ago my husband and I watched many of the people we know buying giant homes well beyond their means. we were scratching our heads, thinking everyone else must make a boatload of cash compared to our income. Watching my friends and neighbors walk away from their mortgages while at the same time taking vacations, over spending on handbags, cars etc with no means to pay for it totally ticks me off. I know that in the end it will negatively affect my family, even though we’ve always been responsible with our finances. We have a moral obligation to our community to payback what we borrow, even if it means beans and rice for dinner and an extra job at mcdonalds.

No it isn’t ethical, nor is it an easy out. The bank can still come after her for what is owed (plus a lot more, when they sell it on the cheap, expenses, etc.) Whether they will or not…who knows.

I agree with you completely on your aside, BTW. In my opinion, all the bailout does is - effectively - mortgage our future (at a steep interest rate) to avoid some short-term pain. It’s mainly being done as political grandstanding.

There’s no denying that a foreclosure, or filing for bankruptcy, sucks. Bad. I hope and pray I never have to deal with either. But I had friends who had to do the latter, and found themselves able to buy a much bigger, nicer home five years later. I had family who did the former and were able to get into a a great bargain of a house with payments they could more easily afford which was worth far more than they had to pay for it, putting them into a nice equity position. It’s not the end of the world in either case.

I don’t totally agree with your position on walking away from mortgages but I definitely disagree with your friend about not writing you back. You simply aired your opinion, which she ought to have seen coming anyway, and she should reply respectfully as I am sure your initial email was. I am tired of people who aren’t able to have a reasonable disagreement and talk it out or agree to disagree and get on with the friendship! There, rant over.

I am with those agreeing that it is totally unethical to walk out on a contract. Forget what is the financially smart move, some things are just WRONG. I find the government efforts to bail out the current mortgage crisis personally offensive. I know that there are some people who were genuinely lied to, etc. but the vast majority dug their own holes and it should be up to them to get themselves back out. Homeownership is a priviledge, not a right and the constant trading up for bigger and better is just crazy in my opinion. Those of us that bought a moderate home, that we could afford and are paying down our mortages instead of leveraging the equity should not have to foot the bill (via our taxes etc.) for those who foolishly chose to do otherwise. I have a friend who has been in foreclosure 3 times in the past 4 years. Each time they manage to secure another mortage with yet a higher interest rate. Even though I consider her a friend, I do not feel in any way sorry for her situation because it is totally self created. She and her husband both have decent paying jobs but not, apparently, well paying enough to support the life style they feel they “deserve”. I avoid the topic of finances with her because I would probably go on a rant about the fact that her kids “deserve” not to have the financial stress in their lives that she and her husband continue to create. If you are in foreclosure and just manage to escape (for the third time) what are you doing eating out every week, buying expensive christmas presents, designer label clothes and birthday parties “out” at fancy places???? See, I am starting to rant already! Anyway, in my eyes, there is no grey area on this one - it is just WRONG! And Trent, if you lose the friendship over this, condsider whether or not it is really a huge loss!

The personal responsibility shows when you make the hard choice, do what’s right for who your responsible to, and accept the consequences of your actions.

It does not have to do with honoring a contract you signed with a bank.

If the consequences of breaking a contract with a bank are better for me and my family than the consequences for honoring it then the choice is easy.

If a business determines that the consequences of breaking a contract with an individual are better than honoring that contract their choice is easy.

That’s not to say that people/business’ always come to the correct conclusion about which way is better for them though…

Yikes. I hope she reconsiders her plan. She’ll probably have to pay that 10 % difference anyway–might as well do it WITHOUT it harming her credit.

One option she could consider: Rent the house out for now, and when the market improves, sell it for a profit.

She’ll still be able to move and pay cash for her new house, save her credit history, do the right thing, and make a little extra money.

I hope the friendship isn’t ruined.

Your friend should sell the house at a loss and bring the extra cash to the closing to pay off the mortgage. I can say this, because I’ve done it!

We bought a house in 1995 in an urban neighborhood that was supposedly up-and-coming. Well, it wasn’t. Three years later, we relocated to another city for a job, and crime rose in that area, coincidentally at the same time. We had already bought another house and relocated before we realized how badly the home’s value had dropped. Eventually, we sold the house for a sale price less than the balance on the mortgage. I had to show up at closing and PAY to sell that thing!

We had good credit, but it was maxed out with the new house and the move. I tried to get a personal loan from a bank, but no deal. We had to borrow money from relatives to sell that house! It hurt us financially. I paid off the loan to the relatives as fast as I could because I was so embarrassed.

Chalk up one life lesson learned. We emerged from that crisis with our credit intact, mortgage paid off, no guilt, but definitely some trampled pride.

I agree with your friend. As a matter of fact I would take it even further.

Since the stock market has gone down and I assume her stocks have decreased in value, she should walk away from those as well.

With the high cost of fuel, I am sure the SUV she is driving is not worth as much now. Why keep it? Walk away.

What? Her kids aren’t getting straight A’s in school. Take them out. It’s obviously the schools fault. I would say home school them, but…

Agree that on all your opinions on walking away from a mortgage, but your friend probably already knew what she was doing was wrong. Was it worth losing a friend over to point that out to her and try to make her feel guilty? If she was a friend, you need to let her make her own decisions and not pass judgement.

