Why Are Homeowners Idiots?

Across the country, many homeowners have faced the devastating realization that the homes they own are now worth less than what they owe the bank. We all know this unenviable situation as being "underwater."

The pervasiveness of underwater homeowners is already fairly well known, particularly when it comes to hard-hit areas like Arizona, Nevada, Florida, and California. What is not particularly well known, though, is exactly why most of these battered borrowers are still making good on their monthly payments.

Why don't they walk away?
An interesting quirk of economics is that the dismal science generally assumes that all agents in an economy work in their own best interest. But this doesn't always happen in real life.

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

The situation had University of Arizona law professor Brent White scratching his head, and as a result he wrote a very interesting paper on the subject, which University of Chicago luminary Richard Thaler brought to an even broader audience over the weekend.

Come on, everybody's doing it
Among the conclusions White reached is that borrowers are suffering from "norm asymmetry." That's a jargony term for sure, but it basically means that homeowners are being convinced that the "right thing to do" is to keep paying their mortgage -- even if it's not in their best interest. That stands in stark contrast to the financial giants that make these mortgages, which are free to do whatever they need to in order to maximize profits -- and bonuses.

And who's doing this convincing? For a large part it's the financial companies themselves, folks like Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , JPMorgan Chase (NYSE: JPM  ) , and Wells Fargo (NYSE: WFC  ) .

But they're not alone. They've had plenty of help from government officials like Hank Paulson. Back in 2008, Paulson launched a sharp jab against those who would consider walking away from their homes, saying:

And let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator -- and one who is not honoring his obligations.

Which makes perfect sense, since I imagine Paulson never speculated on anything when he was at the helm of trading king Goldman Sachs (NYSE: GS  ) . And, of course, with de facto ownership of the ill-fated Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) , the government doesn't stand to gain anything at all from persuading homeowners to act against their own best interest.

During the implosion of the housing market, the government has helped massive financial firms and many homeowners who bought houses they never should have qualified to buy in the first place. Meanwhile, responsible borrowers who bought houses they could afford on traditional fixed-rate loans are made to feel as if they are morally bankrupting themselves if they decide to do what is often highly financially advisable.

Why do we have this "norm asymmetry"? Why would we heap guilt onto this particular group? My guess is that if the powers that be answered honestly, that answer would be "because we can."

Thanks to folks like Brent White, Richard Thaler, and homeowners who are already choosing to move against the grain, though, the stigma of walking away from a severely devalued asset may be waning. If this is the case, the big banks and Uncle Sam need to put away the wagging finger and instead actually deal with the situation in a reasonable and sound manner. I'd suggest a confab with White and Thaler as a good first step.

Underwater homeowners have been getting some rotten advice, but they're not the only ones. Check out this terrible advice you should ignore.

Editor's note: A previous version of this story incorrectly stated that law professor Brent White was an economist. We regret the error.

Fool contributor Matt Koppenheffer owns shares of Bank of America but of no other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool’s disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants …


Read/Post Comments (238) | Recommend This Article (170)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 26, 2010, at 11:11 AM, MKArch wrote:

    Matt the vast majority of people don't buy houses as investments they buy them because they need a place to live. The ones who did buy as an investment are long gone by now. The ones left also know the bank foreclosure sale down the street at the height of the worst recession in modern history is not the last word on the value of their own house.

    BTW for the few people who do take your advice and walk when they can afford to stay should they sue you in a couple of years when the can't get a home or auto loan because they have wrecked their credit taking your advice? If it's not their fault home prices have fallen it's not their fault they no longer have credit right?

  • Report this Comment On January 26, 2010, at 11:12 AM, TMFMarlowe wrote:

    Leave it to economists to completely discount the possibility that people are paying underwater mortgages because they <i>like their houses</i> and don't want to move, especially if the choice is to move into rental housing for several years.

    I bought a house last year -- and I'm a professional Fool, mind -- fully aware that I might end up underwater for a few years. Why? <i>Because I wanted to live there.</i>

    John Rosevear

  • Report this Comment On January 26, 2010, at 11:19 AM, XMFTom7 wrote:

    Let me echo John's comments here: for some of us, a house is not just an investment, it's a home, full of memories and a life lived. I don't know how to put a financial value on what we love and live for, and I imagine that's the case for most of us -- perhaps norm asymmetry is an economist's term for "not having a fricking clue on understanding what might be important to people that defies financial quantification."

    But then again, maybe I'm just an idiot.

  • Report this Comment On January 26, 2010, at 11:23 AM, BMFPitt wrote:

    Why don't they walk away? Well, for one thing we're starting out with a subset of the population that paid $400k for a 1400 square foot house when they make $80k. It's not, "Why are homeowners idiots?" it's, "Why are idiots homeowners?" And we know many of the answers.

  • Report this Comment On January 26, 2010, at 11:24 AM, herringj wrote:

    What an incredibly irresponsible article written by a man whose word is obviously not worth much. When you sign a contract and walk away, your word (and credit) is worthless. Not to mention your name becomes greatly devalued. To suggest and condone that kind of activity means Mr. Koppenheffer has obviously done it himself. I have just now changed my mind about joining Motley Fool Pro and will NOT join! Also, I will cancel my membership in Motley Fool Options based on your irresponsible actions.

  • Report this Comment On January 26, 2010, at 11:25 AM, BMFPitt wrote:

    MKArch - If a person is sufficiently underwater, they'll probably have saved more than the cost of a new car in a few years by renting, so they won't need a loan.

  • Report this Comment On January 26, 2010, at 11:41 AM, TMFDiogenes wrote:

    non sequitor alert:

    "To suggest and condone [signing a contract and walking away] means Mr. Koppenheffer has obviously done it himself."

  • Report this Comment On January 26, 2010, at 11:43 AM, littlemas2 wrote:

    The problem with economists is that they tend only to think of self-interest only in economic terms. In real life people have many different motivations, including wanting to honor an obligation, the desire to continue to live in a place where they are comfortable, the fear of loss of respect (both financially and personally).

    If you want to be a good economist, you also have to include some sociology and psychology into your thinking.

  • Report this Comment On January 26, 2010, at 11:46 AM, Divlover wrote:

    Thank goodness not everyone listens to this fool! Two wrongs do not make a right - just because the banks do whatever they wish to make a profit doesn't mean I want to teach my son and daughter to just walk away from obligations when they no longer are profitable.

    Perhaps if the bank CEO's parents had taught them this lesson when they were young we wouldn't be in this mess. I purchased a home within my budget (unlike many) so even though I am upside down on my mortgage, I can still easily make my payments and would NEVER walk away as long as I can make those payments.

    Shame on Matt for writing this artical and shame on those who can afford their mortgage and walk away leaving an empty home on the block.

  • Report this Comment On January 26, 2010, at 11:46 AM, jpm1799 wrote:

    First and foremost, the actions of human beings can never be quantified, simple as that. Our very greatest strength and weakness is the ability to act irrationally and sometimes with complete disregard for self-preservation based on a higher notion beyond simple "good and bad."

    Secondly, walking away from your mortgage because your home is underwater is like walking away from a paternity suit because it is against the palintiff's religion to have a paternity test, even though you and everyone else know without a doubt that the kid is yours. If we loose are butt in the stock market because we bought high and had to sell low, we have to take our lumps and move on. How is a home, the single largest investment most people have, any different? To answer your question simply, homeowners are "idiots" because they bought the hme at that price, not because they have a sense of responsibility. If responsibility were more prevalent in our generation, a lot of today's issues would never have been issues in the first place. Thank you for being an enabler, and may there always be someone willing to accept the responsibility for all of YOUR bad decisions.

  • Report this Comment On January 26, 2010, at 11:47 AM, XMFTheNew wrote:

    I pay my mortgage on my underwater home every month because I need a place to live. I also plan on buying a bigger home in the near future and wouldn't want to sabotage my credit or my relationship with my bank and my mortgage officer.

    I am actually in constant communication with my bank rep about when to buy a bigger home before interest rates are jacked up. It all depends on your bank and who you work with.

    I don't think turning the bank or the government into an enemy would help my situation at all...

  • Report this Comment On January 26, 2010, at 11:48 AM, BioMentat wrote:

    What an incredibly good article (ok, incredible may be a little strong, but seeing herringj's over-the-top comment above, I couldn't resist).

    Seriously, everyone else is getting a bail out, why not the people who can afford it least? Sentimental reasons aside, a house is just a house. I love my house...but if I didn't consider it an investment, why wouldn't I just rent??? Answer: because it is also an investment and at the very least a savings account. An underwater house is neither...there is no reason to stick around.

    I do like BMFPitt's comment though: "It's not, 'Why are homeowners idiots?' it's, 'Why are idiots homeowners?'"

  • Report this Comment On January 26, 2010, at 11:51 AM, XMFRael wrote:

    herringj...

    Just after his death, I heard an interesting story about the late Abe Pollin. A DC colleague remembered a call about some big deal or another and Abe told him to "swing by for the handsake." The guy had no idea what Pollin meant. Of course, he meant the handshake to seal the deal -- apparently, that was all the contract Pollin ever needed.

    To me, that's the sign of a great businessman and a stand up individual.

    Long story short, your decision to join or quit any Motley Fool service is yours alone, but I hope you won't think that everybody at The Motley Fool shares the writer's viewpoint.

  • Report this Comment On January 26, 2010, at 11:51 AM, jason2713 wrote:

    I was 45% under water in my home, it would have taken me 15+ years to just break even on the value of my home, and I'm fairly young at 32. It was my first home, was the hardest decision of my life after being there 3 years and watched everyone around me foreclose and the neighborhood disintegrate. Crime sky rocketed, I couldn't even have people over as guests in fear their car may be broken into. I about had it, and did a short sale, however if the bank did not approve the sale, I was definitely going to foreclose.

    It was a financial decision that saved me more than $140,000 (roughly 45% of what I paid for it) because the bank approved the short sale. The morality button hit me at first, but I had to do what was best for my future, and this was not a 5 year project. I still had second thoughts the entire time, and I definitely was saddened when I moved my final possession out of the home. I'm on the rebuilding track, will save for the next few years and hopefully will be eligible for another mortgage. People can piss and moan about the morality, but financial decisions and moral decisions are not mutually exclusive, and I'd be a damn fool to pay for a home that's 45% underwater.

    Hope this gives you all another perspective.

  • Report this Comment On January 26, 2010, at 11:51 AM, ElCid16 wrote:

    Matt,

    You should have just given thanks to Richard Thaler for basically writing this article for you 3 days ago...

    http://www.nytimes.com/2010/01/24/business/economy/24view.ht...

    C'mon, man. I thought TMF was better than this. Next time just reference the other article rather than write a synopsis and call it your own work...

  • Report this Comment On January 26, 2010, at 11:54 AM, Turfscape wrote:

    BMFPitt wrote:

    "If a person is sufficiently underwater, they'll probably have saved more than the cost of a new car in a few years by renting, so they won't need a loan."

    Hmmm...being "underwater" doesn't change the monthly payments. I don't see why someone being "sufficiently" underwater would save more than, say, someone who's just a little underwater.

    In fact, this entire focus on being "underwater" on a mortgage is a distraction. The issue is not that the home's appraised value is lower. That's just pretend value, funny-money. The issue is people who assumed greater monthly payments than they could afford...usually on the promise that they could turn around and sell the house for a profit, which they could use to buy a bigger house, which they could turn and sell for a bigger profit.

    A primary residence is the WORST investment vehicle one can ever enter into. Please note, real estate is not the worst investment...one's primary residence is. The value of a primary residence is not appraised value, purchase price or equity. The value of a primary residence is the conceptual value of a "home".

    That conceptual value includes the ideas of shelter, community, family, history and life experience.

    That home may be a house. It may be an apartment or cabin or RV. You may own that home or rent it. But, whatever that home is, it is NOT an investment.

  • Report this Comment On January 26, 2010, at 11:57 AM, BertC2 wrote:

    "That's a jargony term for sure, but it basically means that homeowners are being convinced that the "right thing to do" is to keep paying their mortgage -- even if it's not in their best interest.'

    Wow, it's also not in my best interest to continue to pay for that student loan since I already graduated and have a job?

    I hope everyone dealing with fool.com walks away from their contract.

  • Report this Comment On January 26, 2010, at 11:59 AM, SandmanKy wrote:

    Terribly short sighted article. It’s not all about asset values. If that were the case, the minute any one of your investment was underwater you’d sell it right away right (not the whole picture right.)

  • Report this Comment On January 26, 2010, at 12:00 PM, artheen wrote:

    1. Not walking away from a Mortgage to build/keep a good credit history.

    2. Can't place a value to Memories of living in ones Home,

    I think the point of the article is that, the crooks (now) are trying to place guilt on the ones they can or will allow others to talk them into it.

    The rich want the poor to be charitable (to them). Because, its the right thing to do.

    The people in 1 & 2 either can afford or refuse to be categorized as Idiots and prefer to look at the Advantages of owning a Home rather than the Cost, whatever it takes.

  • Report this Comment On January 26, 2010, at 12:01 PM, MKArch wrote:

    BMFPitt

    Anyone who would mail in the keys to the house solely because it's underwater will never own an automobile because as soon as they drive it off the lot they will have to do a U turn back to the dealer to turn in the car keys.

  • Report this Comment On January 26, 2010, at 12:04 PM, DrRoberts1 wrote:

    Sure Matt, in the immortal words of The Humungus from the "Road Warrior"...."walk away...just walk away". Just don't ever try to take out another mortgage in this lifetime. More completely worthless advice from the "Fools" at "Motley".

  • Report this Comment On January 26, 2010, at 12:05 PM, imup wrote:

    This is one of the dumbest articles I've read. Who is this guy??? People stay in their homes because they need a roof over their head, the housing market screwed them, and they are people of their word. Like someone else said... "They are legally bound by a contract". Hello, doesn't that mean anything?? Who would want a home foreclosure on their record?? If I make a wrong decision, I live with it and try to figure a way to get out of it legally, ethically and honorably!

    What a jerk! Is he really a Fool's adviser? I'm glad I'm not that type of an investor.

  • Report this Comment On January 26, 2010, at 12:07 PM, be42long wrote:

    I'm dissappointed in the Motley Fool for even running this article.

    I get his point that what corporations and the gov't. has done condoned is wrong, and put the burden on us, however...

    To encourage the idea of breaking a contract they can fulfill, and to subject those people to severe credit issues in the future is irresponsible.

    The Motley Fool needs to seriously consider its principles it so proudly espouses.

  • Report this Comment On January 26, 2010, at 12:08 PM, jpm1799 wrote:

    THIS STILL BEGS THE QUESTION: Why is it suddenly acceptable to force the responsibility your bad purchase onto a third party? YOU bought the home when it was overvalued, YOU borrowed the money to overpay. The bank shouldn't have lent you the money, but YOU shouldn't have been spending it on something that wasn't worth it. Until there is acceptance of responsibility, the buck will snow-ball every time it gets passed, and the economic situation will continue to deteriorate, regardless of what props you try to place under it. The economy is a victim of deteriorating social values; the deteriorating market values are just a symptom.

  • Report this Comment On January 26, 2010, at 12:12 PM, KFDEKEN wrote:

    Fortunately, most of these comments show that TMF readers are neither idiots who buy too much house nor creeps who walk away from their responsibilities.

  • Report this Comment On January 26, 2010, at 12:19 PM, jddubya wrote:

    Turfscape hit the nail on the head. Underwater really means nothing.

    The real issue is having taken one of those loans that aren't affordable, then having the rate reset... AND on top of that getting nailed with values dropping so to put you underwater.

    That's a perfect reason to walk away.

  • Report this Comment On January 26, 2010, at 12:34 PM, TMFHousel wrote:

    " People stay in their homes because they need a roof over their head, the housing market screwed them, and they are people of their word. Like someone else said... "They are legally bound by a contract". Hello, doesn't that mean anything?? Who would want a home foreclosure on their record??"

    Whether you agree with Matt or not, the fact is walking away has become incredibly popular. Here are some numbers:

    http://www.fool.com/investing/general/2009/07/28/this-is-kil...

  • Report this Comment On January 26, 2010, at 12:37 PM, NoMoeMoney wrote:

    Equity is an illusion..., Fools are the ones who borrow against it, Fools are the ones who pray to it, Fools are the ones who's greed consumes them.

    It means nothing until the day your house is sold then it means...NOTHING!

  • Report this Comment On January 26, 2010, at 12:37 PM, OCMTGGUY wrote:

    When you are walking away you are not sticking it to the man, but rather robbing your neighboors from their down payments and earned equity as well as deflating the market. The selfish me first mentality is what caused this mess in the first place. I'm sure banks created "exotic" loans for consumers, but I don't think banks were holding people at gun point to sign loan docs. Let's call a spade a spade some people have no business owning homes their quest to keep up with the Jones and living way beyond their means create this problem. There are plenty to blame from governement, wall street to Main street. We were are acting like drunking whores with an endless bank account shopping at Neiman Marcus. In the end what goes around come around and we all are paying the price. Walking away will lengthen the recovery process, talk to your banks they are doing extremely obscene things to keep people in their home. At the end of the day it is your responsibilities dont fail short on it, and dont expect to get something for nothing. Those who do deserves to be renters for the rest of their lives.

  • Report this Comment On January 26, 2010, at 12:37 PM, Borbality wrote:

    Ridiculous pretense in this advice column.

    Good to see the backlash in the comments.

    Also, some of us with "underwater" homes might believe in buying and holding, which I thought was the Fool's mantra.

    Foreclosure is a last resort. With more and more people deciding it is easier to walk away and make it someone else's problem, housing might never recover.

    I have to agree with the commenters that a house's appraised value has very little to do with what it is actually worth. Buying and selling homes with funny money eventually catches up with speculators, for obvious reasons.

  • Report this Comment On January 26, 2010, at 12:44 PM, Robomarkov wrote:

    Your home is an asset in the technical sense. As an investment vehicle, a primary residence is a HORRIBLE choice. Over the number of years you will be in your home, you will spend more money on upgrades, remodeling, repairs, and maintenance than you will likely recover from its sale. If you bought a home with the intent to move in the near future or strictly as investment property, then you are a speculator. I have no intent to move, therefore I have not lost any value in my "asset" since there is no loss or gain to be realized.

    You have not lost or gained value in your home UNTIL you intend to sell it.

  • Report this Comment On January 26, 2010, at 12:46 PM, TMFKopp wrote:

    Wow! I can see that I certainly touched a nerve here. Obviously, the sentiment runs deep that paying your mortgage has a lot to do with morality.

    But before you throw the feathers on me, let's be clear on a few things.

    - I'm not suggesting here that everyone that has gone a small amount into the red should jump ship on their mortgage. That would be silly. After all, the small amount you'd be running away from would be dwarfed by the very real costs of walking away, such as moving costs and the cost of higher credit rates.

    - Following on that, I would have to assume that most people up at arms don't really know what I'm referring to when I talk about a severely underwater mortgage. We're talking about houses that people paid $300,000 for and are now being sold for $150,000 or less. It's easy to figure out that it'll be a long, long time before somebody in that kind of situation will have any equity to speak of and meanwhile they could be paying rent that's far lower than their mortgage payment. Is their credit rating worth that? The answer will typically be "no," because even if they wait years to buy a new home they'll still be ahead of the game financially.

    - We can wax sentimental about the good old days when everyone sat on their porch drinking lemonade, smiling at each other, and calling up their pal the banker on the corner. However, in the vast majority of cases, the banker isn't your pal anymore. Your banker is a number cruncher potentially halfway across the country who's figuring out the quickest way to turn a profit on your loan -- maybe before the ink even dries. As noted in the article, the key here is "norm asymmetry." During the lead-up to the financial crisis the banks gave loans to anyone and everyone and did so on ludicrous terms. Now those terrible loans have come home to roost and have decimated the U.S. housing market. The bankers got bailouts, the homeowners who got the ludicrous loans got bailout, and yet the responsible homeowners who are now sitting on a home worth a fraction of what they paid for it are within their rights to walk away are being made out to be terrible human beings. Again, norm asymmetry.

    - I should also point out that if Thaler didn't mention it in his article White did mention in his paper that one of the reasons some homeowners aren't walking is because a home is a home, not an investment. And this can be a very good reason. Though it could be argued that the notion of a "home as a home" is being pushed extra hard these days to get some people to ignore the possibility that they might be better off choosing to walk.

    Matt

  • Report this Comment On January 26, 2010, at 12:49 PM, rclaussen wrote:

    The vast majority of individuals who take out loans, not just mortgages, but all kinds of loans are typically underwater at some point in the loan. The reason it gets as much press as it does now is:

    • It is in many cases the largest asset for many individuals

    • There has been a general decline in home values coupled with the economic downturn

    We have experienced declines in home values before, but not to the extent prevalent now. Individuals end up second guessing themselves and questioning if they made the right choice in purchasing vs. renting in these difficult times. But that same concern can be identified in many other situations where a loan is involved. Think about your car, new or used. Or your furniture, or your television, or many other things you purchase. Once they leave the lot, store, or are delivered to you from an online purchase, they are no longer worth what you paid for them, and in many cases, worth significantly less. It’s called depreciation, and it occurs almost universally. Suddenly you are underwater on that loan, maybe only for a little while, maybe throughout the life of the loan. Do many people think about this? I doubt it. The purchase was made to satisfy a need – for shelter, transportation, a bed to sleep on or appliances to cook on, or any one of a number of other reasons. And for most of the purchases cited above, the outlay relative to ones’ resources is in proportion much less, and far more manageable. Being underwater at some point in a loan is a very common occurrence.

    One other point that bears mentioning – responsibility. As adults, we theoretically have the ability to examine and make decisions which we fulfill. It is our responsibility to determine what is within our abilities and for which we can commit. We also have to understand not only the expectations but the consequences if we fail to honor our commitments. These are the things we should be teaching our children. Unfortunately, I have seen first hand the lack of skills in financial matters. Until we individually and as a society take on the task of providing a meaningful financial education for all who need it, the excesses that lead up to our current economic distress are likely to be repeated.

  • Report this Comment On January 26, 2010, at 12:49 PM, ETFsRule wrote:

    I bought my home for about $225k back in summer of 2007, right at the height of the housing bubble. Today it's worth about $210k, so technically I am "underwater" in my home.

    Do I care? No.

    Do I have any problem making my monthly payments? Not at all.

    In fact I've been able to refinance my mortgage, and as a result my payments have been lowered by more than $125 per month.

    This article is an insult to anyone with a brain, or with any morals, self-respect, honesty, integrity... etc, etc.

  • Report this Comment On January 26, 2010, at 12:50 PM, MKArch wrote:

    <<<Whether you agree with Matt or not, the fact is walking away has become incredibly popular. Here are some numbers:>>>

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

    Can I assume you didn't read the title of this article? The heart of the negative equity theorist doomsday argument is a housing death spiral as lower home prices beget more walk aways further lowering prices leading to more walk aways. The theory is already dead the housing death spiral it predicted is not happening. Now the advocates of the theory are out trying to coax home owners to walk in a effort to create a self fulfilling prophecy.

  • Report this Comment On January 26, 2010, at 12:52 PM, ATI2DE wrote:

    So Matt, your solution to a bad decision is to follow up with an even worse one? Sure, that makes sense.

  • Report this Comment On January 26, 2010, at 12:52 PM, bakretsch wrote:

    Mr. White is a very wise man. Obviously, there are a lot of people out there in denial who have thier ego standing in the way of sound financial decisions. These might be the people who hold a stock to the bitter end because they refuse to admit they made an idiotic purchase. The excuses for holding on are empty. If your emotions are going to dictate your finances, then you are a fool. The bad credit excuse is weak also. It will take you 10-30 years to recover from setting yourself back $100k - 300k. Your credit will take a 5-7 year hit. Save the money!

