Why Not Walk Away from My Mortgage?

Kelli writes in:

My husband and I are sitting on a thirty year mortgage (with twenty six years left to go). We still owe $330,000 on our home. A week ago, a very similar home to ours two blocks away sold for $220,000, so we’re under water by at least $100,000. We are thinking of just walking away from this mortgage and renting an apartment for a while until our credit clears up. What do you think?

First of all, there’s a strong personal moral element to this type of decision. Is it morally wrong to walk away from a mortgage? You’ll get strong, impassioned answers on both sides of the question. Some will argue that if you make an agreement with another entity, you’re obligated to stick to it to the best of your ability. Others will argue that banks know what they’re getting into with a mortgage and that foreclosure is a risk they accept in the agreement, so you’re just doing something within the bounds of the agreement.

As with most morality questions, I can’t tell you what to think. I personally feel walking away from your agreements when you have the capacity to fulfill them is morally wrong, akin to lying. If I were a lender, I would never lend to someone who walked away from a mortgage because I would simply view them as too big of a risk. But I’m not a mortgage lender.

Aside from that moral concern, though, is it really a good financial choice? I think it can be, but it depends on the other choices that the person makes.

First of all, walking away from a mortgage will drop your credit rating by 150 points and it will take several years to recover. Such a drop has a huge impact if your credit is good, but a much smaller impact if your credit is already bad.

What kind of impact? It will become incredibly difficult to get a car loan or another mortgage with any sort of competitive interest rate. Lenders will look at your credit score and if your score is low, they won’t offer you a prime loan (if they offer you one at all). You have to accept that you’ll either be paying for cars and homes in cash for the next several years or you’re going to be taking out loans with incredibly painful interest rates and down payments.

If you’re going to do this, your best approach is to make sure you have housing and automobiles lined out for the next several years before your credit collapses. If you’re going to get a mortgage on a second home, do it now and get a fixed rate mortgage while your credit is still good. If you’re going to rent, get your rental agreement set up now before you walk away. If you’re going to need a car in the next seven years, you might want to make the move now (unless you’ll have the cash to do it later).

Another impact is that many other services use your credit ratings to determine what to charge you and whether to do business with you. Insurance is one example of this – most insurance companies regularly do a “soft pull” of your credit and use declining credit as a reason to raise your rates. Many upscale renters will do the same thing and not rent to people with poor credit, which may limit the places where you can rent your housing. Potential employers often pull your credit (I’ve had two employers in the past do this) and use that as an element of their hiring decision, often leaning towards people with good credit over people with poor credit. These are all serious additional costs of walking into foreclosure.

In the end, I don’t think Kelli should walk away from her mortgage as a first response. She should try several other avenues first that would preserve her credit and perhaps even allow her and her family to remain in the home.

First, I’d simply talk to the lender. Explain your situation and discuss options available to you. It’s often easier for a lender to just refinance with you (sometimes even removing some of the principal) than it is to put the homes in foreclosure. Many lenders are currently focused on refinancing in this way rather than taking on more foreclosed homes, so it’s certainly an option.

Second, I’d look at the extra financial costs of what will happen if you do foreclose. Run the numbers carefully here. Include all the extra costs – a serious bump in your insurance rates, for example – and make sure you also include some estimate of the cost of the risks mentioned above – the extra cost of a new car or the challenge of finding a rental home or a new job. Those things have serious financial costs if they occur – or they might have no cost at all. A good way to appraise it is to figure out the cost if it does happen, then estimate the odds of it happening. So, if something has a cost of $100,000 and has a 40% chance of happening, it’d be a $40,000 cost.

You might be surprised to find that staying put is the best option, even if you happen to be underwater in your mortgage. If you still find that abandoning is the best option. then it becomes the moral question discussed above – and moral questions are things we all have to decide for ourselves.

If you enjoyed reading this, sign up for free updates!

Loading Disqus Comments ...
Loading Facebook Comments ...
  1. Geoff Parlett says:

    When a banker looks me in the eye, hands me a check for $300,000, shakes my hand and says ‘Geoff, no need for paperwork, I have your word and your handshake and I know you’re good for this” I’ll have a moral responsibility to pay back a mortgage. Until thay day I have a contractual obligation to a bank. I carefully read my mortgage and there are specific consequences from walking away from my mortgage, specifically they’ll take the house and destroy my credit. By choosing the consequences I have met my contractual obligations.

  2. boxty says:

    If housing prices go up by the historic 6% average per year, then Kelli and her husband will be back to breaking even in 7 years or less. So if it’s a long-term investment and she can afford the mortgage bills then maybe they should consider waiting it out.

  3. Jon says:

    “First, I’d simply talk to the lender. Explain your situation and discuss options available to you. It’s often easier for a lender to just refinance with you (sometimes even removing some of the principal) than it is to put the homes in foreclosure. Many lenders are currently focused on refinancing in this way rather than taking on more foreclosed homes, so it’s certainly an option.”

    Worth a try, but probably won’t accomplish anything. Most lenders won’t even start to talk to you until you are at least 90 days late (personal experience from friends). Applying for adjustment to mortgage because of hardship is also hard to come by.
    Many banks don’t care if you are late anyway if you were required to have mortgage insurance due to the size of the loan. The insurance company kicks in the payments, so the bank is off the hook.
    If you CAN afford the payments, then keep making them. I’ll never understand why people think that they can just dump a house because its worth less. Why do people think that real estate is a guaranteed return on money? You signed on the line for the house. Deal with it.

  4. joe says:

    Trent could you give real world examples/anecdotes of people suffering financially because of the decision to walk away? Granted some or most of the costs associated with doing so are delayed (or are hidden), but I think it could be useful. Thanks.

  5. Jason says:

    Trent – it may be immoral for Kelli to walk away but since it is legal to do so, she should. Laws are, to a large extent, a society’s way of codifying morality and since walking away from a mortgage is acceptable legally, she should definitely do it, given how badly she’s underwater.

  6. Eric says:

    Don’t forget about the recourse vs non-recourse loan question if you are contemplating walking away. The bank may be able to come after you for the underwater balance anyway after the foreclosure saving you nothing. The rules can vary from state to state.

    http://banking.about.com/od/loans/a/recourseloan.htm
    http://www.fhfa.gov/webfiles/15051/website_ghent.pdf

  7. lurker carl says:

    Practically every passenger on routine scheduled airplane flights pays a different fare, some are only slightly different and some are outrageously different. After the plane takes off, does the person who paid the lowest ticket price stay aboard while everyone else bails out?

    Most financed automobiles fall into that same category and no one seems to think it’s a problem. Same with all the crap owed on credit card bills. Big deal. So, they owe more for the house than it’s now worth. Is that the ONLY reason they want to walk away?

  8. wanzman says:

    As a banker, and also a person who believes strongly in personal responsibility, I’ll add the following.

    Real estate is not a guaranteed deal. It can either go up in value or go down in value.

    If the house doubles in value, are you going to share some of that gain with me, the banker? of course you’re not.

    So, since the house has gone down in value, now you expect the bank to eat all the loss on your investment.

    If you want to buy a house, you should be prepared to accept both the upside and downside potential that comes along with it.

    Sure, walking away might be best for you. But you are going to screw over all the other responsible people in your neighborhood and your community when property values decline even furhter due to your very selfish decision to walk out on your obligations.

    The cost will be born by all, via lower property values and higher loan costs to spread around the losses the bank just ate.

    If you have a child with down syndrome, do you just put him in a dumpster and walk away? After all, when deciding to have a child, you are aware that something could be wrong with the child.

    This risks are much the same when purchasing real estate (or pretty much anything else).

    Always understand the risk, and if you are not prepared to accept those risk, do all us responsible folks a favor and DON’T BUY A HOUSE.

  9. t says:

    Trent,
    1st of all talk to you lender – ABOSLUTELY CORRECT. Lenders want to see you successfully repay your debt and move on to other borrowing opportunities. If they can work with you at all – they will. Working with you in order to ensure you successfully repay what you owe is more profitable for all concerned than for the bank to reclaim and the liquidate your collateral.
    I agree with the banker as well – having been a lender myself.

  10. wanzman says:

    Jon said:

    “Many banks don’t care if you are late anyway if you were required to have mortgage insurance due to the size of the loan. The insurance company kicks in the payments, so the bank is off the hook.”

    You’re wrong, and obviosuly not informed about such matters, so please refrain from spreading misinforamtion.

    Mortgage insurance only kicks on after the bank goes through the entire foreclosure process and incurs a loss after sale of the property. Even then, it may not cover all of the loss.

    Not to mention the countless hours spent on the foreclosure process by the bank and lawyers, etc.

    Trust me, banks care if you are late. Many of the large banks just have so many customers past due they are overwhelmed. But trust me, they care. Don’t think otherwise. And don’t tell tell others otherwise.

  11. Jason says:

    wanzman – fact is that in this situation the banks are the ones that made the bad contract. Why did the banks not give themselves the ability to garnish the wages of those who walk away or pursue legal judgments for the amount a house is underwater while entering into a contract with the buyers? And please, you did not just compare walking from a house to abandoning a child!

    Bottom line: you do what’s best for you legally.

  12. Jon says:

    “Trust me, banks care if you are late. Many of the large banks just have so many customers past due they are overwhelmed. But trust me, they care. Don’t think otherwise. And don’t tell tell others otherwise.”

    eeh. wrong. I’ve got a friend who is more than 6 months late and his bank doesn’t care jack about it. Wanted to continue making payments while trying to short sell it but was told they wouldn’t consider it until he was at least 90 days late. Why would a bank not want to continue collecting interest and principal while trying to short sale? That’s just dumb.

    And for the record, the mortgage insurance company has already called him and tried to get him to negotiate with his bank because they are having to pay. So please, don’t tell me I don’t know anything just because you are a banker.

  13. alo says:

    Why should individual homeowners be held to higher standards than banks when it comes to financial matters? Courts decided long ago in this country that there is no such thing as an immoral breach of contract and the only thing to consider when breaching a contract is whether it is “efficent” meaning whether it makes financial sense. This is standard law school stuff that every lawyer learns. Morality does not even factor in unless there is fraud or coercion involved. Banks and corporations have been operating under the theory of efficient breach for at least a century. Actual humans should do the same. Otherwise actual humans are operating at a constant disadvantage to ficitional entities when it comes to entering a contract. If there are bad effects to taking morality out of contracting, then the law should change for everyone across the board. I can’t stand to hear a banker talk about personal responsibility and risk to berate and shame a homeowner into bearing all the risk THAT THE BANK ALSO TOOK ON. Utter nonsense.

  14. wanzman says:

    Jason said:

    “fact is that in this situation the banks are the ones that made the bad contract.”

    Really, because here is a simple fact that I have observed in my banking career:

    At 100% of the mortgage closings I have participated in, the BORROWERS have signed the documents (the contract) along with myself. It’s funny how people forget.

    I’ll also add this – in 100% of the mortgage deals I have down, the Borrowers have come to me to ask for money. I have never once solicited mortgage business. Most mortgages are made after the Borrower has already decided which house to buy, or which crap to buy with a home equity loan.

    People want to blame the banks, but they entered into the very same contracts. Now it may be your fault for not understanding what you signed, but you have the opportunity to understand, or to get advice from someone who understands (I would consult a lawyer if I was about to be obligated for hundreds of thousands of dollars and I did not understand what I was signing).

    As for the baby comparison, buying a house and having a child are both large commitments. Why is it OK to bail on one commitment, and not another? Either you are an honest committed person, or you aren’t. Morals are morals – not just when you want them to apply.

  15. Angie says:

    Uh, simply call the lender? Have you tried to call a lender lately? If you’re looking for a mod, you have to fill out forms, submit them, and wait for the lender to call YOU. It’s not like they’re handing mods to people like candy (believe me, we’re 100k+ underwater as well).

  16. alo says:

    Let me fix that for you: Always understand the risk, and if you are not prepared to accept those risk, do all us responsible folks a favor and DON’T [UNDERWRITE A MORTGAGE ON] A HOUSE.

  17. Jessica says:

    I’ll leave the moralizing to others and focus on the numbers. I encourage Kelli to get a good spreadsheet started to help quantify these variables. All of my pontificating below boils down to this: she needs to create two budgets – one showing walking away and one showing keeping the house.

    I often hear people say (as Kelli will) that she should just stay in her house and wait for the value to go back up. Assuming a 4% increase in value a year, it will take a house currently valued at $220,000 almost 10 years to get back up to $330,000. Four percent a year is the most optimistic number I’ve heard on home value – a more realistic increase rate would mean it will take even longer for her value to come back up.

    I’m assuming she can rent an apartment at a significantly lower monthly cost than her mortgage payment. While it can be harder to find a rental with bad credit it simply isn’t true that you can’t find one (I often see that statement in blog comments and it’s just flat wrong.)

    Yes, her insurance costs may go up some and I agree completely that she needs to get a car plan in place before totally trashing her credit. But other costs will go down in a rental. No home maintenance, presumably lower utilities for a smaller place, etc.

    So, the financial calculus she needs to consider:

    1) How long will it take the house to increase enough in value to meet her principal balance (assuming that is going down every year.) At what point will those values intersect?