The xBox analogy is wrong - the person here is entering 2 contracts, 1 to borrow $600 and one to buy the xBox from the store. If the person defaults to the friend, they can offer the xBox, but there is no reason for them to accept. Stores take this risk directly all the time, with financing offers - if you don’t pay, they file suit for the money or repossess the items.

If they enter a real contract, then this is an actionable offense. If not, then chalk it up to bad judgement of who you lend money to.

I don’t agree with walking out on a mortgage, but I genuinely believe there are many situations (whether you are taking advantage of a loophole or just managing numbers) where this will work out for you. There’s no one to blame, the industry will take the hit, and suck it up.

@dogatemyfinances: It is very different from a short sale. In a short sale, the lender AGREES to accept less than the full amount of the mortgage in a negotiated agreement. They are motivated to do this because often it is less expensive for them than the cost of foreclosure. Since it is an agreement to accept a short amount as payment in full, the negative consequences for the borrower are somewhat reduced. (Still a ding on the credit, but not nearly as bad as a foreclosure, lawsuit, collection, etc.) Also, more to the point, I think it is much more ethical than just walking away. Agree 100% with Trent on this one.

Jeremy said, “… go back to sound money, which is the foundation of a sound & moral country & people.”

What? That is precisely backwards. You cannot base your morality on money - that basis results in the unethical decisions that “Lindsay” considered. Instead, a sound morality insists on sound money and acts ethically even if the money isn’t sound. Morality and ethics come from the person, not the environment; Jeremy’s argument, at it root, is still insisting that an individual’s lack of ethical behavior isn’t their fault. Oddly enough, this is opposite of the stance Jeremy wants people to adopt.

And Stephanie? Your pride may have been trampled, but it’s still there. The other option would have excised it completely.

Not only is it unethical, it is stupid. She’ll get foreclosed on and sued for the money she’s not paying back.

This is just another example of typical laziness. Yes, its hard work to sell a house, but it is better than the alternative.

Thank you for this post.

Yes, there are situations where foreclosure is unavoidable. Having just had emergency surgery myself, I can see how these bills that I keep getting would be crippling to someone living paycheck to paycheck. If not for good insurance and a strong belief in living frugally and saving what we can, we too would be in trouble.

However, there are to many people tossing in the towel just because they can.

When did this become and acceptable and somewhat normal practice?

No one forced these people to buy a house rather than rent. No one forced them to sign those mortgage documents.

When you borrow money, you pay it back. Since when is it ok to make a bank take a loss? Yeah, so they have lots of money. Have you thought about who the bulk of that money belongs to? How about US. The rest of the banks customers.

Think it’s ok to let the government bail you out. Who do you think pays for that ? The rest of us. so the next time someone thinks about avoidable foreclosure, I hope they think about their friends, neighbors, and family members who are having to work harder and harder just to survive this economy and high cost of living.

Why are we putting up with this? And why are we saying its ok for the government to bail these people out rather than let them fail and learn from their mistake?

Why should the rest of us suffer the huge and growing government debt because of the bad choices of these people.

I’m shutting up now because I could go on and on and on.

I see someone already mentioned this, but the real issue is that she didn’t ask for your opinion (on whether or not she should walk away) so it probably would have been in your best interest to bite your tongue (and blog about it for our enjoyment!)

She probably felt pretty bad about the whole situation. It is like telling an overweight person they are unhealthy and need to lose weight. They already know that. You aren’t helping.

I don’t condone walking away either. In fact, I had a similar experience: One of my good friends from my MBA days said he was going to walk out on his commitment; I haven’t heard from him since I implored him not to.

Interestingly, the news has reported many financial experts and planners have recommended to their clients to do just that — walk away from their mortgage.

However, the consequences of breaching the contract (it is a legally-binding contract) are nil. Okay, the fact that you didn’t pay your debt will be reflected in your credit record and will negatively affect (severely) your FICO and other credit scores. But it remains to be seen how this long-term consequence will outweigh the ‘here and now.’

I don’t know why lenders don’t sue borrowers who renege on their obligation. It must just be a numbers game. However, I work in the credit card industry and I *know* my company is first in line at bankruptcy proceedings and is very aggressive in its collection efforts. After all, it is the credit card company’s money. In the case of a mortgage, it IS the mortgage company or bank’s money.

Sure, they get a house, but they don’t want a house any more than a credit card company wants a boat. It’s money they want.

People make choices based upon known information. If you know there are no consequences (except “feeling bad”), 9 out of 10 (perhaps 99 out of 100) people will walk. Especially if validated by the “advice” of so-called financial experts.

People who are not placed in a situation like a foreclosure who decide to walk away simply because they have a loss on paper just boggle my mind. You bought a house and thought it was worth X amount of dollars, so you got a mortgage. There are no guarantees that it would go up or down, you simply agreed to purchase something for a certain amount of money.

How come you don’t hear about people walking away from their car loans the day after they purchase the car? A vehicle will lose value immediately, and is almost guaranteed to every year for as long as you own it, yet you’re still making loan payments for the initial purchase price.