  • Report this Comment On January 26, 2010, at 12:53 PM, BMFPitt wrote:

    Turfscape -

    Being underwater doesn't change your payments, but it's pretty easy to assume that anyone who is vastly underwater is also paying far above market rent to live there. I don't know of many areas where ths is not the case.

    MKArch -

    Many people buy cars for cash, and therefore can never be "underwater" on it. Of course that's just one small part of why your analogy is absurd.

    be42long -

    Your mortgage contract, along with state law wherever you live states explicit terms for severing the contract by the mortgaee. Those who choose to exercise their contractual and/or rights are no less moral than those who foolishly burn through their savings and ruin their family financially in order to live in "their" house for a few more months.

    jpm1799 -

    The bank is NOT a thrid party. They knowingly and willfully lent you that money with an overvalued house as collateral. Choosing to return that collateral rather than pay the note is a perfectly legitimate action, and the bank's loss it due to their own negligence.

    The REAL theird party is the taxpayers who have had their money stolen by Congress to bail out the irresponsible banks and house "owners" who deserve nothing other than bankruptcy. Those who leave aren't causing the problem, those who stay using OUR money are exploiting it.

  • Report this Comment On January 26, 2010, at 12:59 PM, TMFHousel wrote:

    "The heart of the negative equity theorist doomsday argument is a housing death spiral as lower home prices beget more walk aways further lowering prices leading to more walk aways. The theory is already dead the housing death spiral it predicted is not happening."

    Really? If 50% declines aren't a death spiral, what are they?

  • Report this Comment On January 26, 2010, at 1:01 PM, sdblack100 wrote:

    I am considering a short sale on my home,I am current on my mortgage, and can afford my payments.The problem is I paid 275,000 now worth 160,000,neighbors on both sides are in forclosure and one accross the street has stopped making his payments.It will be years before my home is worth what I owe 220,000. , I have excellent credit,but think it would be worth the credit hit for a short time to get out of this undrewater mortgage.I will need some good advice before I proceed.I would have to stop making payments for the bank to approve a short sale,and what about moneys I have in savings and stocks.dont know what to do, but doing nothing seems to be a bad decision on my part.

    California resident.

  • Report this Comment On January 26, 2010, at 1:02 PM, Turfscape wrote:

    OCMTGGUY wrote:

    "We were are acting like drunking whores with an endless bank account shopping at Neiman Marcus."

    Or...we were told we should act like 'drunking whores' as it would be good for our pocketbooks, good for the economy and good for America.

    See, we don't value financial education much (in the global perspective). So, as a society, we've created this situation where a large portion of the population believes that there is a single way, a simple way, to financial freedom™. This has been presented to us a "HOME OWNERSHIP...I did it, and you can too".

    And because we don't, as a society, have the financial education to know better, we believe those with letters after their name, like ABR, CRB, CeMAP, CMP, CMC or little certificates with "Series 7" stamped on them. Those folks (not all of them, mind you...but it doesn't have to be all of them) tell us things like "real estate values only go up" or "you don't have to pay anything up front, or any principal at all...just pay the interest and sell in a year to reap huge profits". And we like to think that these folks are highly regulated (after all, someone had to take special care to give them a certificate or letters after their name). So, we think "they must know what they're doing, right?"

    And then we see all those late-night infomercials (as we sit up worrying about the fact that we don't own a home and everyone else is looking at us like we're some kind of dope) that tout the millions to be made through a patented home-buying system. Well, by gosh, we're not going to be the only sucker out there not making money on real estate! Why am I throwing my money away on rent when I could be building some of that magic "equity" (whatever that is...).

    The next thing you know, the dollar signs are flashing in our eyes and we're buying a 4-bedroom suburban nightmare.

    Now, the average home-buyer is not guiltless in this. Obviously, not everyone bought into the myth. But, we sit here pointing fingers and crying foul at "drunking whores" or "greedy banks" or "corrupt mortgage companies". The root problem is our society's lack of interest in financial education.

    P.S. If I ever start a band...I'm calling it the Drunking Whores!

  • Report this Comment On January 26, 2010, at 1:05 PM, grover15 wrote:

    "Why is Matt Koppenheffer an Idiot?"

    Matt, your reasoning assumes that the sole purpose and motivation of owning a house is as an investment. You ignore the simple fact that for most families, it's not just a HOUSE....it's a HOME. There is a greater cost to a family than just mere dollars lost in terms of loss of sense of security, moving kids away from their social network, the hit to sense of self-worth by moving out of a house and into an apartment (since no borrower would qualify for another home loan today after walking away from a current mortgage obligation).

    If a household consists of a single homeowner without kids who bought a condo in Florida at the peak....sure, then walking away makes some sense. But for most, it's not just about the dollars in your account.

    Hopefully you don't have kids. I'd shudder to think of the lesson you'd be teaching them if you followed your own advice.

  • Report this Comment On January 26, 2010, at 1:06 PM, CurmudeonDoug wrote:

    I scanned the responses to the referenced "Fool" article with interest. I'm a community banker in a small rural Kansas community. But I plied my trade in meto and rural areas of Arizona and Colorado for more than a few years. I've been in this business for a few decades and have noted that the word of a borrower means less and less.

    There was a time bankers could make a "character loan" to a person of high integrity. Those people are getting harder and harder to find because we are experiencing an ethics problem in our society. Borrowers with character (integrity) experiencing financial problems would come to the bank explain their problem, and we could usually work together to get us both out of trouble. Sadly, borrowers today are taking advice from accountants, attorneys, and economists. They just walk away from their responsibilities and leave the bank to clean up their mess.

    One can make the case that becuase of state law an implied contract makes the mortgage loan transaction a "business" deal and under the terms of a non-recourse contract, the borrower has as the legal option to walk away from the obligation and abandon the collateral. Its sophistry, but we all suffer from cognizant dissonance and any excuse to justify an immoral act works for those of weak character.

    The days of the handshake deals are long gone because so many ethically challenged people aren't willing to accept the responsibility and follow through when they have to deal with the result of poor choices. the ethically challenged have unfortunately become the norm, not the exception.

  • Report this Comment On January 26, 2010, at 1:07 PM, MKArch wrote:

    Matt,

    If you keep making payments on the house you recently bought for $300K but at the height of the worst recession in modern history is now valued at $150K for the life of a 30 year mortgage you are left with a house probably worth more than the original $300K that you own outright. You also get to deduct the mortgage interest helping to offset a good part maybe all of the savings in renting.

    After 30 years of renting you are left with nothing. I think there is a good reason why just about anyone who has the choice between owning and renting chooses owning.

  • Report this Comment On January 26, 2010, at 1:11 PM, MKArch wrote:

    <<<Really? If 50% declines aren't a death spiral, what are they?>>>

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

    They are the extreme end of home price declines that are no longer in the free fall that the negative equity theory says they should be in right now.

  • Report this Comment On January 26, 2010, at 1:13 PM, BMFPitt wrote:

    TMFGraphics -

    You seem to be stating that you think it's morally wrong to return your collateral to your lender, yet you seem to want the government to steal our money and give it to you. Why is it wrong to choose to end your mortgage contract in a way that only hurts those who voluntarily entered into it, but a great thing if we are all forced to pay for your mistakes? Also, how do you sleep at night?

  • Report this Comment On January 26, 2010, at 1:20 PM, BMFPitt wrote:

    MKArch -

    If you bought a $150k house for $300k, and paid off your mortgage after 30 years, you'd have the house - and would have paid about $600k.

    If you got out now and rented until you could buy the same house for cash, putting away the differecne between rent and mortgage/taxes/insurance each month, you'd probably own it in 15 years or less, and paid much less than $600k over that same 30 years.

  • Report this Comment On January 26, 2010, at 1:22 PM, Fair10 wrote:

    We should keep our all obligations-- to the lenders as well as to our family's well being.

    When everything goes well, we can fulfill all our obligations. However, everyone knows that things may turn ugly. (Lenders know best, government second, and homeowners last)

    When government draw the law (e.g. non recourse), lenders design the contract (FHA, conventional w/ 20%DP)-- they have factored in the possibility of default, of the worst scenario.

    In this current financial situation, homeowners who choose to give back their home to their lender (in good term) have done their best to keep the overall obligations.

    (Maybe, the contract should include that a homeowner may leave and return the property with three month notice, such as written in the rental contract.)

  • Report this Comment On January 26, 2010, at 1:22 PM, MKArch wrote:

    BMFPitt,

    If you would walk away from a mortgage solely because the house is *currently* worth less than you paid for it why would you buy a car knowing as soon as you drive off the lot the car is worth significanlty less than you just paid and will rapidly decline from there? At least with a house the odds are if you hold you will eventually get your money back. If you view everything you buy as an investment then it makes no sense to ever own a car or just about anything else for that matter.

  • Report this Comment On January 26, 2010, at 1:26 PM, banker777 wrote:

    Anyone who thinks that the actual borrower and asset owner has no fault in this instance is an idiot. I work for a large bank and I can tell you that your personal credit will show when you settle debt for less than owned (short-sell). As a credit underwriter I have not and will not ever lend a dollar to anyone with this on their record. For those that choose this option I say to you, hope you enjoy paying cash for every major purchase in the next 7-10 years.

  • Report this Comment On January 26, 2010, at 1:28 PM, damilkman wrote:

    I agree that a good economist needs to be a good sociologist. The author is assuming that a house is like any other comodity. But houses are not pork bellies. I know people who spent over a year looking for the perfect house. So viewing this from a pure cost and investment perspective, the author does not account for the time spent to find a new house, then move into it, and lastly to make the improvements to make it in the image of what the occupant wants. Add that to the cost model, and staying in the underwater home still makes sense, even from a pure dollar perspective.

    That all said, my neighbors did walk away despite being very well off. They overpayed almost 300K on their house in my opinion. Couple years later, they had to move. They secured a 2nd home. They had the income to carry two mortgages on paper. Then walked away from the 1st. They had made no significant investment and had to move. Shame on the banks for giving them a loan so large.

  • Report this Comment On January 26, 2010, at 1:28 PM, MKArch wrote:

    BMFPitt,

    Over the course of your hypothetical 15 years that someone is going to save up for a house by renting inflation is going to eat away at the current difference between owning and renting if any after taking into account mortgage interest deductions. Your rent is going to keep going up, your mortgage isn't.

  • Report this Comment On January 26, 2010, at 1:33 PM, BMFPitt wrote:

    MKArch -

    First, what you paid for the house is completely meaningless. It's what you OWE on it. If you owe $150k on a $150k house you paid $300k for, you are not underwater and it makes no sense to walk away.

    A car is a method of transportation, a house is a home. Both are pretty terrible investments. While a car might be worse percentage wise, it's pretty easy to lose more than the whole cost of a new car on a house purchase. The difference is that renting a house makes more sense financially for 50-80% of people, where car leases almost never make sense for an individual.

    Also, a car loan is a recourse loan, at least in any state that I'm aware of. If you owe more on your car than it's worth, you can't just return the car. On a house you can return the keys and buy/rent the one next door - saving yourself that $150k or $600/month.

    And who said I thought that buying a new car is a wise financial decision? I'd much prefer to buy a good off-lease vehicle that some fool used up all the most expensive miles on.

  • Report this Comment On January 26, 2010, at 1:36 PM, rett448 wrote:

    This sounds like another CNN Money article written to stir up the portion of the American population that knows little about investing or the economy as a whole. As many of the other fools have stated, if you took out a loan you could truly afford it would not matter if you were under water. If you walk away from the underwater mortgage it doesn’t just disappear, someone will be left holding the bag. For exampling taking another fool article “Inside Bank of America’s Earnings” you can see from the break down the home loans division is still bleeding cash. At some point Bank of America is going to try and offset these losses, and that usually means higher interest rates and more banking fees for everyone else. People can’t say “I’m walking away from my mortgage because its underwater” and then down the road complain about high credit card interest rates, high bank fees, and ridiculous bailouts. If everyone took a little personal responsibility for the finances we would have experienced a downturn instead of an extended recession.

    http://www.fool.com/investing/general/2010/01/20/inside-bank...

  • Report this Comment On January 26, 2010, at 1:38 PM, GunnyHiway wrote:

    Regardless of the effect of walking away on your credit, the bottom line to me is that if you make an agreement, you should stick to it . . . period. Otherwise, you're a liar and a cheat. Whatever happened to personal responsibility and integrity? I applaud those folks on this site who are commited to doing "the right thing." By the same token, I am appalled by the number of people who refuse to live up to their obligations.

    I disagree with Fair10. Many people walk away from their homes because it is the easy thing to do and the stigma of leaving a mess for someone else to clean up is just not as great as it used to be.

    I have friends who have had to declare bankruptcy and, while not legally obligated to repay their creditors, have done it anyway, very slowly perhaps, simply because it was the right thing to do. Those are the kind of folks I want as friends.

    Let your 'yea' be 'yea!'

  • Report this Comment On January 26, 2010, at 1:43 PM, JEPAFF wrote:

    Wow, an unbelievable article. Sounds like John Belushi in the Blues Brothers, "My tux didn't come back from the cleaners. There was a traffic accident. We ran out of gas." I don't need a corporation to make me take care of my own responsibilities, my parents did that years ago.

    The vast, vast bulk of people I know have a set of personal ethics that prevents them from being scoundrels. Taking out a loan and walking away when you can afford the payments is shirking responsibilities. It's taking what isn't mine as mine. I realize governments have problems with this (see the California Coastal Commission, for example) and some corporations have problems with this (see AIG) but good people try hard NOT to do this.

    As to the value of home ownership --

    A goal we should have, every single person, is to not be a drain on someone else downstream. If I rent my house when I'm 75, it is exceptionally unlikely I will be able to afford that rent when I'm 85. If I own my house at 75, it's mine, and I can choose to live there with small leaks, deferred maintenance, thin rugs until the cows come home, without too much fear of getting tossed out.

    Also, consider that <u> every rent payment </u> is the same as being upside down. You never get it back. Never. Now, I know, Mr. Thaler said, "Think of the insurance, the taxes, the upkeep costs." I never did figure out how these aren't "in the rent".

    - J

  • Report this Comment On January 26, 2010, at 1:45 PM, Turfscape wrote:

    GunnyHiway wrote:

    "Whatever happened to personal responsibility and integrity?"

    Turns out they weren't profitable and had to be cut from the balance sheet.

  • Report this Comment On January 26, 2010, at 1:48 PM, BMFPitt wrote:

    MKArch -

    Principal and interest don't go up, but taxes sure do. I just checked the website of the apartment I rented from 2006 until buying my house. Despite at least 12% inflation since the day I moved in, the rent hasn't changed. I don't know how long it was before that since it increased. Meanwhile, townhouses in the same community with near-identical floorplans are going for what would cost nearly 20% more, and that's before property taxes and HOA fees, which bring it up to about 40% more. Are you saying that someone who is $50-75k underwater in that development wouldn't be better off moving accross the street and saving a third of their monthly housing cost?

    Mortgage interest deduction is nearly worthless to most Americans, it is only worth the difference between itself and the standard deduction. For most married couples in houses at or below the median price, that's not much if anything.

  • Report this Comment On January 26, 2010, at 1:49 PM, catoismymotor wrote:

    Here is my .10 for the kids!

    What? That's over? Oh, come on! This one story is good for $6.00 so far. :(

  • Report this Comment On January 26, 2010, at 2:36 PM, snugmotleyfool wrote:

    The patient is bleeding out; do you walk away or do your best to save him?

    Most of the articles written on this topic ignore some basic variables. For instance, is a major change going to take place in your life, requiring the home be sold in the short term? Divorce; job downsize, change or loss; moving outside the state? You can't walk away unless you have first exhausted all short-sale options with your lender.

    But if you walk away because the underlying asset depreciated, and/or all of your friends are walking, then you are throwing yourself down the toilet. Do you continue to own the car if the loan balance exceeds the blue-book? It does just that in the majority of cases, but you still pay.

    RE loan repayment is based on your ability to pay, not conversion of the asset. To do otherwise is

    speculation.

    Real estate, like all commodities, has always been cyclical and there is no reason to believe that this time will be different. Values will return if given enough time. If your job is secure and you like where you live, then you continue to pay, period. You'll retain your credit history and you won't think "stiff" when you look at yourself in the mirror..

    The promisorry note says, "I promise to pay". It has nothing to with asset value vs. loan balance. To walk, in the majority of cases, is wrong.

  • Report this Comment On January 26, 2010, at 2:36 PM, TMFKopp wrote:

    I really appreciate the enthusiasm with which people are responding here. I wish I could respond to every individual comment, but I'll try to hit the general points.

    1. Your home loan as a moral obligation. For those of you that thinks your character and moral fiber are on the line with your home loan, I would suggest that you vastly overpaid for your home. When banks give you a loan, they are making a calculated decision (an investment, you might say) to give you a loan over a certain number of years, for a certain property, at a certain interest rate. You in return, agree to pay back that loan, with a significant sum of interest, and put your credit rating on the line. If you're also putting whether you can get up in the morning and look at yourself in the mirror on the line, well, I think you've given them more than they deserve.

    Looking at it another way, in the majority of cases banks today are not investing in YOU. They are making a loan to a specific piece of demographic data -- a credit score, a profession, an annual salary, a zip code. In most cases today, you're not going to get a higher or lower interest rate because your banker knows you to be a good, wholesome person versus (as some have put here and likely many others have thought) a creep. Again, the bank is not investing in YOU, so why are you putting your moral standing on the line?

    Sure, maybe back in the day a banker might have known you as a person and made a loan decision based on YOU. Of course, back in the day, a banker would not have given a loan to your neighbor with $0 down and a 3-year ARM.

    2. Also, consider this: in states that are nonrecourse, homeowners typically paid significantly higher closing costs. From Thaler's article in the NYT:

    "In fact, borrowers in nonrecourse states pay extra for the right to default without recourse. In a report prepared for the Department of Housing and Urban Development, Susan Woodward, an economist, estimated that home buyers in such states paid an extra $800 in closing costs for each $100,000 they borrowed. These fees are not made explicit to the borrower, but if they were, more people might be willing to default, figuring that they had paid for the right to do so."

    3. A few folks have suggested that being underwater on a mortgage is similar to being underwater on a host of other bought-on-credit assets. In simple terms, it's not. Let's take the example of a car for instance. Let's say you pay $30,000 for a brand spanking new car a year before the recession sets in. You put 10% down on the car, so you have a loan of $27,000. With an interest rate of 5% and a five year loan term, you're paying roughly $500/mo. By the time the recession hits, you still owe about $22,000 on your car.

    Now that recession has decimated the consumer, nobody would be willing to buy your car, and while you might have been able to sell it for the $22,000 you owe before, let's say it's gotten so drastic that the only takers you'd possibly be able to find are only willing to cough up $8,000. So essentially you're now $14,000 underwater on your car. Time to walk away?

    Not so fast. I could give a whole host of reasons why this would be a silly idea, including the fact that your credit is now shot and you're still going to have to find a way to get a car to take you back and forth to work. However, the simple fact is that for most people, a good credit rating is likely worth more than $14,000. The same could be said for any number of other items bought on credit -- furniture, TVs, etc -- if for no other reason, the size of the shortfall simply isn't enough to make it worthwhile to back out of the loan.

    With the deep underwater homes we're talking about shortfalls of $100,000 or more. Are you folks telling me that if someone offered you a couple hundred thousand dollars and in exchange your credit rating would go to dirt you wouldn't take them up on it?

    4. bakretsch hits the nail right on the head:

    "Mr. White is a very wise man. Obviously, there are a lot of people out there in denial who have thier ego standing in the way of sound financial decisions. These might be the people who hold a stock to the bitter end because they refuse to admit they made an idiotic purchase. The excuses for holding on are empty. If your emotions are going to dictate your finances, then you are a fool. The bad credit excuse is weak also. It will take you 10-30 years to recover from setting yourself back $100k - 300k. Your credit will take a 5-7 year hit. Save the money!"

    5. There seem to be a lot of people commenting that think I'm a) suggesting that THEY walk away from their home and b) that the idea of walking away from your home is one-size-fits-all advice. Let me put your minds at ease: I'm not and it's not.

    There are a lot of variables that come into play when making a decision whether to walk away. If you have a house in a nice neighborhood, have kids that love the house, and live near good schools, a $100,000 shortfall might not be enough to make you want to move. If you're single and moving isn't as much of an issue $75,000 may be a tipping point. Even for the family, once you start talking about $200,000 or more, the financial implications of the move may make it well worth the effort.

    However, let me suggest that if your house is underwater $100,000 or more I'm going to bet you're not living in a nice idyllic neighborhood with birds chirping and flocks of kids walking to school together smiling. If your home is underwater that much, my bet is that you probably live in a neighborhood that is already plagued by foreclosures due to the fact that banks lent oodles of money with nothing down to many borrowers who couldn't afford the payments the same way you could. While that neighborhood may have been full of homeowners when you bought, today it's likely part ghost town, part low-rent housing.

    6. @MKArch. This is a great point:

    "If you keep making payments on the house you recently bought for $300K but at the height of the worst recession in modern history is now valued at $150K for the life of a 30 year mortgage you are left with a house probably worth more than the original $300K that you own outright. You also get to deduct the mortgage interest helping to offset a good part maybe all of the savings in renting."

    Yes, you are absolutely correct. But consider the interim period between now and 30 years. There's likely a 10-15 year period in between where that homeowner will still be paying a mortgage well above market rental rates and will still be underwater on the house. Let's say, for example, that this homeowner is moved by their job seven years from now. Between today and that point they've been dutifully paying down their mortgage (even though they could have paid far less in rent) and when they're forced to move they'll still find they owe more on the house than it's worth. Worse still, there are current government provisions that excuse forgiven mortgage debt as a source of income, but those end I believe in 2012. So even if this homeowner walks away seven years down the road, they're not only facing a credit hit at that point, but they're also going to have to pay a tax bill on it. Their other choices at that point? Pay down the shortfall or find a new job. Clearly that's a pretty dismal situation.

    Don't get me wrong, I didn't write what I wrote in this article lightly. Before writing the first word, I ran a lot of calculations to decide for myself whether what White and Thaler are saying makes sense to me. For sure, a deep-underwater homeowner that pays down the mortgage over the full 30 years will be better off versus someone that rents for the next 30 years. But what about the homeowner that rents for the next five then buys with an elevated interest rate? The latter will typically be better off than the person who stayed for the full 30 years in the deep-underwater home. What about the person that rents for 10 years, then buys again once their credit rating has come back up? That person has a good chance of being better off than all the folks I've mentioned here.

    It's important to keep in mind that this isn't a simple question of pay down the mortgage for 30 years or rent for 30 years.

    Matt

  • Report this Comment On January 26, 2010, at 2:46 PM, SJPhil wrote:

    Most homeowners pay around double to triple the price renters pay for housing. It takes quite a while to recoup that price differential. Typically, it's earned upon the (greatly appreciated) sales price of your house. And for most, the proceeds of which are immediately re-invested in another home.

    Good advice if you do not have any down payment on your original purchase AND you don't mind going through BK and credit hell for the next 10-years.

    Bad advice if you have a substantial down payment and you have any hope at all of recovering a substantial portion of your original purchase price.

  • Report this Comment On January 26, 2010, at 2:53 PM, jpm1799 wrote:

    YOU PEOPLE AMAZE ME! This is not a debate about what decision is the most benficial for the homeowners, or if the "banks" are perpetrators or victims, or about what your level of "underwaterness" is. This is about RESPONSIBILITY! If you take the responsibility of borrowing to purchase a home, that home, and it's payment, are YOUR RESPONSIBILITY! No matter what numbers you present, or what example you use, you CANNOT justify walking away from the RESPONSIBILITY of paying your mortgage when you have the means to pay it.