    2) What is the true cost of home ownership for her each year? Factor in the mortgage interest saving, but also include property taxes, insurance, association fees, lawn care and other expenses associated with home ownership.

    Assuming she will want to sell in 10 years or at whatever point she determines she should factor in the realtor commission, any make-ready expenses, etc. as well in the cost of home ownership.

    3) What is the true cost of renting for her each year? She should include using the difference between her mortgage costs and rental cost to pay down other debt (so quantify that interest savings), save or invest. She may also want to factor in expenses that would increase while renting, if she has them (storage maybe?) Moving expenses from the house to the rental should go here too. Don’t forget to factor in rental rate increases over time as well.

    4) Then add in the costs of increased insurance premiums for bad credit(I can’t believe they would rise too much but hard numbers should be included in the spreadsheet.) Same goes for transportation costs – if she must have a car loan higher rates should be included here.

    The biggest expense I see underplayed in these calculations is home improvements and repairs. How many of us would go 10 years without making repairs or upgrades to our homes? Doing that when our equity was doubling every couple of years was one thing but when values are flat, buying a new HVAC system in incredibly painful. Consider than in a rental that expense does not come from your pocket.

    Once Kelli has all the numbers she needs she can look at her two alternative budgets and see where she would be in 3, 5 or 10 years if she keeps the house or if she walks away. How much would she have saved in either sceanrio? How much in debt, if any? This won’t tell her what to do but it will give her information that she can weigh, along with her own sense of whether defaulting is “immoral” or not.

    The numbers don’t make the decision for her but they can inform her thinking and will give her hard facts to use to weigh her options.

    Saying “defaulting is immoral” is easier when you haven’t considered that staying will cost you $150k. Walking away to “save money” can also seem like the best choice if you don’t run the numbers and come up with the actual savings. Much of these budgets would be based on educated guesses (the biggest of these guesses being potential home value appreciation) but all budgets are.

    Good luck Kelli!

  18. Donna says:

    I don’t understand why someone would default on a mortgage just because their neighbor’s house sold for less than theirs would. Unless they are trying to sell their house, then why wouldn’t they just stay put and wait until the market turns around?

    How come you don’t see people bitching that their houses went UP too much in value and they are making too much money when they sell at the top of the market? LOL. Like others have said, when you buy a house, part of the risk is that it might go down in value, too.

  19. Money Smarts says:

    It is so strange to me how so many people are just willing to walk away because the home that THEY decided to buy at an agreed to price and mortgage rate has now dropped in value. When you buy a home you’re not buying a guaranteed investment, that is always going to go up in value. You shouldn’t be making a decision on buying a house based on what the value will do in 5 or 10 years. You should only be buying a house that you can easily afford, and that doesn’t stretch the budget. Go in with eyes wide open people, then you won’t have to back out of a signed contract and suffer the consequences!

    I’m with those who say that this is immoral – to back out of your mortgage contract. Not only are you backing out of a deal you agreed to, but you’re hurting yourself, and those around you as well because the values of homes around you will continue to drop because of your foreclosure.

  20. L says:

    This kind of advice pisses me off. Why is it that huge banks, corporations, etc. are allowed to walk away from bad investments when they find themselves underwater without all the hue and cry about moral hazard while ordinary people who, sure, might have made poor decisions, but end up being morally crucified for even contemplating the same kind of business decision made every day by corporations? Oh, I forgot — businesses can get away with things ordinary people go to jail for. Give me a break. I thought one of the things you and other personal finance people lecture people on, Trent, is to treat their finances like a business, with an eye toward the bottom line. It’s not illegal. If they can live with the morality of it, who is to judge them. You? Me? Give me a break.

  21. B says:

    Moral question aside, unless you bought a house and the entire neighborhood goes from being wealthy to being gang territory, it’s most likely over the long haul your house will come back.

    Since houses are over 30 years, seems like a very silly thing since 5 years is only 17% of the time of the loan (even longer if you keep your house well past it being paid off).

  22. alo says:

    Where are all the appeals to morality when the decision is between re-working a loan to keep a family in a house and refusing to restructure a loan and filing a foreclosure action?

    The banks do what is best for them financially. We have all been trained to accept that and understand their decision. Why don’t we give the same acceptance and understanding to personal financial decisions?

  23. Johanna says:

    @Donna: “I don’t understand why someone would default on a mortgage just because their neighbor’s house sold for less than theirs would. Unless they are trying to sell their house, then why wouldn’t they just stay put and wait until the market turns around?”

    Because, in the meantime, they are paying mortgage payments that are much higher than they would otherwise be paying in rent. That’s why it can make financial sense to walk away from a mortgage.

    I’m one of those who thinks there’s no moral dimension to this. I don’t know anything about this aspect of the law, but it sounds like alo does.

  24. Courtney says:

    Donna, I had the same question. Outside the financial or moral perspectives, why do they need to leave their home in the first place? Is it no longer meeting their needs? Or are they just annoyed that they’re not making any month on their ‘investment’? I’m guessing the latter, since they’re willing to move into an apartment which I’m presuming will be a downsizing for them.

  25. Courtney says:

    *Money* not month :-) (Darn you, lack of an edit feature!)

  26. Jessica says:

    Is it immoral to negotiate a better interest rate on your credit card? You agreed to pay one rate and to let the lender increase it at will – is calling to ask the lender to lower your rate immoral then?

    Is negotiating a reduced payoff immoral on a credit card balance? Often if you get behind on payments you can call after 90 days and offer them 60% of the balance and they’ll take it. Is that immoral? The difference there is listed as lost revenue on the books of the bank and so, as least with the logic some of you use, costs everyone.

    Is canceling your cell phone contract early immoral? You agreed to keep if for 2 years and now you want out just because you found a better deal, want a different service, etc.

    A mortgage is a business arrangement governed by a contract that spells out what happens if you make the payments and what happens if you don’t. I’ve tried to understand but I just can’t wrap my head around the concept that paying or not paying is “moral” or “immoral.”

    There seems to be general agreement that it’s ok to default in certain circumstances. How broke do you have to be for it to stop being immoral?

    Casting financial contracts as moral duties is a slippery slope for me. Our highest and first duty is to our families and we should make the decisions that optimize their security and happiness. If walking away from a mortgage that far underwater allows someone to provide security and comfort for their family, how is that immoral?

  27. Amy says:

    Kelli never indicates if they are having trouble making the mortgage payment. If they are not having trouble, then I don’t think they should walk away. We’re all happy when our houses go up in value; well, sometimes they go down too. If they can afford the payments, why not wait and live there and who knows? In five years the value could easily be above what they owe.

    Morally, I agree with Trent. A mortgage is an agreement, a signed contract. The bank was willing to take a risk on Kelli and her husband. If they CAN fulfill their obligations they should do so. All this said, I understand that a lot of people have become unable to fulfill their obligations through no fault of their own, which is an entirely different story.

  28. Craig says:

    The only thing I’ll say is: make your decision NOW, especially if you’re having any trouble at all making the payments. Bank policy is in effect to bleed people dry before ultimately foreclosing on the loan. Too many people deplete their savings, run up huge credit card bills and so forth, all to stay in a house they can’t afford for a few more months. If you can’t afford your house in the long run, get out now.

  29. Joe Public says:

    Don’t walk away- RUN.

    Morality shmorality. The banks are crooks. They are the reason we are in this housing mess.

    They paid the politicians to change the laws. They paid the politicians to bail them out. They fueled the fire with exaggerated appraisals. The bubble was manufactured to fleece YOU.

    Credit Score? People have lived for 10,000 years without it, you can to.

  30. Jon says:

    @Johanna

    “Because, in the meantime, they are paying mortgage payments that are much higher than they would otherwise be paying in rent. That’s why it can make financial sense to walk away from a mortgage.”

    Unfortunately we don’t really know enough of this situation. If their mortgage is fixed, then there is the possibility that they have ALWAYS been paying more than rent would cost. They would have known that at closing and been accepting of it. But now (based on the information), it appears that they just want to skip out on a bad investment and now want a cheaper payment simply because the house isn’t worth as much. If they are not trying to sell and are able to make the payments, then what does it matter if they are upside down? Eventually, they will be on the right side again. Might take many years, but it will happen. They should just enjoy the cheaper real estate taxes and be happy they can still make the payments.

  31. Monica says:

    @ #7 Jon – Yes, I’ve also witnessed this exact same situation. This person was current on his mortgage and making 100% of the payment each month. Short sale was the best option since he had moved out of state for work and then the real estate market crashed. He tried six ways to Sunday to get the mortage company to work with him. The only response he was able to get — Until you are late on your payments, we won’t even talk to you.

    To me that is so incredibly backwards and ridiculous.

  32. Justin says:

    Most importantly, you can live in the home for a year or more mortgage/rent free if you just ‘walk away’ and live there. That gives you an entire year of saving money from no mortgage or rent. Banks will come knocking about six months in, but they aren’t going to kick you out until the foreclosure process. With a large bank such as Wells Fargo, you are looking at at least 16-18 month before you are kicked to the curb.

    As bad as this sounds, I’d much rather have a neighbor do this than simply walk out and leave their home in disrepair, not mow, etc. Trust me, I live in a semi-detached home and next door did this. I was stuck mowing their grass, shoveling snow, etc. There was a rotten odor from the house detectable in the basement. I called everyone I could, including the bank, but nobody could do anything until the bank officially had officially went through the early stages of the foreclosure process, which is about 10 months into the process. It’s now been 16 months and the sheriff’s sale is next week.

    They’ve been nice enough to mow once every three weeks, but they don’t weed, trim, clean-up, etc.

  33. Kevin says:

    Monica:

    No, that doesn’t seem backwards at all to me. You see, a “short sale” is when the bank agrees to accept the sale price of a home as settlement in full for the outstanding mortgage. It means the bank is going to lose money, but they just want out of the deal, so they’re agreeing to it.

    The reason they want the seller to be behind on their payments is so that the seller shares at least some of the pain with the bank, in the form of having their credit score ruined.

    What’s the alternative? That the bank take a huge loss on a loan, and the individual who benefited from it gets to walk away scot-free, not owing any money, and with a clean credit report? Doesn’t sound very fair to me.

    The bank cannot trash your credit report unjustifiably (that is, they can’t wreck your score by claiming you were 90 days behind if you were in fact current), so they need you to ACTUALLY have committed a credit-ruining action so they can legally put that on your credit report and ruin your score. They’re not going to let you walk away with spotless credit and take a huge loss, just because you don’t think you should bear any of the pain for the market declining.

    Frankly, I think it makes perfect sense. The banks are absolutely right.

  34. Joanna says:

    In making a judgement on the morality of the situation, a good question is WHY they’re underwater on the mortgage. Is it b/c they bought at the market’s peak and now the house value has plummeted or does it have to do with a second mortgage taken out for other reasons (credit cards, etc.). Perhaps that changes the point of view for some.

    As for whether or not morality is valid, I say exclude it from your decision making process if you will, but be prepared for the karma.

  35. Suz says:

    How “similar” is the house down the street from her? It might look the same, but inside could be vintage 1970 or something.
    Real estate value goes up and down, and you take that chance when you buy a house. It’s a shame that it is $100,000 less than you paid, but if you are going to live in it over the long term, it should hypothetically even out.
    It doesn’t seem worth it to me to just walk away from your responsibility.

  36. Johanna says:

    @Jon: Whether they made decisions that were not in their best financial interest in the past has no bearing on what’s in their best financial interest now.

    It’s true that there are many reasons why walking away might *not* actually save them money in the long run, but there are also many reasons why it might. That’s why I agree with Trent that they should run the numbers very carefully. If it’s better financially to walk away, then they can decide whether they think there’s anything immoral about walking away. But if it’s better financially to stay put, then the moral question is moot.

  37. M in TX says:

    Sounds to me like someone bit off more than they can chew. Taking out a loan for $330,000 on a mortgage. Seriously? That means they either make a ton of money or they way overextended themsevles. Suck it up and deal the cards you dealt to yourself.

  38. Jon says:

    “What’s the alternative? That the bank take a huge loss on a loan, and the individual who benefited from it gets to walk away scot-free, not owing any money, and with a clean credit report? Doesn’t sound very fair to me.”

    The question is why don’t banks work with the owner to short sell the property and then put them in an unsecured private loan for the difference. The bank gets all their money AND the property. If the owner defaults on the personal loan then their credit score is still affected.

  39. Honey says:

    I also don’t understand why they want to sell just because they’re underwater. It sounds like they are current on their payments (and not having any difficulty making them), and I am assuming the neighborhood and house still meet their needs. If they were planning on selling the house and moving after owning it a few years (four?!) then that is one thing, but if they were planning on living there forever, then why not wait it out?

    Values have gone down enough that they are GOING to go up again (though hopefully at a more measured pace) in the future. Allowing yourself to go into foreclosure now and ruining your credit (and ability to buy elsewhere) is buying high and selling low, which is the OPPOSITE of what you should be doing, investment-wise.