The only difference is the perception that real estate must go up in value, and vehicles will go down in value, so that somehow justifies walking away from a mortgage because the outcome wasn’t as expected. Well, if you weren’t considering that before going into the purchase, you probably shouldn’t be a homeowner anyway.

But I guess if you want to take the loss and hit to your credit score simply because you may have a loss on paper, good luck to you, but no thanks to you for making the real estate problem worse by unloading your house to the bank when they don’t want it.

@Jeremy: No, there’s more of a difference than that. Car loans are recourse loans, so if you default, the lender can repossess the car *and* go after your other assets to make up the balance of the loan. For many (but not all) mortgage loans, they can’t do that - if selling the repossessed house doesn’t pay off the loan, the lender has to eat the difference.

This is why, in their sensible days, lenders required a 20% downpayment for a house. In the worst-case situation, if the borrower defaulted right away, the lender could be reasonably sure that they could sell the house quickly at a 20% discount and suffer no loss. But lenders haven’t been so sensible lately.

Joe (comment #7) said:

“It may not be ethical but it is not unfair to the lender - lenders price the likelihood of such events occurring into the rates that each borrower is offered.”

By this logic, shoplifting isn’t unfair either, because the stores raise prices to cover their losses. This is just one more reason why walking out IS unfair, because those of us who are not walking out are paying higher prices. In both scenarios, the honest are paying the bill for the dishonest.

As they say down under, good on you, Trent. This loss of a friendship is just simply a manifestation of the ever widening gulf between your values now and the values you lived by just a few years ago.

Your friend’s actions might not have seemed that unethical prior to your financial meltdown and recovery. But you’ve moved in a completely different direction in life, and sometimes that only becomes apparent when you reconnect with people in your past who still live by unhealthy values.

Take it as a testament to your substantial progress in straightening out your own financial life, and recognize that even friends have value conflicts over time. She might very well contact you in a few years and let you know that she’s no longer suffering from “cranial-rectal inversion.” I know this because I have firsthand experience in reconnecting with friends who kept me at arms length during my “tomfoolery” years.

Best,

Steve

I agree that walking away is unethical, however I think it’s a horrible idea to dole out advice to friends when it’s unsolicited. That is indeed how you lose friends. If they pointedly ask for advice, sure, give it…you know their situation and they’re asking for your help. When you hear of someone making a financial mistake, it’s tempting to give the same great advice you give daily on your site, but don’t do it. Unsolicited advice is rarely rewarded, and more often viewed with contempt.

In the strict legal sense, there is nothing wrong with walking away from a mortgage. The risk of default is priced into the interest rate. Not making payments is still following the terms of the contract; the bank just has a right to repossess the property, as written in the contract. It’s perfectly fine. In fact, major banks do this all the time. It’s just part of the cost of doing business, and such costs are written into the interest rates.

HOWEVER, I do agree that while walking may not be illegal, it is unethical. As Trent mentioned, there is a good faith aspect to the deal. But more quantitatively, by walking away, you are increasing the costs for everyone else. Since the bank does have to price in the risk of default into the mortgage rate, the rate will thus be higher than if people didn’t default, and so your actions end up costing other people more money.

Any time your own actions cost others, especially in the form of these hidden costs, that action is usually immoral.

I like Trent’s blog and I have been able to use many of his articles and links to my advantage. But I must say that this post brings out what I dislike most about Trent: he seems so self-righteous!

Some of the lenders were unethical in their approach to originating loans. I think the mortgage mess is more the fault of the banks trying to make as much money as possible (that sure backfired). Consumers certainly should perform due diligence when decided if they can afford a mortgage but given how fast the market was growing, it was hard not believe that your property would increase over time (albeit at a slower rate). I doubt most people would have believed the value of their house would decline so much in such a short time.

I don’t think honesty is the problem that might have cost you the friendship.

Just because something is true doesn’t mean that now is the time to say it.

There is one thing about this whole situation no one has mentioned.

Is this the first time she’s pulled, or attempted to pull, something like this? As other people have pointed out, there are other options (renting the place out until the market improves, getting approval from a bank for a short sale, etc.) She’s not doing them. This could be one-off behavior, or maybe she was framing a hypothetical question….or this is her M.O. since she left college. We don’t know.

Does she have a history of financially, emotionally and otherwise screwing people over? Does she only honor “a deal” when she’s benefiting from it?

Sure, what she’s doing is unethical, even if not technically illegal, and yes, it will eventually catch up with her. If this is typical behavior for her, maybe what you’ve really lost is a *fiend*, not a *friend*, and you should be thankful she revealed her true self to you before you got burned by one of her stunts.

Johanna, I know they are different types of loans, that wasn’t the point. What I was getting at was it is the mindset people have going into a purchase that drives these decisions. Common sense tells even the stupidest people that they purchase a car knowing that it will go down in value. That is just expected.

But at the same time, people have been trained to think that when you buy a home, it goes up in value every year. So when this isn’t the case, people freak out. In fact, for all they know, they might be able to sell their home for the same price they paid, nobody knows. Just because the media or your realtor says home prices in your area are down 10% doesn’t mean anything. It certainly could be true, but something is only worth what someone else is willing to pay, and there could be a buyer out there and thinks the price you’re asking is fair. But all of this is moot if your house isn’t on the market anyway, so you have no real way of knowing what it is really worth in order to base your decision.