    For TMFKopp: Responsibility is, in fact, an officially recognized English word, and it's definition can be found in any dictionary between "rectally-impacted cranium" and "ruined credibility."

  • Report this Comment On January 26, 2010, at 3:01 PM, TMFKopp wrote:

    @SJPhil

    Interesting point here:

    "Good advice if you do not have any down payment on your original purchase AND you don't mind going through BK and credit hell for the next 10-years."

    First of all, you don't have to go through bankruptcy to walk away from a mortgage. Particularly in nonrecourse states.

    The more interesting point here though, is the fact that in his paper, White highlights the fact that most people overestimate the impact that a foreclosure or short sale will have on their credit, or what bad credit will mean to them.

    Here's an except from his paper:

    "To be sure, foreclosure comes with costs, including a significant negative impact on one’s credit rating. But assuming one had otherwise good credit, and continues to meet other credit obligations, one can have a good credit rating again – meaning above 660 - within two years after a foreclosure. Additionally, one can qualify for a federally-insured FHA loan to purchase another home in as little as three years if the foreclosure was caused by unemployment or other extenuating circumstance – and in 5 years absent such a precipitating event.

    "While the actual financial cost of having a poor credit score for a few years may be hard to quantify, it is not likely to be significant for most individuals – especially not when compared to the savings from walking away from a seriously underwater mortgage. While a good credit score might save an average person ten of thousands of dollars over the course of a lifetime, a few years of poor credit shouldn’t cost more than few thousand dollars. Moreover, one who plans to strategically default can take steps to minimize even this marginal cost. For example, one could purchase a new vehicle, secure a new home to rent, or even purchase a new house before beginning the process of defaulting on one’s mortgage. Most individuals should be able to plan in advance for a few years of limited credit."

    Matt

  • Report this Comment On January 26, 2010, at 3:03 PM, BMFPitt wrote:

    snugmotleyfool:

    "Real estate, like all commodities, has always been cyclical and there is no reason to believe that this time will be different."

    I do not believe that we will ever again in our lifetimes see the highs of the bubble peak in terms of real dollars. If we do, I can guarantee it will be through government meddling, and the government would collapse soon afterward.

  • Report this Comment On January 26, 2010, at 3:05 PM, TMFKopp wrote:

    One thing that I will say is that regardless of whether the "moral obligation" aspect of a mortgage is something that should be there, it is apparent from the comments that it is there, and it's there very strongly.

    For anyone that is truly interested in this topic, I highly suggest reading the source material that inspired me. Here is a link to Brent White's paper on the Social Science Research Network:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1494467

    Matt

  • Report this Comment On January 26, 2010, at 3:09 PM, MKArch wrote:

    Matt,

    You can add to your calculations that current market values are severely depressed due to a glut of motivated sellers brought on by the most severe recession in modern history. By most accounts prices have stabilized and it doesn't take a lot of imagination to see prices gain back significant amounts of the losses once the economy is on firm footing and the motivated sellers are gone. Assuming current market prices will not go up over the next few years is a mistake in fact if the hyper inflation theorist are correct they'll go up a lot. Rents are going to go up as well and would skyrocket if everyone who was underwater mailed in the keys.

    We could go on for ever inventing hypothetical scenarios about whether walking makes economic sense but my main point along with many others on this thread is that for the vast majority of home owners the home is not an investment it's a place to live. Just like the car is not an investment it's transportation. The negative equity doomsday theorist make a false presumption that home owners view their home as an investment.

  • Report this Comment On January 26, 2010, at 3:14 PM, BMFPitt wrote:

    MKArch -

    What makes you think we've hit bottom? The government is bribing people to buy houses, the Fed is burning hundreds of billions suppressing treasury rates and buying up CDOs, and Fannie, Freddie & the FHA are lending to anyone with a pulse in order to slow down the decline to try to buy time fo the Fed to inflate their way out of it. In the near term, the housing market has nowhere to go but down.

  • Report this Comment On January 26, 2010, at 3:26 PM, TMFKopp wrote:

    @MKArch

    Check out this graph of U.S. housing prices (http://mysite.verizon.net/vzeqrguz/housingbubble/). I would suggest that this does not show a normally functioning housing market that has temporarily gone below trend. If the housing market begins functioning properly again -- and I think that's what we should all be hoping for -- housing prices overall, and particularly in hard-hit areas, will not get anywhere near the prices we saw just a few years ago.

    Matt

  • Report this Comment On January 26, 2010, at 3:50 PM, GunnyHiway wrote:

    Mr. Koppenheffer, I believe you are missing the point. I looked at the abstract for Brent White's paper and see that he doesn't understand why people would want to do what is right, as well.

    I don't remain faithful to my wife because I want to avoid the shame of getting caught or am afraid of catching an STD. I do it because I love her and because it is the right thing to do.

    By the same token, I meet my oblilgations because it is the right thing to do. I really don't understand why you think it has ANYTHING to do with the mortgage contract.

    You wrote, "If you're also putting whether you can get up in the morning and look at yourself in the mirror on the line, well, I think you've given them more than they deserve." Don't underestimate the value of a clear conscience. It has nothing to do with the bank or mortgage company (who,by the way, DO live up to their end of the bargain the lion's share of the time.) It has to do with what type of person you are. The cavalier attitude you espouse is what has turned "Business Ethics" into a punch line.

  • Report this Comment On January 26, 2010, at 3:54 PM, bodiddlie wrote:

    Good points on both sides here. I think that a lot of the ire that is present in the comments comes not from the idea of walking away from a mortgage, but from the fact that it seems to be getting easier to do so. I know someone here in AZ that is going to be walking away from their mortgage on a manufactured home. It is honestly the best decision for them at this time. My problem with their situation is that they have a long history of making extremely poor financial decisions (as I would suspect many, not all, in the same situation would have). Their mindset going into this isn't about how they can be financially responsible in the future, it's about how soon the foreclosure will fall off their credit report.

    The legal avenues to get out from under a mortgage exist to enable people to learn from these errors. But we have a government that wants to hide the lessons from people and lenders that hope to profit from future errors. Not everyone needs to OWN a home, and not everyone needs unfettered access to credit.

  • Report this Comment On January 26, 2010, at 4:04 PM, JEPAFF wrote:

    One should note Mr. Brent is a law professor, not an economics professor.

    _______________________

    >>For those of you that thinks your character and moral fiber are on the line with your home loan, I would suggest that you vastly overpaid for your home. <<

    >> If you're also putting whether you can get up in the morning and look at yourself in the mirror on the line, well, I think you've given them more than they deserve. <<

    But this is what normal people do everyday with nonmonetary things, like not running that idiot over despite him running in front of your car, or not punching the IRS moron who misfiled your taxes and put you into a 60 day cycle of "The IRS requires a Form 1053/Q, but where it says 'income' cross it off and write 'Pizza oven' " Sure, they deserve it. Credible, responsible, ethical people don't do that, not because of some corporation, but because it's just wrong.

    Yes, perhaps we have emotions, but remember, the LACK of attachment to financial responsibility got us into this mess, as well as the federal deficit mess. The two quotes are insulting.

  • Report this Comment On January 26, 2010, at 4:05 PM, MKArch wrote:

    http://news.morningstar.com/articlenet/article.aspx?id=25308...

    I couldn't open your link Matt but here is my counter link. This one is over a year old so houses are a lot more affordable today than when the article was written and inventories are down 1M from the high in 2008 to almost normal today.

    Simple supply and demand should tell you prices will make some sort of rebound when the economy is healthy again. Motivated sellers that depress prices will be gone and many more buyers will be entering the market.

  • Report this Comment On January 26, 2010, at 4:41 PM, ElCid16 wrote:

    "I don't remain faithful to my wife because I want to avoid the shame of getting caught or am afraid of catching an STD. I do it because I love her and because it is the right thing to do."

    Did your wife con you into getting married in the same manner that predatory lenders convinced ignorant homebuyers into their guarantee-for-failure mortages?

  • Report this Comment On January 26, 2010, at 4:55 PM, ATI2DE wrote:

    Matt:

    So now what you are saying is, "it's nothing personal, it's just business"?

    Are we to judge all decisions based on how many zeroes we stand to gain? Or to put it another way, if I paid you enough money you would be willing to do just about anything?

    There is a reason why they call it "doing the right thing".

  • Report this Comment On January 26, 2010, at 4:59 PM, TMFKopp wrote:

    @MKArch

    Unfortunately that link requires a subscription log-in. A lot of the inventory talk doesn't take into account many of the houses that are in various states of foreclosure currently. Many banks are keeping houses off the market currently because of depressed prices. Bear in mind too, that a Fed Funds Rate of 0% - 0.25% isn't going to stay around and as that rises so will mortgage rates and that will put downward pressure on housing prices. Going forward I think we're also going to see more people trying to get a better gauge of what a house is actually worth -- that is comparing it to nearby rental rates, which housing prices have tended to trend with over time. All of these factors will likely conspire to keep prices from even catching a whiff of what they once were.

    @GunnyHiway

    I'm sorry, but even suggesting that dealing with your mortgage contract is anywhere near similar to staying faithful in a marriage is utterly ridiculous.

    As for the value of a clear conscience, the point I was making wasn't that walking away shouldn't impact your conscience, it's that perhaps your conscience shouldn't be on the line in the first place. The banks look at these loans as business deals, why are consumers treating them as moral obligations?

    @JEPAFF

    Why don't we punch the IRS fellow? Perhaps it's to keep a clear conscience, but perhaps it's also because we know that we'll be booked on assault charges if we do.

    There are repercussions for folks even in nonrecourse states when they walk away from their home including 1) they lose the home and 2) their credit rating is shot. Why shouldn't they weigh that decision on the basis of a cost/benefit analysis as any bank would?

    A wise man once said "Render unto Caesar the things which are Caesar’s, and unto God the things that are God’s."

    Certainly there can be a lot of interpretations of that quote, and now that I've brought it up I'm sure that there will be. But perhaps it means that dealings of an earthly nature -- or specifically, in this case, of a business nature -- should be treated within the realm that those are governed, while dealings of a higher (moral, we might say) nature be dealt with in their own realm.

    Based on the nature of the responses, if Mr. White is correct in his assumption that the banks and government have been convincing homeowners of a moral duty to pay down their loan, then based at least on many of the comments here, they have done a very good job at it.

    Matt

  • Report this Comment On January 26, 2010, at 5:04 PM, TMFKopp wrote:

    @ATI2DE

    "Are we to judge all decisions based on how many zeroes we stand to gain? Or to put it another way, if I paid you enough money you would be willing to do just about anything?"

    Haha. No, sorry, if you need somebody whacked you're going to have to look elsewhere.

    The issue at play here isn't whether we should abandon morals on the whole. It's a question of separating moral considerations from business dealings when they have no place there.

    Matt

  • Report this Comment On January 26, 2010, at 5:05 PM, BMFPitt wrote:

    MKArch -

    Supply and demand you say? Supply is artifically suppressed in hope of more government giveaways, and demand is artificially inflated by current government giveaways. What happens when these are taken away?

    dkilgour16 -

    Cry me a river. No one held a gun to anyone's head and made them buy a hous ethey couldn't afford. Everyone that is deeply underwater is like that of their own doing, and has no one to blame but themselves.

    ATI2DE -

    Not all decisions, just business decisions. If you are in business with an entiry that has no interest in you other than making a buck, then there is no moral obligation to them - just what is legally required.

  • Report this Comment On January 26, 2010, at 5:07 PM, fadler1 wrote:

    Back up and slow down.

    A primary residence is NOT an investment, it is a personal security. Anyone who purchased their first home during the feeding frenzy is screwed, no doubt. Put that group into one subset. If they are subprimers (als Carter, Clinton and Frank), they put nothing in and they get nothing out if it is their chosing. If they are like my daughter, a first timer in 2008, they are marginal and as long as rent is higher than mortgage payment, tax payment less deduction, they stay in. IF it is someone who had a lot of equity in an inflated house and then moved to a more inflated house and spent some of that equity along the way on cars, pools, furniture, it is their own fault. If they walk, they should be punished as far as credit. They made their own bed and should lay in it. The pockets of foreclosures are largely in new construction areas or areas where the original Carter plan of "everyone DESERVES a house" took over. Don't even get me started on "everyone DESERVES healthcare".......................they do but not the heroic levels we do now because of fear of litigation.

  • Report this Comment On January 26, 2010, at 6:10 PM, Turfscape wrote:

    BMFPitt wrote:

    "Everyone that is deeply underwater is like that of their own doing, and has no one to blame but themselves."

    I disagree. There's plenty of blame to go around. We look to certified professionals for advice because we can't all be experts in everything. We indeed had a situation where the certified experts were incessantly and uniformly telling the masses "home prices only go up and these complex mortgages with adjusting rates and interest-only payments make the most financial sense for you...sure I'll profit, but is it so wrong that I make a living providing you with the means to buy your dream home? Besides, all you have to do is sell next year and you'll have money streaming out of your orifices".

    We all have the obligation of due diligence, but blame lay not only with the borrower here.

  • Report this Comment On January 26, 2010, at 6:11 PM, grthinker wrote:

    Wow John,

    I'm sure glad I don't own any of you debt!

  • Report this Comment On January 26, 2010, at 6:34 PM, ojdrew wrote:

    The most valuable thing you will ever own is your reputation.

    That is my mantra as a business owner, teacher, husband, father and economist. The truest words I know, even today; especially today.

    I bought a house April 2008 at the height of property values in my area. I KNEW it was a terrible investment and I knew it was the wrong time to buy. Since then the house has declined in value ~ 25%. Why would I buy a house knowing this?

    Because I love the house, the area and I'm going to live there for the next 20+ years with my wife and small children. Plus I also know that we will be able to pay off the mortgage within 10 years.

    We didn't view the house as an investment, it is a home. Like a car it is not a good investment but I spent a lot of money on it anyways. Over the next 30 years I'm willing to bet it will pay off as an investment but I certainly do not expect it to be one of my better choices.

  • Report this Comment On January 26, 2010, at 6:45 PM, MKArch wrote:

    Matt,

    Normal home sales average about 6M/ year. Estimates of "shadow" inventory are about 1.7M or less than 1/3 of years home sales. That's not to mention by definition those homes are not coming on the market until the market firms up.

    The notion of getting something at the end of a mortgage as opposed to nothing renting is well ingrained in the U.S. psyche as is housings long term increasing valuation. People want to own houses and will continue to choose houses over renting when the economy recovers even if rents are lower than mortgages.

    When the motivated sellers are out of the market and buyers come back prices will increase. Will they get back to recent highs? Not likely at least in the near term but they certainly can get back to somewhere between current lows and recent highs when the economy is fully recovered. BTW not everyone bought at the height of the market.

  • Report this Comment On January 26, 2010, at 7:16 PM, BDRudolph wrote:

    Ave,

    Personally, with what little I do know about Real Estate, as an investment or primary residence:

    - Knowing that the market cycles, why not treat real estate as "just another stock'?

    - looking for under-valued to bounce back to "normal", instead of buying "normal" expecting the price to go up?

    - In the mean time, is there no comparison of rental homes/apartments in ones particular area? Increasing cash-flow to savings so when the resseccion/depression happens again you are ready to buy a dozen for the prince of one?

    - Isnt now the best time to BUY as the interest APY is blessedly low?

    - My first TMF post, my net-worth = USD 0.00 not including car.

    - If I am so far off the mark as to cause you to destroy your computer, please email me that I may better understand (to shut-up?).

    -BDR

  • Report this Comment On January 26, 2010, at 7:17 PM, BDRudolph wrote:

    Ave,

    Personally, with what little I do know about Real Estate, as an investment or primary residence:

    - Knowing that the market cycles, why not treat real estate as "just another stock'?

    - looking for under-valued to bounce back to "normal", instead of buying "normal" expecting the price to go up?

    - In the mean time, is there no comparison of rental homes/apartments in ones particular area? Increasing cash-flow to savings so when the resseccion/depression happens again you are ready to buy a dozen for the prince of one?

    - Isnt now the best time to BUY as the interest APY is blessedly low?

    - My first TMF post, my net-worth = USD 0.00 not including car.

    - If I am so far off the mark as to cause you to destroy your computer, please email me that I may better understand (to shut-up?).

  • Report this Comment On January 26, 2010, at 7:22 PM, tjensen3618 wrote:

    I suggest people walk away and I have been suggesting this to people i know who are badly underwater. The bank felt your home was sufficient collateral to lend you money at 110% LTV, well they were wrong, the banks should be paying for it, but are getting bailed out. I say homeowners should bail out of their homes.

    I rent and I will not buy until my income can comfortably (20% down & 33% of income to mortgage) purchase a home equal to that of my income. As it stands now, an average income does not buy you an average home.

  • Report this Comment On January 26, 2010, at 7:30 PM, jbowman90 wrote:

    What you forget about is that keeping a good credit rating is in my best interest. Dump your house, there's goes your credit rating for 7 years. Good luck buying a house when they start appreciating again. Some businesses, on the other hand, seem to have easy access to credit in spite of constant screw ups year after year. If I could have easy credit after walking away, I just might. But I can well afford to keep making payments. So why screw up my credit rating?

  • Report this Comment On January 26, 2010, at 7:47 PM, dogsled97 wrote:

    I'm guessing the people concerned with the moral implications are not living in homes worth 50-60% of the original purchase price.

    Let's say you paid 350K for a home in 2005, now the same floorplan in your community is selling for 165K. Would you begin to consider the repercussions of walking away and renting for a few years? Most financially savvy people would.

    Housing prices in those areas would have to see an average of increase of 5% a year for 15 years before the house is worth the original purchase price.

    Most people's moral obligations are first to God and their family, not a financial institution that will loan anyone money during good times and no one money during bad times. Besides, if you look at what people have paid in interest and what the home sells for after foreclosure are the banks really 'losing" money?

    I'm sure for most people going through the foreclosure process it is a sad experience. If they have small children, they might be thinking about how they can save for their child's college tuition. If they stay in the home they will not be able to save as much money and will have no equity in their home.

    Maybe the banks will be so grateful for the homeowners sacrifice they will be neighborly and give them a home equity line of credit even though they have no equity. I can hear the underwriter now saying, "you can tell this is a stand up guy, let's give him the money with no way of securing it." I don't think the banks will make that mistake again.

  • Report this Comment On January 26, 2010, at 8:21 PM, TMFKopp wrote:

    I think dogsled97 makes some fantastic points here.

    First of all, I believe that many of the comments here are coming from folks who may have been hurt by the housing downturn and are now looking at a home price that's 15% - 20% below what they paid. If they assume that the article above applies to them, then they're rightfully confused.

    Having your home price depreciate is a very different picture than being severely underwater. If you put 20% down on a $250,000 house and it's now worth $190,000 you may be facing a moderate shortfall if for some reason (job, etc) you were forced to move. Depending on how long you have been paying that mortgage you may not even face a shortfall.

    But what about if you put 20% down on a $250k house and it's now worth $100k? This isn't about sour grapes, stomping your feet, and telling the bankers to kiss off. It's about making sound financial decisions. For folks that are slightly underwater, it'd be a terrible idea to walk away. But there's a not-insignificant number of homeowners in the U.S. who are not just a little bit underwater and they're being told to "buck up and do the right thing."

    Dogsled97 also notes -- "Most people's moral obligations are first to God and their family." To which I say Amen. Are we really going to hold a business contract with a bank above doing what's in the best financial interest of our families? For folks with a $100k or $200k shortfall we're talking about potentially multiple college tuitions and maybe years of piano lessons and SAT tutoring on top of that.

    But of course I know at this point I'm probably beating a dead horse...

    Matt

  • Report this Comment On January 26, 2010, at 8:46 PM, BMFPitt wrote:

    grthinker -

    Are you a taxpaying US citizen? If so, there's at least a 50% chance you own some of his debt. And they're working hard to make sure to get some even lower quality debt in there with it. I've heard that they're dropping FHA credit requirements down to a 580 FICO, which I guess means if you haven't declared bankruptcy in the last week or so then you can get a $500k mortgage.

    BDRudolph -

    Stocks can be sold in about a minute, and commissions are a few bucks. Houses can take weeks even if you have a buyer lined up, and can run a few thousand even without the real estate cartel taking their cut.

    jbowman90 -

    How much would you sell 300 points off your credit rating for right now? I can assure you that my price would be well below 6 digits, as no amount of good credit could save/earn me that much money.

  • Report this Comment On January 26, 2010, at 8:54 PM, TMFBent wrote:

    Great discussion, but I bet an awful lot of people would look at this differently if it were recast to remove an individual and a home, and instead has a soulless corporation play the part of the borrower and, say, a rubber factory as the home. (This runs afoul of accounting regs, but let's pretend...)

    Imagine you own stock in this company that is making payments on this asset that has lost 50% of its value and currently costs, say, 35% of pretax income every year. Assume that whatever remaining value this asset provides (i.e. living space) can be easily rented for 1/3 to 1/2 the mortgage payments.

    If it defaults on this and walks away, it may be penalized when borrowing for a time, but the sum of that damage is far less than the sum of the damage for continuing to pay off this crummy asset.

    As a shareholder, do you want the company to keep owing money down the rathole because that's the moral thing to do, or eat the problem up front, suffer the consequences, and move on, financially stronger, and increasing the value of your stock?

    Is that different from an individual in the same situation? Why?

    Sj

  • Report this Comment On January 26, 2010, at 9:45 PM, twilightrates wrote:

    Matt, I think a big cause of the uproar is that whether intended or not, your argument is an indictment of morality or sentimentality themselves, and of the decision to prioritize on morals or sentiments over finances. By virtue of the title, your contention is that underwater homeowners are idiots for staying, period. The two major reasons, as detailed in the article, are that either they don't have a moral or sentimental issue with bailing and they don't realize the financial advantage of bailing, in which case they admittedly aren't making a wise decision, or that they do realize the financial advantage of bailing but are staying for moral or sentimental reasons. If staying for moral or sentimental reasons, they are still idiots (per the title), but it is now because they are making a moral or sentiment-based decision. The implied reasons they are idiots for making a moral or sentiment-based decision are that morality and sentimentality are less important than finances, and because they based the decision on moral grounds instead of financial grounds.

    I won't argue the sentimental path, as that seems a bit more cut-and-dried. Your denigration of morality should be contested though. Morals pertain to right and wrong, which are largely absolute. If it's deemed wrong to steal, then the degree to which you steal doesn't change whether it's right or wrong. If an underwater homeowner is staying because they think it's morally correct to fulfill their obligations, then none of the variables you cite change that--they (and I) believe it's wrong to walk out, and it's right to repay the loan. The morality inherent in the question is absolute, and is not diminished by:

    a) The degree to which the homeowner is underwater, nor

    b) The increased distance between the lender and borrower (or the degree to which they're anonymous)*, nor

    c) The degree to which lenders are also immoral (or 'deserve to be treated immorally')**, nor

    d) The percentage of other underwater borrowers that are walking away.

    If a homeowner then is staying due to moral reasons, and if the morality is absolute, then by logical extension your argument becomes: homeowners are idiots if they stay for moral reasons. That's an indictment of their morality, since you're claiming that their moral well-being less important than their financial well being, and an indictment of their intelligence for not recognizing that their moral well-being is less important than their financial well-being.

    * For some that are making these decisions on moral grounds, those grounds are based on a religion or social mores, and thus they answer not just to the one lender of the funds in question, but to the creator and/or to mankind at large. That the lender no longer is as directly involved or cares isn't paramount.