  40. Sherpa says:

    It may seem like an out to walk away and if you are a businessman/investor then that would be the course of action to take depending on your outlook on the housing market. However, you are a homeowner who is actively in the home. You may not be able to find a suitable place to rent for much less than the mortgage payment. The other problem is that the housing market may rebound within the time frame that you might be looking to purchase again, making the walk away a foolish decision. Its only underwater on paper, its not underwater until you try to sell it.
    As for being a responsible borrower, I have to say to the bankers why dont you be responsible lenders. The housing market got wildly inflated because of easy money. The correction will come in the form of borrowers unable to pay and those who look at this as a business decision…corporate America has no conscience…why should the rest of us?

  41. Carrie says:

    don’t forget that even apartment owners will check your credit. you might not be able to get into a decent one.

  42. Monark says:

    #6 Jason @ 8:31 am May 25th, 2010

    wanzman – fact is that in this situation the banks are the ones that made the bad contract. Why did the banks not give themselves the ability to garnish the wages of those who walk away or pursue legal judgments for the amount a house is underwater while entering into a contract with the buyers

    Jason – the banks would have given themselves that ability if the law allowed it. In California, purchase money loans on primary residences are “non recourse” – the banks only option in the event of default by the borrower is to foreclose on the house. Loans that were used to purchase investment property or were taken out through a refinance are recourse loans. The banks have the right to pursue other legal options to recover their losses after foreclosure (or short sale). I am sure it is different in other states.

  43. Des says:

    Morality aside, I’m not convinced this is the best financial decision for these folks. Foreclosure will prevent them from buying another house at any decent rate for as long as it is on your credit report. It goes beyond just the credit score. The credit score is the aggregate of all your credit decisions, but seeing a foreclosure on a CB tells the mortgage lender, very specifically, that you didn’t pay your mortgage. Many banks simply won’t give you a mortgage at all with a foreclosure on your CB.

    That being said, in the 7 years it will take for that decision to drop off, housing values (and rents) will be going up. It MAY be in their best interest to wait that out, depending on how long they had planned on living in that house.

    Also, just because their neighbor’s house sold for $100k less doesn’t mean theirs will. The house next door to us sold for $35k less than ours a year ago, was flipped, and just sold for more than ours this month (with a smaller yard, smaller house, and smaller garage, in a declining market).

    So, don’t lose hope, and don’t make a rash decision based on fear that you may one day regret.

  44. Monica says:

    Kevin:

    Your response makes sense, and I agree that banks shouldn’t bear the full burden for a short sale. However, some of the things witnessed during this process lead me not to agree with the “poor bank; it’s not their fault” mindset that I think you are implying.

    Perhaps my post should have been more clear – this person wasn’t set on doing a short sale. They were willing to consider other options, including keeping the property. But the mortage company pretty much refused to discuss anything with him until his payments weren’t current. That’s what I consider “backwards and ridiculous.”

    Believe me, the mortgage company has made the short sale process (there is a contract on the home) as painful, frustrating, humiliating, time consuming, etc. as they possibly can.

    And, for the record … just want to clarify that this was not a situation where the person purchased more home then they could afford. There was a substantial down payment and a traditional mortgage was obtained.

  45. Milt says:

    Trent,

    Welcome to the club! I’m in the same position. The question I would ask you – What has changed? If the market was not down, would you walk away? You contracted to pay on this mortgage when you signed it. Did you think you would have an opportunity to pay less later? Did you think the value was guaranteed? Unless you planned to sell in the near future or you have a financial crisis, do your neighbors a favor, stay put. I have homes in my neighborhood that have been foreclosed on. Now they are slashing prices and an eye sore. The housing market will recover.

  46. Dolphineus says:

    I don’t understand why “being underwater” is so scary to people. You bought high, the market dropped. Problematic if you are selling, but if it is your home, where you are living, and intend to live, so what? As long as you can afford your mortgage, what difference does it make?

  47. Carey says:

    Kevin: a short sale goes on the credit report as a charge off, so there is no need for the bank to cultivate a delinquency before they’ll talk about a short sale.

    Different mortgage servicers are different. Some will talk to you before you’re delinquent to see what can be worked out. Some will wait until you’re delinquent before they will be willing to talk to you. It depends on their staffing levels, the type of loan you have, whether they own the loan or just service the loan, and what the individual requirements of the actual owner of the loan are. Not all mortgage servicers are the same. They’re not even internally consistent.

    I think morality has quite a bit to do with this decision. I take the Kant approach. I look at the effects if everyone walked away from their mortgage. Obviously, that would have a tremendous negative effect on society. So, since I wouldn’t support everyone else walking away from their mortgage, I would consider it immoral (not to mention hypocritical) to walk away from mine. It’s also a very obvious violation of the golden rule (unless you would be happy to let someone who owed you money just walk away from the debt). You can justify it all you want by saying that the bank is not a person, but you would still be pretty ticked off if your bank decided to walk away from its depositors and leave it up to the FDIC to make them whole.

  48. Leah says:

    An interesting thing to point out here is that the owners are not actually underwater until they try to sell the house. The concept of being “underwater” is a weird one to me — if you’re going to remain in the house for many more years, it is entirely possible that the value of your house could again rise above the value of your mortgage. Then this dip in housing prices will just be a minor blip on your radar that means nothing to you. If you can continue to afford your mortgage payments, I’d stay in the house. Walking away from a mortgage should be reserved for those who literally can not currently afford their mortgage.

  49. Johanna says:

    @Des: “That being said, in the 7 years it will take for that decision to drop off, housing values (and rents) will be going up. It MAY be in their best interest to wait that out, depending on how long they had planned on living in that house.”

    For comparison, if house prices appreciate at the historical rate of between 3% and 4%, it will take 12 years for a house that’s worth $220K now to appreciate to $330K. And that’s assuming that house prices in their area have already hit bottom, which they may not have done.

    So it’s overwhelmingly likely that they will be able to rent a comparable house for seven years for less than they’re paying on their mortgage now, and that they’ll be able to buy a comparable house in 2017 for less than they owe on their mortgage now.

  50. JT says:

    There are a lot of red herrings and other logical fallacies flying around here. Hopefully I can shed some light on the arguments.

    For full disclosure, I do not, nor have I ever, owned a home. I’m a renter, and for good reason–prices are still too expensive in my area.

    Let’s start with the following common argument:

    “Not only are you backing out of a deal you agreed to, but you’re hurting yourself, and those around you as well because the values of homes around you will continue to drop because of your foreclosure.”

    Sure, the prices of other homes may drop, but as you just argued above, that shouldn’t matter to the other “moral” homeowners, who will stay in their house, because they shouldn’t be worried about short terms prices. As you said, “When you buy a home you’re not buying a guaranteed investment, that is always going to go up in value.” So, I might be missing something but I don’t see why the other homeowners care if their price drops, especially if you are so confident in a recovery. But feel free to correct me if I’m wrong.

    Furthermore, you’re choosing to only look at this from one perspective. I would argue that falling house prices are creating more affordable homes, allowing those who were previously priced out of the market to finally buy.

    Which brings me to my next point: why does everyone say they want affordable prices but then call rising house prices a recovery? The government has done everything in it’s power to play extend and pretend, artificially propping up prices. All this has done is led to an unhealthy real estate market where housing prices will continue to slowly drop or stagnate for years, preventing a true recovery in the overall economy.

    The fact of the matter is that a house has a true value, as it provides a critical resource: shelter. Many times the real estate market does not reflect the true price. What we are seeing is the unwinding of prices back down to sustainable levels. Whether people strategically default or not, prices will continue to decline in many areas until they reach a point of equilibrium.

    Another common argument:

    “Most financed automobiles fall into that same category and no one seems to think it’s a problem.”

    The reason why people don’t walk away from their car loans is because the cost of doing outweighs the benefits gained. Car loans are much smaller in amount than mortgages and the credit hit, along with other consequences of default, does not make financial sense.

    Obviously, I’m of the opinion that morality doesn’t even enter into the discussion, nor should it. The contract spells out the terms of the loan and what to do in the case of a default. Neither side walks away scot-free and it is to their advantage to work something out. However, many times this does not happen for one reason or another, but that is their choice to make, not mine.

  51. Eli says:

    Unless they’ve lost their ability to work/pay via means that are completely no fault of their own, they have a responsibility to the bank and to the rest of us to stick it out.

    If greed, both when purchasing and now, are the sole reason for breaking contract, then I whole-heartedly recommend foreclosing, destroying your credit, renting a nicer place to maintain your style of entitlement, missing the bottom of the housing market and then having a difficult time securing a loan for the same house when it costs $300,000 again in the future.

    I have a suspicious feeling the question you had for Trent 4 years ago was “My husband and I want to buy a $375,000 house, we can’t afford to pay the mortgage permanently but since housing prices are guaranteed to increase doesn’t it make the most financial sense to just take out a loan, pay for a few years and then sell? It makes much more sense than renting and having nothing to show for it right?”

    I wish you know ill fate, Kelli. You are no different than the thousands and thousands of other people who got us into this mess…but that is no excuse. I hope you’ll make a good decision. Good Luck to you and your family.

  52. Jane says:

    “It’s often easier for a lender to just refinance with you (sometimes even removing some of the principal) than it is to put the homes in foreclosure. Many lenders are currently focused on refinancing in this way rather than taking on more foreclosed homes, so it’s certainly an option.”

    It might in theory be easier for the lender to refinance, but that is almost never happening, unless you are one of the few people that benefited from Obama’s mortgage negotiation plan. The only time they “reduce the principal” is in the case of a short sale, which also greatly affects your credit. I also don’t believe you can get a short sale unless you demonstrate financial hardship.

    I agree most with Des in that I think they are thinking too shortsighted about this. It won’t matter if the home near them sold for $100,000 less if the markets rebounds. Realtors usually only take comps from the last six months when they create comparables at the point of sale. Continue to watch the market, and you might be surprised what happens. I’m not saying that you will ever turn a profit on your home or even break even, but it might not end up being as bad as you think. And a foreclosure is a real blot on your record that will affect even your options of where you can rent a house or apartment.

  53. Patty says:

    I’m surprised Trent didn’t comment on the tax implications of walking away. I’ve seen in some situations that the walkerawayer owed tax on any reduced/forgivin costs. I’m not very familiar with this but research should be done.

    A lot of background information is missing and some serious number crunching needs to be done before we even look at the moral side. Only one comparable price to define ones own home value? What if that one house was a foreclosure in a sea of more stable homes?

    Also if its just a matter of underwater but they are able to make payments (ie the rate hasn’t adjusted and their income hasn’t decreased) then what is the difference between staying in the house paying “rent” mortgage payments to the bank for a few years waiting for the house value to go up some versus renting somewhere for those same years trying to repair their credit score? Whether renting or paying underwater mortgage payments they aren’t “building equity” anyway. At least staying in the house they could preserve their credit scores and use their ‘moving money’ to pay down debts.

  54. Johanna says:

    @Patty: From the IRS itself:

    “The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.

    “This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).”

  55. chacha1 says:

    I agree with Dolphineus and Leah, there is no “underwater” unless you try to sell the house. Just as stocks have only lost value if you sell when they are low. Houses are only ever worth what someone will pay – there is no intrinsic value.

    If for whatever reason that house was worth $330,000+ to the LW at the time of purchase, they need to examine why it isn’t worth that much to them now. The portion of the letter reproduced doesn’t even begin to tell us why they might want to get away from it.

    Re: why buy at all if their mortgage payment was higher than a comparable rent payment – because in areas where houses are $330,000, you typically get a lot more for your mortgage payment than you do for your rent payment.

    The opposite applies in my neighborhood – my rent payment buys twice as much space as a comparable mortgage payment would.

    Also, of course, most people make home-buying decisions based on emotion and not on logic.

  56. todo es bien says:

    I recall the stock market crash of the late eighties, when Bill Gates was asked what it was like to be the first person to lose a billion dollars in one day in the stock market. He responded, in essence, I didnt lose anything, I wasnt selling anyway. Subsequently, the 2 billion he had became worth 30 times that much. I doubt we will ever get to the bottom of the moral issue here, as what is moral to one person is not necessarily moral to another, and we dont necessarily know what we would do if we were in a similar situation. I will say, I did not buy a house during the boom because it was clearly a bubble, and I was sometimes kicking myself when I saw others drawing out equity and living like a king while I was trying to be responsible to my family. This all came about because everyone from the consumer level to the bank level were either stupid, greedy, or in some cases both. Its hurtful to have to be one of the ones paying for this when I was not a beneficiary of it. If the requirements to buy a home had stayed reasonable (20% down?) the price runup/bubble/collapse would never have occurred. Period. Like all borrowing, it distorts market forces of supply and demand, and usually punishes the responsible.

  57. Jane says:

    “I did not buy a house during the boom because it was clearly a bubble, and I was sometimes kicking myself when I saw others drawing out equity and living like a king while I was trying to be responsible to my family. This all came about because everyone from the consumer level to the bank level were either stupid, greedy, or in some cases both.”

    Wow. So you are a financial genius and everyone else who bought a home in this country in the last five to ten years is a stupid, greedy idiot? I’m glad we cleared that up!