So I find it asinine that people will make such a drastic decision based on the assumption that there is a “loss” simply because someone says so.

You really think the market’s coming back, even two years out? I don’t. And you know why? Because tens of thousands of bad risk lendees like your “friend” are, along with the end of oil, devaluing our currency and forcing this entire country into collective bankruptcy. The fact that the rest of us have lived within our means won’t do us much good, unless we were lucky enough to buy long before the housing market explosion and have already paid off the loans. I’m not one of those people, unfortunately.

Kunstler says it much better than I can:

http://jameshowardkunstler.typepad.com/clusterfuck_nation/2008/07/event-horizon.html

What about the idea that she’s going to pay cash for another house? This is clearly not a hardship case, and her walking away from her obligation adds to the burden for the rest of us. Tough crap on the unsolicited advice. In my opinion walking away when you can pay cash for another home is CRIMINAL ( morally) and if one of my friends were about to commit a crime I would absolutely give unsolicited advice.

I agree, momof4. I think that what she’s doing is morally wrong, and I wouldn’t do it myself(although I could sort of understand the temptation). I think the havoc it would wreak on my credit would take the majority of the temptation away, though.

Thank you for speaking against such things! We’re in a situation where we bought a condo in southern California in 2005 (right before the crash). We’re over a 40% loss right now and my husband finally found a job in northern CA where our family is and we have wanted to move. (Yes buying the home was not a good move when we knew we didn’t want to live there for more than 5 years, now we know). Well we’ll be renting our condo out (for nowhere close to the mortgage payment) and renting a house in northern CA (for less than what we’ll be getting for our condo, so cash flow will increase). People are telling us that we should just walk away. I can’t believe someone is considering it for a measly 10% loss. That’s just wrong. In her case it’s obviously a matter of convenience. We have foreclosures in our complex and I have little sympathy for the people who are walking away (who haven’t had some tragedy to make it impossible to make payments). Even those in ARMs who can’t make the payments should’ve figured that out before hand. Ours is an ARM, but we’ll be able to handle it when/if it does go up in 2 years. Again thank you for your solid post, it brought me out of lurking as this is something I feel strongly about.

@Jeremy: Well, you asked why people walk away from home loans but not car loans. And I answered. And the answer has nothing to do with people’s mindsets - it has to do with the different terms of the loans.

True, it’s not impossible that she might find a buyer willing to pay more than the appraised value of the home. Anything’s possible, and there are a lot of stupid buyers out there. But there are even more homes on the market with ridiculous asking prices, and they’re not all going to find stupid buyers.

What your friend is doing does sound unethical to me, based on what I know of the situation from reading this post.

But the real question that you should be asking yourself is: “Do I want to be friends with a person who behaves unethically?”

If your answer is “yes” for this particular person, you should apologize for the unsolicted advice you gave her, and hope to god she doesn’t read this blog.

It’s definitely unethical, but it’s clear that lenders have behaved unethically too. I would also argue the government was unethical by bailing out stupid people.

Two (or 3) wrongs don’t make a right, but I can certainly understand why people are doing this so often these days.

The bank should have been smarter when it considered the loan and not made it. Your friend should honor her word and fulfill the obligation. Those points are obvious now but there is nothing that can be done to change the situation. Sort of a moot discussion overall.

If she has enough in stock options to cash in and pay for an entire house, ruining her credit at the same time and probably getting sued, why can’t she sell the house, use the stock options to pay the difference and a hefty down payment on the new house with a solid, rational mortgage on the remainder and keep her credit and good name intact?

This has nothing to do with ethics. Any business-school graduate will tell you there’s no such thing as ethics, and it’s quite certain that the lending institutions (businesses) never had ethics in mind when they made the decision to stop verifying income when they wrote these mortgages. This isn’t a matter of ethics, it’s a matter of economics — that is, incentives.

In a modest, fixed-rate 30 year mortgage, the incentive is there for you to maintain it. The hit to your credit would be worse than simply making your house payment, even if the value of your house has dropped by 10-20% in a bad market.

However, in a high-interest ARM, where you’re paying twice the reasonable payment on a loan that is twice the value of the house, the relatively minor hit to your credit is much less painful than making that payment every month.

But, since we live in a world that loves the idea of ethics, let me put it this way:

You are so quick to put all this ethical responsibility onto the shoulders of the homeowners who want to “walk away”, but isn’t that a one-sided assessment? Isn’t there just as much ethical responsibility, then? These homeowners signed their names to bad loans, but those bad loans were authored by the very lenders who are now asking for a bailout too!

And in regard to the idea of a bailout, I think we should not do it. Not for the lenders, and not for the homeowners. The marketplace should sort out its own mess. Some lenders will collapse. Some homeowners will default. Eventually, the water level will even out and life will go on.

Is it still unethical to walk out on a mortgage if the other side wasn’t playing by the rules in the first place?