    ** Here's where the 'largely' on 'largely absolute' comes in: there are obviously extreme cases where this gets clouded, like if it was known that any funds repaid would be enabling a greater wrong or evil than would reneging on the promise to repay the loan.

  • Report this Comment On January 26, 2010, at 10:00 PM, twilightrates wrote:

    To Seth's question (only saw it after submitting my previous post), I'd contend that the answer doesn't change whether the subjects are a corporation and a faithfully executed obligation, or a team's contract with a coach or athlete, or vice-versa. If one (individual, or corporation) has and operates on morals, then the only mitigating factor is ability to pay, not desire to pay. I would divest myself of the stock in a company I learn to be willfully operating amorally.

  • Report this Comment On January 26, 2010, at 10:08 PM, twilightrates wrote:

    To Seth's question (only saw it after submitting my previous post), I'd contend that the answer isn't changed if the subjects are a corporation and a faithfully executed obligation, or a team's contract with a coach or athlete, or vice-versa. If one (individual, or corporation) has and operates on morals, then the only mitigating factor is ability to pay, not desire to pay. I would divest myself of the stock in a company I discover it to be willfully operating amorally.

  • Report this Comment On January 26, 2010, at 10:12 PM, ewwest wrote:

    What is amazing to me in all this discussion about walking away, tanking your credit and renting misses a very important point. I am not talking about the truly important ethical and moral issues already covered. I am taking about how your credit impacts your ability to rent. Many appartment rentals require a good credit score. If you walk you may not be able to rent.

  • Report this Comment On January 27, 2010, at 12:06 AM, jesse2159 wrote:

    Simply walking away from a bad deal, in which a legally enforcable contract has been signed, is stupid. Those who do so may destroy any chance that they might want a house eventually and will need good credit. Do you really thing a bank will trust you if you abandoned your responsibility to a creditor. Not too likely. I hope you like apartment living.

  • Report this Comment On January 27, 2010, at 3:26 AM, ET69 wrote:

    I am of the opinion that the working class is inherently more moral and ethical than the bourgeoisie like the economists in Chicago or MIT or Harvard will ever be.That is why they continue to pay bills and fulfill obligations unlike the ruling class which is utterly cynical and corrupt. That being said, perhaps the best way to get even would be for everyone who is underwater to walk . I for one would not blame you at all. Don't worry about your credit ...those same corrupt bankers who lent you money before will do it again as soon as the financial hub- bub over financial reform is over and buried. Hey its Capitalism right?

  • Report this Comment On January 27, 2010, at 4:13 AM, JibJabs wrote:

    This article borders on plagiarism.

  • Report this Comment On January 27, 2010, at 8:59 AM, barentz wrote:

    Perhaps it's already been said--I did not read this entire thread--but how many of these folks who are "underwater" are so because they used their houses as ATMs? Especially in those cases, I would have a real moral issue with walking away...

  • Report this Comment On January 27, 2010, at 10:15 AM, dogsled97 wrote:

    ewwest:

    In those places where homes are severely underwater there are plenty of rentals, many of which are owned by investors who might be underwater as well. Do you think they are going to worry about someone whose only blemish on their credit is a foreclosure? I doubt it. Has anyone heard the news that rent rates are down and vacancies are up? It's true. People are very forgiving when they want/need to put money in their pocket.

    fab4fanatic:

    You are right, shelter not an investment. So why pay twice as much for shelter if you don't have to? That is the point of the article.

    barentz:

    This article would not apply to people who "used their houses as ATMs". Even in states with anti-deficiency laws those people can't walk away without getting sued.

    ET69 is right. Look at the large percentage of the population who has gone through a foreclosure for one reason or another. This will be the era of foreclosure and bad lending practices. Sure, initially a foreclosure will hurt someone's credit, but credit can be rebuilt and the banks are going to be anxious to move these properties. Who is going to buy the homes in the hard it areas that were incredibly overbuilt? Maybe all of the smart people who knew more than the fed when this housing bubble was building. This country is loaded with those incredibly smart people who can predict markets. No, people with a foreclosure will be buying again in a few years and that is when the housing market will fully rebound. In other words, that is when the market will truly be corrected.

  • Report this Comment On January 27, 2010, at 10:32 AM, AnthemFool wrote:

    This article would be tolerable if the writer had used less inflammatory language. I'm insulted to be called an idiot because I choose to honor my financial commitments, and because I don't view my home only in terms of dollars earned. I don't judge people who feel differently, why should the writer, representing the Fool, be able to flout the rules prominently displayed just to the right of this window as I write this? "Please be respectful with your comments."

  • Report this Comment On January 27, 2010, at 11:07 AM, sillih67 wrote:

    Would Mr. Koppenhetter suggest turning a handicapped child over to the state because it will save him money or walk away from a sick spouse because it offers a cost benefit? Sometimes good moral decisions have a price that is worth paying!

  • Report this Comment On January 27, 2010, at 11:15 AM, ElCid16 wrote:

    JibJabs

    I agree completely. I pointed out the NYT article in an above comment, but never got a response from the author. TMF's website has grown tremendously, but with this growth comes more reponsibility for coming up with your own work, rather than paraphrasing others' work. Hopefully we'll see some original stuff (or better citation).

  • Report this Comment On January 27, 2010, at 12:02 PM, bricks79 wrote:

    To the banker who said he wouldn't lend to someone who enters a short sale: You will lend to a company that walks away from a non recourse commercial real estate loan, won't you? You need customers and non recourse is exactly that. Go ahead and demean the individual who walks on a non recourse mortgage. You made the loan on lousy terms in the first place. Morgan Stanley is giving back the keys to buildings in San Francisco and will have lenders like you lining up to lend them new money on the next real estate deal. Where is their "moral obligation"? You can find it in the taxpayer bailout money!

  • Report this Comment On January 27, 2010, at 12:15 PM, Turfscape wrote:

    sillih67 wrote:

    "Would Mr. Koppenhetter suggest turning a handicapped child over to the state because it will save him money or walk away from a sick spouse because it offers a cost benefit? Sometimes good moral decisions have a price that is worth paying!"

    Uh...are you really equating a business transaction with a human life? If you want stupid analogies...how about:

    Would sillih67 suggest that a battered and abused wife stay with her drunken criminal husband and risk death rather than break her marriage vows?

    Seems just a bit silly, doesn't it?

  • Report this Comment On January 27, 2010, at 1:08 PM, thku4grace wrote:

    Matt compares homeowner speculation with Goldman Sachs' speculation. What he doesn't seem to understand is that Sachs can be sued if they walk away from contracts, while nonrecourse loans leave banks with homeowner loss.

    Matt doesn't comprehend ethics or the damage done to both the real estate market and the economy as a whole by the snowball effect of homeowner decisions centered on breaking valid contracts.

    Frankly, I'm of the opinion that homeowners who walk away from properties that they can still afford ought to have their credit tarred and feathered for decades to come.

  • Report this Comment On January 27, 2010, at 1:19 PM, NoMoeMoney wrote:

    dogsled97 wrote "

    barentz:

    This article would not apply to people who "used their houses as ATMs". Even in states with anti-deficiency laws those people can't walk away without getting sued. "

    But they can declare bankruptcy and if its a chapter 13 and the house is underwater (home is worth less than 1st mortgage) they can do a 'lien strip', thus removing a 2nd mortgages secured status to unsecured.

  • Report this Comment On January 27, 2010, at 1:22 PM, acslater2001 wrote:

    When I first read this article I thought, "what an incredibly irresposible person to suggest such things", and I pretty much stand by that original thought. However, consider the theme of the article. This comes from an investment point of view, and from that point of view, all morality aside, this makes sense. If your whole intent was to purchase a home as an investment then it makes sense, in the very short term, to walk away when the investment turns bad with no regard for your credit.

    From a moral stand point this article is filled with the stench of a morally decayed society. Here's my point, many of the people that "walked away" from their homes recently, including relatives of mine, did not in fact "walk away". They first stopped making payments on their "investments", then continued living in the homes for free for months and even years after. Is it fair that people, many of whom only purchased homes to try and make money on the real estate boom even though they knew they couldn't afford their purchase, are allowed to live in homes they aren't paying for while the rest of us continue to pay for our homes and / or rent where we live? Mr. Koppenheffer never mentioned it, but if people are going to walk away from their obligations then they should be forced to actually walk away, not linger around saving thousands of dollars a month while the rest of us pay for their mistakes. Talk about multiple slaps in the face of people trying to do the right thing. Mr. Koppenheffer you should be ashamed of yourself for assuming that people who are doing the right thing even though it may damage their investment portfolio in the short term. Especially when you don't even mention the destruction of someone's credit which would very likely destroy them in the long-term.

    BMFPitt - well put..."Why are idiots homeowners?"

  • Report this Comment On January 27, 2010, at 1:30 PM, aggie9711 wrote:

    Well, gee, my car is worth less than the loan I have on it, I should walk away from that too right? And that big screen TV I bought is worth less than I paid for it, I should walk away from the credit card I used to buy it, right? Encouraging people to walk away from their obligations and totally hammer their credit (and by the way, many landlords check credit reports on potential renters, so that can affect what you'll be able to rent and how much it costs) is idiocy and completely irresponsible. Plus it doesn't teach the lesson to these people of "buy what you can afford and pay for it". It's the same principle that should be applied to the banks and corporations, no bailouts, no safety net, you assume the responsibility and the repercussions of your own actions.

    We bought our first home right in the middle of the mortgage meltdown (Summer 2008). My bank said we were qualified for a mortgage that equaled over 5 times my salary. We could have taken it and bought a big house (and here in TX I most likely wouldn't be underwater), but we didn't. We were responsible and purchased a more modest house that met our needs and was well within the range of affordability. It doesn't have all the things we wanted and all the space we wanted, but we made those sacrifices in order to be responsible homeowners. The bank didn't put a gun to my head and say "No, you're going to borrow more". Encouraging the irresponsible to walk away just does one more piece of damage to the rest of us that honor our obligations and accept the responsibility of our decisions, both good and bad.

  • Report this Comment On January 27, 2010, at 1:49 PM, dsp444 wrote:

    I'm curious about the "moral outrage" that has been posted in quite a few responses.

    What specific moral is somebody pointing to when they claim that walking away from a contract is amoral?

    If I sign my name on a piece of paper that says "you must pay $XXX or your property will be confiscated", then do I agree with that entire statement or not ? If I walk away, I am merely accepting the consequence I signed up for.

    What specific "sin" or "moral" is this person crossing? Lying? Stealing? I just don't see it.

    (a side note that you could argue from a Biblical perspective that it is amoral to take out any loan - Proverbs)

  • Report this Comment On January 27, 2010, at 2:13 PM, GreatestPakiQB wrote:

    I loved the article and the dialogue it has incited. I recently attended a lecture by a UCLA business professor who chastised the government for continuing the FHA program, requiring only a 3% down payment, in the wake of the housing crisis. He made the point that somewhere in American history homeownership became a right that should be guaranteed by the government, when it shouldn't be, and called for the end of the FHA program. I'm not sure how I feel about his argument since I have never purchased a home, so wondered how others felt?

  • Report this Comment On January 27, 2010, at 2:30 PM, gozags1 wrote:

    danpuperi asked: "What specific sin or moral is this person crossing?"

    Psalm 37:21 The wicked borrow and do not repay.

  • Report this Comment On January 27, 2010, at 2:31 PM, acslater2001 wrote:

    @danpuperi - the moral stand point doesn't come form a perspective of simply having your property confiscated if you fail to pay. This article is centered around calling people idiots, who can pay for their homes...the $XXX as you put it, but refuse to walk away when they can continue to hold sound on their agreement to pay and not to simply "walk away" when the investment fails to meet their needs. The mindset of just "walk away" from an agreement, not because you can't pay due to some unforeseen, unpreventable circumstances, but simply because you want to is wrong. In addition, the author makes the point that because everyone is taking a piece of the give up pie, why wouldn't everyone do it? If this doesn't start to sound a little morally unsound to you then this article was definitely written for you.

    Also, read my post above, I make mention that the moral decay in this case also comes from the fact that the vast majority of people not only stopped paying for their homes, but continued living in them for free while saving their money that should have been going to the people that loaned them the money. They were purposefully screwing someone that loaned them money for a house. More often then not the home will sell but at a huge loss therefore causing huge financial loss to the loaning bank simply because someone wanted to walk away when the agreement, that they made on their own free will, didn't fit their needs. A similar mentality can be found in people that think that stealing cable is okay simply because the cable company has millions of dollars from over charging customers and they deserve to have a few people steal from them because they can afford it.

    Also, I'm curious to know what scripture you are referencing in Proverbs. I'm not saying there isn't a verse that says something to that affect, I would just like to read it for myself in context.

  • Report this Comment On January 27, 2010, at 2:37 PM, TMFKopp wrote:

    @JibJabs and dkilgour16

    That is a hefty allegation. The Motley Fool takes that kind of thing very seriously and I promise you that the writing above is original work. Did you notice that I cited both Thaler's New York Times article and Brent White's original working paper in the article? That would have been pretty silly if I were lifting their work. I've also exchanged emails with Mr. White. Actually, now that I think about it, I can't think of anything sillier than plagiarizing a law professor's work. Come on now, let's keep this civil.

    @Turfscape

    Thank you. I wasn't sure whether I was going to even respond to that. To say the comparison is spurious is like saying that Death Valley is warm in the summer.

    @thku4grace

    "What he doesn't seem to understand is that Sachs can be sued if they walk away from contracts, while nonrecourse loans leave banks with homeowner loss."

    Goldman can only be sued if the contract they entered into is a recourse contract. Many business loans are nonrecourse. It's not as if the banks were unaware of the fact that if they're lending in Arizona they have no recourse on home loans. Maybe they should have thought a little harder about that when they were giving 110% LTV loans on short ARMs in that state.

    "Matt doesn't comprehend ethics or the damage done to both the real estate market and the economy as a whole by the snowball effect of homeowner decisions centered on breaking valid contracts."

    How can we have a normally functioning real estate market when owners are weighed down by mortgage loans that are sometimes multiples of the house value? Proposals like Mr. Thaler's in his New York Times article would have this issue dealt with now. Leave it alone and tell those home owners to "just deal with it" will end up with the market trying to swallow these problems for years to come.

    "Frankly, I'm of the opinion that homeowners who walk away from properties that they can still afford ought to have their credit tarred and feathered for decades to come."

    Write your Senator, maybe we can get that law instated. However, as it stands now, there is no legal avenue for tarring and feathering homeowners that strategically default. It's simply silly to say that homeowners entered into contracts with specific legal recourse for noncompliance, but oh yeah, they should be punished over and above the remedies defined within the bounds of the contract.

    @acslater2001

    First of all, fantastic moniker.

    "If your whole intent was to purchase a home as an investment then it makes sense, in the very short term, to walk away when the investment turns bad with no regard for your credit."

    I think you're missing the point. This isn't about people who were speculating on the housing market. This is about people that bought their house with a conservative down payment, payments they could (and still can) afford, and did so on a fixed interest loan. Many of these people have now seen the market price for their home fall by 50% or more due to the vast amount of speculation that went on. There has been government help for the banks that made speculative loans and government help for those who took out the speculative loans, but many responsible borrowers are left bearing the brunt of it all and are told by the government, the banks, and their fellow citizens to "suck it up and deal with it."

    "From a moral stand point this article is filled with the stench of a morally decayed society."

    This kind of attitude is exactly what this article hopes to combat.

    When a buyer takes out a mortgage contract there are legal remedies put in place in the case of default on that loan. That borrower should be free to consider whether the financial impact of continued payment exceeds the impact of the default remedies outlined in the mortgage contract. I don't know why this contract should be any different from any other contract. Heck, even Faust was clear about the details of what he was getting himself into.

    If you're not convinced, I suggest you take a look at some of the articles involving businesses not making good on property loans:

    http://online.wsj.com/article/SB1000142405274870490560457502...

    http://www.sdnn.com/sandiego/2010-01-11/business-real-estate...

    Note the wording used to describe the default:

    "The fund, RREEF America REIT III, gave up the building in a deed-in-lieu-of-foreclosure transaction to Prudential Mortgage Capital"

    "Late last week the REIT announced that it would hand back three San Diego hotels to Massachusetts Mutual Life Insurance Co."

    No talk of morally bankrupt companies or depraved decision-making. The companies in question stopped making payments on their loans, so under the terms of the contract, they gave the properties over to the lenders. No doubt these companies will also have a tougher time borrowing in the future.

    Why do we think about property contracts that consumers sign differently from the property contracts that businesses sign?

    @aggie9711

    "Well, gee, my car is worth less than the loan I have on it, I should walk away from that too right? And that big screen TV I bought is worth less than I paid for it, I should walk away from the credit card I used to buy it, right?"

    This is nowhere near the same situation and this is an issue I've addressed above. Not only is it ludicrous to say that you're "underwater" on your TV, but the few hundred, or, heck, thousand dollars that you may be "underwater" is nowhere near the hundreds of thousands of dollars of shortfall that many homeowners are facing.

    "Encouraging the irresponsible to walk away just does one more piece of damage to the rest of us that honor our obligations"

    You miss the point. We're not talking about irresponsible borrowers here. The irresponsible borrowers that borrowed more than they could afford are walking away because they have no other choice. What we're talking about here is people who bought houses they could afford, yet are seeing their neighborhoods changed into ghost towns and home prices plummet because of the irresponsible around them. What we're talking about here is the ability for those borrowers who can afford their mortgage to make the choice to deal with the repercussions of noncompliance with their mortgage contract rather than continue to pay down a mortgage that's multiples of the home value.

    Matt

  • Report this Comment On January 27, 2010, at 2:39 PM, BMFPitt wrote:

    acslater2001 -

    Your beef seems like it should be with the states' various forcelosure/eviction laws rather than the people acting within the bounds of those laws. I absolutely abhor many tax credits/deductions that are available, but it would be stupid to refuse to take them as long as they're there.

    GreatestPakiQB -

    Here's a few bits of information on the FHA for you: They are intentionally giving out bad loans they know won't be repaid in order to make houses more expensive so responsible people can't buy them. And when asked about it, Senator Barney Frank (who has a lot of influence over such things) said that was a GOOD THING. They're taking the money from responsible taxpayers and gambing it on bets they know they're going to lose - and they won't even bother lying about it.

  • Report this Comment On January 27, 2010, at 2:44 PM, TMFKopp wrote:

    danpuperi has hit the nail right on the head.

    Homeowners that are walking away are not "not making good on the contract that they signed," they are operating within its bounds. They agreed to pay the mortgage or forfeit the property. Ceasing payments is simply making a choice to use the latter portion of the agreement.

    The choice is not an enviable one as it has severe consequences, but under extreme circumstances, as many are in right now, homeowners should have the option to consider the contract from all angles without feeling morally bankrupt.

    And I feel like I'm endlessly repeating myself, but again, we're talking about extreme circumstances here. For those who are slightly underwater or whose house has declined in value some moderate amount, walking away would probably be a terrible decision.

    Matt

  • Report this Comment On January 27, 2010, at 2:51 PM, TMFKopp wrote:

    @GreatestPakiQB

    The FHA program is ridiculous. We don't want people in this country to be homeless, but I don't understand why there's so much shame around renting. I guess it is simply a matter of perspective. If you live in NYC you rent as a matter of course, maybe for your entire life, and you don't think twice about it. But in, say, TX, people might think there's something wrong with you if you're 40 and renting.

    Home ownership should be reserved for those that have the financial means, and that means having a considerable amount of skin in the game when you buy. The low- and no-down loans that were made in the run-up to the crisis have been a prime driver of the housing market disaster. That the government is continuing to sponsor home loans with little money down is just silly.

    Matt

  • Report this Comment On January 27, 2010, at 3:11 PM, acslater2001 wrote:

    @TMFKopp, BMFPitt, danpuperi - I see what you guys are saying, and I'm certainly not trying to offend or push any ethical lesson on you guys as ethics and morality are completely in the eyes of the beholder. But when an agreement states that a lender can take the property of an non-paying individual it is meant as a provision to protect those people that lend from unforeseen circumstances, like death, loss of employment, sickness, etc on the receiving individual's part. Those provisions are put in to place to protect the lender from complete loss of a loan. But again, that's just me.

    I also do not believe that simply because the government implements a new rule or law that it automatically becomes moral or ethical. And yes, picking up the slack of other people who were most likely irresponsible in their purchase decisions does suck. I don't, however, feel it my right to follow suit of other people, including businesses, and bail on my obligations simply because other people say it is okay to do. But again, everyone has their viewpoint, and I may very well be missing some huge point here. But my interpretation of the article above is simply face value. I'm not reading in to any hidden meanings or anything like that.

    I do apologize for the use of feelings here. But again, morals, ethics and the interpretation of law has always been a gray area in society. So I'm certainly not offended if any or all of you disagree with me here.

  • Report this Comment On January 27, 2010, at 4:07 PM, dsp444 wrote:

    gozags1 - Psalm 37:21 - legit. thanks

    acslater2001 - not necessarily that I would endorse this view but I've heard some folks use Proverbs 22:7 with some Dave Ramsey mixed in to say that it is morally wrong to be in debt.

  • Report this Comment On January 27, 2010, at 4:09 PM, dsp444 wrote:

    gozags1 - Psalm 37:21 - legit. Thanks

    acslater2001 - not necessarily that I would endorse this view, but I've heard some people use Proverbs 22:7 (with some Dave Ramsey mixed in) to say its morally wrong to be in debt.

  • Report this Comment On January 27, 2010, at 4:17 PM, jimmysunshine wrote:

    One of my summations from reading through comments: This is why many people from other countries don't like America - full of self-righteous egotists.

  • Report this Comment On January 27, 2010, at 4:34 PM, jimmysunshine wrote:

    It's not the people, Idiots! It's the system!!

  • Report this Comment On January 27, 2010, at 4:53 PM, nasis wrote:

    Here's a different take on the moral aspect: If the banks really do share blame for the meltdown, as many believe, then "walking away" can be thought of as a form of justice... However, I agree that since the terms of walking away were agreed upon in the contract that it's not a moral issue.

    @TMFKopp: In your comments, you implicitly put some limits on the value of a person's credit: greater than $14k and less than a couple $100k. Would you put your credit in that range? I don't think I would, but then, like most people, I would probably overvalue mine! One consideration you seemed to ignore is the possibility of future employers pulling your credit score when deciding to hire you.

  • Report this Comment On January 27, 2010, at 4:58 PM, jimmysunshine wrote:

    I'm curious to know how many posters espousing morality to shame others, betray their own lack of morality in other areas of their life.

  • Report this Comment On January 27, 2010, at 5:07 PM, BMFPitt wrote:

    nasis -

    My personal answer to that would be about 6 months' gross income. If I could have that (tax free) in exchange for a foreclosure on my credit report, I would do it.

    And I could certainly argue that 1-3 months is more than adequate to cover any negative consequences that would arise. I'm just factoring in the potential that in the future, you'll need more than a pulse to get a mortgage, and if I need to move in 15 years or so, I might need one. Of course 15 years on on-time payments and a down payment of 50% or more should more than cover that.

  • Report this Comment On January 27, 2010, at 5:28 PM, TMFKopp wrote:

    @nasis

    "In your comments, you implicitly put some limits on the value of a person's credit: greater than $14k and less than a couple $100k. Would you put your credit in that range?"

    Interesting question. Can I squeak away by saying "I'd know it when I saw it?" I can say that I'd be very hard pressed to turn down $100k or more, particularly if the loss of credit was temporary (as is the case in a foreclosure). Of course you can make me an offer and we'll see what we can work out :)

    I don't live my life completely without credit like truthisntstupid, but honestly I make very little use of credit. Basically everything I buy is with cash. Ok, scratch that... I put everything on my credit card and then pay the full balance every month. But if I had little or no access to credit it would impact my life in a very limited way. So for that reason I'd probably be willing to part with my credit for a lower sum than many other people.