  58. Jen says:

    When I bought my condo (my first home) two years ago in Las Vegas, never in a million years did I expect to consider walking away or short selling my place. I was always the responsible person that did everything right (had a perfect credit score, saved for a down payment, didn’t have credit card debt, etc.) Prices in my area had dropped 30% and interest rates were low, and it never dawned on me that the market would crash another 40% within months of buying the place. I know real estate is a risk, but despite all my research, this thought never occured to me. I thought my condo could go down maybe 10% in value.

    I bought a new construction condo, which was delayed several months, and because of bad luck, I got one of the highest interest rates in the last two years because loans had risen sharply the week I had to lock in the loan. Also, the mortgage lender lied to me about several things, including not needing mortgage insurance, so in the end my monthly payments are about $200 a month more than I anticipated. I found this out a week before I closed. Right after I closed, I found out the higher-end condo/retail center that was going to be built across the street folded, and the awesome park that is supposed to be built across the street has been delayed (but there is still hope it will be built next year).

    So why consider walking away? My condo is down 40% from what I paid for it, and given the projections for Las Vegas, it seems unlikely I will be above water in 5 years, and maybe not even in 10 years. So if I try to sell the place within the next 10 years (which was my plan), I will have to come up with money when I go to sell it. Rents have gone down considerably in the last year, so while I was paying maybe $300 more a month than a rental, now it’s more like $600 a month. A ton of my neighbors have walked away, and the HOA is now bankrupt. I can only imagine big assessments coming down the line. Further, my condo development itself was foreclosed on, and the unbuilt land is owned by the bank, and they haven’t started finishing up the second half of the units yet, so that is another reason the HOA is bankrupt.

    Because I locked in the high interest rate, my plan was to refinance in a year or two, but I didn’t realize I couldn’t refinance if I was underwater, and I didn’t anticipate the crash. I can barely afford my mortgage, and I don’t have a steady job anymore, and the economy/job market is horrible in Las Vegas. All solutions are bad – staying and knowing I’m wasting a lot of money and may eventually run into more trouble, vs. short selling and ruining my credit and losing my down payment. What I’m trying to do is make a lot more money and just stick it out. Half the people I know have walked away on their mortgages, but these are the people that bought ARMS with no money down at the height of the market.

  59. Ryan says:

    I don’t understand how we got to the point where just walking away is now no big deal.

    Why does no one want to take responsibility for their own actions?

    Just because the banks did unethical things (although it doesn’t sound like that’s the case here) doesn’t make it OK for more people to.

    It honestly sounds like Kelli is just annoyed that she bought during a bubble and now that’s it popped, she doesn’t think it’s “fair”.

    Finally, just because something is legal doesn’t mean it’s right.

  60. Terrell says:

    If you are employed and can make payments, there is NO REASON for you to walk away from your financial obligations. By doing so, I feel you are stealing in a way. Your actions will affect others, even though you may not think so.

    However, if you are unable to make payments on your home, TALK TO YOUR LENDER. I work at a credit union and we help people who are in financial trouble every day. We would rather work with you to lower payments than have you walk away because your actions will have a negative impact on the credit union, our members and the community as a whole. PLEASE think this through.

  61. Jenna says:

    @ Eli – You wrote exactly what I was thinking. The way the information is presented, it seems they CAN continue to pay but don’t want to because their initial gamble didn’t pay off as they hoped. If you thought you needed to keep up with the Jones when you were buying and have a change of heart now…bummer. What if the banks decided they no longer wanted to hold the loans of all of us morally/financially responsible people and said we needed to pay the balance immediately or leave our homes…how would we all feel about that?

  62. Dar says:

    Moral issues and credit rating damage aside, doesn’t the couple still owe the bank for the mortgage–or at least the difference between the amount owed and the results of a short sale?

    I’m having a hard time understanding how people can “walk away” from the amount of money they contractually owe without going the whole nine yards and declaring bankruptcy. Yeah, you leave the house and you stop paying–but you still signed papers saying you owe $X.

  63. Finance Nerd says:

    @Jon (#24) — I had an experience relevant to that. We moved about 3 years ago, and our old house sat empty for an entire year.

    During that year we made every payment on time (on both mortgages). We finally got an offer on the old house that was about $60K less than we owed.

    We approached the bank about converting the upside down amount to a SECURED loan on our new house. No deal. They would not work with us since we were not “behind.” We were offering to replace the undercollaterilized upside down loan with cash and a secured (much smaller) loan against our new house (which had equity in it). But they were not interested.

    So, we cashed in my wife’s IRA to pay the balance and be done. Huge tax hit, plus the loss of a significant retirement account, all because they would not work with us.

    BTW, also raises the question why that loss should not be deductible. If gains on home sales are taxable (subject to a generous exclusion) shouldn’t losses be deductible?

  64. KimK says:

    Kelli – I understand your pain. I’m in a similar dilemma. My house is underwater too and I’d like to walk away, but just haven’t had the guts to take the plunge. I’m still gathering all my information. There are a lot of options (foreclosure, short sale, strategic default, deed in lieu of foreclosure and I think one more). My coworker is actually suing her bank for predatory lending and going for the deed in lieu of foreclosure (she hopes to keep her house and have her mortgage value significantly reduced). Please check out all the various options as each one has their own consequences and impact your credit in different ways. There are even lawyers that specialize in that stuff (they will handle collection calls), just be careful who you get (don’t trust anyone who says they can guarantee to keep your credit clean).

    I feel that the banks should share the misery in monstrosity that they created. They agreed to the inflated home values, they knew that this was a bubble too. They gave mortgages to people who shouldn’t have gotten a mortgage. My bank tried to talk me into a mortgage for $100k more than what I wanted to spend (luckily I didn’t go for it). The banks lured us with special “affordable” mortgages. Why should the little person bare all moral responsibility when the banks don’t have to? They could have easily said that the house wasn’t worth the inflated value and not grant the mortgage.

    For me buying a house is an investment. A car is definitely known not to be a good investment. A child is not an investment (at least one that you look for financial gain). If this was a business that she owned and was $100k underwater. If there were no clear signs of her making a profit for the next 7-10 years, all of her friends would be begging her to walk away from the business. Accountants and even the banks might be telling her to cut her losses. We are told buying a house is an investment, why is it now so bad to walk away if the investment tanked and there will be many many years until we could see any sort of return on our investment.

  65. DiscoApu says:

    I feel a lot of people are thinking about this incorrectly. When you enter into a mortgage agreement the bank/broker/market has already priced in the possibility that you will not make the payments. The reason on why is of no consequence. It is not the individuals fault that the mortgage was priced incorrectly because of insane real estate assumptions.

    My point is that you have paid for the right to walk away, no matter what the reason.

  66. William says:

    Good article

    I have a slightly different take on the same situation here:
    http://worthwild.net/blog/?p=145

    It is a gut-wrenching decision but I would start by asking the lender to reduce the principal to be more in line with current home values. Tinkering with interest and terms is mostly ineffective for the severely underwater homeowner.

    -WR

  67. Lisa says:

    I agree the morality issue is a hot topic (the personal part of “personal finance”), but when it comes to the finance part I agree you need to look at the costs. It may a be finacially sound move to walk away.
    A big point to remember is a mortgage is a collareral loan and the contract you sign says that if you stop paying you forfeit you house. It doesn’t say you should ruin your life and declare bankrupcy in order to keep the value of your neighbors house up.
    That being said, it’s not a decision to take lightly.

  68. Karen says:

    Kelli doesn’t state that she is unable to pay the mortgage. Just that their home is worth less than they owe on the mortgage. Unless she’s planning on selling, she hasn’t lost anything.

    When my husband and I purchased our home 20 years ago, we purchased it at the height of the last real estate boom. It promptly lost value, and was worth less than what we paid for it. It took 7 years before our home was worth more than we paid. We never considered just walking away. We could afford the mortgage payment, and we were not planning on moving. And despite the real estate bust of the last 3 years, our home is now worth 3 times what we paid for it. Plus our house will be paid for in 3 years.

  69. Johanna says:

    @Dar: Many mortgages are what are called non-recourse loans, meaning that if you default on the loan, all the bank can do to you is take the home and sell it. If the proceeds of the sale don’t cover the balance of the loan, they can’t come after you for the rest.

    Obviously, if you’re considering walking away, you should first check to see if your mortgage is a non-recourse loan. But even if it’s not, my understanding is that the bank can’t get any more money out of you unless they actually initiate action against you, which they’re not likely to do unless they have reason to believe that you actually have the money.

  70. Geoff Parlett says:

    For all the people who are mad at homeowners who bought at the top of the market and now realize they have overpaid for a house, understand that the bank also bet on the house increasing in value. After all the bank is using the house as a security against the value of the house. When they give you a $300,000 mortgage the bank is betting that the house will remain worth $300,000 and thay they will be able to foreclose and sell the property off to get their money back. In these cases both the homeowners and the banks made bad guesses about the direction of the market. Why should the homeowner be the only one who suffers the consequences? Shouldnt’ the banks, with all their expertise, have been in a better situation to see that this bubble would burst than the homeowners were?

  71. Chris says:

    I agree with #43 DiscoApu that bad debt is definitely factored into the price of the mortgage or at least the decision to finance.

    As we know, this crisis was not one party’s fault by any stretch of the imagination. I don’t believe this email was intended to determine who the finger should be pointed at. The request was for advice, and this should not exclude moral advice.

    It is to be sure that, very similar to a recent post regarding the financial gain/loss of a divorce, other aspects of this “relationship” should be factored in. Just because it appears at face value to be a positive financial decision to abort a current engagement, this short-term analysis may be hasty.

    Finally, a house is not a car, and unless the car is one of the rare, appreciating assets (which few are), a car is much more likely to depreciate in value rather than increase. A bank, as well as the owner of the house, understands that the risk is low in that the house will devalue permanently over time, hence why you are much more likely to get a $300,000 mortgage for a house compared to a $300,000 loan for a car.

    A long-term analysis would be extremely valuable in this scenario.

  72. Stephan says:

    crazy that we are even having this conversation, as in the past im sure this idea wouldnt cross most homeowners minds. IMO, walking away is not the right move for anyone involved. the homeowner isnt down 100k until they actually sell the house, so if they can still afford the payments, i dont understand why they would walk away. and please people, its not the banks fault that this person signed the lease agreement. All these underwater homeowners who complain are idiots and didnt understand the idea behind real estate, it goes up AND down in value, and clearly these people bought too much house too soon or shouldnt have bought at all!

    Preferred Financial Services

  73. Ken says:

    @Johanna(#46)

    “…my understanding is that the bank can’t get any more money out of you unless they actually initiate action against you, which they’re not likely to do unless they have reason to believe that you actually have the money.”

    This is actually a very good point – if enough homeowners take the option to walk away, then more banks *will* have reason to believe that there are probably assets to go after, and probably will initiate more action (or at least do some digging to see if it is worthwhile).

  74. Geoff Parlett says:

    Okay, for all the people who can’t understand why Kelli would want to walk away if she can still make the payments, how would you feel if this was a cell phone contract? What if Kelli had just signed up for a cell phone plan with AT&T for two years at $100 a month, then found out that Verizon had the same plan for $50 a month. Kelli can walk away from AT&T by paying a $200 early termination fee. She’ll make that money up over the length of the contract by paying significantly less per month. Would it be immoral of her to walk away from that cell phone contract? I think not, by paying the ETF she upholds her part of the contract. And if emailed Trent or any of you asking this question you would reccomend she change plans. No discussion of morals.

  75. Dar says:

    Johanna (46) — Ah, I see. Thank you!

  76. Valerie says:

    I admit that I am a lifetime renter because I move frequently for my job. However this whole “underwater” thing baffles me. Presumably, you searched long and hard for a house that you could make your own and call it home for a long time. You negotiated with the previous owner for the best deal you could then with your mortgage lender for the best possible rates. You signed up for a 30 year mortgage. If you were thinking of moving in 3-5 years after purchase you shouldn’t have bought a house. If this is intended to be your HOME for 30 years, why do you even care how much the neighbor’s house sold for?

  77. Anne says:

    There are many issues to look at with this question and I can only speak from my own experience.

    I bought my home five years ago when prices were rising quickly. I had very good credit and no debt. The mortgage company advised me not to put any money down (though I could have put 20% down) and to finance 80% with a fixed 30 year mortgage and 20% with a five year, balloon payment mortgage. This way I would be able to avoid paying mortgage insurance.

    I did not spend as much money as the mortgage company was willing to finance but it was still more than I could truly afford to spend. It wasn’t until years later that I realized they should NEVER have offered me such a big mortgage – not on the salary I was making.

    I’ve been fortunate in that I am very frugal and my pay has increased over the last five years. I was able to refinance the whole thing last year at a very good interest rate. Nevertheless, it’s been a struggle and will continue to be for a few years to come.

    Yes, I was uninformed and stupid but I was also very misled. If I knew then what I know now, I would not have made the choice to purchase my home. I could easily be one of those people whose home is being foreclosed on – a home they should never have been allowed to purchase.

    Now, having said all that…. I believe there is a strong moral component to the issue raised. My word is my bond. I made an agreement and I need to uphold that agreement unless it is impossible for me to do so. Being a “bad deal” doesn’t qualify.