Please, everyone, take the time to listen to this episode of This American Life regarding the housing crisis that we have found ourselves in…

It’s definitely hard to feel sorry for these companies once you’ve heard what they did to get themselves into this mess.

http://thisamericanlife.org/Radio_Episode.aspx?episode=355

I completely agree with you about the ethics, and especially with regards to the bailouts. People who are financially cautious and take the extra time to suss things out will never see the benefits of Uncle Sam taking pity on the little guy.
And the flip side is that those who throw caution to the wind and convince themselves they can afford an ARM on a McMansion will never feel the pinch enough to give them pause the next time around.
The bailout just sets examples for future irresponsibility for everyone involved, including lenders, and for everyone on the sidelines watching.
We need a long time out.

It is good to hear that you were honest. I had to tell a friend recently something that wasn’t easy to hear, but was the right thing. With her a lot of emotion was involved, with this, it sounds more like scheming.

Is this what’s wrong with the USA? There seems to be very little accountability. I’ve known many people, who once in debt realize they will need to file bankruptcy, so they buy more, do more so that in a few months when they file, they can include that bill. It’s disgusting.

Financial hardship is another. When someone has no assets left, and they are forced to let a home foreclose due to job loss, disability, etc.. that is different. But this, it just happens too often, and the people doing it don’t learn a thing except that their scheming was successful.

I agree with Randy. Banks have their own agenda in granting mortgages. They don’t loan money to people because it makes them feel warm and fuzzy inside. Would I walk away from the loan of a “friend” for my own gain….no, not in a million years. Would I ever consider the bank a “friend”….no, not in a million years. They always make sure they get theirs, and that’s no friend at all.

There really should be no help for either party, and it seem like they both lose regardless.

Ethically, yes, it is just wrong. But what I’ve learned in my (young) 30 years is that it’s a “dog eat dog” world. Better someone else (in Lindsay’s case, the bank) than me.

P.S.
I am current on my mortgage so my comment above is not to say that I have or will do what Lindsay did, but just wanted to point out that in this world you got to take care of #1 or the world will eat you alive.

I was hoping you would post a response to that Trent!

To Randy Hunt (#50 above),
I couldn’t find another comment in all of these that I agreed with more than yours. I think you said exactly what I wanted said, and I’ll leave it at that.

One final thought though.
I wonder if the bank finds out that she has this new house if they could go after her for it? A friend of mine defaulted on a truck loan years ago and they came after him for about 4 years, even taking him to court. Hmmm, makes me wonder..

I’m curious whether Trent–and the others who echo him– approve of the government bailing out Fannie Mae, Freddie Mac, et al? It is the same case of failing to take responsibility for one’s own actions, isn’t it? I’m assuming that everyone who made this argument opposes the bailout of the lenders, too, but I just wanted to confirm that that’s true.

There are varying degrees of ethics. Lots of things are unethical. Divorce, late payments, even eating meat and cutting down trees can be described as unethical by some.

Is it unethical to walk on your mortgage. Maybe. Is it unethical to shoot someone who is breaking ito your home and threatening your family. Maybe.

The point is to assess the situation in the proper context. A SMART person understands the situation and the rules surrounding the situation. In many states, walking away from your mortgage is non-recourse, meaning the lender cannot come after you for the difference. In addition, the Gov’t has eliminated the taxation of the write-off as a taxable event.

So, for many people, this is a viable option. If that person is incredibly upside down, lives in a non-recourse state, and the mortgage fits the parameters, it can actually be a financially savvy move. Is it ethical? It is when the decision betters your family situation.

If this move allows a family to eat, to move to a better situation, for the kids to move to a better school, closer to family, or whatever the reason, then I understand why people are doing it.

It is like raiding your retirement plan to pay off your debt. Most people say that is a bad idea. Forget what they say. It may be a great idea for you if it allows you to get a fresh start and focus on what is important in your life.

The simple fact of today’s society, and one that few will admit, is you have to look out for yourself, because no one else will. Take care of yourself, and your family first.

I don’t know about in Iowa, but in Canada the bank is the one that has the option of foreclosing (and relieving the buyer of any further obligations) or conducting a power of sale. In a power of sale, the amount of the mortgage not satisfied by the sale is still owed by the borrower - it’s just not secured against anything (although in a case like your friend’s, I think the bank could find a way to attach a subordinate (2nd, 3rd) mortgage against the new home). So walking away from a home that has value less than the mortgage doesn’t necessarily mean you increase your net worth.

Unethical. No question. Pay your bills or don’t sign up in the first place.

@Paul: See my posts about recourse versus non-recourse loans. Or look up those terms for yourself.

This is the whole reason you collatoralize large debts.

If you finance a car, you sign the title saying “BANK XYZ gets the car if I default.” You are typically obligated to take out collision and comprehensive, not to mention encouraged to assume gap insurance.

In Lindsay’s situation, it sounds as though she put down less than 20% on the home. As a consequence, she was likely paying PMI in the event that this scenario did arise.

Now is this the best approach for her to follow? Maybe! If she can walk away from the house and purchase one outright without relying on her credit score for 5 years…maybe so! Even so, if she can apply for a mortgage now for a house in Iowa, she still may come out ahead.