    In fact, now that I think about it, if you want to be critical of my views on the mortgage situation, perhaps you could say that I don't have a good grasp on what it means to be heavily dependent on credit as many folks are. Of course, my response to that is that rather than try to salvage their credit score so they can pile more debt onto their personal balance sheets, they might be better served by rethinking their lifestyle and starting to live more within their means.

    Matt

  • Report this Comment On January 27, 2010, at 6:25 PM, Bonsaiscrooge wrote:

    For me as a Swiss it is entirely unintelligible how the banks in the USA can provide their debtors with a mortgage in the form of a house and not, as is standard in Switzerland (and probably in most other countries), in the form of a defined sum of money, with which the debtors can mortgage their home. This latter principle would not only make sure for the banks that the interest on the mortgage will be serviced until the debtor pays it back (simply leaving the house doesn't work), but also the loss on the house, if it goes underwater, remains with the debtor and not the bank.

    Evidently, Hank Paulson is wrong: it is the US banks that are the speculators because they carry the mortgage risk and not the homeowners.

  • Report this Comment On January 27, 2010, at 6:39 PM, BMFPitt wrote:

    Bonsaiscrooge -

    The banks don't carry the risk anymore, either. It's all financed on the backs of the taxpayers. Read all about Fannie Mae, Freddie Mac, and the FHA. 90% of mortgages written in 2009 were guaranteed at face value by the government, and the banks will give a loan to anyone with a pule because they have no downside in the deal.

  • Report this Comment On January 27, 2010, at 6:41 PM, dogsled97 wrote:

    Comparing televisions and cars to a home is ridiculous. People expect such items to depreciate in value as technology advances and years of use diminish values. When people were buying homes at the height of the market a 50% decrease in value was practically unheard of. The appraiser they paid to estimate the value of the home certainly did not tell these people this property could lose half it's value in 3 years. Nor did their mortgage broker, real estate agent, lender, etc. These are all professionals who profited from the transaction. I am sure there are many people who expected the market to drop down a bit from its highs, maybe 10% -15%, and were willing to ride out the loan to see the value recover. Unfortunately, that hasn't happened in many places. I can't blame people for looking out for their families financial future. You never know, one of them might be employing you. I'm sure many on their high horse would quit their jobs if they were informed of working for such an immoral, sinister person. In turn, sacrificing their families well being to set a moral example for us all.

  • Report this Comment On January 27, 2010, at 7:45 PM, TheBigARRALie wrote:

    How did they do it? I started asking myself this question around the fall of 2008 – About the same time that Main Street got hip to what mortgage-backed securities (MBS), collateralized debt obligations (CDO) and credit default swaps (CDS) were. I never quite understood why reputable lending institutions were making high risk loans to buyers who otherwise would never have qualified for even a secured credit card, let alone a 200K-600K home loan. Now I do. The tweaking of the Community Reinvestment Act (CRA) in 1999 coupled with the speculation and hedging in the CDS market set the stage for a “Designed to Fail” lending scheme with the bulk of the liability landing fully on the American taxpayers. Once the US taxpayer was on the hook for the bulk of the Wall Street’s MBS investment & CDS liabilities, selling loans, particularly high risk loans, became the name of the game. Good reference article: http://www.time.com/time/business/article/0,8599,1723152,00....

    In the end, the chief architects of this financial house of cards, JP Morgan Chase, Citibank, Bank of America and Wachovia, were able to offset the vast majority of their debt liabilities on the US taxpayer. Neat trick, wish I would have thought of it…

  • Report this Comment On January 27, 2010, at 8:12 PM, TMFKopp wrote:

    A few more issues to consider (this is based on a comment received on my blog -- http://caps.fool.com/Blogs/ViewPost.aspx?bpid=332489&t=0...

    - The job of the banks is not to just hand out mortgage loans left and right. Their job is to assess the value of the asset that they're financing and make a sensible loan based on that asset -- after all, that's what they end up with if the loan goes sour. In all of this, it seems to be overlooked that the lenders -- who have been making loans on this same asset for decades -- did a terrible job assessing the collateral that they were lending against. In search of the next origination fee and the next securitized asset pool they were willing to write loans based on no down payment and spurious assessments. If the banks end up with a flood of devalued assets (or should we say rightly valued assets) instead of blaming awful, no-good borrowers, they should look in the mirror and consider their underwriting standards.

    - And for those who like to think that borrowers walking away even though they can afford their mortgage is a sign of the degradation of traditional American values, let me remind you -- at the risk of going off topic here -- that our country was born in the wake of a displaced native population and has a history of rich barons stomping on the necks of hard-working citizens. For all of its faults, I love the U.S., but don't fool yourself into thinking that borrowers walking away from a devalued asset is a sign of the U.S. populace sullying a pristine history of moral uprightness.

    Matt

  • Report this Comment On January 27, 2010, at 8:52 PM, kengzeng wrote:

    What's gonna to happen if the owners just give up these houses and simply walk away.

    Are all the bank system are done? Very very possible. Somebody must to pay for the crisis which caused by wall street. Of course wall street would not pay for it.

  • Report this Comment On January 27, 2010, at 9:45 PM, TMFKopp wrote:

    @kengzeng

    "What's gonna to happen if the owners just give up these houses and simply walk away."

    We're not talking about an insignificant number of borrowers, but we're also not talking about massive numbers of borrowers that would seriously cripple the system (or at least in my opinion). Remember, we're talking about those severely underwater, not those who are just slightly underwater.

    Even if these homeowners continue to pay their mortgages, it doesn't change the fact that their mortgages are vastly higher than their mortgage principal. These borrowers sticking around doesn't change the situation, it only delays and extends the problems. We'd get back to a fully functioning housing market faster if we dealt with problems like this head on, rather than hoping that they'd go away if we ignore them.

    Matt

  • Report this Comment On January 28, 2010, at 2:44 AM, bonznstonz wrote:

    Unfortunately, this seems to go against everything that my parents taught me and that I've tried to instill in my children and grandchildren. Your word is your bond, what happened to trusting that someone would do the right thing, morally and ethically?

  • Report this Comment On January 28, 2010, at 7:33 AM, Donnernv wrote:

    Matt:

    I have gone to the trouble of reading your post here and on the CAPS site, as well as every one of the comments in each site.

    After thoughtful consideration of all posts, I have come to the conclusion that you repulse me. You have a warped view of the world and the place that honor, responsibility and obligation play.

    You are obviously a youthful dupe who has no appreciation of the importance these virtues play in the world of commerce, or indeed, of civilization itself.

    These virtues are the basis for commerce. When they are gone, the world becomes a pit of liars, dupliciators and lawyers. And you advocate extending this s**tpit by encouraging people who are able to satisfy the terms of their contracted obligations to walk away.

    Who is stuck? The folks who deposit, buy stock or bonds, or otherwise invest in the lending institutions. Not the lenders themselves.

    You are obviously very young, very inexperienced and very stupid. And as I said on the CAPS site, I wouldn't lend you 50 cents for a cup of coffee.

    You are a shame to Motley Fool. They should shut you down.

  • Report this Comment On January 28, 2010, at 7:55 AM, Donnernv wrote:

    And I'm a lot older, more experienced and more ethical than you.

  • Report this Comment On January 28, 2010, at 8:38 AM, Duke5343 wrote:

    Boy Matt! better open mouth in insert BOTH feet, terrible article and view point- not eveyone can buy cheap before the market takes off, some get lucky just like stocks, get in cheap but buying stocks and home are not the same. we do not have the loyality to a stock / company that we have to a home.

  • Report this Comment On January 28, 2010, at 9:26 AM, Bonsaiscrooge wrote:

    To BMFPitt:

    You are right! Consequence: the taxpayer is the idiot...

  • Report this Comment On January 28, 2010, at 12:07 PM, jm7700229 wrote:

    I was surprised that a lawyer (and law professor) wrote the book calling people who pay their debts "woodheads." To a lawyer, of course, anything that doesn't get them sent to jail is ethical; what surpises me is that he doesn't fear being disbarred for advising honest citizens to act like lawyers.

    The banks didn't steal from the people to whom they loaned money. They were stupid, but not necessarily dishonest. The people who borrowed the money were stupid, too, but in today's society, we can't blame people for their own stupidity; we need to blame it on a corporation or a lobbyist or a political party.

    People who took out responsible loans and didn't take out additional loans to buy their BMWs and Escalades are paying the price for those who behaved irresponsibly. I've seen my (debt-free) house in a moderately up-scale neighborhood lose probably an additional $100k or so just because of the foreclosures on two people who bought houses elsewhere and then just walked away. One of them gutted his house, taking everything that could be unbolted or ripped out: doors, garbage disposal, granite counter tops, two furnaces and air conditioners and used them in building his new house. That's the kind of morality that the Motley Fool is advocating.

    I realize that the lawyers are winning -- the only evidence I need is that there are people who are not embarassed to write an article like this. That doesn't mean I'll ever join them. Matt Koppenheffer, you disgust me. I will drop my trial subscription to Global Gains and allow my subscriptions to Stock Advisor and Income Investor to expire. The only thing separating the Motley Fool's advice from Willie Sutton's behavior is that the lawyers are on your side.

  • Report this Comment On January 28, 2010, at 1:00 PM, gimponthego wrote:

    You paint with a mighty broad stroke! "Why Are Homeowners Idiots?

    We own our home outright as do many others. If I take your Headline literally, being debt free is idiocy. True, I grossly exaggerate. However, a more specific banner would be in order, IMO, rather than make me do a double take..I threw my neck out. I was under the impression being debt free was a Good thing!

  • Report this Comment On January 28, 2010, at 1:32 PM, MonkeyFish912 wrote:

    "The banks thought your honor was worth something, and they gave you a mortgage in exchange for your honor. It was so precious to those banks that they bundled your honor with other people's honor and cut that honor bundle into securitized honor derivatives which they then sold to Wall Street honor speculators. And in an attempt to get more honor to sell, they mixed your honor with the honor of people who did not honor their honor -- and eventually, the honor bubble burst." -- Stephen Colbert

  • Report this Comment On January 28, 2010, at 2:37 PM, hbofbyu wrote:

    I lost all respect for the Motley Fool since they started sending out "carnival barker" emails pumping their newsletters. "..but wait! There's more. We will also send you a free dicer and slicer and a Shamwow to boot!". The Motley Fool has become the "them" that they always railed against in the late '90s. Matt and The Fool have shown that integrity is for sale and everything has a price.

  • Report this Comment On January 28, 2010, at 3:19 PM, TMFKopp wrote:

    @jm7700229

    I'm saddened by the fact that you're considering canceling your subscriptions to Motley Fool services because of my article. This is only partly because I work for the company and hate to think that what I'm writing would push people away from some very fine services run by very fine advisers (who, by the way, are not me).

    More so, though, I'm saddened by the fact that you're punishing The Fool for providing a forum for a variety of ideas to be expressed. Rather than one, company-endorsed viewpoint, The Fool endorses a collection of varied viewpoints. If you scroll through the comments above, you'll find quite a number for TMF monikers responding that they very much disagree with my position. However, my position was logical, laid out clearly, and based on academic research. I think it would be a much poorer reflection on The Fool if they silenced views like mine that not everyone agrees with.

    Personally, I'm proud to work for a company that encourages all viewpoints to be heard and I truly hope that most readers appreciate that as well.

    @jm7700229, Donnernv, Duke5343

    A lot of vitriol in the responses this morning...

    I would encourage both of you to think about exactly why this stirs up so much heated emotional response. Is it perhaps because you assume that people making the decision to walk away would have a negative impact on your own financial picture? What we're talking about here is letting hard working Americans who have been trying to do the right thing all along be able to make the decision to choose a decidedly distasteful path in an effort to do the best thing for their family and their financial future. While this decision may go against long-held beliefs (beliefs that have been solidified by a housing market that hasn't seen this kind of slump for decades if ever), it's not something that's illegal in any way.

    I would also encourage you to consider the fact that if we want to get back to a normally functioning housing market we need to deal with this situation rather than ignore it. Even if these people stay in their homes it has major implications for the housing market for years to come. Either they are potential move-up buyers that will no longer be able to re-enter the market because they can't sell their current home, or they will be forfeiting their house years from now and have no money to put towards buying a new home. Either way, we're going to have to deal with it, and if homeowners are willing to walk away now, either we get to swallow the issue sooner rather than later, or, better still, it forces the banks to look at the situation realistically and propose solutions that might be better for both the banks and the homeowners.

    Donnernv:

    "You have a warped view of the world and the place that honor, responsibility and obligation play."

    I'm sure that there are a lot of people that would agree with me that putting the welfare and financial future of their family ahead of the best interest of a multi-national bank is not a "warped view."

    jm7700229:

    "One of them gutted his house, taking everything that could be unbolted or ripped out: doors, garbage disposal, granite counter tops, two furnaces and air conditioners and used them in building his new house. That's the kind of morality that the Motley Fool is advocating."

    This is an utterly absurd jump in logic. What you're describing is theft and has no place in what I'm talking about. In fact, what I'm talking about here is people that did take out responsible loans and didn't take out additional, unwieldy loans for expensive cars, but rather are put in a very poor financial position due to those that did do that.

    Remember, as somebody comment somewhere else, it's not as if the folks walking away from their homes are making out like bandits and going off to some Caribbean island to sip daiquiris for the rest of their days. These people will be moving out of a house that many had no intention of moving from when they bought, will have to go through a very painful process with their lender, will have wrecked credit, and apparently will have to face severe moral judgment from their fellow citizens. But they're doing it because they're trying to create the best financial future that they can, which is something I think we all strive for.

    Matt

  • Report this Comment On January 28, 2010, at 3:22 PM, habens86 wrote:

    "You miss the point. We're not talking about irresponsible borrowers here. The irresponsible borrowers that borrowed more than they could afford are walking away because they have no other choice. What we're talking about here is people who bought houses they could afford, yet are seeing their neighborhoods changed into ghost towns and home prices plummet because of the irresponsible around them. What we're talking about here is the ability for those borrowers who can afford their mortgage to make the choice to deal with the repercussions of noncompliance with their mortgage contract rather than continue to pay down a mortgage that's multiples of the home value."

    I believe many people are missing your point because you actually failed to state your point. I find nowhere in your article where you state we are only talking about the "people who bought houses they could afford, yet are seeing their neighborhoods changed into ghost towns and home prices plummet because of the irresponsible around them." Perhaps if you made your point in your article instead of way down here in the comments after the fact, people would be less confused and upset when you appear to insult their intelligence.

    From the "article:"

    "The pervasiveness of underwater homeowners is already fairly well known, particularly when it comes to hard-hit areas like Arizona, Nevada, Florida, and California. What is not particularly well known, though, is exactly why most of these battered borrowers are still making good on their monthly payments."

    As just one example, this appears to apply to "most of these battered borrowers" who are underwater, not just those who were responsible borrowers finding themselves in tough situations because of other's actions.

    Your article in no way distinguishes between underwater borrowers and those "irresponsible borrowers that borrowed more than they could afford."

    Also the only place in the article any mention of these being "severely" underwater borrowers, is in the conclusion paragraph. The rest of the text appears to be talking about any underwater borrower.

  • Report this Comment On January 28, 2010, at 3:42 PM, TMFKopp wrote:

    @habens86

    Alas, these are relatively short articles and don't necessarily provide the space to discuss everything in exhaustive detail. Brent White's working paper, which goes through a wealth of detail on the issue, is roughly 50 pages long. I guess that's why it's great to have the comments section where details can be discussed is more detail.

    I will point out one other section in the article that addresses your concern though. I wrote:

    "During the implosion of the housing market, the government has helped massive financial firms and many homeowners who bought houses they never should have qualified to buy in the first place. Meanwhile, responsible borrowers who bought houses they could afford on traditional fixed-rate loans are made to feel as if they are morally bankrupting themselves if they decide to do what is often highly financially advisable."

    Matt

  • Report this Comment On January 28, 2010, at 8:06 PM, metroplex99 wrote:

    For all you 'moral' people , let me ask you this:

    I am a CEO of a bank.

    My bank makes loans to people who did not provide proof of income and made purchases that were WAY beyond that of which they could truly afford.

    My bank is in trouble because of these loans but no worries, the FED has provided my institution with billions to fix these mistakes.

    Oh, and I am getting a huge bonus.

    Someone please explain to me how this is moral and if you can provide me with a convincing argument you can have my place in Vegas which is worth half of what I paid. I make enough to afford it, and I took a responsible loan (30yr fixed). Because of my morals and responsibility the government has no plans to help me at a minimum refinance to take advantage of lower interest rates and take some of the bite out of the fact that maybe, just maybe in 15 years I will break even on the house.

    Let's really look at the big picture here folks. I am going to break it down so you all understand:

    Those of us who purchased homes during the bubble, make a good income because we are free market capitalists and continue to make payments have NO PROGRAMS TO HELP. Why, well because at the end of the day we are most likely conservatives and that does not equate for a vote for Mr.Obama.

    Those of us who took ARMS, showed not proof of income and possibly no proof of us citizenship well, there are plenty of programs to help us stay in our homes. Come election time there is only one button I am pushing and that is the one that says 'Our Lord and Saviour Obama'

    Wake up folks. It is about power, about votes and about bigger government.

    To all of our people of such high moral standards...did you know that at any given moment your unsecured credit line can be reduced? Is that moral? Espeically since that open credit has a huge impact on your score? Banker777 your comment infuriates me the most. Maybe when you move out of your Grandma's basement and see what is happening to our country you will think twice when an application comes across you desk from a hard working american who may have suffered hard times at the above forementioned CEO's expense actually DESERVES the credit he/she is applying for.

  • Report this Comment On January 28, 2010, at 8:55 PM, tricktrack wrote:

    No financial expert here, but the way I see it is that this isn't a decision that affects only lender and borrower. Every time a law is passed that results in a cost to businesses, we hear the mantra repeated that the expense will be passed on to the consumer. Why should we believe this situation will be any different? Either as taxpayers or as bank customers, we'll end up paying to offset losses from borrowers just walking away.

    Another thing, Matt, the infrastructures of many of these "ghost towns" you allude to are probably financed through bonds. As they become even more desolate as people walk away, cities and sewer and water authorities have less revenue coming in. What happens when they can't make bond payments? Now, the circle expands to include the bondholders, plus the city/authority whose ratings get trashed, plus the remaining residents who see their services reduced and taxes increased.

    The irony is, these people just had to have these houses you're suggesting they walk away from, because they desperately wanted to live in that community. Now they suddenly have no sense of, nor need for that community. These folks may have been "responsible" by your definition, but by walking away, they're simply passing the pile of manure onto different people who were responsible and played by the rules. Then what do we suggest as their bailout? Do we keep playing until we figure out how many wrongs actually do make a right?

    If it's purely a matter of looking out for one's personal financial interest, why not just tell people to keep an iron plugged in or walk away with food cooking on the stove, then collect the insurance?

  • Report this Comment On January 28, 2010, at 9:43 PM, TMFKopp wrote:

    "If it's purely a matter of looking out for one's personal financial interest, why not just tell people to keep an iron plugged in or walk away with food cooking on the stove, then collect the insurance?"

    Well, see, you miss the point. It's not "by whatever means necessary." What you're talking about is insurance fraud. That's illegal. Walking away from your mortgage is not.

    "but the way I see it is that this isn't a decision that affects only lender and borrower."

    Now maybe we're getting to the heart of the "moral" outrage here. Yes, you are correct. If the homeowner at 100 Deadbeat St. walks away from their home, that is bad news for the homeowner at 101 Deadbeat St. So now we're saying that the folks at #100 should do something that hurts them financially because it's good for the folks at #101? Isn't this #101 just talking their own book?

    Not to mention the fact that many of the arguments here start to trip over themselves. I've seen more than a few folks suggest that it would be a bad idea to walk away now because buyers are about to come back to the market and home prices will rebound. Well if this is the case why should #101, or everyone else for that matter, worry so much? If #100 walks away, it will just be swallowed up by this oncoming rush of demand (if you can't tell, I'm a little skeptical of this coming wave of huge homebuyer demand).

    But what it seems like we're getting at here is that the issue of what's "morally" right to do is really boiling down to whether their actions are going to have an impact on you. If the housing market were booming right now and somebody proposed to do this, I'm not sure there'd be so much moral outrage -- everyone would probably call that person stupid for walking away from an appreciating asset, but the act of walking away wouldn't a big deal.

    Or to look at it another way, when the financial crisis was working up into a blaze, every additional person that short-sold, or just plain sold, a stock was harming everyone else that still held onto that stock. Was the seller immoral?

    As to the bonds and infrastructure thing, I'm not so sure I agree with you on that. Unless these people are moving out of state, they're still going to need to live somewhere. So they'll move into a rental and that rental property will have a paying tenant. And if you consider how that plays out -- more tenants on the market, more rental demand, more investor demand for the foreclosed homes. And let's be real here about the bonds, bondholders are investors and sometimes you just make a bad investment...

    "Then what do we suggest as their bailout? Do we keep playing until we figure out how many wrongs actually do make a right?"

    Well, since strategic defaulters are not committing any crimes, we can potentially do a few things:

    1) We can continue to morally castigate them and hope that that strategy works to keep them from acting in their own best interest.

    2) We can let it happen and hope that it all shakes out for the best. Remember, while these folks make the banks take a loss on the property in question, they may be providing a near-defaulting landlord with a tenant, and, 2-5 years down the road they could well be a buyer re-entering the market keeping the great housing market circle of life pumping along.

    3) Banks can get their heads out of the sand and deal with the situation. I've seen many potential suggestions. Richard Thaler had a good one in his New York Times piece (http://www.nytimes.com/2010/01/24/business/economy/24view.ht... -- he suggested that banks write down the principal on the loans to the average home value in the area and then sign a rider with the homeowner that lets the bank take 50% of the area home value appreciation when the house sells.

    Alternatively, many severely underwater homeowners may be willing to stay in the home and continue paying if the principal were reduced to some middle ground between where it is currently and where the home's current value is. If you currently owe $400,000 on a house worth $200,000 you have little hope of recovering equity for a looooong time. But if you owe $250k, then you're in a much better position.

    There are probably many forms such a plan could take, but the point is that there are certainly ways where all parties could be better off than if the homeowner walks away. The banks might take a loss, but not nearly as bad of a loss. The neighborhood doesn't end up with another foreclosure. The homeowner doesn't have to take the foreclosure hit and isn't in nearly as dire of a financial situation.

    Of course maybe the banks just like playing chicken with homeowners.

    But why would anybody do anything about the situation if homeowners are too scared of judgment to do what's in their best interest? What the heck, I say we stay with #1 and continue to wait at the moral high ground until we see the whites of their eyes.

    Matt

  • Report this Comment On January 28, 2010, at 10:17 PM, TMFHousel wrote:
  • Report this Comment On January 28, 2010, at 11:00 PM, dogsled97 wrote:

    I wonder how strong your moral convictions are outside of paying for your home?

    1. Are you a veteran of the military? Did you serve for your right to freedom?

    2. Moral obligation to your marriage? Ever been divorced?

    3. What kind of car do you drive? Do you only drive american to help the american auto industry and all that it employs?

    4. Some people were considered immoral who went to college to avoid Vietnam. Do we call them immoral today?

    I could go on and on. I think Matt makes an excellent point when he writes:

    "Now maybe we're getting to the heart of the "moral" outrage here. Yes, you are correct. If the homeowner at 100 Deadbeat St. walks away from their home, that is bad news for the homeowner at 101 Deadbeat St. So now we're saying that the folks at #100 should do something that hurts them financially because it's good for the folks at #101? Isn't this #101 just talking their own book?"