    Let’s look at another illustration. Say I want to buy a barbecue grill for my backyard. I decide on the features that I want, find the best price and purchase the grill. I bring it home and use it all summer long – nearly every day in fact. Fast forward to October. I see “my” grill in the store on clearance. In fact, it’s 50% off!! Do I go to the store and say I want my money back for the grill I purchase 5 months ago because it’s now on sale?? Heck, no. I wanted my grill and I got to use it all summer long. If I’d been willing to delay gratification I could have saved some money. It’s actually a pretty good analogy.

    Just because something is legal doesn’t make it right.

  78. getagrip says:

    Two points to consider.

    First the basic agreement is that you either pay the monthly mortgage or they get all your previous payments and the house. Walking away produces the second option.

    So, as a rough guess to make the numbers easy, say they’re paying $2000 a month for the mortgage. That’s $24K a year, $96K in four years, then they walk. Then the bank gets the house plus all payments.

    Second point is that it doesn’t seem to me the bank has lost a whole lot in the scheme of things. They get $96K in payments that they’ve used for other investments to earn money on, plus a home they can sell at $220K then make a claim to mortgage insurance for a $100K loss. In this case it seems to me they can do better than break even. Additionally, if the bank choses to do so, they have the right to sue the homeowner for the difference in sale price versus remaining debt plus costs (not that they’d likely win, but they can sue) if I remember correctly.

    It’s hard for me to drum up a lot of sympathy for the bank when you look at it this way.

  79. Johanna says:

    @Valerie: By that logic, people shouldn’t even refinance their mortgages when interest rates drop. After all, if you searched long and hard for the best possible mortgage, why would you all of a sudden want a different one? Just because it would save you money? How baffling. :)

    On a related note: To all the people who have been arguing that you haven’t “lost” anything until you sell, the way I see it that’s not true. If you’re paying $2000 a month on a mortgage when you could rent an equivalent house for $1000 a month, every month that goes by, you lose $1000 (give or take a little for the other costs and benefits of homeownership). The comparison to stocks and other investments that lose value doesn’t hold water either – if you buy stocks and the market drops, you’re presumably not still paying for the stocks at their original price. (And even if you are, it’s presumably not with a non-recourse loan.)

  80. Monica says:

    @ #50 Valerie
    You can still buy a house if you move frequently. Frequent moves shouldn’t preclude people for buying homes if they are smart about their investment.

    True, might not be the smartest move in the current market. But traditionally it isn’t a bad idea.

    I’m largely referencing corporate transfers here.

  81. Johanna says:

    @Anne: “Let’s look at another illustration. Say I want to buy a barbecue grill for my backyard. I decide on the features that I want, find the best price and purchase the grill. I bring it home and use it all summer long – nearly every day in fact. Fast forward to October. I see “my” grill in the store on clearance. In fact, it’s 50% off!! Do I go to the store and say I want my money back for the grill I purchase 5 months ago because it’s now on sale?? Heck, no. I wanted my grill and I got to use it all summer long. If I’d been willing to delay gratification I could have saved some money. It’s actually a pretty good analogy.”

    No, actually it’s a pretty terrible analogy. No store in existence (at least, not one that wants to stay in existence) is going to let you buy a grill in May and return it for full price in October. Saying that it’s immoral to get your money back in this situation is like saying it’s immoral to defy the law of gravity: It’s impossible, so who cares?

  82. Chuck says:

    Here’s some math to bolster Valerie’s (#50) comment:

    If Kelli has a 6% mortgage, we can figure out that the original mortgage was around $355K and that monthly principal and interest run around $2,125. Let’s say that starting next year, average house prices in Valerie’s neighborhood start to rise, and over the next 25 years average a modest +2%/year. By 2020, Kelli is not underwater anymore, and by 2035, she has about $325,000 in equity. So unless Kelli has a compelling reason to leave, why should she?

    My wife and I figure we are about $150K underwater, but we love our house and neighborhood, we can afford the mortgage, and we expect to live here until we are too old to keep it in shape. At the end of the day, a house is not an investment, which we all lost sight of – it is a place to live. Yeah, I wish I had a chance to buy the place THIS year instead of five years ago, but I didn’t get cheated five years ago, and I got to live here five years longer. Regardless of WHAT the appraised value is, in 26 years, I will own, free and clear, this place that I love to live in. That sounds like a good deal to me.

  83. Valerie says:

    @#53 Johanna Everyone is focusing on the moral/legal/financial aspects of walking away from a building and a debt. But is this just a house, a place to sleep, or is it a home? Is this where she wants to raise her children and grow old with her partner? What does she really value?

  84. Jane says:

    @Johanna
    I think you bring up a good point about how they are losing money every month if rentals are half the price of their current mortgage. I guess my question is: how will the foreclosure affect their ability to rent nice properties in the future? Most reputable places run a credit check.

  85. jim says:

    Don’t assume one recent sale alone is a very good measure of the market prices. Just cause a similar house nearby sells for $220k doesn’t necessarily mean your house is really worth $220k. The other house may have been sold for dirt cheap or it may have been a foreclosure or short sale.

  86. Kerry D. says:

    And it really wasn’t clear if they had difficulty making payments–if they can make the payments, it shouldn’t matter that the house down the street sold for less than they owe.

    Our home dropped quite a bit in the first few years after we bought it, in early 1990′s. Today, it is worth nearly triple what we paid. But, either way, we have enjoyed our home all these years, and the moment by moment value is all “funny money” to me.

    I don’t get walking away, unless there really isn’t an alternative, in which case–it isn’t a question but a reality.

  87. Crystal says:

    Jason, just because something is legal doesn’t make it the right path.

    I wouldn’t walk away unless your mortgage is a hardship. Just because it’s legal doesn’t make it right. If you don’t hold yourself to moral obligations, how can you expect it from others?

    Putting the morality aside, you also deal with the credit issues and the hassle. Unless you are moving soon, why do you care what your house is valued at right now anyway? Our house fell in value and we’re dang happy since that makes our property taxes lower (by a fourth) and we’re not moving for at least 10 years. Am I missing something? Did you want to move soon or get an equity line of credit or something?

  88. Johanna says:

    @Valerie: Well, if she values her emotional attachment to that particular house at more than $1000/month (or whatever the difference between owning and renting works out to be), I suppose there’s nothing wrong with that. But if she doesn’t, I don’t think there’s anything wrong with that either.

    @Jane: Good question. I don’t know the answer for sure. But it seems to me like she’d have to secure a rental home before she moved out of her mortgaged home, so at least that first credit check would be based on her pre-foreclosure credit score.

    @Karen and Kerry D.: It’s great that hanging in there worked for both of you. But I hope you realize that the current housing boom/bust is a lot bigger than the one you experienced in the early 90s. By my estimate, Kelli is looking at a 20-year wait (including the four years she’s owned the home already) before the house is worth what she paid for it. (This is assuming that she paid about $375K, that it’s worth $220K now, and that it will increase by 3.5% a year from here on out.) Imagine that you bought your homes in 1990, and you’ve had to wait until now, 2010, for them to return to their initial value. Maybe you’d still feel it was worth it. Or maybe you wouldn’t.

  89. Anne says:

    @ Johanna – Perhaps I didn’t make myself clear. My post posed the question – do I try to get my money back for a product that I purchased, met my expectations, and that I used and enjoyed simply because it is now on sale? “Heck, no” means NO – I don’t go ask for my money back. I got what I paid for. Too darned bad if it’s on sale now. I would NOT presume to ask for a refund, nor do I think the store should give ANYBODY a refund in a similar situation.

    Kelli agreed upon a price for her home and the mortgage terms to pay for it. There is nothing wrong with her house. She got what she paid for – got the terms she agreed to. Just because the neighbor’s house sold for a “clearance” price doesn’t mean she’s not still obligated to pay for her house.

    It might be legal for Kelli and her husband to walk away from their mortgage. That doesn’t make it right.

  90. Craig says:

    One thing that really bothers me about this discussion is the number of people who take it as a given that housing prices in pretty much every market will recover in the forseeable future (“Values have gone down enough that they are GOING to go up again”). It just doesn’t follow. Houses were insanely overpriced in the hottest markets. It may be that houses in most parts of the country are now back down to reasonably sane levels. The only way for them to appreciate substantially is if the buble re-inflates.

    I don’t have up to the second numbers on Japan, for instance, but their real estate bubble burst circa 1990, and parts of Japan _still_ haven’t regained their peak prices.

    Many of us grew up in a culture of reliably increasing real estate prices, and it’s clear we still haven’t gotten it out of our bloodstreams. Do you know what the _real_ growth of housing prices is–after taking out inflation? Probably zero. That’s right: zero. Maybe eight tenths of a percent–that’s the bullish estimate. Look at the chart at http://badmoneyadvice.com/2009/02/house-prices-long-view.html for a long-range analysis of housing prices that factors in inflation. The last couple of decades have been strange. We can’t go around pretending that it’s going to be 2004 again once we get over this little bump in the road.

  91. JT says:

    There are a lot of red herrings and other logical fallacies flying around here. Hopefully I can shed some light on the arguments.

    For full disclosure, I do not, nor have I ever, owned a home. I’m a renter, and for good reason–prices are still too expensive in my area.

    Let’s start with the following common argument:

    “Not only are you backing out of a deal you agreed to, but you’re hurting yourself, and those around you as well because the values of homes around you will continue to drop because of your foreclosure.”

    Sure, the prices of other homes may drop, but as you just argued above, that shouldn’t matter to the other “moral” homeowners, who will stay in their house, because they shouldn’t be worried about short terms prices. As you said, “When you buy a home you’re not buying a guaranteed investment, that is always going to go up in value.” So, I might be missing something but I don’t see why the other homeowners care if their price drops, especially if you are so confident in a recovery. But feel free to correct me if I’m wrong.

    Furthermore, you’re choosing to only look at this from one perspective. I would argue that falling house prices are creating more affordable homes, allowing those who were previously priced out of the market to finally buy.

    Which brings me to my next point: why does everyone say they want affordable prices but then call rising house prices a recovery? The government has done everything in it’s power to play extend and pretend, artificially propping up prices. All this has done is led to an unhealthy real estate market where housing prices will continue to slowly drop or stagnate for years, preventing a true recovery in the overall economy.

    The fact of the matter is that a house has a true value, as it provides a critical resource: shelter. Many times the real estate market does not reflect the true price. What we are seeing is the unwinding of prices back down to sustainable levels. Whether people strategically default or not, prices will continue to decline in many areas until they reach a point of equilibrium.

    Another common argument:

    “Most financed automobiles fall into that same category and no one seems to think it’s a problem.”

    The reason why people don’t walk away from their car loans is because the cost of doing outweighs the benefits gained. Car loans are much smaller in amount than mortgages and the credit hit, along with other consequences of default, does not make financial sense.

    Obviously, I’m of the opinion that morality doesn’t even enter into the discussion, nor should it. The contract spells out the terms of the loan and what to do in the case of a default. Neither side walks away scot-free and it is to their advantage to work something out. However, many times this does not happen for one reason or another, but that is their choice to make, not mine.

  92. TeacHer says:

    I’m wondering if there is a generation divide on this issue.

    I got into somewhat of an argument with my dad about this issue a few months ago (I’m 25 he’s 53). We were talking about the circumstances of my aunt’s foreclosure; I don’t think it’s immoral to stop making payments on one’s home as long as the consequences (lowered credit, inability to purchase a home again, etc.) for such behavior are meted out. The bank is not a person. No one is going to be physically or emotionally harmed by someone’s house getting foreclosed on. The bank will lose a serious amount of money, but is this immoral? Not to my way of thinking.

    My dad completely disagreed. He feels that, consequences or no, it is morally repugnant to not honor an agreement. Period.

    I suppose if there were no consequences for walking away from your home – or if the consequences were mild – I might feel differently. But since foreclosure will basically ruin your financial life (and by extension, other aspects of your life) for a long time, I don’t view walking away from a mortgage as an immoral act.

  93. JT says:

    “Kelli agreed upon a price for her home and the mortgage terms to pay for it.”

    @Anne – So what about all the people who were foreclosed upon because they couldn’t afford to pay their mortgage? Didn’t they agree upon a price and fail to meet the payments? If people are going to bring morality into this then I’m going to put just as much blame on these people as I am the strategic defaulters. How dare they stop paying! They should have saved more money and prepared for when they lost their job!

  94. JT says:

    “It might be legal for Kelli and her husband to walk away from their mortgage. That doesn’t make it right.”

    No one is saying that it’s morally right to walk away. People defending strategic defaulters are simply saying that morality does not even enter into the decision.

  95. Lisa says:

    Developement companies and corporations do it all the time (in this economy at least) and there is no issue of morality – it’s purely business. Why does that fundamentally change when it’s an individual? The only difference is whatever personal value we put our own moral decisions. You evalute the current situation and your new situation (including bad credit, morals, etc) and see what the best financial choice is. In many cases I can’t see the personal morality value exceeding the many thousands you could losing every month.