I don’t think it is unethical. Both parties are conforming to the conditions of the contract. The mortgager knew the risks of the loan defaulting (whether or not it was expected) and Lindsay knew what would happen if she owed more than the house was worth (whether or not it was expected). She even volunteered to pay Private Mortgage Insurance in the event that it did happen.

For the mortgager to earn interest on that money for the next 30 years (for example), he or she took the risk of default and planned for it accordingly. For Lindsay to buy that house, she took the risk of a depreciation in home prices, and paid for it through PMI to this point, and will exercise the appropriate sections of the contract agreed upon by both parties.

This is an ethics question how?

I’m not understanding peoples’ “sacred” view of a contract. A contract is an agreement between parties that will be enforced by a court. It facilitates doing business, nothing more. Actually, an agreement that is not enforceable by a court is probably more “sacred”, as it relies on trust rather than legal authority.

But anyway, your friend walking away isn’t avoiding the contract. Instead of Clause A, telling her to pay, she’s going with Clause B, which says what happens when she doesn’t pay. Her walking away isn’t just priced into the contract, it is actually written there.

As you say, it may not make as much financial sense as she thinks. And it’s true the cost may be passed onto the rest of us. But is that her fault, or the bank’s? They did write the mortgage agreement after all. If a store sells widgets at $20 less than they should have, should I not buy some, even if the seller “regrets” it? Even if they raise the price next month to compensate and pass their mistake onto all other widget buyers?

For all the people who think this is a personal/ethical situation, try to imagine the woman as a business, just like the bank. And try to imagine the bank not as inviolate as everyone seems to think. Who precisely entered into a bad contract here?

Think of it from the perspective of the lender. If I lend my friend $700 for an Xbox that cost $600 and he, after 3 months, returns me the Xbox and says he can’t finish his payments, who is to blame? Will I be upset? Of course I will. Will I continue to be his friend? Probably not. But in hindsight I would have to think it was pretty stupid in the first place to lend him the $700. That is the risk I took as a lender and should have incorporated that risk into the interest rate I charged. If I didn’t anticipate the possibility of that happening….shame on me.

If your friend is in the 3rd situation, with an ARM that she can’t pay off, I sympathize. Truly. Yet…if she has stock that she can cash out in order to buy a new home, she should be using that stock to pay off her current home, regardless of the financial downturn. It’s the right thing to do.

Trent:

I agree that walking away from your mortgage when you don’t absolutely have to reflects poorly on a person. But with regard to comment # 51, I think you’re shooting the straw man. The folks who said you came off as self-righteous weren’t criticizing you for blogging on the ethics of walking away from a mortgage. They were talking about the unsolicited statements you made to your friend.

Nobody likes unsolicted moral advice, and based on your description of what happened, that’s exactly what you gave your friend. How would you like it if you mentioned to your friend that your family was planning on renting an RV and taking the kids on a cross-country road trip for summer vacation and her response was to tell you that, in her opinion, you were being environmentally irresponsible? Just my $.02.

@Johanna,
No need to look them up. Pretty obvious meanings just by the terms.

I’m just saying that it would be nice, at least in this situation and to my ear, for them to be able to come after her for the difference of the loan. Not that all lenders deserve to be let off the hook either, that’s not what I’m saying, but what was suggested to Trent by his friend was just wrong. At least to me.

As for a bailout, no way. This situation should be shouldered solely by the lenders and the borrowers.

I absolutely agree about the bailout as well - unless borrowers can show clear evidence that they were outright deceived about the terms of their mortgages, I don’t see why we should bail them out. They wanted to believe, they didn’t do their research, they got burned. Let them go on a budget for a few years to work it out. At best, we should allow those that are strapped to re-finance into market rate 30 year fixed mortgages that cover the remaining balance on their loans.

@imelda #55

I am totally against the bailout of Fannie and Freddie - if it passes the bill onto the taxpayers. The shareholders profitted from lousy loans, and so they need to pay for this. Anything else is unacceptable.

I’m sick of government being ready to bail out these massive companies. Why on god’s green earth would you expose your company to bad loans? Its simple, only carry so many “sub prime” loans. It should be a small percentage. You should go into them knowing that if they all default, that your company will be fine. These CEO’s were irresponsible and people should be going to jail in droves over this.

I have a friend who has declared bankruptcy twice, lives in a house much nicer than mine, has two new cars and a new boat. Her daughter will be going to college next year. They have saved absolutely no money for their daughter’s education. They borrowed money from her brother when their dog got in the boat and destroyed a couple of the seats! I live in an older, not so nice condo - I definitely would have liked a nicer place but I can AFFORD where I am. I would never have considered borrowing more than I knew I could pay back. I don’t want the government to bail people out who live in nicer houses than me! I would think that only about 5% of the “walk aways” had a really compelling reason to do it.
Thanks for letting me rant!

Walking away from my mortgage made the most sense for me. My lender kept raising rates and would not re-finance my loan, even as the value of my home dropped.

That’s hardly “good faith” on their part.

I could have afforded a lower rate and stayed in the house, but instead I got to live 6 months mortgage-free and save up for a move.

I think the lender deserves to inherit that money pit.