    A lot of people have strong opinions about all sorts of issues until they get their own kick in the pants. I thank motley fool for its willingness to print something unpopular, yet logical. Keep up the good work, Matt. Many of us come to this site to gain financial insight to today's issues, to crunch the numbers, and to see things in way we might not have seen them before. In other words, to learn something. For those of you who only want to see things your way and push your ideals, I am sure there is a witch hunt somewhere out there for you. Try not to discourage free speech in your quest.

  • Report this Comment On January 28, 2010, at 11:45 PM, jm7700229 wrote:

    Dogsled and TMFKopp,

    1. Yes, I'm a veteran of the militiary; I served in Viet Nam. I was a volunteer, not a draftee. My father was a World War II vet, my brother is a retired military officer, two of my kids have served. However, that is not an issue of morality but of personal beliefs and standards. Absent the draft, there is no moral or ethical obligation to serve in the military in order to be a responsible citizen.

    2. No, but there are certainly legitimate reasons for doing so. Those reasons don't include "my wife isn't the asset I expected her to be."

    3. I own two American cars and a Korean one. I have never signed a contract agreeing to buy only American cars. I have no legal nor moral nor ethical obligation to help the American auto industry or the people it employs.

    4. No, because the people who were protesting in the '60s run the newspapers now. They are also the lawyers and judges. Two of the murderers from that era, Bernadette Dorn and William Akers, are law professors today. That should tell us a lot.

    TMFKopp, it seems to be important to you that stealing from a bank is legal. That's not the point. To quote you:

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

    Where in this statement is need addressed? The people who bought these homes felt that the properties were worth what they were paying for them. They bought the architecture, they bought the neighborhood, they bought the schools, they bought the community, they bought the monthly payment. Now that other people don't want to pay as much for the house, they are free to walk away and help to destroy the neighborhood for the more responsible members of society.

    I have nothing but sympathy for someone who loses his income and has to choose between a mortgage payment and feeding his kids. It's for him that the "no recourse" law in my state was intended -- not for the deadbeat who made a bad investment and walks away to try again. And stripping the house before abandoning it is no more theft than walking away from the mortgage is.

    Three houses in my neighborhood have had mortgages foreclosed. One family spent the entire summer before leaving touring Europe. The other two purchased their next homes before screwing their credit by walking away. All three -- get this, all three -- had mortgages that exceeded the original price of their homes by $200,000 or more! And all of the houses were less than 5 years old. So I think they are, in fact, sitting in beach chairs on a Caribbean island drinking mai tais.

    And you both have confused morals. My belief in free speech is strong, but does not extend to promoting racism or violence or theft. What we're talking about here is theft. Furthermore, I am not interfering with anyone's right to speak. I'm just refusing to pay my money to support a forum for speech that is as offensive to an ethical person as racism is. And selling a stock because I think it will drop in value is not a violation of a contract. I also can't force anyone else to pay for it. By equating the two you are acknowledging my first argument, that the lawyers have convinced us that money is the only morality.

  • Report this Comment On January 29, 2010, at 1:15 AM, FinerPoints wrote:

    VERY interesting thread!

    I'd like to add my two cents.

    Please explain to me how having to pay 3 times as much more than the original price of your home over the 30 year mortgage is right on the part of the lender and on the part of the government who convinces us to believe that the "tax write off" for interest is somehow a good thing. Hello, it's not dollar for dollar. In both cases, the homeowner is the financial loser whereas the lender and the government are the greatest financial benefactors. Yes, I agree that there might be intrinsic value to where you live and the neighbors you have grown to love. Reality is: you could probably find that somewhere else if you had to look and were forced to do so. COMPLACENCY and NORMALCY are overrated and Oh! how you are paying dearly for it. I think this is the gist of the matter: What and how much are you willing to pay for the aforementioned. If it were me, I'd walk away simply because I believe in being a good steward of the finances entrusted to me which means I could hustle my little tail into high gear to search for opportunities that would afford me greater returns.

  • Report this Comment On January 29, 2010, at 6:09 AM, Donnernv wrote:

    Matt:

    I think that you can judge from the bulk of the comments that your notion of walking away by people who CAN AFFORD TO PAY for their agreed-upon contracts is repugnant to many.

    I shall exempt those who can no longer pay because of stupid decisions (theirs' or the banks or both) or changes in life circumstances, but I don't admire them.

    But your commentary that those who can support their obligations should still walk away, regardless of the cost to others (bank, neighbors, community orgovernment) is profoundly wrong.

    Your article is so repugnant to those who cling to and live by the mores of honesty and responsibility that it should never have seen the light of day.

    You obviously are very young, have never absorbed the principals of morality and are a prime example of why we, the American people, are now tanking.

    Once, we were a people who made their best decisions based upon the facts available at that time. Good or bad, we lived by our decisions and reaped the gains (or swallowed the losses).

    But you, and your ilk, simply seek to pass any losses from your decision-making onto someone else (the lender, the government, your neighbors, anyone).

    You are not a MAN. You do not have broad shoulders. You are simply a kid trying to skate along in a world you had no hand in creating by calculating how you could benefit by screwing someone else.

    Sonny...I would not hire your flabby ass nor lend you 50 cents until you demonstrate and prove you have the moral integrity and resolve to make your own best decisions and live by the results...as a MAN.

    Then, I would hire you because I could count on you to do the right thing when times are tough. Now...not so much.

  • Report this Comment On January 29, 2010, at 8:25 AM, dogsled97 wrote:

    Maybe you would not hire Matt for his viewpoint. Hopefully, that is exactly why Motley Fool hired Matt. We need varied viewpoints to make good decisions.

    And how is walking away from a home theft? If you paid 350K for a house, 5 years later its worth 200K, you put 25K down, and paid 125K in INTEREST over that period, not to mention any upgrades one might have made...where is the huge loss to the bank? Those are very real numbers, by the way. Who is taking the loss? The homeowner. No one is saying walk out with the AC unit, but maybe cutting the loss is the best financial decision. The homeowner is going to take a huge credit hit, realize the loss of down payment, mortgage interest, and upgrades. The market for that home resets at a true value. Someone else buys the home. The leaving homeowner rents a vacant home and has more disposable income to start a business or put back into the economy in one way or another. I don't see how this scenario has a whole lot of negative effects. Except for people like you who are upset that the value of their home was also inflated. Be thankful it's not 100K less than what you paid for it.

  • Report this Comment On January 29, 2010, at 9:48 AM, TheStucks wrote:

    Bad article all around, I hope most people didn't waste time reading it all. Sure enjoyed a few of the comments though. Seems the bloggers have common sense, something the writer of this article might want to consider using next time when discussing such a not complex issue.

  • Report this Comment On January 29, 2010, at 11:03 AM, iamstock wrote:

    What wonderfully stupid advice. Sell at the bottom of the market. Wait 10 year and buy again at the top!!!!

  • Report this Comment On January 29, 2010, at 12:16 PM, LydiaVorst wrote:

    This is a great article.

    It makes no sense to bankrupt yourself to pay for a house that you cannot afford while the government and the bankers execute a massive wealth transfer in this country. And, even if you're making your payments, if your house is worth less than your loan, you cannot afford your house, regardless of how much you like it.

    Don't people realize that the banks insured themselves against defaulting loans by getting government guarantees for most of these loans? That is, even if you default, the bank collects 80% or more of the mortgage value from Indy Mac, or Fannie or Freddie, depending on the loan? And don't forget the government insured these mortgages with your taxpayer money.

    Is it any wonder that loan modifications or short sales are almost non-existent? It just doesn't pay for the bank to help a homeowner, they make much more money if you default, plus they get your house too!

    Doesn't anyone see the connection between rising unemployment resulting from the crash of an overheated economy that was created when the Fed lowered interest rates below market levels?

    Why do you think credit default swaps, which are basically bets that pay out when loans go bad, were created?

    We are unwitting participants in a giant government Ponzi scheme...

    The dollar is being destroyed right under your noses by a morally corrupt, bankrupt federal government which is being run by heinous bankers, and people are worried about the stigma of not paying their mortgage and about their credit score?

    WAKE UP PEOPLE!!!!! Educate yourself about what your government is doing to our economy and our country! GET OUT OF YOUR LITTLE BUBBLE and look around, before our courtry and our liberties are destroyed!!!!

    Peter Schiff is a good place to start, search for Schiff Report on youtube:

    http://www.youtube.com/

  • Report this Comment On January 29, 2010, at 12:20 PM, LydiaVorst wrote:

    Great Article, people need to wake up and smell the coffee before our country is totally destroyed by our government in collusion with bankers.

  • Report this Comment On January 29, 2010, at 1:12 PM, wolfwuf wrote:

    I haven't read all the comments but unless something has changed...if you walk away the IRS could count this as income and you may wind up with a hefty tax bill.

    Also, the banks have no incentive to rewrite these loans because they get to take the loss on mortgages against their gains from other (rather hefty) income from fees etc.

    The banks are in a win, win ,win situation.

    Its also immoral to walk from your commitment...how old fashioned.

  • Report this Comment On January 29, 2010, at 1:30 PM, wolfwuf wrote:

    Now I have read some comments...to dogsled..You agree to borrow money to by something you want i.e. the house, sometimes referred to as your home. You then chose without agreement by the lender to walk from you obligation because you feel its no longer as valuable, thereby leaving the lender without his/her money as you promised. You have taken away their money without permission...i.e. theft.

    You believe thats ok, because you are losing.

    Now, shouldn't you, believing as you do, agree that if you borrow money and the value has gone UP and when you sell you make a profit...you should then give some of that to the lender?

  • Report this Comment On January 29, 2010, at 3:55 PM, mattr71 wrote:

    ***I'm talking about houses that people paid $300,000 for and are now being sold for $150,000 or less. It's easy to figure out that it'll be a long, long time before somebody in that kind of situation will have any equity to speak of and meanwhile they could be paying rent that's far lower than their mortgage payment. Is their credit rating worth that? The answer will typically be "no," because even if they wait years to buy a new home they'll still be ahead of the game financially.***

    So if something is financially "best" for someone it's okay to screw the other party to your contract?

    Would you say the same about conterparties in options or futures contracts? You buy an option and when it comes time to exercise your counterparty says, "Nope, not gonna follow through - it's not in my best financial interest."

    What a horrible way to approach business!

    These people overpaid for their houses. The fact that they are underwater doesn't make their mortgage less affordable. They need to stay in their houses and keep making their payments. Sooner or later their houses will recover their value.

    Paulson wasn't that far off base. The only people this really affects are those greedy pigs who were buying houses and flipping them for huge profits. They got caught at the top of the market... and we all know what happens to pigs in the market.

  • Report this Comment On January 29, 2010, at 3:57 PM, mattr71 wrote:

    ***And don't forget the government insured these mortgages with your taxpayer money.***

    Yes, and the cost of these greedy pigs (homeowners) walking away is borne by those of us who are responsible.

    Personally, I think all of them should have to pay back every penny to the banks and/or taxpayers and if they can't or won't they get put in work camps.

  • Report this Comment On January 29, 2010, at 4:50 PM, luxonytim wrote:

    A reputation for honesty takes dilligence and discipline to earn, a scant second to lose, and an eternity to gain back. You'd sell yours for a mere $160,000?

    Reneging on a contract because the price turned out to be too high makes for amusing converstation - just don't be surprised when people no longer take you at your word.

    I wonder what it's going to cost you now that you've pretty much just shown everybody that your "word" can be bought and paid for with so little?

  • Report this Comment On January 29, 2010, at 4:50 PM, TMFKopp wrote:

    I'm amazed at much of the great thought and effort that's going in to keeping this conversation going. Even if you don't agree with me, I appreciate that so many people are taking their time to discuss their views.

    @mattr71

    "Would you say the same about conterparties in options or futures contracts? You buy an option and when it comes time to exercise your counterparty says, "Nope, not gonna follow through - it's not in my best financial interest.""

    Actually you make a good point for my side. The counterparty is not able to do what you're suggesting because an option contract is very clear about what happens at the end of the term of the option. But options are a very apt comparison here. On a put option, one party says "I'll pay you a fee so that if the security is worth less than X price at the end of the term, I can sell that security back to you at that price." The other party agrees that "If the security is worth less than X price at the end of the term, I will buy it back from you at the agreed upon price."

    Obviously mortgages are not written explicitly in this way, but the buyer is agreeing to pay fees (interest) in exchange for taking ownership of a piece of real estate. If they continue to pay the fees and want to keep that piece of real estate they may. If they don't, the bank has agreed that their recourse is to take back the piece of real estate. This is most true in nonrecourse states where really the only recourse for banks is the reclamation of the property.

    Once again, the homeowners are not working outside the bounds of the contract, they're choosing to go with a certain clause of it and suffer the predetermined consequences.

    @wolfwuf

    "You have taken away their money without permission...i.e. theft."

    There seems to be many people here that want to call this theft. A home loan is not a one-sided transaction where it's the homeowner taking risk all by themselves. There are two parties involved, the bank and the homeowner. Both parties take on a certain amount of risk when they enter into the transaction. The homeowner takes on the risk that they will end up paying more through interest and principal than the property is worth, while the bank is taking on the risk that the homeowner won't make good on the loan and they'll end up with a property that doesn't make them whole on the transaction.

    As I've pointed out in the past, banks themselves realize that this course of action (walking away that is) is sometimes in their best interest:

    http://www.bloomberg.com/apps/news?pid=20601206&sid=aLYZ...

    "if you walk away the IRS could count this as income and you may wind up with a hefty tax bill."

    Through 2012 the IRS is forgiving taxes due on forgiven mortgage debt.

    @Donnernv

    I find it disheartening that you believe you can judge the entirety of a person based on a single view on a single issue. If we want to talk about problems in this country, we could probably get into a whole other topic regarding how it often seems impossible to have rational discourse without resorting to thinking one side is "bad" and the other side is "good."

    On the topic at hand, you seem dead set on anointing the banks as saintly entities that are doing all of us mortals a favor by granting us part of their enormous wealth to purchase our homes. The decision to lend to a home buyer is a business decision. This is a decision they are making in order to make money and it's a decision that should be done with risk management in mind. They are investors in the property and they face the possibility that they'll end up with the property that they're financing. Saying that homeowners should continue to pay for their mortgage come what may is giving the banks a free pass to make riskless loans -- which, of course, would only perpetuate the reckless lending standards that got us into this mess in the first place. I mean, if homeowners are under the unbreakable obligation to pay down the mortgage why wouldn't banks feel alright giving no-money-down loans with low interest rates?

    The homeowners that walk away from their homes will have to face the financial consequences of their actions. The banks that made unwise loans should also have to face the financial consequences of their actions.

    @jm7700229

    "The people who bought these homes felt that the properties were worth what they were paying for them."

    And the banks that financed these homes felt comfortable that the down payments, interest rates, and collateral value of the house that they were financing were sufficient to protect them in a downside scenario. Both parties were obviously mistaken here, but only one should face any consequences of that misjudgment?

    "not for the deadbeat who made a bad investment and walks away to try again."

    Interesting comment here. Taken out of context we might question whether you're referring to homeowners or banks. We bailed out quite a few deadbeat banks who put a gun to the nation's head due to the fact that they made bad loans and had poor risk management. But apparently it's A-OK that they're free to walk away from the mess, start paying massive bonuses again, and try to start printing money again.

    "My belief in free speech is strong, but does not extend to promoting racism or violence or theft. ... a forum for speech that is as offensive to an ethical person as racism is."

    Exaggerate much?

    "And selling a stock because I think it will drop in value is not a violation of a contract."

    And neither is not paying for your mortgage. I'm not sure how many different ways I can put it. We're not talking about theft here, nor are we talking about the violation of a contract. We're talking about the functioning of a contract. Party A is taking a certain action that allow Party B to exercise their rights under the contract.

    However, when we start talking about homeowners stripping the house before leaving, then we're talking about theft. The contract stipulates that the bank get back the property that they originally financed, and so the oven that was in there when the bank financed the property is now the bank's oven, and if you take the bank's oven, you have stolen.

    @TMFHousel

    If anyone missed TMFHousel's post, it's an important one. He linked to an article (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a... talking about bank's going after homeowners for deficiency judgments. Again, the homeowner took a certain route under the terms of the contract, and the banks are taking actions consistent with what they're allowed under the terms of the contract.

    This is also one more good reminder that the act of walking away from your home isn't something that you should take on lightly or do without the guidance and support of qualified professionals.

    Matt

  • Report this Comment On January 29, 2010, at 5:01 PM, fsx101 wrote:

    WOW....

    I have seen a LOT of harsh words in this thread.

    I personally had to deal with this situation, with a relative.....

    They bought a place in 2005. They stretched to buy it, on the (now invalid) assumption that it was a "good investment".

    Come late 2007, it was worth $200k LESS, and chewing up $1500 a month more (in mortgage payments) than it would have cost to rent a comparable place.

    They tried to do a short sale, but the bank wouldnt cooperate.

    So they decided to walk, and rent now instead. And they have more piece of mind now, and $1500 extra a month in hand.

    Could they have continued to stay there and pay the mortgage? YES, but at the expense of everything else in their lives for the next 10-15 yrs, given that they stretched to buy the place.

    Dont be so harsh to judge, unless you have been there yourself.

  • Report this Comment On January 29, 2010, at 5:43 PM, punterman wrote:

    I bought into the ownership of my first house here in the U.S. in early 2007, and it is my primary and only residence.

    The reality for this house: I have great credit, I have a fixed rate, I have never missed any payments for mortgage, utilities, or anything for that matter.

    However, I am not the owner. I am the co-owner. I own about 10% of the house. A bank owns the other 90%. But not the bank that I contracted with as co-owner. It is difficult for me to know just who is the co-owner of the house right now, or how many co-owners there are for this house in which I live, or where those co-owners are located.

    In just under three years, I have paid in about $4,000 against principle, and about $70,000 in interest. The house has lost 25% value since early 2007 when I moved in.

    I am having a hard time appreciating the words and/or viewpoint of those people in this thread that state that they own their home. Is it not a fact that you are a co-owner, and that there is another co-owner or several other co-owners, and the various co-owners have signed a contract clarifying terms of exit strategies? It seems that this is not just semantics, but rather a contract structure reality.

    I am also having a hard time appreciating the words and/or viewpoint of those people in this thread that are citing biblical phrasing as foundation for interactions based in statutory or common law. There are many many good people that live honestly and operate ethically and generously in our communities that consider the bible to be a fairy tale that has only ever been a superstition.

    The co-owners of this house that I live in (FED-licensed banks) have just glutted the system with a substantial amount of new dollars, thus depreciating the value of the prior existing dollars in my possession. Those co-owners of the house are providing loans and credit to industrial organizations (that hire and employ and pay workers) in other countries in a heavily tilted ratio as compared to reducing and eliminating credit and loans to industrial organizations in my town/state/country. It is difficult for me to appreciate the appeals in this thread for people to consider that their ethics or their personal morality is at stake while making choices made legally available to them in the contract terms with a co-owner that is gutting domestic employment which in turn is gutting domestic home values.

    I am confused by the statements in this thread that refer to the coming cyclic nature of the economy, or refer to the economy recovering. What are you talking about?

    The recent stimulus borrowing which creates newly minted inflationary dollars is, from most analyses, simply going into government growth and securing government jobs, while reducing the spending power of existing dollars that people may wish to use for profitable free market activity.

    Wage arbitrage has steadily moved U.S. production jobs of breadwinner level wages offshore, and all indicators show that it will only continue in that direction, with no return of that industrial activity or those jobs to the U.S. system during our lifetimes.

    With the job migration due to wage arbitrage and the stimulus of government activity which is not supporting our free market, where is your recovery rooted or sourced?

  • Report this Comment On January 29, 2010, at 6:37 PM, TMFKopp wrote:

    "But not the bank that I contracted with as co-owner. It is difficult for me to know just who is the co-owner of the house right now"

    punterman actually brings up a really good point here (besides the co-owner point which is also really good). As far as this whole sentiment of a "handshake agreement" goes, what of the situation where you decide to take out your mortgage with Wells Fargo because you've had a long history of banking with the company and like their customer service, then Wells Fargo decides six months into the loan that they'd rather sell the mortgage to someone else. Now instead of having a 30-year relationship with Wells Fargo, who you had your "handshake agreement" with, you may be dealing with the Bagadonuts Mortgage Co who couldn't care less about returning your phone calls or addressing any concerns you have about your mortgage?

    In other words, what happens to a handshake agreement when you're no longer dealing with the entity that you supposedly shook hands with in the first place?

    Matt

  • Report this Comment On January 29, 2010, at 7:26 PM, D0min0 wrote:

    "folks like Bank of America (NYSE: BAC), Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), and Wells Fargo (NYSE: WFC)."

    Matt, please don't anthropomorphize corporations. Contrary to the Supreme Court decision, these companies are not "folks", they are organizations composed of people, but not people themselves. This may be an unintentional elision on your part, but as a professional writer you should be more careful.

  • Report this Comment On January 29, 2010, at 7:55 PM, RHoneycutt wrote:

    What an interesting argument.

    When we take out a mortgage we make a commitment to pay it back. I've never seen a mortgage contract that said your commitment goes away if the house loses value.

    Some people believe we should live by our commitments, that it relates directly to our "word" and our character. Matt is saying that by living up to your word, you are an idiot. Interesting. That suggests that Matt will only abide his word if it is convenient to him.

    That suggests to me that I would never want to enter into an agreement with Matt, because I would not trust his commitment to fulfill his promise.

  • Report this Comment On January 30, 2010, at 12:02 AM, jm7700229 wrote:

    Thank you RHoneycutt! It seems that Mr. Koppenheffer does not understand a mortgage. The mortgage contract is not an option to either repay the loan or give the property to the bank. It is a promise to repay the loan. Look at it this way, Mr. Koppenheffer: if you take out a loan to pay for a vacation, and you then take the vacation, then there is no longer any value to be had from the vacation, but you still owe the money. By your logic, you should not pay the loan because you no longer have anything of value to show for it.

    Mr. Koppenheffer is attempting now to justify his position by talking about what the banks did and the fact that they are paying bonuses (to people who have nothing to do with the retail mortgage business). This is a red herring. His article is not about banks. It's about calling people idiots for paying their mortgages. And he's not talking about people who can't pay their mortgages walking away from them. He's specifically calling people who can pay their mortgages idiots for doing so. That he and Truthisstupid don't see anything wrong with this is more evidence that the lawyers have won.

    I am not offended that Mr. Koppenheffer and his defenders think I'm an idiot for believing in personal honor. I'm offended that they don't.

  • Report this Comment On January 30, 2010, at 12:03 AM, tfgray wrote:

    My question is, if everyone walks away from their house, what happens to the value of everyone else's home? A market flooded with vacant homes is going to end up putting even more people underwater, which if they then follow the author's advice, creates a giant downward spiral. This is an example of how "every man for himself" creates disaster for all.

  • Report this Comment On January 30, 2010, at 12:42 AM, StarWitchDoctor wrote:

    as an investment, your home is TOTALLY WORTHLESS AND ILLIQUID. As a place to live, its PRICELESS. It has allways been that way.

  • Report this Comment On January 30, 2010, at 1:33 AM, starbucks4ever wrote:

    If houses were priced fairly, then walking away could be considered unethical. The way they've been overpriced by 300-400%, only an unethical man can demand from others the same kind of behavior that would be the norm in a fair market. Walking away is morally wrong? Oh yes, sure it's wrong. Making houses cost like castles is honorable but everything else is dishonorable.