  96. This has been an interesting debate, but if one chooses to walkaway and they CAN afford the payments, the law provides lenders with plenty of recourse. The bank will sue the borrower and exhaust all available assets. In addition, it is not beyond the lender’s power to garnish wages up to 25% of income less certain allowances. Whatever the difference in sale price versus loan value, plus fees, interest, and other costs will be pursued should the lender so choose.

    Regardless, walkaways are best taken care of through communication with the lender. In addition, many abandoned properties are later damaged or destroyed. If insurance payments are not made, the lender can also sue for those damages as well.

    Sure, if one doesn’t have the ability to pay, it is a very different story. However, if one has the ability to pay, or to put it another way, has something to lose, the lender is fully within its rights to recoup losses.

    The bottom line for me is walking away is a last option, but in some cases, the only option left on the table. Until it gets to that point, it is difficult to believe that it is a good decision. Setting morality aside, the litigation risk, long-term damage to creditworthiness, etc. all have associated costs. Even in this case, if ‘Kelli’ has the ability to pay, I would be surprised if the lender didn’t pursue legal action – action that it would likely win.

    Of course, she could walkaway and try to file bankruptcy, but I would think the judge would recognize her ability to pay the mortgage and be less than kind during the proceedings. While I’m not an attorney, I would love to know if a judge has seen something like this recently and what the outcome was. After the 2005 legislation, it became more difficult to fully discharge debts…I’d think something like this would be very difficult to be absolved of.

  97. BJ says:

    CBS’s Sunday Morning ran a good story on this issue a few weeks back; it’s probably available for review on their web site. There are always multiple ways to look at this situation, and in the end, you have to decide between what’s morally right and what will allow you to survive. If someone is just upset that their “investment” didn’t pan out, they should probably suck it up and hope for a turn in the market, providing that they can afford the payments. Personally, I’ve always thought it was a bit immoral to make people pay for a house three times over, and a bit immoral to charge what the market was demanding for homes at its peak. Maybe that’s just me.

  98. BJ says:

    I might add that several large businesses are doing exactly the same thing lately and just walking away from office buildings they bought as investments. If it’s good enough for them….

  99. Johanna says:

    @BJ: Do you mean the Early Show? I just found a clip there and watched it. They had two main points:

    – Walking away starts to make sense when you owe 20% more than your home is worth. (If her house is worth the same as her neighbor’s, Kelli owes 50% more.)

    – Talk to an attorney before you do anything drastic.

    Makes sense to me.

  100. James says:

    you are very clear in your post and i totally agree.

    i think it is great that you took the time to lay out all the negative impacts of walking away.

    you have to realize most people think that it’s ok to walk away because so many other people are doing it but that is simply not the case.

  101. Gretchen says:

    Did you leave out a large part of this letter? The part where she says they are having trouble making the payments?

    I agree that she’s not underwater unless they are actually trying to sell.

  102. Preston says:

    This article should probably include a discussion of post-foreclosure problems like deficiency lawsuits, which can lead to judgments, which can lead to garnishments against bank accounts and wages or liens on property in some states. Walking away simply is not an option in some places.

  103. BJ says:

    @Johanna: I was wrong – the story was on CBS’s other news magazine – 60 Minutes. Here’s the link: http://www.cbsnews.com/video/watch/?id=6470184n&tag=cbsnewsMainColumnArea.8

  104. Jennifer says:

    In the end, Kelli, no matter what everyone else thinks, it’s your decision. If you’re looking for legal advise or real estate advise, talk to a professional. Leave morality out of it. No one is going to agree 100%, so why even bring up the morality of the subject? You’re not a bad person if you foreclose and you’re not a bad person if you don’t. And to Trent’s point “your best approach is to make sure you have housing and automobiles lined out for the next several years before your credit collapses”… that only matters if you need CREDIT. Here’s a thought – get off the credit merry-go-round. Budget your money & buy with cash. Don’t spend more than you make/have. Then you won’t have to worry about situations like this.

  105. Jennifer says:

    I wonder how we’d all feel if, after the housing market recovers, the banks started increasing the amount owed on our mortgages by 100K + just because the values have gone up. We’d never stand for that, just like we should never walk away from a mortgage unless there is no other option. The bank agreed to lend the money at a time when the borrower needed it. The borrower is the one with the responsibility to pay it back and the banks aren’t in business to own houses.

  106. tentaculistic says:

    The problem with comparing your house to your neighbor’s with no other information is that house buying is based on so many factors, and in this market buyers can be choosy. Weird smell, ancient kitchen and bathroom, badly maintained exterior and/or yard – all of these can scare off buyers. “They” always say that to sell a house you need to hit good emotions (new paint, clean and pretty, classical music, baking cookies, plants) so if that works in the plus, why can’t negative emotional factors work the same? I came very close to buying a place once, but a single wall crack made me leery and I walked away. A bad feeling (anxiety) can make you just not want a house. Long post to say that houses are not widgets, and some sellers make good choices and others make bad ones.

  107. Johanna says:

    @tentaculistic: For all we know, it’s Kelli’s house, rather than her neighbor’s, that is the one with the weird smell, ancient kitchen, crack in the wall, etc. Her house could be worth more than her neighbor’s, but it could also be worth less.

    I think it’s admirable that Kelli has managed to keep a sober view of the housing market. All too often, homeowners take the attitude that “My home is special, so it’s immune to all the things that are making other houses lose value in my neighborhood/city/state.” That’s rarely true. And just statistically, it can’t possibly be true for everybody.

  108. If you can’t afford the payments, that is one issue. If the main issue is that you are underwater, it makes no sense for you to walk away. If you can afford the mortgage and don’t need to sell anytime soon, it doesn’t matter what your home is worth. Home values will come back and each time you make a mortgage payment, your principal balance decreases. Eventually, you’ll be rightside up again.

  109. Doug says:

    Your character is defined by your actions. Some people have good character, some people don’t. Some people learn from their mistakes, others won’t. I’ll put money on the fact that the people making the decision to walk have a long history of poor decisions (and not just horrible financial decisions like leased cars and maxed out credit cards).

  110. Ryan says:

    The argument that it’s OK to walk to away because business are walking away is so misguided.

    BP, TransOcean, and Haliburton have spilled millions of gallons of oil into the ocean. I guess I should just dump my used motor oil into my yard. If it’s good enough for them…

    Corporations are a very odd beast – they enjoy all the privileges of being a legal individual with none of the the responsibility. Just because they do something unethical doesn’t make it OK for other people (or businesses!)

  111. Bill says:

    Kelli is looking for an enabler to tell her it’s OK she can do whatever she wants.

  112. Ashley says:

    I’ve just got to chime in on the house vs. bbq grill analogy…

    What if you purchased the very best grill in the whole universe…a $3K grill. You had to finance the grill for two years at 7 percent. You use the grill all summer, only to discover that your neighbor now has the identical grill, purchased for $100.00 cash. You still have 18 months of payments…

  113. Sara Bee says:

    I didn’t see that Kelli had a problem. She doesn’t say she is having trouble paying, or that they need to sell because they have to relocate. She just wants to quit paying for the house she bought. I see a number of comments in different places about people wanting to walk away because their house value has dropped below what they agreed to pay. They are like the people in the stock market who forget their portfolio is imaginary money until they sell something. Smart people don’t always sell stock because it drops. It may take a long time, but paying principle and increasing values will have most of us right side up eventually. The fact that your house is less than you paid for it is only a problem if you can’t make the payments or if you have to sell.

  114. skp says:

    Has Kelli considered that she will loose her downpayment plus any equity she has put into the house if she walks away from her morgage? She isn’t getting away scot free. She still is going to lose money o the deal.

  115. skp says:

    Has Kelli considered that she will loose her downpayment plus any equity she has put into the house if she walks away from her mortgage? She isn’t getting away scot free. She still is going to lose money on the deal.

  116. skp says:

    Has Kelli considered that she will lose her downpayment plus any equity she has put into the house if she walks away from her mortgage? She isn’t getting away scot free. She still is going to lose money on the deal.

  117. Karen Dunbar says:

    Here in the UK, if you walk away from a house because you can no longer afford the mortgage payments, you are liable for the difference.

    So, if you buy a house for £200K, and the bank sells for it for £150K, you are liable for the £50K.

    Some people whom this happened to in the 1980′s, bought years later, only to find the banks coming after them for the original £50K when they had sufficient equity in their new home !

    There is therefore no “moral” dilemma in the UK about walking away from a home, purely a financial one.

    Not saying either is right or wrong, just adding my tuppence worth.

  118. deRuiter says:

    Banks were FORCED by the Federal Government, through the “Community Reinvestment Act” to give loans to minorities, those with bad credit histories and the impoverished or the Federal Government would make their business lives miserable. This mess is the fault of Barney Frank and Chris Dodd (nice low interest, non variable rate mortgage you got there Chris, too bad you can’t run for the Senate again or you’ll be investigated for that sweetheart mortgage!) The Gvt. FORCED banks to make loans to people who would never pay, and then the banks cleverly bundled and sold these loans which they knew were never going to be repaid, to investors. The Federal Government is responsible for this mess, and is pretending that it is the banks’. Banks never would lend to those who could no repay (liar loans, no documentation loans, 100% or 125% financing) until forced by the Community Reinvestment Act. Lending money on purpose to those who would not pay back the loans is a relatively new concept in the lending market.

  119. “The Federal Government is responsible for this mess…”

    Wow, I’d thought the “it’s all the CRA’s fault!” story would have died away by now, after it had been amply shown to be contradicted by the facts after it was brought up last year.

    You can find links to various takedowns of this particular right-wing fable at http://www.cjr.org/the_audit/a_community_reinvestment_act_r.php .
    In particular, note that most of the really badly designed loans mentioned above were made by companies that weren’t subject to the CRA.

  120. Todd says:

    Housing prices should be set by the federal government. If I deposit $100,000 in a bank, the FDIC guarantees I can take $100,000 out. If I buy a $100,000 house, the govt. should guarantee I could get $100,000 back as long as I’ve maintained the house. If we take the market out of the process, maybe people would start using their homes like savings accounts rather than like they’re playing the stock market.

  121. Crystal in Ft Worth says:

    My situitation may be a little diffrent than most, but we walked away from a morgage and it was the BEST thing we ever did for our family. The house was not a huge lavish place-just a 70K blue collar pier&beam place that we really loved….until our neighboirs became involved in a serious gang dispute. Our house got sprayed with bullets due to proximity. We tried for 2 years to sell, we tried deed-in-leiu of forclosure but the bank did not wanmt it back and b/c of the new neighborhood atmosphere market value was non existant. So we just left. Its been 3 years and I’ve never looked back

  122. Craig says:

    “Banks were FORCED by the Federal Government..to give loans to minorities.”

    Sometimes the mask slips a little, eh, deRuiter? Those %^&%$! minorities! Always causing trouble for the rest of us.

  123. M says:

    Why not look into short selling your home? The bank takes whatever you get for the house, and you walk away. True, you walk away with nothing, but the bank doesn’t want to have to take it and try to sell it, so they are happy with getting SOMETHING.

  124. Ruth Hansell says:

    Wow, lots of responses. What I didn’t see as I skimmed the 84 posts was the mention of tax consequences – in addition to consulting a lawyer, you really, really, really need to consult a CPA with experience in short sales,etc. I don’t remember the details, but I’ll see if my CPA friend can give me a very brief description of what happens tax wise when you walk away from your mortgage or do a short sale.

  125. Amanda says:

    In some states, even after a foreclosure banks can come after you for the money lost on their loan to you.

  126. GregB says:

    Where have all the good people in this world gone?
    People who make smart educated money decisions, not going for the quick buck (big homes and internet stocks with no earnigs). People who work hard, take care of their family first, then help relatives, friends and neighbors. People who do not overspend, just to try to show people they do not like how great they are. People who who make a promise and follow through and not burn people, “I will pay this loan back”.
    People who save on a regular basis to slowly become wealthy – boring, but it works!
    People who can be self sufficient and not look to untrustworthy politicians for help all the time, all their lives.
    I frown upon these people because they walk from their homes and other commitments, but we all pay for their selfish stupidity. I hope they learn a lesson, but they won’t.
    Watch out though because these types of people are EVERYWHERE out looking for “their” next big business deal. Just hope they do not try to involve you in it.

  127. Golfing Girl says:

    People like “Kelli” and all those who wrote comments to encourage her make me sick. The reason our country is in a recession/depression is because there are way too many “Kelli”s out there who have no morals. Would you walk away if the mortgage was held by your parents or friends? Just because you owe a bank (instead of individuals) doesn’t mean your friends or family don’t suffer. The bank will either lay off your friends and family who work there if too many people walk away from their debts, or the bank has to charge others higher rates because of the increased risk involved with dealing with borrowers that was not there 20, 30, etc. years ago (you know, when people actually were mortified, not smug to declare bankruptcy).

  128. Patti says:

    I have known folks who have walked away from their mortgage/home. Eventually the bank comes after them for the difference between what they were able to sell the home for and what that person had owing on it. Sooo, if you walk away from your mortgage, it will certainly come back to haunt you and your credit score. You will have to pay back the difference, which could be very substantial and you won’t have anything to show for it. If you have to sell it try selling it on a short sale. You may come out a lot farther ahead.