My friend bought a house six years ago in a suburb of Detroit. He got a government backed FHA zero down loan.

His job is now relocating him to North Carolina, however, his house is now worth about 60% of the original value (things are VERY BAD here in Detroit).

He is upside down on his home and does not have the money to cover the difference, but he HAS to move for his job.

What are his choices besides walking away? There are no jobs around here, so staying is not an option, but he cannot afford to pay two house/rent payments.

OK, even though this post has its share or replies already, I have to get my two cents in.

I am finding myself facing a situation similar to your friend. I live in Nevada (strike 1), I bought a house in 2006 (strike 2), and my mortgage company went under and will not write any new loans (strike 3). We purchased with an ARM, due primarily to a few straggler bad marks on our credit from just at 7 years ago. We were assured by many people that we would be able to refinance in 2 years when we reset (esp. since we were finishing repairing our credit otherwise), in order to get something that would remain stable. We could afford the house with no problem then; we even bought at just over 1/2 what the bank qualified us for. Now we find ourselves with a property valued at literally HALF what we paid, unable to refinance (the servicer did say they would freeze our intro rate though, but it’s a brutal number), and my husband is now trapped in a horrible job (his company was purchased in the last year and it hasn’t gone well). The only way he can comfortably look for another job is if we make plans to cut our monthly output. Trying to short-sell the house would likely result in our still owing nearly $200k on it. Trying to wait out the market means that we’ll probably be paying our high interest rate for upwards of 7-10 years, if the forecasters are correct, before we are back to zero equity. Or, we can try to save up some cash in the short term and either buy something smaller or find a rental to hold us over for the 4-7 years a foreclosure would impact us.

It’s an ugly spot to be in, especially in the Vegas area. But the options are so limited when you’re trapped in a house that you can’t sell, rent out, or refinance.

The unfortunate thing about this situation is that the honest people who pay their mortgages end up hurting the most.

For example, a friend of mine is walking away from his house, but first he has gotten a new mortgage on a new house in a different state. Since values are down he was able to get a much nicer house than he had before. So he is going to be paying about the same amount for a much nicer house.

Now, I am underwater on my house and would like to move, but I do not feel right walking away, therefore I will be paying as much as my friend for a much smaller house.

Doesn’t seem fair…..

While I usually side with the indignant huffery about how people should sign up for what they can’t pay fore, I think a lot of people are forgetting that the mortgage crisis is, in a large part, the Fed’s fault.

I’ve been following the whole debacle pretty closely, and here’s my take on the thing: Home ownership has, for a long time, been considered a measure of economic health. In the 90’s, when people were actually accruing wealth, a whole new industry evolved, whereby mortgages could be divided and the risk split more evenly between several banks.

I think you can see where this is going: Government policies are designed to encourage home ownership. Unscrupulous lenders would give people who really couldn’t afford a mortgage a mortgage, sell the mortgage to a bank, and cut loose with the cash, leaving the bank to hold the strings when the people defaulted. IOW, lenders didn’t do adequate checks to make sure the people they were lending to were of sound financial means.

Add to this the fact that oil prices have been steadily increasing for the past two years, and houses tend to be not-in-the-city. Factor in being a ten-minute drive from anywhere when you’re in the suburbs, and suddenly it comes down to putting gas in the car, not paying your utilities, or defaulting on your mortgage.

Fannie/Freddie did not actually give out sketchy mortgages, but because they have such a huge stake in the mortgage market, if they were to collapse, it would literally cause financial mayhem–Zimababwe is probably an exaggeration, but I’m sure it will feel that way.

The short version is that the story in its entirety is hugely complicated (which is probably why every turn is so grossly exciting to me) and it’s not as simple as people not reading the small type.

Er, there are a few typos in my opening statement: obviously, it should read “should not sign up for what they can’t pay for”

I do agree that it is very unetical to walk out of the mortgage. However, the bank could possibly make its money back and then some by placing the property up for auction and selling it for the balance of the loan or more. That is the way I bought my home. The previous owner did not pay federal taxes for his business and they went after the other properties he owned to get their money. It went up for auction and we ended up with a really great deal.

It’s like saying if you get in a car wreck, you shouldn’t file a claim even though you have insurance because A) it raises rates for the rest of us, B) it costs the insurance company money, and C) you should just suffer through the loss out of personal responsibility. Why????

If you have a business agreement with the bank and you decide to exercise some part of it then good for you. Have no doubt that the bank would leverage every word of the contract against you that is to their advantage!

Two different issues here -

One - is it morally ethical to walk out on mortgage and

Two - should you offer a friend unsolicited advice?

Two very good topics of discussion. Maybe the other one should be examined in a separate entry?

Right on, Trent! Friends of mine just quit paying their mortgage since they know they’re going to get foreclosed on anyway, and are socking it away for their next place. I know it makes sense, but part of me balks at how horribly unethical this is.
I also feel shafted that I made the right, but tough, choices when I bought my place, by insisting on a fixed mortgage I could afford, in a smaller place. Now I find out that I could have just WAY overextended and let the gov’t bail me out. Insane.

I’ma have to go against the grain here and say that “walking away” from a mortgage is perfectly ethical.