  • Report this Comment On January 30, 2010, at 7:17 AM, ImHere4U wrote:

    TMFKopp is espousing 'survival of the fittest balance sheet'.

    There are no morals, no personal responsibility factored in. There's no place for that in his world. He's talking only about what makes 'financial sense' nothing more.

    I'd like to take his "logical" reasoning a step further....

    I'm not going to pay my credit card bills anymore. That's right. The value of what I purchased is worth only a fraction of what I paid for it. If I wanted to get any money back for the DVD player I purchased, I'd get maybe 50% of the purchase price on Ebay, or less from a yard sale. And as far as the dinner at the nice restaurant last week and the beers I bought...well, we know where that's gone, don't we? No value there. It's unsecured debt, so, no lasting hit on my credit score after a few years have passed. And the credit card companies deserve it because they advertised the good life, hiked up the interest rates and fees and left me holding a bunch of near worthless crap. That card balance really doesn't make my balance sheet look good so I'm just gonna walk away. Yeah, let's just apply his "logical" reasoning to all financial affairs of life.

    I'm sickened. Ain't noth'n the man can do, so let's just walk away from the bad decisions we make and leave someone else to pay for our naivete, our idiocy, or our shortsighted lack of due diligence for which we SHOULD accept responsibility; that is, until it no longer looks good on our personal balance sheets.

    What an incredibly, selfish posture! Just because something is LEGALLY justifiable, doesn't necessarily make it MORALLY so. Society without morals...Is that really what you want???

  • Report this Comment On January 30, 2010, at 2:04 PM, chrismankins wrote:

    Like a lot of people I bought more house than I could afford in 2003. I was young, new professional, wife was professional. We got divorced, and to ease the process I agreed to take the house. Paid 200k, still owed 190K, price appraisal still only about 175k, even after I did a lot of repairs just to keep it livable.

    I still agonize over my decision. I saw my parents buy a house in the 1980's, and proceed to pour every ounce of their livlihoods into it, and for what? I sucked it up and worked overtime, lived like an ascetic, and poured every ounce of my livlihood into a stupid house. It was the moral thing to do. But the shame of being "had" seems just as bad as the shame of breaking a contract.

    Maybe this is why, when I hear about Geithner and Paulson and Bernanke giving sweetheart deals to AIG and GS I want to literally wring their necks. I am apopleptic with rage, because not only do I pay my own underwater mortgage, I pay other people's mortgages and I pay keep AIG and GS at 100% par. This is how socialist and communist revolutions get started. Just screw the little guy long enough, and be cavalier about it long enough, and the moral foundations of a free, capitalistic society will crumble.

    We're seeing "wealth redistribution" alright. And it's going in the wrong direction.

  • Report this Comment On January 30, 2010, at 2:05 PM, chrismankins wrote:

    sdf

  • Report this Comment On January 30, 2010, at 3:08 PM, 4wheelfool wrote:

    Some people stay in these underwater homes for moral reasons for sure. I think a lot of them are staying for the the difference between price and value. This is talked about a lot here at Fool regarding stocks. Price is what you pay, value is what you get. The value of a home is more than the price you can get on the market, and often more than the amount of your mortgage. To get the intrinsic value of your home you need to factor in the cost of moving, cost of a ding in your credit, the value of the roots you put down for your family, etc. So, for many people, unless you are deeply underwater, it is still worthwhile to stay.

    4wheel

  • Report this Comment On January 30, 2010, at 4:57 PM, ImHere4U wrote:

    truthinstupid,

    How convenient to change the scenario. You are taking a great deal of liberty with the author's article and his self-justifying responses to the comments posted here.

    Why don't you just add "house burned, sewer clogged causing horrific smell and the crack houses that opened up across the street and on both side of the homeowner.

    You picture that "young couple" all you want, but that's not what this article was about. It was about sticking it the the financial institutions and cleaning up your personal balance sheet (even though you may still be able to pay the underwater mortgage) at someone else's expense because it's "legal" to do in some states.

    That's the moral issue at stake here. And while some may 'judge' that as morally wrong, YOU are conversely rushing to judge it as morally right and acceptable. It's just the other side of the same coin.

    There are some pathetic attempts to rationalize this posture here.

  • Report this Comment On January 30, 2010, at 5:27 PM, prettysmart wrote:

    I think this article was written just provoke some controversy, and it certainly has.

    One of the things I havent seen mentioned yet,is that when you walk away, the lienholder has legal recourse, and not just for a few months, but for years and years.

    Which is a pretty big loophole for those of us who are losing our homes due to loss of jobs and the economy, and not because we bought more home then we could afford.

    So while it sounds like a financially viable idea to walk away from a home just because it's not worth what you paid for it, in the end, it will cost you much more than a couple years of monthly payments on an upside down property...be careful what you advise people to do

  • Report this Comment On January 30, 2010, at 5:40 PM, falstaff88 wrote:

    [..."moral obligation" aspect of a mortgage is something that should be there, it is apparent from the comments that it is there, and it's there very strongly.]

    ^^What a sad heard mentality...no self reliance. Some of the posts also neglect the fact that the banks, fannie mae, freddie mac, and third party lenders, all willingly contributed to the problem. They care nothing for morals-- so imagine fighting a war in which one side attempts to be the moral and nice. This is them versus you, and you're duped. Lender pressure on appraisers and confusion/corruption at Fannie Mae is what led to this problem. That's what caused the bubble, and you can absorb the brunt of the affects...stupid people always do.

  • Report this Comment On January 30, 2010, at 5:49 PM, wz4rfv wrote:

    The reason most people don't walk away is because they see the OBAMA INFLATION coming!!! Remember when you bought that $20,000 house in 1973? In 1983 it was worth what, $100,000? Now, aren't the people who are sitting and making their payments, and who see this coming, acting in their own best interests?

  • Report this Comment On January 30, 2010, at 5:49 PM, YELLOL wrote:

    I must be the biggest idiot of all because I chose to pay off my house note last March while I was financially able.

    Yes, it continues to go down in value but as long as I can pay the property tax I will have a roof over my head.

  • Report this Comment On January 30, 2010, at 5:59 PM, kbc1000 wrote:

    I can't believe that walking away doesn't result in trashed credit ratings but my personal reason that I would not walk is that at 54 with a modest income, I'll never again have enough for a down payment and would be dooming myself to rental living for good.

  • Report this Comment On January 30, 2010, at 5:59 PM, erichwest wrote:

    Homeowners, don't give in the to such 'scholarly' Propaganda!

    So long as you require a roof over your head, the value of your home is worth exactly what you paid for it, not a penny less.

    Don't be foolish enough to walk away if you can still afford it.

  • Report this Comment On January 30, 2010, at 6:04 PM, sasully60 wrote:

    Exactly! So much righteous anger directed at the author, but where's the moral outrage at the corporate and federal entities that seem to play by such different rules? Amercians today have a fundamental blind spot when it comes to the disjunction between morality and capitalism.

  • Report this Comment On January 30, 2010, at 6:05 PM, sasully60 wrote:

    (my comment was in response to falstaff's up there).

  • Report this Comment On January 30, 2010, at 6:05 PM, oppsadoozy wrote:

    In the garden, the deceiver was punished too, not just the deceived. We are all accountable.

  • Report this Comment On January 30, 2010, at 6:30 PM, sdfjwes wrote:

    It is always in one's best interests to neither give nor accept the unearned. The rational among us act in accordance with that principle. It's source is the nature of reality not consensus. Read "Atlas Shrugged" for more details.

  • Report this Comment On January 30, 2010, at 6:42 PM, FredHannibal wrote:

    Morality arguments aside. Isn't walking away, at the end of the day, a market dynamic driven by an individual's decision on the best use their limited resources? As a few other have remarked, I don’t see where this becomes a moral decision. That is to say, it’s sort of like nature, where there is no morality—just actions and consequences. If the consequences are spelled out and understood (as they are in any loan vehicle) it’s a matter, of one’s willingness to suffer those consequences, as opposed to the consequences of staying with an underwater mortgage. I’ve read that in nonrecourse states, banks charge extra closing costs to offset their recourse limitations.

    More importantly, as with any market driven phenomena, it will be the market that will throttle or promote it. As was the case in the build up to this mess in the first place. Banks now have the option of seeking the deficiency judgments and property seizures to which they are contractually entitled. They also have the option of working short sales more aggressively or other work outs and loan modifications that might make a homeowner’s decision not to walk away, the more prudent one. That, and not morality will ultimately keep people from walking.

    Who was it that said "Man is as faithful as his options"? (was it Tiger Woods who said that?—joking)

  • Report this Comment On January 30, 2010, at 7:00 PM, yorgus wrote:

    In 1976, I purchased and engagement/wedding ring for my wife. The jeweler encouraged me to "buy as large a diamond as possible, because it is a good investment." I refused, pointing out that an investment is something that you are willing to sell at the right moment to make money. I would never take the ring off my wife's finger because we could make a killing on the diamond or gold market. The ring was nothing more or less than a representation of our love for each other. [Side note: the ring was stolen after about six years of marriage, but we are still together, even without the ring.] Because it was NOT an investment, I paid for the ring as soon as possible.

    Likewise with our home. I paid if off as soon as possible. Unlike the ring, under the right circumstances I would sell it; nevertheless, I do not consider it to be a true investment as I would rental property or raw land. Since I am not really interested in selling it, and since it is paid for, the concept of "underwater" is essentially without personal meaning.

    Like the other 50+ aged writers, if I were to sabotage my credit at my age, it is unlikely I would be able to salvage it within a reasonable amount of time. Life is to be enjoyed, not merely endured.

  • Report this Comment On January 30, 2010, at 7:29 PM, dmon1 wrote:

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

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

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

    at that point , good luck getting another mortgage....no one will be in the mortgage business anymore. And those that are in the business would require such a high credit history that even good risks would be turned down, lord knows what rates they would demand...

    .....why would anyone loan money to a market sector that believes they can just decide not to pay????

  • Report this Comment On January 30, 2010, at 9:02 PM, monmonping wrote:

    This article is a classic example of what my dad taught me as a kid, "think before you speak". Who do you think you are Matt? You have just exposed your true character to the rest of the world and to me, it stinks! This is the type of short term gut knee philosophy that led us to this whole mess in the first place. Rest assured to my fellow idiots, we may be underwater but if you like where you live, you bought a home you can afford, and you bought because you wanted a home..you are not alone and there are more people like us than Mr. Koppenheffer. There are better days ahead!!!!!

  • Report this Comment On January 30, 2010, at 10:32 PM, drilldmc wrote:

    I'm one of the people this article refers too, so I am somewhat qualified to post this response.

    As far a moral or ethical rights or wrongs, I wrestled with this issue mightily, but the reason we finally stopped paying our mortgage is this. Our house will NEVER (let me repeat that NEVER be worth anywhere near what we paid for it. It has become, through no fault of our own, THE worst kind of asset possible. At the time we bought it, housing values had been level for 12 months, we needed a place to live and we bought what we could (and can still afford). We have a fixed, 30 yr mortgage.We had the choice of 3 houses in a 10 mile radius. We could have rented, but even finding a rental was difficult becasue everyone wanted to buy and sell (flip).

    Had I know at the time that people with practically a zero credit score and with no money down were buying houses more expensive than ours, I dont believe that would have bought a house, but we didnt have the benefit of that information at the time.

    A house, throughout modern history, has been the one investment that at the very least would hold its value and hopefully gradually appreciate over the life of the mortgage. I know there have been exceptions to this, but generally, this has been the case. There were checks and balances in the financial systems to ensure that this happened, there were systems in place to help this happen.

    Fast forward to the middle of last decade. No checks, no balances, rampant greed, stupidity and arrorgance. And the cost? Trillions. An almost crippled financial system GLOBALLY.

    And ironically, the Govt. rode in to save the day. Well, the day shouldn't have been saved. Every one of those institutions should now be a memory. Yes it would have been very ugly, but at least the wounds could have begun to heal. Now instead we have a festering sore that will inger and linger. So much for a free market system.

    I own a small business, and I employ 10 guys. I need to upgrade some of my equipment and I cannot get financing, not even $50k at 30% interest. Not because I have bad credit or anything else, just because I am in construction in Las Vegas.

    So, do I feel any kind of obligation to my morgage lender? Not unless they present me with a vastly different mortgage package. Let me state very clearly, that I hope many more people stop paying their mortgages and that it ultimately leads to the collapse of the instigators of this massive problem, becasue let me tell you, maybe your not too far underwater this time, maybe this situation doesnt effect you very much, but the next time it will, and as sure as I am sitting here there will be a next time. The people at the center of all this made so much money there is no way that they will stop trying to do it again unless it is impossible to do or they are incarcerated.

    Here's the numbers:

    Bought the cheapest house out of three that were for sale in the area we needed to be in. $426,000.00

    Estimated value of house now $less than $200,000.00

    Loan modification application has been with Bank of America now for 8 months - still in review.

    My wife has excellent credit (800 +)

    I have excellent credit (almost 800)

    Will it trash our credit not paying? Sure.

    Do we really care at this stage? No.

  • Report this Comment On January 30, 2010, at 10:42 PM, lurkinghere wrote:

    While I certainly understand the passion of some posters re: such words and phrases as 'responsibility' and 'one's good name', I would also be willing to guess that most of those posting such are not in dire financial straits with their mortgage.

    Let's be frank. Economic morality is a function of surplus. When survival comes knocking, survival will trump the intangibles. EG: guy bought a house in California for 800k, paid 5 percent down, had excellent credit, and took the ARM loan. The market crashes and he also loses his job. He chooses to pay his mortgage from savings while he goes job hunting. Problem is, six months later he still has no job. The house is now worth 600,000 due to the crashed market and this gentleman has a choice to make. In the 'always on' morality model, he'll just have to... well - hope, I guess. Or he can put his keys in the mail and keep what's left of his savings and begin to rebuild.

    Come on, people. This is no longer JUST a simple matter of 'stupid people who took out loans they could never afford'. The ripple effect of this has made the problem far, far more complicated than the two dimensional view some seem to be sticking to. We have people beginning to default on conventional loans, who had excellent credit for many years and always strove to fulfill their obligations. They've lost their jobs because the economy has tanked.

    Banks want to put people's feet to the fire on the concept of the 'honor of obligation'? So sorry, but banks are not entities of honor. I'm not saying they're dishonorable - just that they exist for one purpose only: to make money. They will roll over you without compunction. They will put families on the street and sleep easy. Not because they're evil, but because that's their function in capitalism. They have no soul, because you can't do what a bank has to do and have one.

    THAT'S the point I got from this article. Not that everyone should go 'yahoo!' and stop paying their mortgages. But that anyone in a real, matter-of-survival situation should do what they need to do and not feel too bad about it.

    One quick note. Someone made the comment about 'one's name.' I certainly agree with this on a personal relationship basis. Keep in mind, though, it no longer has any function in a loan transaction. Credit score is all. When it comes to borrowing, you are your number. The most blatant example of this has been credit card companies. Long term customers who have never missed a payment having their interest rates hiked because their overall credit score dropped. Please. Names are superfluous in this environment.

    Economics is about self-interest. Anyone dressing it up differently is living in a world I'd like to live in, too. Unfortunately, I don't.

  • Report this Comment On January 30, 2010, at 10:46 PM, falang1 wrote:

    I completely agree with the article. If you don't mind leaving your house, are greatly underwater, and can rent next door for cheaper per month, I would at the very least consider leaving. You of course take the risk that your credit will be damaged, rent will go up, home prices will go up, etc, but it's a business decision. If you can detach the emotional part of it (Johnny had his first tooth here) then do whatever is in your financial best interest. Rest assured the banks are.

  • Report this Comment On January 30, 2010, at 10:47 PM, lurkinghere wrote:

    While I certainly understand the passion of some posters re: such words and phrases as 'responsibility' and 'one's good name', I would also be willing to guess that most of those posting such are not in dire financial straits with their mortgage.

    Let's be frank. Economic morality is a function of surplus. When survival comes knocking, survival will trump the intangibles. EG: guy bought a house in California for 800k, paid 5 percent down, had excellent credit, and took the ARM loan. The market crashes and he also loses his job. He chooses to pay his mortgage from savings while he goes job hunting. Problem is, six months later he still has no job. The house is now worth 600,000 due to the crashed market and this gentleman has a choice to make. In the 'always on' morality model, he'll just have to... well - hope, I guess. Or he can put his keys in the mail and keep what's left of his savings and begin to rebuild.

    Come on, people. This is no longer JUST a simple matter of 'stupid people who took out loans they could never afford'. The ripple effect of this has made the problem far, far more complicated than the two dimensional view some seem to be sticking to. We have people beginning to default on conventional loans, who had excellent credit for many years and always strove to fulfill their obligations. They've lost their jobs because the economy has tanked.

    Banks want to put people's feet to the fire on the concept of the 'honor of obligation'? So sorry, but banks are not entities of honor. I'm not saying they're dishonorable - just that they exist for one purpose only: to make money. They will roll over you without compunction. They will put families on the street and sleep easy. Not because they're evil, but because that's their function in capitalism. They have no soul, because you can't do what a bank has to do and have one.

    THAT'S the point I got from this article. Not that everyone should go 'yahoo!' and stop paying their mortgages. But that anyone in a real, matter-of-survival situation should do what they need to do and not feel too bad about it.

    One quick note. Someone made the comment about 'one's name.' I certainly agree with this on a personal relationship basis. Keep in mind, though, it no longer has any function in a loan transaction. Credit score is all. When it comes to borrowing, you are your number. The most blatant example of this has been credit card companies. Long term customers who have never missed a payment having their interest rates hiked because their overall credit score dropped. Please. Names are superfluous in this environment.

    Economics is about self-interest. Anyone dressing it up differently is living in a world I'd like to live in, too. Unfortunately, I don't.

  • Report this Comment On January 31, 2010, at 12:21 PM, spongeworthyusa wrote:

    Why are homeowners idiots?

    Now there's an easy one. Maybe it has something to do with the idiotic tax law that turns something as simple as a decision about where to live into an investment decision. Maybe it has to do with the idiotic ability to deduct interest on purchases made with HELOC funds if you happen to own a house but not if you don't.

    As is often the case (though I surely admit, not always), mass stupidity in this country is driven by tax law more often than not.

  • Report this Comment On January 31, 2010, at 2:05 PM, drmrboi57 wrote:

    So by this logic as soon as you drive a new car off the lot you should stop paying for it because it has already lost a major portion of its value and is now worth less than you just paid. Some People have way too much time on their hands. Not to mention its only a loss if you sell or walk away. Not only have you lost your credit, and your home you also lost the $ you just threw down the toilet in payments, taxes, up keep, down payment, escrows. For all the back and forth on here lets see..it was ok to pay twice as much over the life of the loan (400k+ on a 200k loan) the banks dont care if you walk away they have probably already made enough to make up for the loss, and get to resell the home again and start the interest proicess all over again so who are you really hurting?...the best way to get even with them is to pay it off sooner using any number of mortgage acceleration process..they get less interest and you are free and clear. assuming you havent lost your job. If you baought into one of the many 2/28 loans at 1% interest and lied about your income to get it then you desreve to lose your house.

  • Report this Comment On January 31, 2010, at 8:05 PM, TMFKopp wrote:

    Thanks all for the continued comments and thoughts.

    One issue that seems to continue coming up is the comparison between auto and credit card loans and the home loans I was talking about in the article. If you scroll up through the comments (I know, there are a lot...) there are a few places where I, and other posters, have addressed this issue.

    In short, though, when walking away from an "underwater" auto loan we're probably talking about a few thousand dollars at stake. For most people, the same is probably true when it comes to credit card debt. For most people, the repercussions of walking away from the debt (sunk credit score, loss of asset(s), etc) isn't worth it. When we're talking about a few hundred thousand dollars with some houses, the math is very different.

    So, no, just because it might make sense to walk away from a house that's significantly underwater, that doesn't mean it suddenly makes sense to walk away from any and all loans.

    Matt

  • Report this Comment On January 31, 2010, at 10:35 PM, TMFKopp wrote:

    Here's an excerpt from a comment (used with permission) from a reader who couldn't post to the site for regulatory reasons:

    "One observation not made is that if you walk away and rent instead you have more money to spend. That's good for the economy, but more important is that you can save for retirement (with the decline in home equity and the stock market retirement nest eggs have shrunk), pay for your children's education, or have a little more money to enjoy life. And the sooner people walk away, the sooner we can hit bottom, stabilize, get back to a normal market where people have to be creditworthy to buy a house, and see some recovery in neighborhoods that have been devastated by foreclosures."

    Matt

  • Report this Comment On January 31, 2010, at 10:44 PM, TicoHombre wrote:

    I see....walk away from the mortgage and save the economy. That's a good one.

    The rationalizations continue.

    They are getting more refined, however. Keep adding addenda to the story... You sure you're not a banker?

  • Report this Comment On February 01, 2010, at 7:30 AM, Rorfool wrote:

    So morality is determined by the amount of money involved. Personally, I signed a paper promising unconditionally that I would pay the loan. I didn't say I would pay it as long as the house was worth more than the mortgage, or as long as I could afford to make the payments. Because I am over 65, I have a different idea of morality then most of the younger people. Sure, the banks and other corporations have no morality. The only ethics they have are those legally forced upon them. That is the fault of the Supreme Court who, through a grave mistake which I believe was contrary to the Consitution, gave corporations the same rights as individuals. The SC did this to aid industry.

    I believe that some people are justified in walking away IF they really can't afford to make the payments. But that assumes that they have lowered their living costs substantially. If they can't afford the payments and still maintain their previous standard of living, then they are frauds.

  • Report this Comment On February 01, 2010, at 8:05 AM, Rorfool wrote:

    Some more notes on my previous post. From the comments made it appears that FOOLS think morality is a matter of convenience. Do what is right if it is convenient. The truly moral person does what is right no matter the consequences, even if it hurts a LOT. Our society would be much better off if we had less greed and more morality.

  • Report this Comment On February 01, 2010, at 1:23 PM, desertr0se100 wrote:

    Very sound advice from a smart guy. Thanks for verifying what I knew all along.

  • Report this Comment On February 01, 2010, at 1:25 PM, PL404 wrote:

    The only thing the writer of this article did wrong was in failing to credit the NY Times article where a majority of these ideas first appeared.

    As for homeowners who don't walk away, one man's "idiot" is another man's morally responsible and decent individual.

  • Report this Comment On February 01, 2010, at 1:35 PM, BMFPitt wrote:

    "Personally, I signed a paper promising unconditionally that I would pay the loan. I didn't say I would pay it as long as the house was worth more than the mortgage, or as long as I could afford to make the payments."

    Really? You didn't just get a mortgage? Because if you got a loan secured by the property, I can assure you that somewhere one a piece of paper you signed that day is a whole clause about what happens when you don't pay your loan. It'll include them getting the house, and may or may not include you owing them some portion of the balance depending on state law - and that's the end of the contract.

  • Report this Comment On February 01, 2010, at 1:43 PM, drg101835 wrote:

    Not everyone over purchased. Many put 20 to 25% down and purchased with fully documented income and qualifying ratios YEARS ago. The issue is, especially if you live in non-recourse states, you pay for the privilidge of being able to give the property back. Loans are more expensive in those states. If indeed the lenders would be more responsible and work with owners, then there would be less temptation to "walk". Also, since non-recourse states provide that option, ie, no recourse but to take the property, lenders should have been more careful in the loans they made. There is a great deal of blame to go around!

  • Report this Comment On February 01, 2010, at 2:11 PM, lyndengeorge wrote:

    The people commenting against a homeowner choosing to leave, sound like the same ones who emotionally ran behind the war in iraq without thinking about the long-term consequences. Their rally cry was based on an illogical and non-biblical self-righteousness that certain 'full-blooded' americans are prone to have. They didnt start to logically think about their decision until their kids, grandkids etc started coming home in bodybags. how much sense does it make spend billions to attack a country with nothing to lose?