  129. tom says:

    I’m in the same position as her, I have not lost my job nor my wife, but record number of people are doing it around me and now the market is way down. the only thing I have to consider is that we don’t have anything to write off. and making 110k a year between us would cost us 18k in taxes without the write off. I would hope she considers this at tax time if she does leave from the contract. but on the flip side I am 113K now off and it keeps dropping where do you draw the line? Feel like I’m riding a loser hoping for the best.

  130. TomK says:

    “Banks were FORCED by the Federal Government, through the “Community Reinvestment Act” to give loans to minorities… ”
    they were FORCED to lend credit “consistent with the safe and sound operation of such institutions”
    ie, on an equal basis such that a person with good credit history could receive loans regardless of the neighborhood he lived in. The CRA is over 30 years old. Not following a safe and sound lending operation is to blame here. And the only non-compliance penalties related to CRA are for bank mergers.

  131. tiffany says:

    IMO the loan was made under the condition that the property was worth the value of the loan.

    In bubble zip codes the sales prices were 50% – 100% higher than they had been 2-5 years prior. Can any of us honestly say that houses bought then were worth the sales price? Is it “moral” to ask Kelli to sacrifice her financial security in favor of her neighbor’s or to avoid breaking a promise?

    That said, let’s look at Kelli’s options. This is a best case scenario where home prices stop falling and appreciation returns to normal 3-4%.

    In such a scenario, Kelli can:

    1. Stay put for 10-15 years. She can hope prices don’t fall further, and that normal, 3 – 4% appreciation returns this year instead of next. Her credit isn’t damaged, but her financial security is. She she has no equity to borrow against for anything. If she *has* to sell at any time before she breaks even, she is STILL going to have damaged credit (see #3).

    2. Pay extra on her mortgage so that she reaches a break-even point sooner rather than later. That has a HIGH an opportunity cost, however: that’s money she could save for retirement, emergencies, future kids’ college funds, etc. Paying down the principal would mean that she’d owe the bank less if she had to sell before breaking even (see #3). I’d say in a best-case scenario, she’s still looking at 5 years. 5 years to break even.

    3. Short sale. In fact, if she wants to sell at any time in the next 5 – 10 years, this may be her ONLY option. Her house will not appreciate enough, and she’s unlikely to pay down enough principal to avoid it. She will take a 100-150 credit score hit. She won’t be able to get a mortgage for 5 years. Her credit score will start to improve after 1-2 years. She may still be required to pay back the difference between the sale price and the mortgage-owed though. But her savings from renting could probably mitigate the higher costs of borrowing.

    4. Foreclose. Take the 150-200 point credit score hit. She won’t be able to get a mortgage for 7 years. In most states, she runs a risk of being sued by her bank. BUT such lawsuits are rare if the buyer only has one mortgage and few other assets. If she lives in a state with anti-deficiency statutes (AZ, CA), she can walk away without being sued (and her mortgage had more up front costs as a result). Again: her credit score will start to improve after two years. Her savings by renting could offset the higher borrowing costs. See Brent T. White’s (Univ. of Arizona) work for more about this.

    In other words, Kelli can risk financial well-being now or risk it later. She can take 7 known years or she can take a minimum of 10. There is NO way to get out of her mortgage without great cost. Staying put is just as risky as walking away and would actually take more time.

  132. Golfing Girl says:

    P.S.
    At #52 Getagrip:
    You seem to have forgotten that the bank has to pay salaries to its lawyers, mortgage loan officers, and all of the “behind the scenes” people who process the payments, handle customer service calls, etc. They are not likely to “break even” as you claim if homeowners walk away.

  133. tiffany says:

    Forgot to add to #3: in order for a short sale to be approved, the mortgagee needs to demonstrate a hardship. You can’t just ask for a short sale because you want one.

  134. Dave says:

    This is a wonderful discussion—I have been involved in many real estate transactions and when it comes to a first mortgage in most states the contract reads—if you don’t make payments the bank owns the home—there is no moral issue here. The bank does not have a lean on your future earnings it has the house—that’s the contract. In fact there should be no hit on your credit as the terms of the contract have been fulfilled, the banks just hold that over peoples heads to keep them in a failed business deal. Look at it another way—if the home doubled in value and you stopped making payments the bank would take the house back and sell it for a profit, they are the owners by contract and they would be happy to do so. Of course it would be stupid on the mortgage holders part to do this but I hope we get the point.

  135. lisa says:

    Well you guys hit my hot button….it is ironic the comments regarding banks from those that have never been in this situation. I HAVE so I know what I am talking about. After purchasing my home in 2005–perfect credit always paid all my bills etc. I suffered an injury that left me disabled for all of 2008. Went IN the bank before I was late and told them of my situation. Their response was”Try real hard to pay.” ??? What part of disabled do you not get? No work, no money, self-employed. Try hard? This was before Washington Mutual was bought by Chase. Had no money and stopped paying. Constant calls to them did nothing. Never talk to the same person and most people knew less than I did. Tried a short sale–Wa Mu gave reasons why no. EVERYONE said the GOV should help out–all those programs blah blah blah. Called, asked for help, asked where to go. Went through all the forms with WA Mu–was denied because they said I did not prove that I paid my HOA fees—I HAVE NONE! Called them repeatedly and told them this–sent letters, othing. Also denied because they said did not prove I paid insurance–I sent them the bill twice and the response was that once they deny you they take all your paperwork and throw it out and you have to start all over again. WHAT! I said I have started over like 4 times now!! Keep sending all my info and then they come back and say oh no we never received this piece–it was in a package–COME ON. Do not even tell me these people are competent or care. After Chase bought them it was worse. Call one number and find out you are WA Mu and say you are not our prob call this # and get the same run around. Finally gave up. Let them foreclose and by then was sooo appy to be rid of the thing. Sure I had to call
    around to managers to get some one to rent to me. I explained my situation over the phone–most said sorry-no. I finally found a lady that looked me in the face and said that is not right, you need a break, you need help. They gave me 1 month free and waived my security deposit–yeah…angels:) And since last July I pay all of my bills and am getting back on my feet financially after my injury healed. My credit is in the toilet–have a debit card. Life goes on. And life is amazing now! I know what is important and what is not.

  136. victor says:

    Great topic and a very interesting argument on both ends, I read a great blog about this very topic at
    http://www.dollarsintosense.com that focuses on the morality aspect of walking away from your home.

  137. Erin says:

    Non-recourse states are Alaska Arizona
    California Connecticut Florida Idaho Minnesota
    North Dakota Texas Utah and Washington State. If Kelli lives in another state then my understanding is the bank will eventually sue her for the difference between her mortgage and what they sell it for after foreclosure. That’s the benefit of a short sale – still hurts your credit but not quite as much as a foreclosure, and the bank is basically agreeing not to come after you for the difference.

    If she is having trouble paying the mortgage that’s one thing. If she’s not and just wants to walk away because she doesn’t like the fact that the house is worth less then I’m pretty disgusted by her sense of entitlement.

  138. almost there says:

    #132, Golfing Girl, The bank makes money out of thin air when if funds the loan. So yes, they are always ahead, no matter what cost to sell the house less selling expenses. Google Money as Debt and watch the informative video. The House (bank) always wins when one plays the debt game.

  139. Jessica says:

    re: Not being able to get a mortgage for 7 years after a foreclosure-

    This is incorrect. FHA currently allows new mortgages 24 months from the foreclosure and many other lenders will 36 months after the foreclosure.

    And with so many people in financial distress right now the consensus among my banker friends is that lenders will have to offer some kind of “re-building” loans for those with damaged credit or the banks will have no one to make money from in a few years.

  140. kristine says:

    #37 made me laugh. In L.I. NY, the median income is 45,000. The median house price is 450,000. But it is slipping just a bit. Housing is not realistically priced-and they are bloated in size.

  141. Frank says:

    All of this “personal responsibility” and “morality” talk is shocking – this is JUST money – not someone’s life or emotions. Government tax money bailed out the banks after the almost tore the world economic system apart . . . what about the little guy. Where’s the morality and personal responsibility there. Government has made it irrelevant. So if someone wants to walk away from a mortgage it’s not a “moral” issue – it’s a money issue.

  142. Brian says:

    I read the first 15 comments but they kept going around in circles.

    First, I tell anyone who will listen that buying a house should NOT be an investment. If you want an investment in real estate, buy a rental property. The house you live in has too many outside factors involved in it to consider it a pure investment. Not to mention the fact that housing prices can’t go up 6% a year forever (well I suppose they can, but I’ll probably never buy anything in that case. It’ll be most cost-effective to rent).

    As for Kelli, one thing she should look at is whether or not she wants to stay in the house she is in. Kelli, do you like the house you bought? Is it a good place to raise your family? Is the neighborhood nice? How are the schools? Does/has the house had many unexpected problems?

    I’m not a homeowner, but let’s not discount the idea of staying in a house that’s undervalued solely because its a good house for our needs/desires.

  143. Julia says:

    I’d like to suggest another definition of “value”. I consider value to be the amount I’m willing to pay for something. Not the amount I can sell it for, not the amount that others are willing to pay for it.

    When you buy a house, you choose a product that you want and agree to a price that you are willing and able to pay for that product based on the value that you assign to it – based on what it’s worth to you.

    When the market value goes down, what exactly has changed? The house is the same house you chose. It still has the same number of rooms, same quantity of space, the same little details that made you want it in the first place. It’s still in the same neighborhood, the same school district. What has changed?

    With all the interest you were already paying far, far more than the market value so how are things different when the market value goes down?

    I agree that if you are trying to move or unable to make the payments than you should do what’s best for you in the long run. But if you chose a house to live in for a while, what difference does it make what other people are willing to pay for it (that’s what market value is)?

    Buying a house is not an investment. It’s your home. If you can make the payments, make the most of what you’ve got – your own home!

  144. Ashley says:

    I honesty think that a house, that was intended to provide shelter for you and your family, is now being tracked like a volatile day-trading stock. (No) thanks to websites like Zillow, people can now track the value of their home in an obsessive/compulsive manner, comparing their home’s value with others. Now EVERYONE is an appraiser these days. Now EVERYONE is a speculator of their own abode.

  145. AnnJo says:

    Another negative to walking away on a mortgage is the potential tax hit.

    Being released on a liability is treated as income for tax purposes, so if the bank does NOT go after you for a deficiency (difference between what you owe and what they recover on re-sale) they will report that amount as income to you and the IRS on a Form 1099.

    In Kelli’s case, she says her house is worth $100,000 less than what she owes on it. Assuming she just turned the keys over to the bank and the bank accepted them, she would have an extra $100,000 of taxable income for this year and therefore extra taxes of perhaps $25,000 or more.

    There are likely to be a lot of “rich” people in the next few years paying the extra taxes for Obamacare, etc., who are rich for tax purposes only because they’ve lost their shirts in the real estate market. Possibly poetic justice for many of them.

  146. Johanna says:

    @AnnJo: That’s not correct. See my comment 54.

  147. Holly says:

    Do not feel ‘sorry’ for the banks. They turn a healthy (gov’t. subsidized) profit!

  148. Jeff says:

    Nice post!

    I’m in similar situation, but forced to move due to military orders. Got an offer (and a very favorable appraisal!) but still looking at writing a 75K check to make the move happen. Still looking at all options. In CA so consequences are small for a DIL or SS (but not likely able to get Chase to agree to either).

    Fun stuff.

  149. Matt says:

    One thing Kelli didn’t include which would make a huge difference in the answer would be what KIND of mortgage she has now. If she has one of those 5-1 ARMs that so many brokers [i]SOLD[/i] to unsuspecting home buyers, with the promises of ever rising real estate values, and ever willing refinances, then she might be much better off to walk away. Depends a lot on what her “equity” is as well.

    Another thing I didn’t see mentioned is, what her family income is relative to the cost of the home. Just because she qualified for the mortgage, doesn’t mean she can really afford it. When I was buying my house, I was being pressured hard by the mortgage broker to go with a 5-1 ARM. By doing so, I could afford almost twice as much house. He only stopped pushing the ARM once I threatened to go elsewhere if he mentioned it again. I knew what payments I could afford, and was not going to be put in a position to lose it all. It was a very good thing I did, as I can still afford the house even after 8 months of unemployment and a new job that paid 15% less money.

    Kelli should also consider what the rent would be per month for comparable space. My mortgage, including escrow, is less than what anything comparably sized would cost to rent, and I can add insulation, turn down (or up) the heat as I please, paint what ever colors I choose, and some of the “expenses” of owning are also deductible, renting is not. Yes, I may have to put on a roof, or replace a furnace. And even there, I can choose to go top quality, or go stop-gap. There are options. In some cities and suburbs, there are even assistance programs for people caught in that situation.

    And just because a neighbor’s house sold for $100,000 less doesn’t automatically put hers that far under. What was its condition? Was it a forced sale? Were there other extending circumstances? Her house may be less underwater, or more? Until she actually tries to sell, she won’t know for sure. And if she tries by letting the bank foreclose, she certainly will maximize how far underwater she is.

  150. Al says:

    People need to think about buying a house as a cold hard investment. The emotional baggage that many people attach to owning a home is ridiculous and is one of the reasons that we have the housing mess that we have right now. Similarly, the role of “morality” in your investment decisions should be limited. Sure, you’d probably choose to invest in a company that spends its time saving orphans from oil spills rather than a company that makes dalmation-fur coats, but if Orphan Savers, Inc. is losing your life savings, you probably won’t merely sit around and watch because of a moral obligation to the orphans. Just because you can continue to pay for something, doesn’t mean it’s a good decision.

    Efficient breach is something everyone knows how to do – both cancelling a cell phone and cancelling a residential lease can be efficient breach, and I know lots of good moral people who have done those things. Business is really good at efficient breach because it comes up more often for them. People are really bad at it because we attach weird emotions to our purchases, especially homes, and because people around us say things like “there’s a strong personal moral element” when really it’s a business decision.

    That said, you need to carefully weigh the negatives – many of which were outlined above – against the positives. Also, just because it’s a business decision, that doesn’t mean you can’t consider emotions – it does mean that those emotions don’t automatically outweigh the analytical elements of the decision – the emotions should play a small role. One of the trickier emotional elements is the effect your foreclosure would have on your neighbors – the value of their homes will decline because of your foreclosure.

    In the end, I would recommend you talk to a real estate lawyer, and carefully consider the pain-in-the-neck aspect of all this. Then make a decision that is as rational as possible. If you do decide you need to get out and you go through the foreclosure, but you feel “immoral” afterward, take some of the money you saved and donate it to a charity for the homeless.

  151. Dottie says:

    A mortgage is simply a contract with written instructions and options. Period.
    I have NEVER seen a morals clause in a mortgage agreement.
    It is merely an investment for the lenders. Some turn in to good investments like when the borrower executes his option to fully pay off the loan with interest ..ALOT of interest which results in the lender returning the collateral and making a huge profit.
    Or when a borrower executes one of his options listed in the contract pertaining to default and the ownership of the collateral is given to the lender. If the collateral is worth more than what the lender has invested in it is still a good investment for the lender. If the collateral’s value is less it was a bad investment.
    Either of the options above is perfectly legal. There are risks and downturns to each person/organization involved in this agreement. It is clearly written in the contract what the consequences/ options will be if you do X, Y, or Z. Some good, some not so good.
    Morals didn’t enter the bank’s decision to give you a mortgage, and morals should not enter your decision to stop paying the mortgage. A bank would never consider “morals” if your home was worth a million dollars and you only owed them $500,000 when you lost your job and couldn’t make the payments. They would simply execute their option listed in the contract to take possession of the collateral.

    Side Thought: If the banks were smarter with the money they invested in mortgages homes would be worth about 40% more today and only a fraction of homeowners would be executing their option to default!

  152. Dottie says:

    #120 Todd
    Housing prices should be set by the government…
    I read this comment and immediately started typing a reply, however I am still gasping for air and am speechless.
    How about you move to a communist country and buy yourself a price mandated government home and let me know how life is working out for you in a few years.
    I really mean it … get out of America!

  153. KKL says:

    I hope I am not the only one who feels this way here, because sometimes it feels like I am. I have very strong feelings about this…
    #8 wanzman, I think you said it best so far!…

    Where are people’s ethics and values? A mortgage is a contract, and when people sign contracts, they have a legal, ethical and moral responsibility to follow through with 100% of the terms of the contract. Plain and simple.

    In very isolated incidents I can see where a person may utilize the option of “walking away” – Take this example: if a couple purchased a home that cost them an amount equal to or less than three times the gross household income (which is the true limit that should not be exceed, even a conservative accountant would agree) and then that house plummeted in value by 60 percent, and furthermore one of them got laid off and cannot find enployment with equal or greater compensation, walking away then becomes a “slightly” more legitimate (ethically speaking) option, in my eyes. Here is a couple who made a sound financial decision and did not exceed their means like so many others, and were struck by a tragic financial event beyond their control.

    However, if that same couple purchased a home in CA for example, for a selling price of 5 to 6 times the combined gross annual income, and then the house plummets in value by 60%, and nobody has lost a job and the ability to pay the mortgage has not been affected at all, well then, to me … that’s just “tough breaks” and you need to pay for your mistakes. One may argue: But what if the couple in CA had an ARM mortgage, and so not only has the value plummeted, but the payment is going way up? Same thing… Tough break! I suppose they would have no choice financially but to walk away in the case with the ARM loan, but serious repurcussions need to be in place by the government. *serious ones!* 7 years of bad credit is severely insufficient. They should never be able to purchase a home again as far as I am concerned.

    Let’s analyze what happens when more and more people walk away… House values continue to go down and the estimated time-span of when values are predicted to rise gets further and further away into the future. Do you think it is fair to your neighbors or to the community (and to the economy and housing market in general) to contribute to the 10 – 30%+ decline in the value of your neighbors’ homes, due to your poor, ill-advised and uneducated financial choices?

    One may argue: “But the mortgage broker back in 2006 lied to me! He LIED! The banks are at fault! Everyone is out to get us!” I am sorry but I absolutely do not buy or accept this line of “reasoning,”
    for lack of a better word. Yes, I agree, the mortgage industry, overinflated real estate appraisals, and many factors contributed to the current housing market crash. These people are, in part, to blame.
    But ultimately, a consumer needs to educate him or herself prior to making large financial decisions. People who plainly analyze the “monthly payment” are highly in need of some basic economics and accounting courses, are in need of understanding the risks involved in purchasing a home.

    Many comments above, in particular the comment about comparing walking away from cancelling on a two year cell phone contract, clearly do not understand the US economic system at all and the widespread impact that foreclosure has on our economy. I highly encourage you to do some reading on this subject, and therefore realize how this is a *moral and ethical* issue with very realistic economic impact on you and me and everyone around us in this country. Cancelling a cellphone contract with Verizon before the 2-year agreement end-date is simply not the same as refusing to pay Bank Of America for your $600,000 house.

  154. Dottie says:

    ……Where are people’s ethics and values? A mortgage is a contract, and when people sign contracts, they have a legal, ethical and moral responsibility to follow through with 100% of the terms of the contract. Plain and simple.

    YEs you have a legal responsibility to follow the terms of a contract, however the terms of a mortgage contract clearly state options..If you pay us back in full, we the lender will do this… IF you do not pay us back in full, we the lender will do this….
    By choosing to not pay them back in full is still following through with the terms of the contract.
    Verizon’s contract even tells you if you WANT to break the contract this is what will happen.ITs still legal to “break the contract” .. The is nothing pertain to ethics or morals in a contract. Comment #1 GEoff explained it best.

  155. Dottie says:

    #153……Where are people’s ethics and values? A mortgage is a contract, and when people sign contracts, they have a legal, ethical and moral responsibility to follow through with 100% of the terms of the contract. Plain and simple.

    YEs you have a legal responsibility to follow the terms of a contract, however the terms of a mortgage contract clearly state options..If you pay us back in full, we the lender will do this… IF you do not pay us back in full, we the lender will do this….
    By choosing to not pay them back in full is still following through with the terms of the contract.
    Verizon’s contract even tells you if you WANT to break the contract this is what will happen.ITs still legal to “break the contract” .. The is nothing pertain to ethics or morals in a contract. Comment #1 GEoff explained it best.

  156. PMC says:

    Banks and corporations love to talk about “personal morality” whenever a topic like this comes up. Meanwhile, they propagate shady deals and mismanage their finances until they get bailed out by taxpayers or just declare bankruptcy. For them, it is a business decision. But for some poor slob making 30k, it’s morally repugnant?

    As far as I’m concerned, I hope they all fail. What’s going to happen? Are they going to evict everybody?

  157. Bill says:

    First off the banks dont loose. Your first years just pay interest. Ive lived in my house for six years and ive already payed what my house cost. Now i owe more then its worth. If i bail they have already made there money and they get my house and make more. The Goverment bails banks out as we’ve just seen and the CEO’s and upper management can give themselves big raises and parties! We are the ones who loose!

  158. deelo says:

    I bought in 05, for 174,000. put 30k down, paid 1k a month for the last 5 years. That’s 90k. I owe 139k. house is worth maybe 95k now. I won’t walk away, but feel like a chump.

  159. Informed Wall Streeter says:

    This is the ugly truth of this situation. Having worked in a several trading desks during the boom that were trading the CDO’s, MBS and CDS contracts which contained many 100′s of these individual mortgages, I know a lot of the inside workings of these obligations. First off, lets cut the moral argument completely. THERE ARE NO MORALS HERE, simply financial instruments. Second, let me dispell the myth that the “bank” will lose money if you default, I assure you they WILL NOT LOSE A DIME, and in many cases may actually benefit. Most of the losers in this are: The Chinese government, the taxpayer, many pension funds, many hedge fund CUSTOMERS NOT MANAGERS. How you ask, very simple. Many of the banks knew in 2005 that the end was near, and KNEW that there was a blow up coming. They simply (including my own trading desk) purchased HUGE Credit Default Swap contracts through AIG, and sold off most of these to other intities (either off-balance sheet but controlled by the bank, or other companies or investors). Essentially if the government would have let AIG fail, most of the large banks would have gone under because their Tier 1 credit ratio’s would have dipped below the FDIC regulations, making them technicaly insolvent. However, with the bailout of AIG, the government guaranteed that the burden of falling home prices would fall squarely on the shoulders of the homeowner and the public. It is that simple, everything else is hyperbole and moral posturing. You can continue having all these arguments about the “morality” of walking from your house, but at the end of the day, the only losers are the public, fighting amoungst itself over the scraps left over. The factions are the taxpayer losing in the form of higher taxes later on (to pay for the bailout of AIG), the homeowner who continues to lose money on the asset value of their home due to the foreclosure next door, or the pension fund that takes it in the shorts from the defaulted mortgage. But, the bankers themselves really are above the malaise, as their only achilles heal was taken care of in the AIG bailout. If you walk from your home, you are exercising essentially an “in the money put option” on your home as an investment. The fund that owns the MBS which contains the fractional ownership of your mortgage will lose money on that portion of the “tranche” of the CDO. In some cases they are hedged as well, so they simply would “put” that loss to someone else. This is definitely NOT the days of the bank holding the mortgage on its books and then taking a loss. Just not happening. All of the morality talk on here is simple social engineering and ignorance. It is up to you to be in business for YOU and YOUR FAMILY. Period. Sit down and do a calculation in the same way as a corporation would do a ROI analysis. If it makes more financial sense to stay, then stay and attempt to negotiate with the bank. If it does not make any sense to stay, or the bank refuses to negotiate terms that make sense, then exercise your put option and walk. That simple.

  160. Jen says:

    “People plainly analyze the “monthly payment” are highly in need of some basic economics and accounting courses, are in need of understanding the risks involved in purchasing a home.”

    Well, then, by that reasoning, don’t the *banks* understand the risks involved in lending to people whose economic situations are shaky at best?

    Hm.

    What about those of us who have lost jobs and income? Our home has been for sale for the better part of a year since our job losses and no one has made an offer…should I stop eating in order to pay a mortgage?

    Maybe I can survive on the fuzzy feelings I get for being such a morally sound individual.

  161. Nan says:

    I am 74, wife is 67. Have paid our mortgage faithfully for 16 years. Refinanced to put money in our business. Had our house for sale for almost 2 years – sold it – buyers backed out and lost the deposit. Then the market tanked and we haven’t be able to sell it. We are both working full time but at 74 it’s time for me to stop working. When I quit we will not be able to keep up with the mortgage and all the maintenance on the house. In the next year my wife will also retire. At that point we are done – won’t be able to afford the mortgage. At this point in our life we will never buy another house, we have fairly new cars and we need to be out of debt when you stop working. We don’t see any alternative except to walk away – as we have been advised by several attoneys. When you start talking about the morality of walking away….don’t pass judgement until you’ve walked on my shoes. In a million years we never thought someothing like this would happen to us and I dare say we are not the only ones of our age that this is affecting.

  162. Steve in W MA says:

    @ “you might have trouble renting an apartment after the owner checks your credit score.”

    Not when you hand them a bank check for 1 years’ rent up front.

  163. Steve says:

    #157 You must be paying an extortionate interest rate to have paid more than the original cost over 6 years (unless you have a very short loan term).

    Either that or you are including your escrow payment as well.

  164. Does your website have a contact page? I’m having a tough time locating it but, I’d like to shoot you an email. I’ve got some suggestions for your blog you might be interested in hearing. Either way, great blog and I look forward to seeing it develop over time.

  165. Read More says:

    Hello, i read your blog from time to time and i own a similar one and i was just wondering if you get a lot of spam comments? If so how do you reduce it, any plugin or anything you can suggest? I get so much lately it’s driving me crazy so any support is very much appreciated.

  166. Leslee says:

    I’ve been surfing on-line greater than three
    hours as of late, yet I never found any interesting article like
    yours. It’s beautiful value enough for me. In my opinion,
    if all webmasters and bloggers made excellent content as you
    probably did, the web can be a lot more helpful than ever before.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>