The consequences for terminating the contract are in the contract. If someone’s willing to eat the consequences, it’s their right to terminate it, whatever the reasons are. If more people are terminating then you’d like, you didn’t make the consequences stiff enough.

The banks took an awful risk abandoning the 80/20 model, and it looks like it’s biting them in the ass. But it was their risk, not your friend’s - don’t pin the blame where it doesn’t belong.

Amen!

I completly agree with the other commentors about the lack of personal responsiblity willfully walking away demonstates. And that this is an emnormous national problem.

As I walk to and from work each day (I live in downtown San Francisco)I am asked for change from an average of about 5 people per day. In at least half of the cases, the individual is dressed better than I am (as in a ‘traveling’ kid in very tall Doc Martins, $75 Ben Sherman jacket or some other variant in new Nikes) By the city’s own estimates, 80% of panhandlers HAVE homes and 100% have access to city programs for shelter, food and clothing (not new Nikes, but basics).

My compassion for genuinely homeless, disabled and disadvantaged has been almost entirely eroded by the daily assault. I work hard for my financial freedom and am committed to doing homework and correcting past mistakes I have made. I am outraged that it is acceptable to ‘ask’ to be bailed out of financial hardship by strangers and the government. I am disgusted that anyone expects thier mistakes to covered by anyone but themselves.

What ever happened to self respect?

Trent,

I’m curious if your position changes if the numbers are worse, like #63 alluded to.

Here are numbers on my street. These are not in the newspaper or some unverifiable internet site. One of these houses is next door to me.

House bought in 2005: $409,000
House bought in April 2008: $210,000

Both houses are the same size.

Now, I’m trying to sell my house too and we pay all our debts, but I keep wondering what is keeping the man in the first house from walking away? Would it be just exercising the option, as Joanna mentioned? I’m glad he’s still in there for now, as it’s hard to imagine even more stuff on the market than there already is. We’re in FL.

Of course, I’m ticked that the government is bailing out. This privatizes the profits while socializing the risks. Perhaps now the banks will send me dividends when they turn around in a few years?

Big business has long ago given up on “good-faith” morality… take a minute to think about all the corporate bankruptcies that are used to dump employee contracts/pensions/healthcare and all the hidden fees that banks and credit card companies have been sticking to their customers.

Walking away is unfortunate but it’s playing by their own rulebook. I would not feel bad about it.

We all operate our life with our own code of ethic, and how ethical the person is varies if you ask me. Walk away is a big decision, with financial and emotional impact.

I can only suggest what’s the best thing to do, and what’s the right thing for HER. How I judge her ethic is not as important.

The country I came from, mortgage loan is recourse loan. You can’t just walk away, they follow you. Does it make people more ethical? Not necessary. At least, realtors and lenders should exercise higher moral and standard of ethics as professional duty than a customer who sign the contract.

She’ll be sued for the difference. Since she has enough assets to pay cash for a house laying around I imagine she’ll have some other assets they can get to to make up that 10% plus their professional fees. If not, she may want to check Iowa homstead laws to see if they can take away her new house or not. Anyway, she should just pay the 10% she’s short and put it behind her.

Also… assuming that her loan was used exclusively for the home, and she lives in a non-recourse state (like CA), then the only thing that the lender has claim to is the property. So probably no risk of a lawsuit.

This may have been said in the previous 67 comments but unless you are in really dire straits you really shouldn’t “walk away” from your mortgage.

The “Buy and Bail” scheme that Trent outlined is one iteration of a new, frightening trend. Some are taking the route Trent’s friend took. A more common one is to buy a similar property for much less money while creating a fraudulent lease for your existing home. Once you get the mortgage for the cheaper place you “bail” on the other place. Talk about unethical. It sounds down right criminal.

Of course, lenders have caught on after having been burned a few times and tightening up guidelines to make it even harder for legitimate home buyers/borrowers to obtain a mortgage.

This type of behavior is “every man/woman for themselves and screw whatever happens to you”.

So, potential home sellers, when you can’t sell your house because you can’t find a buyer who qualifies for mortgage because lenders have tightened standards and qualifications up so much because people like Trent’s friend were gaming the system… you can thank the [mortgage]gamers of the world.

People just do not think past the point of immediate gratification. No wonder there is a negative savings rate, rampant debt and a housing crisis of mammoth proportions.

I totally agree with you Trent and appreciate you sticking your neck out to say so. But really, Americans are very accustomed to backing out on commitments, just look at the divorce rate. Just because something is legal does not make it morally right!

By coincidence I saw this a on craigslist a couple days ago… for those who worry about being able to get another mortgage after bankruptcy, just pay your bills for 12-24 months and uncle Sam has you covered!

http://sfbay.craigslist.org/eby/rfs/761798389.html

Buy this property with only 3% down! Here are some facts surrounding FHA:
* 97.15% CLTV
* Any buyer; not just first-time buyers
* Current loan limit $729,750 (each county will vary)
* 100% gift allowed for down payment & closing fees.
* Easier qualifying criteria; not fico driven. Bankruptcy: Chapter 7: 2 yrs. from discharge, Chapter 13: 12 mo