    Unfortunately that same baseless self-righteousness is prevalent in these comments. Defaulting would only be a moral issue if you believed that you would be taking advantage of the bank. If that is the case, then you should have had the bank REMOVE the default clause before you signed the agreement. Another option would have been to amend the contract to only allow you to default under certain circumstances. I would bet the farm that NONE of you with commentors did either of those things.

    Instead of posting hypocrital comments on this board, I suggest that you write your bank, ask for forgiveness and request that you mortgage agreement be amended. Then maybe your 'righteous rally cries' might be a little more believable.

  • Report this Comment On February 01, 2010, at 2:14 PM, TMFKopp wrote:

    @PL404

    Thanks for the thoughts.

    I actually did credit the NYT article:

    "The situation had University of Arizona law professor Brent White scratching his head, and as a result he wrote a very interesting paper on the subject, which University of Chicago luminary Richard Thaler brought to an even broader audience over the weekend."

    I didn't mention the NYT specifically, but it was Richard Thaler that wrote the article. And actually, it was Brent White's paper (also cited) which originally got me stewing on the topic.

    Matt

  • Report this Comment On February 01, 2010, at 2:28 PM, lyndengeorge wrote:

    Oh and thanks Matt for the article and the reference. to 'norm asymmetry'. I found it very informative.

    Lynden

  • Report this Comment On February 01, 2010, at 2:30 PM, lyndengeorge wrote:

    Oh and Matt thanks for the article. I knew nothing about 'norm asymmetry'. Both that and the article are very interesting.

    ~ Lynden

  • Report this Comment On February 01, 2010, at 3:58 PM, tbone281 wrote:

    Given that housing will probably not recover to its bubble valuations in the next twenty years, it would be in our best interests if the underwater home owners would simply walk away. This would free up a lot of money currently going into bankers bonuses, rather than actually helping our economy.

    Greed is bad.

  • Report this Comment On February 01, 2010, at 4:43 PM, wasmick wrote:

    "danpuperi has hit the nail right on the head.

    Homeowners that are walking away are not "not making good on the contract that they signed," they are operating within its bounds. They agreed to pay the mortgage or forfeit the property. Ceasing payments is simply making a choice to use the latter portion of the agreement."

    The only thing worse than danpuperi's incorrect assessment is TMF's believeing it's right.

    Nowhere in the US does a residential real estate note and mortgage (or deed of trust) state that. The Note is a promise to pay. The Mortgage or Deed of Trust is the document that secures the collateral in the event of non-payment.

    I agree that in non-recourse states the limit of recovery for the lender is to the collateral. However most states (and even ones like CA) are not completely non recourse, it depends on the type of transaction.

    So, if Banks were smart they would pursue walkaways like the idiots....er, I mean deadbeats they are. Obtain deficiency judgments, ruin the "borrower's" credit and go to court for wage garnishment.

    Of course, most banks won't because it isn't expedient...but they should. Then maybe we could put an end to idiots giving bad advice to bigger idiots.

    Buying a house isn't venture capital, nor is it a co-investment. You wanted the house, you borrowed the money to buy it. Essentially what you're advocating is the same as defaulting on every single piece of credit one has: auto loans, credit cards, student loans. Why does anyone pay any of these loans back?

  • Report this Comment On February 01, 2010, at 4:47 PM, wasmick wrote:

    "So, no, just because it might make sense to walk away from a house that's significantly underwater, that doesn't mean it suddenly makes sense to walk away from any and all loans."

    Oh, I get it. Only steal if you're going to steal big.

    Excellent advice.

  • Report this Comment On February 01, 2010, at 4:52 PM, wasmick wrote:

    "So, do I feel any kind of obligation to my morgage lender? Not unless they present me with a vastly different mortgage package. Let me state very clearly, that I hope many more people stop paying their mortgages and that it ultimately leads to the collapse of the instigators of this massive problem, becasue let me tell you, maybe your not too far underwater this time, maybe this situation doesnt effect you very much, but the next time it will, and as sure as I am sitting here there will be a next time. The people at the center of all this made so much money there is no way that they will stop trying to do it again unless it is impossible to do or they are incarcerated."

    You can't get financing for your business and you're walking away from your mortgage AND you believe these issues are unrelated?

    Wow, just wow.

  • Report this Comment On February 01, 2010, at 5:22 PM, TMFKopp wrote:

    @wasmick

    "You wanted the house, you borrowed the money to buy it."

    What people seem to keep overlooking here is that this isn't a one-sided deal. You act as if the bank were your parents, lending you the money because they love you and trust you and want to see you get what you want.

    The bank is making an investment when it makes the loan. It charges interest to compensate it for loaning money and risking default, and it makes the homeowner pledge the property as collateral.

    You wanted the house, the bank wanted your money (via interest). Or heck, more accurately, whomever gave you the loan originally probably didn't give a hoot about the interest, they just wanted the fees they could collect for originating the loan and then selling it off. Bottom line, everybody wanted something here, not just the homeowners. In many cases everybody also happened to be wrong.

    "So, if Banks were smart they would pursue walkaways like the idiots....er, I mean deadbeats they are. Obtain deficiency judgments, ruin the "borrower's" credit and go to court for wage garnishment."

    This is within the banks' rights in some states and needs to be taken into account when any homeowner is considering walking away. But in the end, banks are banks, not distressed debt collectors. The right answer here is for banks to better manage the risk on their loans -- demanding down payments, not bothering with "teaser" interest rates, and making sure that the collateral backing the loan is properly valued. If they don't actively egg on a market that's running out of control it's unlikely they'll have to deal with people with good credit deciding to walk on their loan.

    "Oh, I get it. Only steal if you're going to steal big."

    More like "Only give up your house and destroy your credit if it's really worth it."

    Matt

  • Report this Comment On February 01, 2010, at 5:48 PM, rekkjjj wrote:

    Just walk away & rent a bigger house for half the money you spend on an underwater mortgage. I wish I lived in Phoenix. My old girlfriend rents a 3/2, 6 yr old house w/ pool for $950. I pay that for a 1 BR condo in Chicago...

  • Report this Comment On February 01, 2010, at 5:56 PM, lyndengeorge wrote:

    Its sad to see that so many people are not aware of what an agreement is.

    Let me help you:

    a) I AGREE to give you $50 to buy a chair.

    b) You AGREE that if you dont pay me back I can take the chair.

    c)I AGREE that if you dont want the chair, you can give it back to me and I will resell it.

    d)You decide to give the chair back.

    What part of that is confusing?

    What part of that is stealing?

    Homeowners that agree to walk away ARE making good on their agreement. They had an agreement to return the property if they no longer wanted it.

    This just cant be that hard to grasp.

    wasmick ==> so exercising your agreement is stealing? is that what you're saying?

    1) can you give me the paragraph in your mortgage agreement that states so?

    2) Are you one of those people that had it removed because it was immoral and unfair to the bank?

    are you having it removed today?

    I think the most bewildering part of this whole thread is that people actually think that banks are STUPID and are the New World Martyrs.

    question:

    when youre paying principal and interest, where is the interest going? my house cost about 265k. with P&I. ive paid about 150k back to the bank in 5yrs. They can EASILY resell my house for 150k if I default - prob more.

    Banks are not losing.

    What's being lost is yall minds.

    Please go to baggage check and reclaim them.

  • Report this Comment On February 01, 2010, at 7:14 PM, gt1135 wrote:

    This is exactly the problem with America today. So many people are not able to take personal resonsibility for their decisions.

    - A man doesn't use a condom and gets a woman pregnant and then doesn't raise the child.

    - A man and a woman have intercourse while drunk. The woman is is ashamed of herself and claims rape even though they were both drunk and the man gets arrested. (Please do not take this to mean that I think all rape is this way. A real case of rape is absolutely unacceptable, but it seems to me the word is thrown around lightly these days in the court system.)

    - Somebody drinks and drugs themselves into oblivion every day and can't get a job, so they blame the system and get welfare.

    - Somebody doesn't make enough money to have the things they want. Rather than work harder, they elect somebody who will take more of the wealthy people's money and give it to them.

    - Somebody constantly complains about the gov't, but they don't vote.

    - Somebody spills coffee on themselves and gets burnt. Its definitely not their own fault. Its McDonalds fault for not telling them the coffee was hot.

    -Somebody gets an interest only ARM and in 5 years the payments increase by $2000. Is it their fault for not understanding what they were doing with the biggest purchase/investment of their life? No no, its the fault of the person who didn't hold their hand and read the documents they signed.

    - Somebody buys a house and then the value goes down so they walk away and blame the system.

    I really get disgusted by all of the blame people pass around these days. I'm not perfect. I screw up like everybody else, but when I do I take responsibility and deal with the consequences. I won't go as far as to say that I'd cancel my subscriptions, because I've learned a lot here and appreciate the community. I will say that I lost a lot of respect for Mr. Koppenheffer.

  • Report this Comment On February 01, 2010, at 9:16 PM, sasully60 wrote:

    A letter on this topic from an astute reader in the NY Times today

    http://www.nytimes.com/2010/02/01/opinion/l01stuyvesant.html...

    ....

    To The Editor

    I read that Tishman Speyer Properties and BlackRock Realty are walking away from their $3 billion loan commitments on Stuyvesant Town and Peter Cooper Village (“Stuyvesant and Cooper Surrendered to Creditors,” news article, Jan. 25).

    They are underwater on their debt and have failed to renegotiate it. Therefore they have decided it no longer makes financial sense for them to keep on paying their obligation.

    Where is the indignation — the same furor and moral outrage an individual homeowner would face if he did the same thing? Why is it moral, logical and perfectly acceptable for corporations to default on a debt but sinful, almost criminal, for a struggling homeowner to do the same thing?

    Why hasn’t the banking industry taken the same stand against corporations as it takes against individuals? Will Tishman’s credit rating be forever tarnished? Will it be forever barred from acquiring loans in the future? Will no one ever deal with it again? I don’t think so! If anything, it will be praised for the logic behind its difficult, heart-wrenching but economically necessary decision.

    We obviously have a two-track economic morality — one for “small loans” and one for “serious money.”

    Michael Lubov

  • Report this Comment On February 01, 2010, at 9:16 PM, sasully60 wrote:

    A letter on this topic from an astute reader in the NY Times today

    http://www.nytimes.com/2010/02/01/opinion/l01stuyvesant.html...

    ....

    To The Editor

    I read that Tishman Speyer Properties and BlackRock Realty are walking away from their $3 billion loan commitments on Stuyvesant Town and Peter Cooper Village (“Stuyvesant and Cooper Surrendered to Creditors,” news article, Jan. 25).

    They are underwater on their debt and have failed to renegotiate it. Therefore they have decided it no longer makes financial sense for them to keep on paying their obligation.

    Where is the indignation — the same furor and moral outrage an individual homeowner would face if he did the same thing? Why is it moral, logical and perfectly acceptable for corporations to default on a debt but sinful, almost criminal, for a struggling homeowner to do the same thing?

    Why hasn’t the banking industry taken the same stand against corporations as it takes against individuals? Will Tishman’s credit rating be forever tarnished? Will it be forever barred from acquiring loans in the future? Will no one ever deal with it again? I don’t think so! If anything, it will be praised for the logic behind its difficult, heart-wrenching but economically necessary decision.

    We obviously have a two-track economic morality — one for “small loans” and one for “serious money.”

    Michael Lubov

  • Report this Comment On February 01, 2010, at 9:37 PM, TMFKopp wrote:

    @sasully60

    Precisely! Norm asymmetry in action.

    Thanks for posting this.

    Matt

  • Report this Comment On February 02, 2010, at 12:49 AM, dibo528 wrote:

    A lot of people love their homes and, if they put a big down payment on the house, they feel like they'll lose their investment. Of course, with the lower value of the home, they've already lost the down payment, but they don't want to consider that.

    Then there's also the problem that, if they do walk away, or even if they do a short sale, unless they get an agreement in writing otherwise, the bank has five years to sue them for the deficiency in some states.

  • Report this Comment On February 02, 2010, at 9:37 AM, wasmick wrote:

    lydengeorge -

    I enjoy a strawman as much as the next guy...so thanks for trotting them out so quickly.

    I suggest that you read the documents before speaking again. You seem to be confusing repossession (or forfeiture if you prefer) of the collateral as an agreement between the Bank and borrower to be a source of repayment; it's not. In fact, no where in the documents does it state that.

    The Note is the debt. By signing the Note you agree to pay. It's that simple.

  • Report this Comment On February 02, 2010, at 10:26 AM, lyndengeorge wrote:

    wasmick, this is too serious of a subject to play semantics. the mortgage agreement that both you and the bank agree to is inclusive of the note.

    ie. line from my mortgage..."this debt is evidenced by borrower's note dated....."

    my mortgage agreement (which i have in hand for another matter) is actionable for both me and the bank. The bank agreed that if I default, they have the right to accelerate the mortgage and foreclose the equitable right of redeemption. I also agreed to this. There are also paragraphs that explain my ability of reinstatement. If these were not actionable and dare I say possibly expected, they would not be in your mortgage agreement.

    If 'mortgage moral superiority' is your fetish, then fine, but for the sake of people who have to make this tough decision, (thankfully not me) please try to stick with the facts contained within contractual legal agreements.

  • Report this Comment On February 02, 2010, at 12:37 PM, EEE1 wrote:

    I have a problem with people just walking away from their homes and sticking the bank with the loss. For one thing, when these people signed a contract, they made a promise and a commitment to pay back the loan. Secondly, people walking away from their mortgages contributed to the meltdown in our economy. Mortgage-backed securities tanked, and we had to bail out the banks to avoid another Great Depression.

  • Report this Comment On February 02, 2010, at 2:29 PM, MightyMack wrote:

    The day when a man keeped his promise is gone - if it was ever here. To walk away from a mortgage because it is currently disadvantagous is bad morelly, bad business, bad socially and bad economically.Those who keep their word when in the moment of "now" it is not in their interest are acting in their interest. A good name is worth more than money - because it will bring money, trust, aid, good things when you need it most. A person's credit score is the new reputation, the new "good name" in a world were thelender does not know the borrower.

    Would you sell a sound stock because the price dropped below the cost for a day?

    Stop listening to that econimist, he does not understand the "market".

  • Report this Comment On February 02, 2010, at 4:47 PM, miteycasey wrote:

    JFK said it best:

    And so, my fellow Americans: ask not what your country can do for you - ask what you can do for your country.

    My fellow citizens of the world: ask not what America will do for you, but what together we can do for the freedom of man.

    Finally, whether you are citizens of America or citizens of the world, ask of us the same high standards of strength and sacrifice which we ask of you. With a good conscience our only sure reward, with history the final judge of our deeds, let us go forth to lead the land we love, asking His blessing and His help, but knowing that here on earth God's work must truly be our own.

  • Report this Comment On February 02, 2010, at 6:26 PM, gunneraz1 wrote:

    Banks set the rules of your note and they list the rules in the agreement you sign. They give you the out with consequences to both sides.

    If it makes sense for to walk for whatever reason; family, relocation, affordability then you do what you need to do. Just be ready and willing to take on the consequence of your actions.

    Depressed areas will continue to play "musical homes" until we have all rotated. I was the first on my street? When is it your turn?

  • Report this Comment On February 03, 2010, at 6:45 PM, wasmick wrote:

    lydengeorge - the remedies of which you speak are built into the agreement for events of default...as are the deficiency provisions and the right for the lender to forego taking the property and sue you persoanlly on the Note alone (depending on transaction type and state laws).

    You agreed to those provisions because you didn't have a choice; they are a part of the transaction. However, those paragraphs do not speak to a borrower's remedy in any way shape or form, they exist simply to clarify the lender's options (not yours) in the event of default. Those options are not and never have been limited to the repossession of the property. There is nothing anywhere in those documents that states - explicit or implied -

    that forfeiture of the property to the lender remedies the debt.

  • Report this Comment On February 04, 2010, at 2:58 PM, shortsalesjulie wrote:

    The banks who walk away from THEIR commercial deals because the investment no longer makes sense have also entered into a legal and binding contract to repay the money borrowed for the purchase. I do not see much difference, except that I would like to consider myself as better than the rapacious and amoral institutions and their managers. That being said, the bset way to both honor your obligation and to get to the best solution possible is to negotiate a short payoff with the bank. You keep a better credit scor and the bank agrees to the write-off of your loan "shortage" rather than go through the expense of a foreclosure. Better for all.

  • Report this Comment On February 05, 2010, at 6:13 PM, ATI2DE wrote:

    Matt:

    I reread your article and recognize where I disagree, you are calling people idiots for continuing to pay their mortgages when the appraised value of their home is less than what they agreed to pay for it.

    "Across the country, many homeowners have faced the devastating realization that the homes they own are now worth less than what they owe the bank."

    You make no mention initially of how much less, but you do imply walking away when it is cheaper to rent. Later in the article mention is made of "severely devalued" but still this is subjective at best and it is left up to the reader and writer to assign an appropriate value based on how they interpret each point of view. Ditto on the word "battered" as used in the following quote, still pretty subjective.

    "What is not particularly well known, though, is exactly why most of these battered borrowers are still making good on their monthly payments."

    Let me also mention there is no qualifying conditions of impending geographic decline, squalor, crime, loss of job, etc. that would figure in to the whole should I stay or should I go equation. The only metric given in the article is, which is cheaper?

    So, we are all just "idiots" if we continue to pay for our obligations, in this case a mortgage, when we could be saving money by getting cheaper housing someplace else. A lot is implied, which I assume is part of the literary device used, what I would call "wiggle room".

    So, are we idiots if it is a dollar less, a thousand, a hundred thousand, five hundred thousand, you don't really say. We are just idiots if we continue to pay, because businesses wouldn't. BTW, do you own a business? Not all businesses operate or make all decisions based on how much money they stand to make or lose. Over time, a business does craft policies that chart their financial livelihood but along the way they generally operate with a sense of obligation, whether you call it moral or not, to its' customers. They usually call it goodwill.

    The sensationalized actions or results that make the papers are not consistent and not indicative of all financial institutions or businesses. Many businesses carry negatives on their books, from assets, loans, customers, etc. and cut people breaks and work out deals to reach an equitable solution for all.

    I do agree that the companies listed deserve a fair amount of tar and feathering, but I doubt they started out with the idea of melting the economy.

    Your article implies a lot, but to make sweeping generalizations about underwater homeowners and the way businesses make decisions only serves to generate a lot of comments and to some extent insult those who consider themselves the target of your article.

  • Report this Comment On February 05, 2010, at 9:51 PM, trishfield wrote:

    I know what this article is talking about. I was divorced 12/09/08. Before filing we listed out home in GA on the market. We got an appraisal done that came in at 675,000. Due to the market, we listed at 599K. Waited a year, decreased to 499K.

    We are both still stuck living here, together because we want to pay our moral obligation. To put it mildly it sucks. All around us we have friends filing bankruptcy. A home of a former couple we knew down the street just sold last week in a short sale for 250K.

    How long do all you do-gooders think it will take before I will be able to get out of here. We owe 407K on the house. I would love to do a short sale but am tempted to just walk away. Both have the same impact on credit and these days I know millionares who are walking away.

    At what point can I say "screw this" and finally get on with my life with my 2 kids. I could relocate to my home town and rent a home for 1/5 of my mortgage here.

    Any advice on what to do???

  • Report this Comment On February 09, 2010, at 4:50 AM, TMFKopp wrote:

    @ATI2DE

    Frankly I'm a little confused as to what you're taking issue with at this point...

    It seems like you're mainly upset that I didn't spell out specifically all of the parameters for determining if you fall into the category of those that should walk away. I agree, that's an unfortunate shortfall here. But like I've said a few different times, this is a short, quick article and simply didn't have the room to do a full run-down. Not to mention that if my article focused on those details, it'd probably do more to put people to sleep than to get them thinking about their beliefs and discussing the topic in the comments section.

    And of course as somebody (you maybe?) mentioned, nobody should be making the decision to walk away based on an article on the internet. At the very most something like this could provide a spark -- though at this point, I guarantee that anyone that's 50% underwater on their mortgage has been thinking about the possibility of walking for a long time already. But in the end the decision is a HUGE one in anyone's financial picture and should be done with very careful consideration and in consultation with experts like lawyers, financial advisers, and tax planners (and possibly friends and family as well).

    So, yes, you are correct the my article wasn't exhaustive in the details, but it wasn't meant to be. If you're interested in the nitty-gritties of the issue, I highly recommend Prof White's paper, which covers a lot more ground than my article.

    Matt

  • Report this Comment On February 09, 2010, at 4:58 AM, TMFKopp wrote:

    @trishfield

    I'm very sorry to hear about your difficult situation. As I, and many other commenters, have pointed out here, this is a huge decision that could carry very serious ramifications.

    If it's something that you're considering, your best bet is to get in touch with qualified professionals in your area -- lawyers, financial advisers, real estate agents, etc. If you're going to weigh the costs and benefits, it's important that you have an accurate view of both sides.

    Best of luck-

    Matt

  • Report this Comment On February 09, 2010, at 4:58 PM, jstSanity wrote:

    Mortgage contracts clearly state that ownership of the property will be given to the lender if the borrower defaults. The bank knew the risks, but chose to take a calculated risk in order to MAKE MONEY. The borrower has no moral obligation to pay their mortgage. That's ridiculous.

    Are banks doing the 'moral' thing by allowing families who can't pay their mortgages to stay in the homes? No! And why should they? It was a business deal, not some agreement between friends. Grow up people.

  • Report this Comment On February 12, 2010, at 7:49 PM, zonadude wrote:

    Thanks, Matt, for this insightful article, its follow-up, and the more recent article about our society's expectation of morals in business transactions.

    The only argument that trumps the economic debate of accepting default terms versus paying an overvalued mortgage is that of the "homebuyer," who values the uniqueness of his/her home for non-financial reasons. But for most of us who live in the epicenters of the foreclosure crisis, this facet doesn't need to enter the debate.

    The home builders drastically commoditized their product for reasons of scale and a very basic but ever-growing market demand in places like Phoenix. Most of us bought what was offered, many "driving to qualify" into the distant suburbs of sameness. So I hate to admit that most people don't have much invested in their homes except, rarely, a little bit of cash. Therefore, we should view these houses as commodities, especially when the law specifically allows for efficient breach. Dump them if they aren't worth keeping.

  • Report this Comment On March 04, 2010, at 3:26 PM, Stephreg wrote:

    These many comments show how tangled the financial and emotional can become in things as intensely personal as a home. My four cents:

    1. Whether a loan is recourse or not is a decision made by the borrower and the lender. The moral obligation is to abide by the terms of the contract. There is no moral obligation to impose additional conditions on the contract like pretending it is a recourse loan when it is not.

    2. Whether you stay in your house or walk is a complex personal and financial decision. If your house is "underwater", it means that the you owe more than the house is worth on the marketplace (i.e., to others). It does not mean that you owe more than the house is worth to you.

    3. Whether you stay in your house or walk is also a comparison between a complex set of alternatives. You could rent; you could buy another house. Buying another house requires capital and the ability to secure a loan.

    4. Given the depressed values of houses, buying a house today could be a very good investment. But wait, you already own a home! Better do the DCF analysis (like a good Fool): no down payment on current house, but higher monthly payment; versus, down payment on new house and lower monthly payment (assuming you can get a loan); versus, monthly rent, "down payment' of last month's rent and deposit, no equity upside.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1093531, ~/Articles/ArticleHandler.aspx, 10/24/2014 8:43:10 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement