Why We Care About Idiot Homeowners

Last week I penned an article, "Why Are Homeowners Idiots?", that engendered a lot of heated debate.

The basis of the article was a paper by University of Arizona law professor Brent White. As White's paper pointed out, many severely underwater homeowners are staying put because of a perceived moral obligation to continue paying. Many readers of the article felt very strongly about this obligation, and suggested that there's no good reason to walk away -- particularly if you can still afford the monthly payments.

But let's try to step away from morals and simple truisms for a moment, and look at why the case of this subsegment of homeowners is so important to consider.

Adding fuel to the flames
There are certainly broader repercussions from homeowners who walk. Though there have been some signs of stabilization in the housing market, it's far too early to say that the market has truly recovered. Additional defaults only serve to exacerbate this problem, since they put downward pressure on housing prices and create even more inventory for the market to absorb.

This dynamic would create problems for homeowners in the areas where so-called "strategic defaults" take place, because they'd likely see the value of their homes decline further. It also causes problems for homebuilders like KB Home and Toll Brothers (NYSE: TOL  ) , as they're forced to compete with the bargain-basement prices of foreclosures.

The situation would also put increased pressure on banks like Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and JPMorgan Chase (NYSE: JPM  ) , not to mention wards of the state Fannie Mae (NYSE: FNM  ) and Freddie Mac, who would have to deal with the foreclosure losses.

But it's not that simple
There's a flipside to this coin, though. I believe that what we'd all like to see at the end of this mess is a housing market that is once again fully functional. While strategic defaulters may force us to deal with increased foreclosures now, they save us from having to swallow the problem over a longer period of time.

One of the key reasons that it may make sense for some severely underwater homeowners to default is because they can't rationally hope to have equity in their home for many years to come. If circumstances dictate that these homeowners need to move, or no longer have the means to pay for their mortgage a few years down the road, they will likely still be in a position where they will have to foreclose or short-sell, rather than sell their house on the open market through the normal process.

Even if these homeowners remain in a position to pay their mortgage for years to come, the lack of equity in their home will keep them out of the homebuyer pool, even if, under normal circumstances, they'd like to move up to a larger home. These factors could help keep the housing market stumbling along for some years.

Additionally, for the housing market to truly find itself on a sustainable path, we'd need to see home prices fall back into line with historical norms. One widely used gauge of home prices involves comparing housing prices with prevailing rental rates. Between 1988 and 2000, the average home in the U.S. sold for 14.6 times the average annual rental rate. Though this multiple has fallen significantly since its high of 25 in mid-2007, it was still at 18 during the third quarter of 2009. Strategic foreclosures could help bring this multiple down further, allowing more potential buyers to be able to afford a home, and putting the market back on a sustainable path.

And though my colleagues and I have poked some fun at the extraordinarily low interest rates that the Fed has been providing for banks, this highly accommodative stance from the Fed gives the banks additional ability to absorb hits from their mortgage portfolios now. Prolonging the process risks the possibility that the banks will have to keep limping along when interest rates are not there to cushion the blow.

Finally, as one reader pointed out to me in an email, homeowners who walk away from a hefty mortgage in favor of a lower rent payment suddenly end up with more money in their pockets at the end of every month. This money can be pumped back into the economy if they decide to spend it at Wal-Mart (NYSE: WMT  ) or Costco (Nasdaq: COST  ) , for instance, or it can be pumped back into the stock markets as these folks rebuild their retirement nest egg.

A touch of gray
Considering many of the comments from my previous article, it is clear that there are many out there who believe that paying a mortgage is a very black-and-white issue. That is, if you can continue to do it, you have the unyielding obligation to do so.

Looked at from a broader perspective, though, the picture may not be quite so crystal clear. The mere fact that we have a good number of homeowners living in houses that are vastly underwater is a problem for the housing market, and it's a problem that we'll have to digest one way or another. As I've argued above, swallowing the bitter pill now may be preferable to letting the issue linger for years to come.

Of course, suggesting that homeowners walk isn't the only possible outcome from all of this. If banks start to get the sense that there is an increased willingness among this group to walk, the banks may decide that it is in their best interest to find a middle ground -- one that would potentially leave both the banks and the homeowners better off.

Housing isn't the only market that's been decimated. But though the stock market has taken some serious lumps of its own, there was one way that many investors could have trounced the average.

Costco Wholesale and Wal-Mart Stores are Motley Fool Inside Value selections. Costco Wholesale is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Costco Wholesale. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not own shares of any of the 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 ...


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  • Report this Comment On February 01, 2010, at 2:23 PM, questioner5000 wrote:

    Hah, hah!

    Funny. Guys like you used to whine about how the government's "saving the TBTF banks", would cause some sort of "moral hazard", because the banks, "knowing that they would be bailed out by the government", would return to their risky ways. (Yeah sure - - like I can just hear the Board of BAC saying, "Hey, this has been a lot of fun! Let's do some risky stuff - - like bailing out the government and taxpayer from the collapse of some troubled, ready to collapse entity - - so that the government can again "ride to the rescue" and "help" us again!")

    Yet, you don't see any danger with the government and media advocating that people who are TEMPORARILY "underwater" in ther homes, or find dealing with their substantial credit card debt "a burden", should simply walk away from their debts, content in the "knowledge" that their predicament was completely "the banks' fault". After all, it's O.K. to walk away from your contractual obligations, without any stigma being attached, because it's in their own, personal best interests to do so. Besides, "It's the economy, ya know!"

    Fine. Wait until the banks react, and demand changes in state laws, so that "turning in the keys" will NOT end the banks' rights to recourse on all other borrower assets belonging to these "borrowers of convenience". (After all, many of them used their homes as piggy banks, to buy cars and other big purchases that they currently get to keep, when they abandon their mortgage debt.

    Just maybe mortgage contracts will have to be clearer, so that borrowers don't feel justified in thinking that if real estate values rise, they get the benefit, but if they fall, no matter how "temporarily", that "loss" is for the account of the banks and taxpayers.

  • Report this Comment On February 01, 2010, at 2:45 PM, jpm1799 wrote:

    TO TMF KOPP:

    "But let's try to step away from morals and simple truisms for a moment"

    That phrase was the preface for every decision making process for the past ten years; the very decisions that created the meltdown we have recently experienced. Now, this author has the nerve to repeat it, in the context of justifiying NOT taking the correct, responsible steps to mend a broken system and restructure it move forward with a wiser, more stable infastructure.

    Secondly, to speak of a "perceived moral obligation" implies that a moral obligation does not exist. If you do not view it as a moral obligation to hold up your end of a contract, agreement, or promise, I can see why you are a writer: you would not have much success retaining clients in this industry. I would also like to know what number marriage you are on. Again, this departure from morality facilitated, and even propogated the poor decisions that have led us to our present demise.

    NO MATTER WHICH WAY YOU TURN IT, THERE IS NO WAY TO PICK "IT" UP BY THE CLEAN END!

  • Report this Comment On February 01, 2010, at 3:03 PM, Borbality wrote:

    the "idiots" thing is officially played out at the fool.

    Weak attempt to generate more comments! Doing it to death!

    What's likely is that readers just reacted to the "idiots for paying their mortgages" part and most probably didn't even read the original story.

    Welcome to journalism! What a world! 2010!!

  • Report this Comment On February 01, 2010, at 3:05 PM, miteycasey wrote:

    And how much larger would you like the 'shadow market' to grow???

    Nothing says that if you default on a house the bank/government will put it back on the market, basically a zero net gain. They can hold your house on the books and it costs them the same as you not paying.

  • Report this Comment On February 01, 2010, at 3:07 PM, TMFKopp wrote:

    @questioner

    For the record, I'm still "whining" about the bailout of the TBTF banks. It was without any sort of real reform and there is no doubt in my mind that it will lead to moral hazard if something additional isn't done.

    Not that I'm the only one that feels that way: http://finance.yahoo.com/news/Watchdog-Bailouts-created-apf-...

    "advocating that people who are TEMPORARILY "underwater" in ther homes"

    On a long enough time frame, everything is temporary. Heck, we're all just temporarily alive, right?

    For those that could reasonably expect that they will once again have equity in their home in the next couple of years, walking away probably doesn't make sense. However, for people that are looking at near a decade (or more) before they could likely expect to have equity, then things really no longer make sense.

    "or find dealing with their substantial credit card debt "a burden""

    Nobody's talking about credit card debts here. I addressed the issue of both credit card debt and auto loans multiple times in the comments section of the previous article -- http://www.fool.com/investing/general/2010/01/26/why-are-hom...

    "content in the "knowledge" that their predicament was completely "the banks' fault". "

    These homeowners could have avoided the predicament they're in by not buying in an overvalued market. So a good deal of the fault lies with them. But when the defaults start rolling in, the banks have themselves to blame for making loans backed by overvalued collateral. There's plenty of blame to go around here.

    "Wait until the banks react, and demand changes in state laws, so that "turning in the keys" will NOT end the banks' rights to recourse on all other borrower assets belonging to these "borrowers of convenience""

    If they'd like to do that, fine. But right now we're not talking about some potential future legal changes, we're talking about what the situation is at the moment.

    But if I were to give the banks some advice, I'd suggest tightening the screws on their lending practices rather than whining to lawmakers that the big bad consumers are hurting their bottom line.

    Matt

  • Report this Comment On February 01, 2010, at 3:34 PM, TMFKopp wrote:

    @jpm1799

    "in the context of justifiying NOT taking the correct, responsible steps to mend a broken system and restructure it move forward with a wiser, more stable infastructure."

    So should I assume that your suggestion would be to treat the economy like a dinosaur and hope that if nobody moves a muscle it won't get angry and hurt us? If we could have gotten every financial institution to hang onto the securities they owned we might have also been able to avoid the fire sales and panics that led to the depths of the financial crisis. Unfortunately, that's not the way the system works.

    As for the issue of morality, the problem here is that the morality of the situation is simply not as clear cut as you portray it. If you go back to my original article, a key point in Prof. White's paper is the idea of "norm asymmetry." That is, that the banks and the homeowners seem to be working off of a different set of rules. The banks operate based on cost/benefit analysis and profit maximization, while homeowners are operating based on a moral code. It doesn't make sense.

    @miteycasey

    "And how much larger would you like the 'shadow market' to grow???"

    A lot of that is the banks' and governments' prerogative. To date, the strategy seems to largely be trying to prop up and reinflate the housing market. As I pointed out above, the market is probably still overvalued, so these attempts will likely end up being like spitting into the wind. But I don’t see how these misguided attempts impact the decision for homeowners to walk. Besides, even if the bank holds the property off the market, there are still other benefits I've noted above.

    Matt

  • Report this Comment On February 01, 2010, at 4:01 PM, miteycasey wrote:

    While strategic defaulters may force us to deal with increased foreclosures now, they save us from having to swallow the problem over a longer period of time.

    ...

    Additionally, for the housing market to truly find itself on a sustainable path, we'd need to see home prices fall back into line with historical norms.

    I was disagreeing with the reality of these two comments.

    They are both based on the idea that the banks and governments will put the houses on the market, increasing supply, therefore lowering prices.

    This hasn't happened with the glut of house that they have now and with the banking rules as they stand so why do you believe more houses in foreclosure will cause them change their behavior???

  • Report this Comment On February 01, 2010, at 5:01 PM, TMFKopp wrote:

    @miteycasey

    I could probably write another article about why the banks and Fed are being silly by trying to prop up the housing market. It got vastly overheated and now it needs to cool off.

    But just because the banks are making a misguided attempt to prop up the market doesn't mean that homeowners should put the brakes on doing what is in their best interest.

    Matt

  • Report this Comment On February 01, 2010, at 5:05 PM, gddunton wrote:

    @ TMFKOPP

    Don't worry your message wasn't lost upon everyone here.

    I thought the article was a good perspective from the other side of the coin. Most people responding with such negative feedback are stubborn and unwilling to understand the other side of the argument.

    From the individual home owner's perspective there is a point where the negative equity "breaks the camel's back' and doesn't make sense to keep the mortgage. At that point, people who feel that they have a moral obligation to pay the loan are being manipulated by the banks to subsidize their income.

    Why do i think defaulting on this "commitment" is acceptable? Because of the interest charged on the mortgage. The bank is making money on the risk of default (among other factors) and they know this going into issuing the mortgage.

    Theoretical argument aside, each individual has their own morals and priorities, and these will ultimately drive their actions to maximize their "utility". And this article ultimately explores one course of action.

  • Report this Comment On February 01, 2010, at 5:16 PM, scotchnovice wrote:

    Maybe I'm missing something. Do we no longer care about credit ratings? How are all of these people who walk away from their mortgages going to participate in the hoped for housing frenzy to come when they've trashed their scores? Or won't that matter in the future?

  • Report this Comment On February 01, 2010, at 5:33 PM, TMFKopp wrote:

    @scotchnovice

    A trashed credit rating is one of the big downfalls for those that decide to walk. But as was discussed in my last article and the comments that followed, when you're talking about hundreds of thousands of dollars, your credit rating may be worth sacrificing.

    "participate in the hoped for housing frenzy to come"

    Can't say that I see things the same way. Or at least I hope that this isn't what comes to pass. I think what we'd like to see is housing prices fall back in line with historical norms, as I noted above. Another housing frenzy will only mean that we'll be setting ourselves up for another bust.

    Of course, if another housing frenzy is really what people believe will happen, then walking away from an underwater home would be a lousy idea. Between 2002 and mid-2007, housing prices more than doubled, appreciating on average 17% per year. If that happens all over again then we'll have very few problems with underwater homeowners.

    If that happens, though, I suggest that everyone duck and cover because the inevitable bust that will follow will probably be even nastier than this one.

    Matt

  • Report this Comment On February 01, 2010, at 5:36 PM, questioner5000 wrote:

    I guess I should have listened to my granddad, who warned me never to argue about sex with a virgin, and never have an extended argument with someone who has a microphone.

    In the first case, arguing with you about one's obligation to honor one's contracts - - "morality aside - - has proven fruitless, since your idea of a contract is that it can, and, in fact, SHOULD, be unilaterally abandoned by either party, if it doesn't "work out" in either party's best personal interests, notwithstanding the mutual commitment to fulfill their respective ends of the contract. The ramifications of such a stance is so damaging to the long term prospects of society as a whole, that it's obvious that, on this topic, you are a "virgin", pontificating about sex you've never experienced first-hand.

    (By the way, I have a great idea. Banks should make lots of good mortgage loans, and, then, when the real estate market improves and the borrowers have built up a nice bit of equity in their properties, the banks, in their own best self-interest, should seize the real estate and take the profit for themselves. After all, notwithstanding the terms of the contract, it's not in their best interest to let that delicious equity go to the other party in the mortgage contracts!)

    Secondly, you obviously have little to do all day but to post the same repetitive, whiny rants on the Fool. I, on the other hand, never hope to keep up with the frequency of your prolific diatribes.

    Thus, the best course of action for me, "in my best personal interests", is to simply ignore your postings as the musings of someone who was never really properly "socialized".

  • Report this Comment On February 01, 2010, at 5:49 PM, sleepymonkey wrote:

    questioner500 says:

    "Funny. Guys like you used to whine about how the government's "saving the TBTF banks", would cause some sort of "moral hazard", because the banks, "knowing that they would be bailed out by the government", would return to their risky ways."

    "Whining?!?" The idea that we as a nation, culture, economic system, what have you, even consider tolerating such a ridiculous concept as "Too Big To Fail" is absolutely ludicrous. I especially love hearing free traders come to the defense of this nonsensical concept. And btw, questioner5000, banks haven't changed their risky behavior one iota. They seem to lack the morality or good sense you attribute them.

    TMFKopp writes:

    "As for the issue of morality, the problem here is that the morality of the situation is simply not as clear cut as you portray it. If you go back to my original article, a key point in Prof. White's paper is the idea of "norm asymmetry." That is, that the banks and the homeowners seem to be working off of a different set of rules. The banks operate based on cost/benefit analysis and profit maximization, while homeowners are operating based on a moral code. It doesn't make sense."

    On the money TMFKopp! "The people" have been brainwashed by corporations and the PR teams working in their interests. Corporations and so-called business people (Donald Trump comes immediately to mind) walk away from their obligations all the time. In fact, they are considered shrewd for doing so. Underwater home owners are expected to stay the course while their underwriters get reimbursed at 100 cents on the dollar by the US Treasury for the worthless paper they wrote. Sorry, you can't have morality on one side of the equation and not the other.

  • Report this Comment On February 01, 2010, at 5:55 PM, MKArch wrote:

    Matt the cut and paste below is from the M* article that I linked last week that you said you could not open. The article was written By Eric Landry their housing analyst on 9-17-08 (about a year and a half ago). I'm sure houses have become even more affordable since then. The fact that housing inventories have been whittled down from an all time high of ~4.7M to an almost normal level of ~3.7M since then and during the great recession pretty much proves the affordability point.

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

    Affordability Is a Bright Spot

    Prices are declining and inventories are high--that much is clear. However, if one digs deeper into the data, some very encouraging trends start to appear. One such area is affordability. We keep close tabs on this metric for all of the cities featured in the Case-Shiller 20-city Index, as well as more than 330 metros covered within the Office of Federal Housing Enterprise Oversight (OFHEO) series. Both indicate the same thing: Affordability is rapidly coming back into line with historical averages. The blue line on the chart below depicts the percentage of annual pretax income a median earner in Phoenix would have to commit to service the mortgage of a median-priced home (based upon the Case-Shiller Index) over the past two decades.

    It's clear that affordability in Phoenix is no longer meaningfully below historical averages. Based upon Case-Shiller paired sales indexes, the same can also be said for San Francisco, San Diego, Denver, Las Vegas, Minneapolis, and Tampa, all of which now reside relatively close to fair value. Even better, cities such as Dallas, Atlanta, Cleveland, and Detroit are approaching bargain pricing. In fact, only one city in the 20-city composite, Portland, Ore., currently sits more than 20% above our fair value estimate, and only four are more than 12% above that metric. Compare this to mid-2006, when 12 of the 20 cities in the study were more than 20% overvalued, nine of them by more than 30%. Although a few MSAs still have a way to go before their homes are reasonably priced, it's pretty evident that affordability has gotten appreciably better across most of the country.

    Is it possible for prices to overshoot our estimate to the downside? The answer, of course, is yes, especially if current dislocations in the banking industry don't abate over the next few quarters. But we wouldn't count on a sustained downward trend in pricing once a region regains affordability. Aside from regions with widespread systemic job losses like Detroit and some markets in Ohio, home prices have proved to be sticky to the downside according to studies such as the two referenced below.

  • Report this Comment On February 01, 2010, at 6:00 PM, TMFKopp wrote:

    @questioner

    What's troublesome is that it so often seems impossible to have any sort of civil discourse about issues like this. One party decides that the other party is "bad" or "evil" and instead of actual debate it degenerates into name calling and avoidance.

    I'll hit your points only briefly because you obviously don't want actual discourse...

    "your idea of a contract is that it can, and, in fact, SHOULD, be unilaterally abandoned by either party, if it doesn't "work out" in either party's best personal interests, notwithstanding the mutual commitment to fulfill their respective ends of the contract."

    In fact, contracts dictate the terms of the relationship and often times under extreme circumstances there is good reason to exercise the "outs" available in the contract. This happens in commercial loans, employment, sports, etc.

    Of course you take the idea to the extreme, insinuating that I would endorse walking away from any and every contract if it's not vastly in my favor. That would be silly. Sometimes you have to bite the bullet in business, but no businessman in their right mind is going to sacrifice the future of his company instead of doing what he can to get out of a very harmful contract.

    If you're known for habitually not living up to contracts, nobody's going to do business with you. If you're known as a generally honest businessman who had to make a gut-wrenching decision and back out of a contract under extreme circumstances, I'll bet you'll find folks (and especially banks) that will still be willing to do business with you.

    "Banks should make lots of good mortgage loans, and, then, when the real estate market improves and the borrowers have built up a nice bit of equity in their properties, the banks, in their own best self-interest, should seize the real estate and take the profit for themselves."

    They can feel free to try it, but I doubt they'll get very far.

    How about this instead: Banks should give out a ton of loans and instead of maintaining the relationship with the person that they loaned the money to, they sell off the loan to somebody else so they can pocket a short term gain from the fees they receive. At the same time, they give wild no-down-payment loans on overvalued properties to folks with barely enough income to pay the mortgage with teaser rates, and never think twice about the impact that this could potentially have on the collateral that they're lending based on all over the country.

    "post the same repetitive, whiny rants on the Fool"

    It's encouraging to know that for some people the idea of discourse has boiled down to, "if you say what I agree with you're a genius" and "if you say something I don't agree with you're on a 'whiny rant'."

    Oh well, c'est la vie

    Matt

  • Report this Comment On February 01, 2010, at 6:03 PM, gddunton wrote:

    @ Questioner5000

    The risk of default is vital to the health of the credit market. This is what generates higher returns than savings accounts and other low return vehicles.

    I believe there is just as much of an argument that NOT defaulting on your severely underwater mortgage is immoral. This is based on the fact that a mortgage is a secured loan.

    The principal of the mortgage is guaranteed by the house itself. If a bank originates a mortgage "correctly" then the borrower should have ample future income to maintain payments and equity in the house. The banks also should have assessed the prospects for the price of the house.

    The minute that the value of the mortgage exceeds the value of the property, the bank has failed in its risk assessment. They made a poor investment.

    If the homeowners continue to pay into the mortgage as the value of the home keeps decreasing then they are propping up a the poor investment of the bank. It is doing a disservice to the efficiency of the markets to accurately price the risk involved in the housing market.

    The prospect of defaults in facts creates the markets for risky, thus higher returning loans and the overall availability of credit in the first place.

  • Report this Comment On February 01, 2010, at 6:05 PM, jesse2159 wrote:

    Contract's have little force of law, so why not walk away. The two biggest apartment complexes in NYC did that last week. Yep, walked away from 110 buildings because they were "under water" Someone now needs to make up the billions in losses. I hate banks but no bank forced you to buy a house you could not afford. Suck it up. You and you alone were responsible for agreeing to the terms of the mortgage.

  • Report this Comment On February 01, 2010, at 6:11 PM, gunnboy wrote:

    This article is the worst I have read in 8 years of Motley Fool.

  • Report this Comment On February 01, 2010, at 6:15 PM, MKArch wrote:

    As I argued last week simple supply and demand tells you that when the economy recovers and the mass of motivated sellers who are depressing prices are gone and potential buyers who were sitting on the sidelines due to uncertainty about the economy are back in the market, prices will make some sort of bounce back.

    I'm not arguing that they will get back to the recent highs but they will get back to somewhere between the high and low. Home owners instinctively know this and even if they may be looking to sell in a few years will weigh potential price appreciation when the economy recovers and all the hassle of moving, downgrading to an apartment and screwing up their credit to the potential savings between renting and owning.

    Once again the vast majority of people buy houses to live in not as an investment. I think you are way overstating the benefits to society of walking away from your mortgage. IMHO the people who stand to benefit the most from underwater walkers are the negative equity theorist who want to say I told you so.

  • Report this Comment On February 01, 2010, at 6:17 PM, TMFKopp wrote:

    @MKArch

    Interesting stuff. However, the measure he's using is based on income versus mortgage payments, which isn't bad, but I'm not sure is really ideal. I mean look at it like this: If I'm making $6,000/mo then a $1,500/mo mortgage payment is pretty affordable for me. But if I'm making $8,000/mo does that mean that I should automatically be willing to pay more for the same house? (prob makes more sense when you think about it in the aggregate)

    That's why I prefer the price / rent ratio as a measure of housing prices. This measure captures the income variable but the income variable doesn't necessarily capture this. That is, if housing (for purchase and rent) inventory stays fixed in a given area, then it's likely that an increase in area income will push up rental rates, therefore housing prices have room to appreciate.

    However, the income affordability measure doesn't capture variables like inventory. Sure, housing prices may have fallen faster than area incomes, but if the inventory has been vastly overbuilt there should still be increased pressure on prices.

    Of course, the price / rent ratio doesn't compute for many people because the way they look at the housing situation is "purchase or death."

    Matt

  • Report this Comment On February 01, 2010, at 6:27 PM, MKArch wrote:

    I think your response gets to the heart of the problem Matt you form your opinion on what you think should be rather than the way things are. You think joe six pack is an MBA crunching all of the possible permutations of renting vs. owning. Reality is all Joe six pack knows is housing prices have a long record of going up and at the end of a mortgage he owns something with and has no and doesn't have to make payments for shelter anymore. If he rents he never owns anything and is making payments forever.

  • Report this Comment On February 01, 2010, at 6:29 PM, TMFKopp wrote:

    @MKArch

    I'm still not sure where you're expecting all of this buying demand to come from.

    There are a vast number of homeowners that are currently underwater. The idea of walking away doesn't apply to many of them because they're not that far underwater. However, those buyers will be out of the market for the next few years because they're not going to be able to sell their current home for what they owe on their mortgage.

    The folks that have foreclosed -- whether they're the great majority who did so because they couldn't afford their home to begin with or otherwise -- have wrecked credit so they're not going to be buyers any time soon.

    Investors will likely be skittish, to say the least, until valuation measures like price/rent fall into more palatable ranges.

    The government's first-time home buyer subsidy won't last forever, and that's probably reduced demand tomorrow by pulling it into today (get your rebate now or risk missing out!!!). Meanwhile, the Fed can't keep its target at 0% forever and the eventual increase in mortgage rates will put downward pressure on prices.

    Unemployment is over 10% and there will be scars from this episode on the American psyche for a long time to come.

    I'm not trying to paint a dire picture for the overall economy here -- in fact I think we'll have a decent recovery -- but I'm just not sure where these buyers are coming from that will be bum-rushing the housing market.

    Matt

  • Report this Comment On February 01, 2010, at 6:32 PM, MKArch wrote:

    BTW read the part about prices being sticky in the affordability range again. It's theory vs. reality and reality is people choose houses when they are affordable even if renting is cheaper (at the moment).

    Sorry about the garbled end of my last post I hit the send button by accident before I got a chance to proofread it.

  • Report this Comment On February 01, 2010, at 6:34 PM, Scottbrown11 wrote:

    Everyone should just stop making their house payments even if they can.

    The only way to help is to stop being part of the problem.

    We stopped the Viet Nam War when we said that "we won't go".

    Big Government and Big Business are in cahoots once again and they can't hear us.

    It is up to the people to stop this unabashed looting of our country.

    Only the people can save us now.

    The only truly Patriotic act available to all of us is to stop paying--NOW!

    The President and our elected officials need our help.

    Be a Patriot and stop paying and while you are at it, plant an American Flag in your front yard to signify that you have stopped paying and are a real American Patriot.

  • Report this Comment On February 01, 2010, at 6:38 PM, wenger2k wrote:

    @Questioner5000

    Its a financial contract not a blood contract. The contract exists almost specifically to specify the obligations of both parties and the ramifications if either party fails to meet their obligation. All thats being suggested here is that the ramifcations of failing to meet the obligations AS SPECIFIED BY THE CONTRACT are less than the obligations of maintaining the contract. There is no side agreement - so I truly don't understand you position on this. There is (assumably) no provision in the contract where you've agreed to be damned to hell, lose a body part, family member or even pet for failing to meet the obligations.

    At issue is that corporations regularly walk away from contracts and willingly pay the penalty because they've determined that the cost of walking away is lower than the cost of staying in and again why should home owners be held to another standard - especially if this standard is self imposed?

    Part of the moral issue in reverse is that the banks were complicit in causing the price of homes to go up in the first place due to highly questionable borrowing practices yet don't want any of the secondary cost associated with it as to their way of thinking they've already paid their due by getting all of the defaults but they're not willing to own up to the price inflation it caused and the asset bubble that will continue to cause defaults in the future.

    For those that think this market will come back soon? have you tried to get a jumbo mortgage lately? folks with 800+ credit ratings and significant income (more than sufficient by any historical standard) are being asked to come to the table with 30-40% down. Personally I'm not seeing this housing market recovering anytime soon.

  • Report this Comment On February 01, 2010, at 6:38 PM, fadler1 wrote:

    Now people. Step back and learn a little from history. There is always a tendency to "blame someone else". In 1989, I bought a house in San Diego. By 1991, that house lost 25% of its value. Did I walk? Of course not because I had in excess of 20% down on the house, I needed to live where I was living, and my payments were the same as they were before the drop. The difference: Crazy, insane, irrational lending and very willing "fools" buying more than they could afford with the blessing of the government where "owning a house is your god given right!.........ala Carter and Clinton and Bush asleep at the switch for whatever reason. When has a salesman (in this case a realtor or mortgage broker in cahoots) not tried to "upsell" the unsuspecting. The safety valve used to be rational lending. But nobody, not Dems, not Reps, not Independents wanted the party to end since that meant they could not use their house as an ATM and could not get more "stuff" than they needed. 1989 to 1991 a 25% drop (woohoo, lower real estate taxes!), and many years to come back (almost ten). The same will happen this time and nobody in Washington can fix that. In the meantime, stop thinking a house is a short term investment and consider it security and stability and if you then lose your ability to pay for it because of job loss or because you were so stupid as to sign up for a balloon payment or rate readjustment..............you deserve eviction. Accept some responsibility.

  • Report this Comment On February 01, 2010, at 6:39 PM, leadbaloon wrote:

    Articles such as this are quite misleading to people who live in states such as Ohio, where the banks are free to go after the defaulting homeowner for the full amount of their loan. Advocating a walkaway for residents of such states is not serving those people, and some mention of this problem should be made in the article. Of course, we don't have quite the underwater problem of coastal states since property here did not really participate in the bubble. We have more of a problem of job and income loss. Failing to reach accommodation with such homeowners, of course, can leave the bank literally holding the property, though. when the owners head into bankruptcy court.

  • Report this Comment On February 01, 2010, at 6:39 PM, TMFKopp wrote:

    @MKArch

    "You think joe six pack is an MBA crunching all of the possible permutations of renting vs. owning. Reality is all Joe six pack knows is housing prices have a long record of going up"

    And this is exactly why there are Joe Sixpacks all over the country sitting in the financial gutters right now. Just because it's been a long-held belief doesn't mean it's OK to perpetuate. In fact, the lack of financial education is a big problem in this country. We just don't live in a world where people can afford to have simplistic views like "housing prices always go up."

    It was because of the "everything works out if you buy a house" mentality that encouraged people to get in over their heads and (even sillier) it was what got banks giving out absurd loans. I believe it was Jamie Dimon who said something to the effect of "we didn't realize that housing prices couldn't go up forever."

    "you form your opinion on what you think should be rather than the way things are"

    What kind of world would we live in if everyone always took the view that "that's the way things are so there's no use in thinking about it any other way?"

    Matt

  • Report this Comment On February 01, 2010, at 6:41 PM, MKArch wrote:

    There were ~6M homes sold in 2009 Matt near the high end of a normal years home sales and this was during the height of the great recession. While I don't disagree that the tax credit helped pull some sales forward it only amounts to a few percentage points difference on the price of a home and if we can get 6M home sales in the great recession I'm sure we can do O.K. when the economy is doing well again.

  • Report this Comment On February 01, 2010, at 6:44 PM, MKArch wrote:

    Bad form cutting off the end of my quote Matt. Joe six pack knows the long run history of house prices is up AND at then end of the mortgage you own something and have no shelter payments.

  • Report this Comment On February 01, 2010, at 6:46 PM, HeyJuan wrote:

    Of course we should be allowed to walk from all contracts if we don't profit!

    Borrow to buy stocks, if they don't go up just default on the loan. Buy cars for resale but stick the lender if you don't profit. Speculate on homes but don't make your payments unless you profit.

    Buy a home and expect to be guaranteed that it will rise in value.

    First Bush ruins the economy for decades to come, then Obama continues some of Bush's idiotic bail-outs.

    Is this a nation of deadbeats now?

  • Report this Comment On February 01, 2010, at 6:49 PM, sleepymonkey wrote:

    @MKArch

    I think you're leaving out an important part of the joe six pack home buying decision equation. That is the status upgrade our culture rewards the home buyer with. Buying a home like a wedding is seen as a right-of-passage in our society. Maybe that will change after this bubble explosion but I doubt it. Our whole economy is based on fanning the behavior.

  • Report this Comment On February 01, 2010, at 6:52 PM, jm7700229 wrote:

    @TMFKopp

    "What's troublesome is that it so often seems impossible to have any sort of civil discourse about issues like this. One party decides that the other party is "bad" or "evil" and instead of actual debate it degenerates into name calling and avoidance."

    Hmmm...does name calling include calling people idiots?

    "The principal of the mortgage is guaranteed by the house itself."

    Absolutely false statement. Although several states have changed the conventional loan agreement to take away recourse from a mortgage lender, no lender ever makes any loan that guarantees the value of the security.

    "The minute that the value of the mortgage exceeds the value of the property, the bank has failed in its risk assessment. They made a poor investment."

    The bank invested in the homeowner. The homeowner invested in the property and borrowed the money to do it.

    "If the homeowners continue to pay into the mortgage as the value of the home keeps decreasing then they are propping up a the poor investment of the bank. It is doing a disservice to the efficiency of the markets to accurately price the risk involved in the housing market."

    Wow! Deadbeat borrower as Hero of the Economy! What an absurd statement.

    "The prospect of defaults in facts creates the markets for risky, thus higher returning loans and the overall availability of credit in the first place."

    You should give up scribbling and become a banking consultant. I'll bet few of the know that they are getting rich on defaults.

    BTW, the legislature of my state (Arizona) is considering changing the "no recourse" provision of the law. It was meant to protect people who got into a bad bind. Instead it's being milked by the selfish. So the people who actually need it are getting screwed. Thanks, Motley Fool.

  • Report this Comment On February 01, 2010, at 6:58 PM, MKArch wrote:

    Sleepymonkey I think the status thing is tied in with the ownership thing. Even if it cost more (currently) to own vs. rent you own something when you are done and rid yourself of shelter payments. It was a smart idea for your dad and you would be smart to own vs. rent as well.

  • Report this Comment On February 01, 2010, at 7:00 PM, TMFKopp wrote:

    @fadler1

    "In 1989, I bought a house in San Diego. By 1991, that house lost 25% of its value. Did I walk? Of course not because I had in excess of 20% down on the house,"

    So it sounds like you weren't really in the same situation as the homeowners I'm referring to here. If you put 20% down, paid down your mortgage for a couple of years, and the price fell 25%, that puts you underwater by around 4%, right? Just one year of even marginal price appreciation and you're back to having positive equity in the house.

    For anybody that's underwater by 4% or so in this market, it hardly would make sense to walk away. Being underwater by 50% is a far cry from 4%.

    @leadbaloon

    "Articles such as this are quite misleading to people who live in states such as Ohio, where the banks are free to go after the defaulting homeowner for the full amount of their loan"

    Trust me, there is no intention of being misleading. And, in fact, there a number of states where the banks have the right to go after borrowers, including one of the hardest hit states -- Nevada.

    In all cases, if somebody is really considering walking away from their mortgage they shouldn't do so without the guidance of experienced professionals (particularly legal). The math of walking away changes when you live in a recourse state, but it doesn't mean that it suddenly never makes sense.

    But going back to the first article, the main point here isn't that it's simply a good idea for anyone and everyone to walk away from their mortgage. Rather, it's that every homeowner should be free to do a cost/benefit analysis -- which means taking into account things like whether the bank can pursue you further -- to see whether walking away would make sense.

    Matt

  • Report this Comment On February 01, 2010, at 7:18 PM, theHedgehog wrote:

    It would be interesting to know the percentage of these houses that people just "walk away from" that wind up being gutted by copper thieves and destroyed by vandals. The idea that there is no harm when people walk away is just uninformed (or willfully ignorant). Many of these houses are never marketable again; especially in exurbs where whole areas have been deserted.

    I'm also a bit concerned by the idea that if someone walks away from a house the economy benefits because now these people have "more money" to spend. The people or institution that was defaulted on surely doesn't have more money to lend to another buyer. The defaulting homeowners have to live somewhere; presumably they'll be spending more or less the same per month on a rental as they did before their ARMs converted. I find it hard to believe that the economy truly benefits from housing bankruptcy other than if deserted exurbs are cleared and returned to farmland. It's certain that bankruptcies don't generate "more money".

  • Report this Comment On February 01, 2010, at 7:25 PM, fadler1 wrote:

    BUT...........it is not your "right" to get more house than you can afford! You can't sit down in a restaurant and order more than you can pay for. You can get more car than you can afford by "leasing" where you really end up paying more faster than by buying since you have no residual. We are becoming Europe and few own houses other than what they "inherit". The reason we have higher home ownership is that we can always find "dirt" to build it on (further and further away from the city and longer and longer commutes) that cost less so the price of a BIG house is lower out in the sticks. The insanity set in when those houses out in the sticks went up by double digits every year artifically.

  • Report this Comment On February 01, 2010, at 7:28 PM, TMFKopp wrote:

    @jm7700229

    "Hmmm...does name calling include calling people idiots?"

    Well played! Actually, I wasn't calling anybody an idiot and I'm sure as you know that (but are ignoring for effect). Economists believe that agents in the economy should work toward their best outcomes. Severely underwater homeowners in many cases are not taking the "preferable" economic route. Therefore, in the eyes of economics, these folks seem like they're of subnormal intelligence (that is, idiots). Of course they're not actually of subnormal intelligence, rather they're reacting to things like the harsh moral judgment of their government and fellow citizens.

    Of course it's silly to even have to walk through that because you and I both know why that was used.

    That, of course, differs a fair deal from folks directly calling me repulsive, disgusting, and so on and so forth. But what can you do? It's not like I didn't know that this is a contentious subject.

    The rest of the quotes you highlight are not from me, they're from gddunton. But I'll tackle a few points anyway...

    "Although several states have changed the conventional loan agreement to take away recourse from a mortgage lender, no lender ever makes any loan that guarantees the value of the security."

    I believe what he was referring to is that the principal that the bank is loaning out is backed by the house, not that the bank guarantees the value of the house.

    "The bank invested in the homeowner."

    If the bank invested in the homeowner then why would the property be used as collateral? The bank is investing a bit in both. An unsecured business lender invests based on the financial health and prospects for the business. A secured lender invests both based on the financial health and prospects for the business, as well as the value of the collateral that's backing the loan. If banks were actually investing solely in homeowners interest rates would be a heck of a lot higher.

    "It was meant to protect people who got into a bad bind. Instead it's being milked by the selfish."

    Who were the selfish and who are those truly deserving? Is that a decision made by you?

    Matt

  • Report this Comment On February 01, 2010, at 7:38 PM, drbob22 wrote:

    The bottom line is that the homeowner signed a contract to take on that mortgage debt. It's not an option - "if the house goes up in value, I win, if it goes down I walk away." What kind of society are you advocating? What if the government says to you, "I'd like to pay your [Medicare...Social Security...food stamps..] but it's not in my best interest to do so, even though I promised it to you. Most people are upset with that prospect, because they perceive it as an obligation of the government, NOT AN OPTION. If contracts become meaningless if they turn against you - and that could be futures contracts, forwards, the contract with your oil company to give you a fixed price, an option on stock granted by your company - law has no meaning, property rights are questionable, and anarchy can't be far behind.

    I can't imagine anyone is reading this comment, since so many precede it, but it makes me feel better to rant at this outrageous post.

    Bottom line - I am very disappointed in FOOL on this one.

  • Report this Comment On February 01, 2010, at 7:46 PM, woodszilla wrote:

    All I get from this is:

    "My original article was really dumb, but got a lot of comments (about how dumb it was,) so I am going to title another article similarly and continue to ride that wave for a while."

    Pretty funny that there are 43 comments and only 26 recs.

  • Report this Comment On February 01, 2010, at 7:52 PM, buynholdisdead wrote:

    I live close to Las Vegas and have seen some of my friends that have been caught up in this whole mess. I too was under the assumption that you pay your bills and honor your contract. I told my friends that they need to stick with their mortgages and most of them agreed with it. Then as time has gone on and they have tried to renegotiate their contracts by lowering their interest rates, and the banks have been unwilling to work with them, they have become disgusted. They threaten the banks that they will walk and the banks still wont bargain with them. One of my friends is 200,000 underwater on his mortgage. I asked him why he thought it was ok to walk away and he said this.

    "Why is it ok for a corporation to walk away from their agreement on pension plans. When a company goes into bankruptcy they have the ability to do away with their pension plans and all the people that had an agreement with that company lose most of their pension. Why is it that I invested my money in the Stratosphere and they claimed bankruptcy and I received 5 cents on the dollar. Why is it morally wrong for me to walk away but it is ok for them to walk away from their obligations?"

    I can see both sides of this argument and the more I think it over the more confused I become on what is actually "Fair". I will say this. If you think it is ok for corporations to walk away then its ok for everyone to walk. If the corporations must pay all their obligations then everyone should pay all their obligations. Lets make this fair for everyone.

  • Report this Comment On February 01, 2010, at 7:54 PM, TMFKopp wrote:

    @theHedgehog

    "The idea that there is no harm when people walk away is just uninformed (or willfully ignorant). Many of these houses are never marketable again; especially in exurbs where whole areas have been deserted."

    Nobody said there was no harm. That is part of the reason why it would be good if the banks were willing to find some middle ground. Based on the reading that I've done on the subject, short sales in many areas are exceedingly hard to complete because the banks won't approve them. And so I can't imagine that there's anything that's more of a true middle ground that's happening. As I noted above, banks are trying to prop the market up by keeping inventory off the market. Bad idea...

    "The defaulting homeowners have to live somewhere; presumably they'll be spending more or less the same per month on a rental as they did before their ARMs converted."

    I'm not so sure this is true. The median home price in Phoenix in 2006 was around $280k, giving a homeowner that put 20% down and got a 6% fixed loan a $1,350 monthly payment (before tax savings, property tax, and any HOA). Browsing CraigsList Phoenix I easily found a number of three and four bedroom rentals for under $1,000.

    Of course the math is even more attractive for someone that didn't buy the median house. If that same homeowner bought a $400,000 house, they would have had a payment of around $1,900. If they can manage to scrape by with three to four bedrooms then they may be able to cut their monthly housing cost in half.

    You did mention an ARM loan, though. For a borrower that bought that $400,000 house with 0% down and got an initial 4% rate on the ARM, they would have been paying $1,900 before the adjustment (excluding all that stuff I mentioned above as well as PMI, which they'd almost assuredly be paying). So we're still talking about a significant drop in housing cost.

    Matt

  • Report this Comment On February 01, 2010, at 8:05 PM, TMFKopp wrote:

    @drbob22

    "The bottom line is that the homeowner signed a contract to take on that mortgage debt. It's not an option - "if the house goes up in value, I win, if it goes down I walk away.""

    It's not as if I'm making this stuff up as I go along. Here's an excerpt from a report from the Dept of Housing and Urban Development called "Report to Congress on the Root Causes of the Foreclosure Crisis" (http://www.huduser.org/Publications/PDF/Foreclosure_09.pdf):

    "There is a rich economics literature examining the cause of mortgage foreclosures, generally referred to as “default” in the literature. Since the 1980s, this literature has been dominated by an option-based theory of mortgage default, where the mortgage contract is viewed as giving homeowners an option to “put” the home back to lenders by defaulting on their mortgage. In an option-theoretic view, the primary factor driving defaults is the value of the home relative to the value of the outstanding mortgage; when the home value falls substantially below the mortgage debt, owners are better off by ceding the home to the lender (a so-called “ruthless” default)."

    In other words, it's not like the idea that homeowners can, and maybe should, walk when the conditions are extreme is something new and novel. Now that it's so widespread maybe it's just more of a question of whether banks will be able to perpetuate the moral obligation angle fast enough to stem the issue.

    Matt

  • Report this Comment On February 01, 2010, at 8:08 PM, sleepymonkey wrote:

    @drBob22

    "if the house goes up in value, I win, if it goes down I walk away." What kind of society are you advocating?"

    Yet what you refer to above is EXACTLY what our "Too Big to Fail" banks were allowed to do to us (U.S. taxpayers). They consciously wrote, then sold, then bet against these horrible mortgages. Then when their house of cards came tumbling down under its own criminal weight they and their minions in the executive and congressional branches of our government made good on their bad bets at 100 cents on the dollar out of OUR country's treasury. Why so much outrage and anger at the downstream end of this debacle when it originated and was orchestrated from the upstream end???

    I don't think TMFKopp is advocating for any "kind of society." I think he is pointing out the realities of the one we unfortunately live in.

    I live within my means and I pay my bills. I don't like it when others don't. However, I have grown tired of the double standard that exists in this country.

    The bankers and the government they were allowed to buy are getting a free ride. Use your energy to cure the disease not the symptom.

  • Report this Comment On February 01, 2010, at 8:20 PM, MKArch wrote:

    <<<In other words, it's not like the idea that homeowners can, and maybe should, walk when the conditions are extreme is something new and novel. Now that it's so widespread maybe it's just more of a question of whether banks will be able to perpetuate the moral obligation angle fast enough to stem the issue.>>>

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

    You write two articles calling home owners idiots because they aren't walking away from their homes the way you think they should and now you claim it's widespread? You can't have it both ways Matt.

    I've seen a study that suggested this was something new, there was no prior data and the study went on to argue it's going to be a huge problem. The study used a survey of homeowners in lieu of historical data because there was none and the conclusion of the study was that foreclosures will lower prices begetting more foreclosures begetting still lower prices in a death spiral we can't hope to avoid. It didn't happen.

  • Report this Comment On February 01, 2010, at 8:32 PM, TMFKopp wrote:

    @MKArch

    The quote from the HUD report suggests that the view of mortgages vis a vis underwater homes isn't novel, not that the practice is widespread.

    "foreclosures will lower prices begetting more foreclosures begetting still lower prices in a death spiral we can't hope to avoid."

    I hope you don't think this is really what I'm suggesting. I hardly would agree with any "death spiral" fears. As I noted in the article, there are great rule-of-thumb ways of gauging housing valuations like price/rent. Buyers drooling over legitimately undervalued properties would serve as a stop-gap for any potential "death spiral."

    Matt

  • Report this Comment On February 01, 2010, at 8:41 PM, tnk4800 wrote:

    These kind of give and take discussions are great and inciteful, especially if your an acadamian and not in the middle of the river getting swept down the stream,dashed over the rocks and inevitable water falls which will certainly kill you.

    When your experiencing near death situations, losing your home or anything of this nature, all you care about is saving yourself anyway possible, regardless of how it looks or what you look like before or after, or what others think should you save yourself in any way shape or form.

    It's all fake and just for show but listening to the bankers testify I thought I was watching allstar wrestling guys in suits. "What? I had nothing in my hand, I didn't grab his shorts, my thumb just slipped into his eye, my finger nails the sameI, we didn't do anything wrong, we packaged the crap and just sold it. the government made us do it. everyone else was doing it. besides we payed it back. So whats the problem.

    " Talk about immoral "Goldman Sachs says it is just a market to market investor type business" what kind of morals or ethics are in that type of leadership?

    All of them were guilty. And not one of those bankers offered to repay for investors and our country's losses. Not one.

    All said with the exception of blankfien, banking reform is necessary, and the government needs to regulate more. .....As if that was enough, lets move on.

    Screw morals. No one seems to have them when their own pocet or life is effected.

    If anyone thinks that the coming mass of forclosuers, total loss of equity, loss of jobs will not take us under, or will be economically surviveable, well your just as nieve. No matter who you are what your economic status is, you need to understand we are being gutted.

    Further no amount of shorting, playing options, puts calls, whatever, nothing will make a difference because all profits, every farthering will all be taken away in taxes to establish a safe haven for those minimal few who survive.

    This coming recession will be different because most people in the great depression had nothing to begin with.

    I think it would be best for us all of us to come up with a "sustainable (all inclusive) solution", instead of conversation, demand tort and banking reform, immediately remove all cureent members of congress, senate, administration, the guilty bankers, loan services, naked short sellers, their brokers including those who didn't settle their accounts the same day. " Thats a good start because they just don't get it, thin they are entitled and all promised some sort of change and lied. Again.

    If not prepare for the final solution.

  • Report this Comment On February 01, 2010, at 8:53 PM, TMFKopp wrote:

    Prob should have posted this sooner, but of course Stephen Colbert puts it better than I ever could:

    http://www.huffingtonpost.com/2010/01/18/stephen-colber-take...

    Matt

  • Report this Comment On February 01, 2010, at 9:00 PM, MKArch wrote:

    You did use the term widespread Matt. A few months ago there were a number of articles proclaiming an avalanche of foreclosures coming based on a stat that showed something like 25% of home owners were under water. The study I saw seemed to be the basis of their argument. It's good to hear you are at least not in the doomsday camp.

    You admit that while price to rent is your preferred metric for affordability price to income level is an alternative. Given the M* article had the market around fair value over a year ago and suggested prices are sticky once they break below the fair value range wouldn't the fact that prices by most accounts have stabilized suggest that most people see housing prices in the bargain range right now even if you don't?

  • Report this Comment On February 01, 2010, at 9:05 PM, namedotname wrote:

    Anyone with an ounce of common sense know that less foreclosures is better for everyone. Best to keep the sort of rationalizing rampant in this article private.

  • Report this Comment On February 01, 2010, at 9:12 PM, ds10 wrote:

    One of the fundamental underpinnings of a stable society is, if you make a promise, you honor it. If the situation changes such that this can't be done, then you explain, attempt to renegotiate or compromise.

    If this fails, then you agree to complete all, or an agreed part of, the obligation at a future time when

    you are capable.

    If you walk without doing this then you are admitting you are never again to be trusted.

  • Report this Comment On February 01, 2010, at 9:16 PM, sleepymonkey wrote:

    @namedotname

    yeah right. don't talk about it and it will all go away.

    sheesh!

  • Report this Comment On February 01, 2010, at 9:35 PM, TMFKopp wrote:

    @MKArch

    "You did use the term widespread Matt"

    Ha, you got me. Sorry, got carried away there. Probably should have said, "threaten to become widespread" or something like that.

    "wouldn't the fact that prices by most accounts have stabilized suggest that most people see housing prices in the bargain range right now even if you don't?"

    I don't know... that's a good question. It's completely possible that prices will levitate above historical levels for all I know. But what I've always seen when it comes to asset bubbles is that they eventually correct not only to long-run norms, but usually over-correct before coming back to normal.

    Whether or not we get an over-correction, though, I still don't think there's any death-spiral scenario that makes sense.

    Matt

  • Report this Comment On February 01, 2010, at 10:02 PM, masterN17 wrote:

    When did morals have anything to do with money?

  • Report this Comment On February 01, 2010, at 10:08 PM, KeitaiOtaku wrote:

    This article, and author, appear to be slightly confused about the purpose of a home. The author appears to be considering whether or not someone should leave their home, based upon whether it is good for the market, good for an investment, and good for the homeowner's overall financial situation.

    This is a little misinformed, and ill-conceived.

    While American's have been using homes as bank accounts, the primary purpose of a home... is to put a roof over one's head. Not to serve as a bank account... not even for retirement. It would be a terrible investment, considering recent return rates, if one compared it against other options.

    The comments about spending one's money on walmart and (though unstated... RENT) are incredibly ignorant. The author is suggesting we buy more trash at the local trash-discounters, instead of keeping our children warm, and getting a good nights sleep where you don't hear your up-stairs neighbor going to relieve himself in the middle of the night.

    No, the intangibles, thoroughly ignored in this article, far outweigh the financial aspects.

    So.. instead of telling people to default on their loans so they can never purchase a home again... why not give them some actually good advice: if you can afford your home, and you are happy, don't change anything.

  • Report this Comment On February 01, 2010, at 10:08 PM, KeitaiOtaku wrote:

    This article, and author, appear to be slightly confused about the purpose of a home. The author appears to be considering whether or not someone should leave their home, based upon whether it is good for the market, good for an investment, and good for the homeowner's overall financial situation.

    This is a little misinformed, and ill-conceived.

    While American's have been using homes as bank accounts, the primary purpose of a home... is to put a roof over one's head. Not to serve as a bank account... not even for retirement. It would be a terrible investment, considering recent return rates, if one compared it against other options.

    The comments about spending one's money on walmart and (though unstated... RENT) are incredibly ignorant. The author is suggesting we buy more trash at the local trash-discounters, instead of keeping our children warm, and getting a good nights sleep where you don't hear your up-stairs neighbor going to relieve himself in the middle of the night.

    No, the intangibles, thoroughly ignored in this article, far outweigh the financial aspects.

    So.. instead of telling people to default on their loans so they can never purchase a home again... why not give them some actually good advice: if you can afford your home, and you are happy, don't change anything.

  • Report this Comment On February 01, 2010, at 10:11 PM, Joemit wrote:

    TMFat one time allowed one to rate the articles with stars, too bad this one doesn't have that ability.

  • Report this Comment On February 01, 2010, at 10:49 PM, PaintItBlue wrote:

    C'mon, are we calling all the investors idiots for not getting out before the stock market tanked? I don't think so. I would agree with KeitaiOtaku, for most of us a house is a home. And I suspect there are a lot of folks who can make the payments OK and are only slightly underwater on their houses, and more from bad timing than doing anything really stupid. So, if housing prices don't drop further, isn't this something that could fix itself in time if the homeowner keeps making the payments? The main problem would be if for some reason the homeowner really needed to move.

  • Report this Comment On February 01, 2010, at 11:23 PM, fremmons wrote:

    This whole discussion line seems to take no notice that a contract is a promise between the parties. If the parties are not trustworthy then ordinary commerce can not be sustained. My state's law allows the mortgagor to get a deficiency judgement against the defaulting party for the amount of its loss. That will affect the defaulting party's credit rating as well as his community standing. I don't know if bankruptcy will clear away a deficiency judgemant in this state but it damages the credit history also. It is clear that a lot of bad faith promises appear acceptable to this article author and comentators. Anyone doing business with these comentators should be extremely leery.

  • Report this Comment On February 01, 2010, at 11:37 PM, Tomohawk52 wrote:

    Perhaps the solution to the problem is for the government to step in and demand that people put up sizable capital of their own (say 25% of the cost of the house) before the banks can lend them any money.

    I live in Canada. About two and a half years ago, my wife and I went into a random bank on a lark and asked them if we could borrow for a home loan and how much we could qualify for. Imagine my surprise when the guy said that we could borrow up to 105%(!!) of the cost of the home and get a 35(!!) year loan.

    I had only two questions:

    1) Why in the hell would anyone lend hundreds of thousands to people who evidently could not save a penny for a house themselves?

    2) I would be almost 80 before I would pay the thing off. Did he really think I would be working until then?

    He didn't seem to think either was an insurmountable problem. Actually, he seemed like these were mere trifles. At that point my wife and I agreed that we would wait for the bottom to fall out of the market then pay cash for a home or even two. Sadly, we didn't calculate that no matter what the government, banks and citizens would collude to artificially keep prices high. I feel a bit cheated that property values didn't collapse to the point where there were bargains everywhere! ;-)

  • Report this Comment On February 01, 2010, at 11:56 PM, PigletOctopi wrote:

    What ever happened to when someone gave their word it really meant something? My husband and I were in a situation very much like this in the 80's. We were fortunate and were able to keep our promise through much sacrifice. I think it made us much stronger and smarter consumers afterwards. Not all failures are failures, some really do teach lessons that cannot be learned any other way.

  • Report this Comment On February 02, 2010, at 12:54 AM, twosense wrote:

    Wikipedia defines "Contract" as

    In law, a contract is a binding legal agreement that is enforceable in a court of law[1] or by binding arbitration. That is to say, a contract is an exchange of promises with a specific remedy for breach.

    Isn't a mortgage an agreement between the bank and an individual based upon the rules that the individual pays the bank a sum or money and the bank lends a sum of money. If the individual stops paying the sum, (the remedy for breach) is they lose their down payment and have to leave the house and the bank takes over possession.

    There is no morality in this situation.

  • Report this Comment On February 02, 2010, at 1:02 AM, dibo528 wrote:

    The problem is, at least in Florida, that the bank has up to five years to sue for the deficiency. Even if the homeowner is allowed to do a short sale, unless they get an agreement in writing, the bank can still sue the borrower for the deficiency. (At least that's my understanding.)

  • Report this Comment On February 02, 2010, at 1:04 AM, TMFKopp wrote:

    In responding to a few comments at once, I'll point out that not everybody's situation is the same. Maybe walking away would make sense for you, maybe it wouldn't, but the main contention of my article from last week was that you should be able to make that determination free of moral judgment.

    As for the people concerned about the value of somebody's word... at the risk of sounding like a broken record here, when we're talking about the issue of morality and walking on your mortgage, the key concept to note (again, mentioned in prev article) is norm asymmetry. Both parties in the agreement need to operate on a level playing field and it makes no sense for consumers to hold themselves to the idea of moral obligation when the banks view the agreement from a strict profit maximization standpoint.

    Matt

  • Report this Comment On February 02, 2010, at 3:05 AM, none0such wrote:

    Mr. Koppenheffer,

    Infuriating as usual. For the record, I thought your first article on this topic very good and this article even better since it succinctly presents the same argument.

    Your better articles are the ones that provoke us all to think about why we value the things we claim we do value. It is in this way that people will be irked to make sound financial decisions in their own interest rather than poor choices against their, and indirectly, everyone else's, interests.

    A case in point - where are the comments from "mortgagees" who are in the predicament you outline? - none, so the readership who care to voice their opinion is composed mostly of those who would deem it inappropriate to break a contract for personal gain because they wouldn't. They also feel they know what they can afford and entered into a mortgage with this in mind. However, I get the feeling after reading these many posts that these commenters are shooting the messenger because of outrage stemming from their own, unrealized house appreciation more than from any moralistic tenet (not to be confused with a moralistic tenant, which apparently is an oxymoron by the standards of most posters here). Such self-victimization masks the fact that these individuals who bought a house, for whatever reason, did so during a blindingly obvious housing bubble (I’m not talkin’ hindsight here and I live outside the US). Your article makes them aware, or should make them aware, of the imbalance of such a situation and that the corrective measures you propose, in effect removing this imbalance from the banks’ books to frame a sustainable housing market where everyone should benefit, are interpreted by them as contrary to the good faith that their mortgage contract was and all other mortgages should have been negotiated under.

    Collectively, where was the rational for these returns on equity between 2002 and 2007? If people did not know that house prices can go down (and the higher they go up the farther they fall) then their value system is distorted. Posters that claim walking away from an underwater mortgage, (an economic distortion), is morally wrong because they should take responsibility and have been prepared to endure the possible financial consequences are being disingenuous if not hypocritical. What they are in effect saying is that by not supporting an unrealistic equity regression line, their own long-term financial interests are threatened so please stop encouraging people from taking action that further reduces home values. In other words, many people did not make a really irresponsible decision of how much house to buy and so they simply are not in a position to ‘walk away’ while at the same time the notion of not paying on an underwater mortgage of any degree is interpreted as a vote of no confidence in the prospect of that house price ever recovering. That someone could have made a mistake on projecting where they would be financially 20 years from now is something no one wants to hear and it is this that motivates the negative responses.

    Thank you for tackling what is essentially an exercise in behavioral economics but, as a few posters have pointed out, it is not like the average person addresses their personal finances from the perspective of an economist (a difference that is a central argument in the White paper).

    Is it really a positive goal to make people more like economists (or even like economists)? An economist can readily see the benefit of 'outsourcing' the cost of raising children by sending them to another country and supporting them there where the cost of living is lower while the parent(s) remain(s) living and working in a country that provides a higher salary. Parents, of course, would have great difficulty condoning this let alone actually doing this if it was not placed in an absolutely necessary context such as legal emigration from a disadvantaged country. Again, do people need to look at their present financial condition with this kind of acuity? Will we all be better off from such an understanding? Will it really prevent or lessen the kinds of bubbles we have repeatedly seen? If so then might I suggest financially disadvantaged people in the US immigrate, perhaps 'rent' or 'downsize' if you like, to another country for the time being (all things being temporary, as you say. However, US income tax, unfortunately, is more or less permanent and binding, i.e. expats and ex-citizens still pay US income tax).

    So when you tell people to walk away from their house maybe they can walk onto an airplane and support the GDP of another country and still support the US (instead of sending remittances to family they can send them to Uncle Sam).

    By the way, could you take a look at the international art market some time? I’d like to read an article on your perspective on this.

    Richard

  • Report this Comment On February 02, 2010, at 3:43 AM, TomBooker wrote:

    @twosome

    I don't know how many other people in this long thread have grasped the concise clarity of your understanding.

    Let's look at this through the eyes one of the Wall Street Randroids. They dared hold up "Atlas Shrugged" and the morality of "rational self-interest" as their moral shield. So I'll speak in their language. Such, with the quick point that selling fraudulently risk assessed vehicles would have been immoral to Ayn. She would have identified and encouraged letting them fail. Enjoining "reality is the ultimate judge" of immoral behavior.

    Nobody promised to pay for the home. They agreed to abide by the contract. Within the contract were stated the consequences of non-payment and references to applicable law for same.

    Walking away is in your financial self-interest. To fail to do the rational thing is immoral (Rand would say). It was always a potential outcome of the contract. Because the lenders didn't provide for it was their mistake. Poor business on the part of the lender, not a moral issue of the payer.

    Walk away and you advance the free market on its way to a balanced real estate market.

    A Wall Street Bankster wouldn't think about for longer than a minute. And he'd leave skidmarks getting out of there.

    To speak to a morality more generally accepted... if enough people start walking away, the lenders will finally fall on their knees to share some of the vanished part of the asset. Then they will be happy to write a new mortgage with principal reduction.

    And something just and productive would be achieved for all.

    Think about it.

  • Report this Comment On February 02, 2010, at 4:40 AM, sleepymonkey wrote:

    @ TomBooker

    thank you!

  • Report this Comment On February 02, 2010, at 5:26 AM, cmatherne wrote:

    Sorry, Matt... but it IS that simple, it IS black and white. You buy something with borrowed money. You sign a legal document agreeing to repay that debt. The underlying 'value' of that item is irrelevant. Why is this different from repaying a car loan (the value of which is clearly 'underwater')? Why is it different than paying the credit card debt for the fancy meal you just ate (which clearly has no more value six hours later)?

    the logic behind the idea that defaulters then have more money to go out and buy more stuff -and maybe even invest in stocks and their retirement - thereby 'rebuilding ' the economy is patently ridiculous.

    Moral hazard truly DOES begin at home!

  • Report this Comment On February 02, 2010, at 7:03 AM, langco1 wrote:

    the depression in the US now in its second year is puting real estate sales and values back where they should be....

  • Report this Comment On February 02, 2010, at 7:05 AM, NolAloha wrote:

    The recent comment about the "underwater" value of anew car just of the lot is 100%.

    There are real costs to leaving a home that is "underwater":

    1. Moving expenses. That is money up-front, and can easily run up to $10,000.

    2. Credit rating drop. That will cost thousand more.

    3. Opportunity cost: If the home is underwater, in a good neighborhood, it will, within a few years, sell for at least the cost to replace it. Face it: the population i s increasing, and people will need homes. Remember, about 90% of people DO have jobs. And builders will not build if there are homes on the market selling for less than the cost to build one. I have seen a home (in Zillow) go from a market price of $1.1 million to $700,000 to $1.25 million in a matter of months ( I do not believe these numbers, but they illustrate the volitility of the situation.

    4. Opportunity cost: If you leave that home with unpaid debts, it will haunt you for years. You will not be able to easily roll into another place. When the economy revives, you WILL NOT participate to the same extent as others who paid their debts.

  • Report this Comment On February 02, 2010, at 8:21 AM, none0such wrote:

    @ cmatherne

    You are making false comparisons. See Tomohawk52's post a little way up to read their disappointment at house prices not falling enough to make it affordable for them to buy a house.

    Unless a car is somehow destined to become a collectable classic, its value is understood by all parties to always depreciate. That is the reason why banks require a down payment for a new car loan.

    Credit card debt: inflation and deflation are generally understood by all involved in that agreement to be negligible compared to the interest payments.

    However, if you contend that an extreme deflationary period of time were to exist in the US, one where the dollar could buy a few times what it does now, then your analogy to credit debt would be valid since no one would pay back (and keep body and soul together) that debt. If you had paid 80,000 for a Porsche and it suddenly turned into a VW would you continue paying on your remaining car loan? That's a stretch, I know, but closer to what is at stake here.

  • Report this Comment On February 02, 2010, at 9:19 AM, YouHeardItFirst wrote:

    These people who bought houses they can't afford remind me of the Eloi race out of HG Wells Time Machine. For those that haven't the novel, these characters had no initiative and no critical thinking skills. The result? They became livestock, literally FOOD.

    Sound familiar?

    Our economy is going to continue to exploit these "Eloi" however they can. Remember, this isn't new. McDonalds and Burger King made their fortunes off these characteristics. I'm sure we could all identify places all over the economy that are closely tied to people making poor financial decisions. The question I'm asking is how much of our economy depends on the fragile financial health of these individuals. Inability to remove themselves from these homes that they can't afford could have ripple effects across the entire spectrum.

    On the other hand, maybe some of them might learn their lesson and help create a more stable economy going forward. I don't think that giving them a way out is the answer, but not doing so may result in exactly what Matt is trying to point out. Socially and economically, I think we're caught in a Catch-22.

  • Report this Comment On February 02, 2010, at 9:23 AM, Gorm wrote:

    There is a difference between theory and practice.

    This is NOT our normal correction where values will bounce back shortly.

    In fact RealtyTrac forecasts 48% of residences will be underwater in 2011, up from 23% now. Last year we had 2.8M foreclosures and forecast to be up to 3.0M this year.

    While I don't endorse the action of walking, I fear it will happen because most Americans are that committed to a contract. They are too into themselves, seeking that immediate gratification, not willing to make a lifetime sacrifice paying up to 30 years for a bad decision. The divorce rate approximates 50%.

    The problem is TOO many people are upsidedown and unemployment and valuation pressures will force more foreclosures, exacerbating our problems. I fear the next wave to drive prices lower is walk-aways!!

    Gorm

  • Report this Comment On February 02, 2010, at 9:35 AM, damilkman wrote:

    I find some of these comments justifying walking away from a mortgage silly. A home as a primary residence is a terrible investment. If someone is treating their home like a stock that they can walk away from, they have no buisness buying a home. They are a FOOL for not putting their money in a stock. If they want to play the housing market, put it in a housing stock.

    The bank has an expectation that a certain percentage of households intend to stay in their homes because they it is their primary residence. As someone pointed out 90% of the country is still employed. If someone is forced to move and has to walk away, that is fine. But walking away from a primary residence because it is a bad investment is unethical in my opinion.

    If most people were not "idiots", buying a house would become infinitely more difficult. Banks would demand more money down and a higher interest rate because they would have to factor in that a percentage of home owners will "walk away" if their is a drop in home values. Investors would treat all bundled mortgage vehicles as toxic because even solid home owners might walk away at the slightest housing dip. Banks might be forced to stop offering fixed rate loans and justify that they have to recover their costs.

    Also, people like living in homes. So most people on sound financial footing would most likely purchase a new home and secure financing before walking away from their old home.

    Their is a modicum of trust by the banks regarding the intentions of home owners. You may just be a statistic to them. But there is an expectation that a home is a primary residence first, and investment second. If that no longer becomes the case, the banks will react to recover costs. And unfortuately, if this author has his way, the dream of owning a home will be just a dream for a lot more people.

  • Report this Comment On February 02, 2010, at 9:54 AM, cruz08533 wrote:

    Some people wrote "How can I buy another house if I damage my credit by walking away from the one I'm in now?” It may not be an option for everybody, but what you can do is buy the "other" house first before you walk away from the underwater one. Yes, your credit will stink for a while but you won't be in the hole for many years to come. Eventually your credit will clear up. Also, I know of someone who did this and it turned out quite well for him. Not only was he able to find a home at a bargain price after the market turned, the bank from the "underwater" property was willing to renegotiate the terms of his mortgage after he stopped making payments so they knocked off about $100k from his mortgage and some points off his interest. He then decided it was worthwhile to keep the "underwater" property and now he rents that one out. Walking away can be a strong bargaining play........

  • Report this Comment On February 02, 2010, at 10:26 AM, gddunton wrote:

    @Tom Booker

    I think you response nails it on the head. I couldn't quite articulate it like you did, but there us a point where not defaulting on your underwater mortgage is more of a burden to society then defaulting.

    Now everyone has their own break point where it makes sens to default. This accounts for all of those other intangible factors people have been discussing above.

    *If you are happy with your home, the degree to which your home is under water would have be to be greater to default.

    *How much you value your credit score and how much credit you utilize.

    *If you strongly believe that honoring your commitment to the bank is a moral obligation, then your mortgage would that much further underwater to make sense.

  • Report this Comment On February 02, 2010, at 10:33 AM, Turfscape wrote:

    Oh, Matt....stepping back into this fray? A glutton for punishment you are....

  • Report this Comment On February 02, 2010, at 10:37 AM, CaptainFiveBaggr wrote:

    All this talk about "honor", "morality", "victimization", etc.. Is ridiculous. Hasn't anyone ever learned to keep emotions out of investments? For the record I posted this exact post on an article called "this is killing housing prices" in July. And I feel 100% the same way I did back then.

    On July 28, 2009, at 5:55 PM, CaptainFiveBaggr wrote: We can point fingers all we want about people "walking away". But lets be serious. Their credit will take a hit.. but the hit will do much less damage than paying mortgage payments for 3-5 years in the hopes that in year 5 their home is worth as much as their loan. The rules are too laxed on foreclosures. If I bought in 2005-2006 I would walk away in a second. Rent for the next 7 years, work to get your credit up. Then have a huge downpayment on a house that you can afford.... thats sounds better than breaking your back to maybe break even with no equity in your current house after 5 years...

    Dont blame the people, blame the system..... how about getting creative refinancing solutions and allowing these people to take their lost equity over time and give them tax incentives to do so. And make the ramifications of foreclosures more serious. Put a limitations on former foreclosed borrowers. Obviously pay a higher rate, but why not enforce a 35-40% down payment if they have foreclosed in the past 7-10 years.. that way the $100K cash they might have will be good towards a $250K house instead of a $1mill house they would want.

    Need to be more strict with these people, or they will continue to find loopholes. Same goes for bankruptcy laws in my mind. too many loopholes.. too many ways to turn failed debt filled investments into marginal losses. Risk vs Return needs to be equal

  • Report this Comment On February 02, 2010, at 11:13 AM, stonebusted wrote:

    Lets me see if I understand things. Traditionally single family housing has been an excellant investment. An old attage was to be the largest house you could and the least car you could get by with. Loans were made to people that really could not afford them under the ruse that they would increase in value at a rate that allowed refinancing to cover any shortfalls. The government both knew and approved of this.

    Finally it hit the fan. The lenders went broke. The government ponied up money to keep them afloat and save their worthless hides. You see these were the people with the economic skills to foresee the crash.

    Act 3. The various institutions, now flush with yankee money make it. I grant you we need a solid banking system for the country to operate.

    Now the banks are on their feet with tax payer money. Next they raise credit card rates everywhere they can. They foreclose on homes, remember the old American dream, without making deals that are based after foreclosure value to the homeowners. By the way these homeowners are the Americans who put the money up to save these floor flushers.

    The banks pay key employees large bonuses to key people fpr fear of losing these very talented people. These people are the same ones who caused the disaster.

    Yeh, sounds fair to me.

  • Report this Comment On February 02, 2010, at 11:19 AM, wolfman225 wrote:

    I haven't seen anyone really pursue the root causes of this whole mess. IMO they are the idiot twin sons of Govenment(public) and Greed(private).

    The beginning was the legislation in the Carter years to make credit more widely available to the masses. This was subsequently expanded on by both the Clinton and Bush administrations. The Clinton administration pressured banks and lending institutions to relax certain long-standing lending requirements in order to better afford the less-affluent the dream of home ownership, going so far as to threaten, through AG Janet Reno, the possibility of regulation and legislative penalties if they didn't comply. This eventually led to the introduction of such financial "innovations" as the ARM, the "interest-only" short term, zero-down, and 105% financing, as well as the relaxation of the usual financial disclosures and verification documents. President George W. Bush exacerbated this with his push to make the U.S. a more "ownership" society (while I agree with the idea that more of the public having an "ownership interest" the the country could/should lead to a more responsible electorate, his approach was all wrong).

    The GREED was on the part of many (not all) consumers who were being peddled the idea that they somehow "deserved" that big house and that it was the banks' obligation to help them figure out a way to get into it. These banks, already under pressure from the government, obliged them with the aforementioned innovations. Suddenly, someone who was just getting by paying for a 2-3 bedroom apartment found that they could "afford" a house in the suburbs in many cases for a few dollars more per month. Many jumped on the offers without reading the paperwork, much less doing any due diligence. Once in these homes, there was the great excess of the 90's and early 2000's, where the inflation of the bubble was at it's highest, giving people even easier access to the funds necessary to "keep up with the Jones's". Many of those who find themselves "underwater" now would not be in the situation they are if they had acted in a more fiscally responsible manner in the past. If you add in the specualtors, encouraged by the TV shows such as Flip This House (and others) buying properties with this easy money expecting to quickly re-sell for a profit, you have a very large number of unqualified borrowers with large amounts of ready cash exposing the financial system to unprecedent risk. Can you imagine a more volatile mix? I can't.

    In spite of the liberal viewpoint that everyone has a "right" to everything that everyone else has, the fact is that they don't.

    If the old-fashioned requirements of income verification, stable work history, and a minimum 20% down payment had been held to, much of the housing meltdown/crisis would have been averted, people would not find themselves struggling with the possibility of financial ruin, and the entire "Great Recession" could well have been avoided.

    "Idiot" homeowners? Perhaps. "Greedy and Ignorant"? Absolutely.

    Those who are truly in distress due to complete inability to pay their obligations because of circumstances outside their control (serious illness, death of the primary earner, long term unemployment, etc) have my complete sympathy and understanding. I'm not rich, I've been broke several times and I'm fully aware of the pressures they are under, as well as of the penalties they face in the future for their default now. Life is, sometimes, hard.

    As for the others, if you have the ABILITY to pay you have the OBLIGATION to do so. No one ever guaranteed that your house would appreciate as you expected and adults who are even paying minimal attention to life understand that, as the saying goes, "Sh!t Happens". If you walk away when you don't have to simply because it is expedient, you deserve contempt, not sympathy.

    Larry

    P.S. For those posting about the banks' moral responsibility in lending to those who couldn't afford the obligation, and about corporations who regularly "walk-out" on their obligations by going bankrupt.......didn't we all grow up learning that "two wrongs don't make a right"? The moral failings of another should in no way excuse (or encourage) your own.

  • Report this Comment On February 02, 2010, at 11:43 AM, andrewbacon wrote:

    Oh, poor poor Bank of America (NYSE: BAC), Citigroup (NYSE: C), and JPMorgan Chase (NYSE: JPM)!!!!!

    They wrap the entire economy up in knots for years to come and we're worried about them instead of the homeowners whose familiies are just trying to get by?

    Screw 'em. Break em up, regulate the hell out of them. They're the ones that blew this thing up.

  • Report this Comment On February 02, 2010, at 11:45 AM, rogershera1 wrote:

    "But let's try to step away from morals and simple truisms for a moment"

    I admit I read most of the previous articles but time / internet constraints prevent from doing so now, hopefully I am not being overly redundant.

    Simple question: What would the Fool think of a company that walked away because it could?

    Say Co. A has contract to buy an item from Co. B @ a set price. Co. B is getting by & will be fine as long the contract is still honored. They are doing a fine job, Co.A has no complaints other than they can now get the item from Co. C @ 20% less. Contract with Co. B lasts another 2 years. Co. B is small & will not have the cash to survive very long let alone pay for the drawn out lawsuit to try to recover damages / etc.... Co. A walk from B to C. B collapses before suit brought in and doesn't matter as they are so damaged within a month that they are done for.

    Is this reasonable acting in ones own best interest?

    Co. B may have gone down anyway if they could find other business, etc....

    Or would the Fool acknowledge their reasons but say how badly it reflects on the Co.'s character!!! CAN YOU TRUST THEM with your investment $$s!?!?!

    How they treat supplies may be how they treat shareholders interest!

    If we set a low standard for one group, we lower it for all.

  • Report this Comment On February 02, 2010, at 11:47 AM, 50something wrote:

    Haven't read every comment here, but unless the law in the US is fundamentally different from here in the UK the original article is badly flawed. Here in the UK if you default on a mortgage and hand in the keys, the bank/ building society sells the house off, usually at auction at a deeply discounted price. Their only immediate concern is to get whatever is owed to them. If the house sells for more than what's outstanding, you'll be given the surplus (less costs.) More likely though is that the bank doesn't recover all that's owed on the mortgage. In that case, they will still come for you for the difference and that may lead to personal bankruptcy.

    Your are liable for every penny owed on the mortgage, and if the forced sale does not cover it, you are not off the hook.

    Isn't it the same in the US?

  • Report this Comment On February 02, 2010, at 12:02 PM, miteycasey wrote:

    It's not the same in the USA.

    In the US mortages are non-recourse loans. Meaning if you default the bank is stuck with the property and has no recourse to get any outstanding money from the individual.

    http://en.wikipedia.org/wiki/Mortage

  • Report this Comment On February 02, 2010, at 12:02 PM, miteycasey wrote:

    It's not the same in the USA.

    In the US mortages are non-recourse loans. Meaning if you default the bank is stuck with the property and has no recourse to get any outstanding money from the individual.

    http://en.wikipedia.org/wiki/Mortage

  • Report this Comment On February 02, 2010, at 12:03 PM, rogershera1 wrote:

    Sorry, one thing to add:

    Anybody notice the link (upper right of page) to the story on "CEOs Cash In at Your Expense" they are just acting in their own selfish best interest?? Just as homeowners are suggested to do?

  • Report this Comment On February 02, 2010, at 12:07 PM, jrj90620 wrote:

    Just think if we could buy stocks with little to nothing down and if they took a big fall just leave the broker to take the hit.Hopefully lenders will adopt higher down payments(at least 20%) so the buyer has more skin in the game and thinks twice before breaking their promise to pay.Maybe only people who can afford to buy a house should contract to buy one.

  • Report this Comment On February 02, 2010, at 12:10 PM, 50something wrote:

    Thanks for the clarification re US vs UK mortgages miteycasey.

    On that basis it sounds to me as if the US housing market could be more likely to go into total meltdown taking more banks with it if the advice in the original article is followed my too many people.

  • Report this Comment On February 02, 2010, at 12:17 PM, miteycasey wrote:

    And that's what some people have argued, but is falling on deaf ears, but in today's society of me...me...me is that really surprising?

  • Report this Comment On February 02, 2010, at 12:18 PM, miteycasey wrote:

    And that's what some people have argued, but is falling on deaf ears, but in today's society of me...me...me is that really surprising?

  • Report this Comment On February 02, 2010, at 12:24 PM, miteycasey wrote:

    Anybody notice the link (upper right of page) to the story on "CEOs Cash In at Your Expense" they are just acting in their own selfish best interest?? Just as homeowners are suggested to do?

    That's part of the hypocrisy of this entire article and the previous.

  • Report this Comment On February 02, 2010, at 12:28 PM, sleepymonkey wrote:

    so much fear and emotion. smells like opportunity.

  • Report this Comment On February 02, 2010, at 12:49 PM, sleepymonkey wrote:

    so much fear and emotion. smells like opportunity.

  • Report this Comment On February 02, 2010, at 1:43 PM, gddunton wrote:

    "And that's what some people have argued, but is falling on deaf ears, but in today's society of me...me...me is that really surprising?"

    Im confused by this statement... When you buy a house who else are you thinking about beside you and your family? Are you doing it to benefit the bank lending you the money or the people selling the house? The people down the street with a comparably valued home? I know when I am its not about them, its about me, me, me.

    So why should my decision to sell / foreclose with the options available to me be about anything about whats best for me, me, me?

  • Report this Comment On February 02, 2010, at 2:01 PM, miteycasey wrote:

    so much fear and emotion. smells like opportunity.

    Of course it is.

    That's why I'm always on the hunt for rental property.

  • Report this Comment On February 02, 2010, at 2:07 PM, miteycasey wrote:

    So why should my decision to sell / foreclose with the options available to me be about anything about whats best for me, me, me?

    And that's a problem with society today. Everyone doesn't care to think about anything or anyone else.

    That's one of the reasons we are having culture decay, the inability to think of, or see, a bigger picture than ourselves.

  • Report this Comment On February 02, 2010, at 2:25 PM, TMFKopp wrote:

    @none0such

    "Is it really a positive goal to make people more like economists?"

    I don't know that we have to go this far, but I think that working toward better financial education for the broader population is a worthwhile goal. I think it behooves the general populace to be able to evaluate the economic impacts of their decisions. While "animal spirits" (to quote Keynes) are what they are, perhaps if people thought of housing in terms of value indicators such as price / rent, we might have backed off from the dangerous peak we climbed to during the bubble. Of course, maybe not...

    Don't get me wrong, I understand that a house can be a home. But does that mean it can't also be an asset? I don't think we should turn everybody into discounted cash flow robots or something like that, but I do think it would be very beneficial if people had more understanding of finances. And this goes beyond houses -- better financial education may help a lot of people understand just how ruthless compounding interest is when it comes to credit card debt.

    @TomBooker

    Exactly...

    @cmatherne

    I've addressed the car and credit card issue in a few other posts. In short, it's different because the amount that you're "underwater" (not really appropriate description for a car or credit card) doesn't normally justify the very real consequences such as wrecked credit that you will face if you bail.

    @NolAloha

    What you are doing is presenting the variables that any given homeowner would have to consider when making the determination of whether walking away would make sense. You are correct, there are many very real costs to walking away from your home (though, it's arguable how much the credit rating drop will cost you -- if you don't use credit, that cost is $0). For each individual that thinks walking away could be a consideration, they should sit down and go through the numbers that you've presented (plus some others) add in the intangibles (like, "I like this house") and decide what course of action makes sense.

    To be clear, I'm not suggesting that everyone should walk, I'm saying that everyone should be free (of moral judgment) to sit down and do those calculations.

    @YouHeardItFirst

    So are you suggesting we become like the Morlocks? My memory of The Time Machine may be foggy, but as far as I remember the Eloi became the way they were by a long history of living in luxury and ease and exploiting the Morlocks...

    If we want to bring The Time Machine into the picture, I might suggest that the bankers are at most risk of becoming the Eloi. Luxury, ease, and apparently a lack of critical thinking skills. I can't tell you how hard my jaw hit the floor when I heard Jamie Dimon say "somehow we missed that housing prices can't go up forever." That is one of the scariest things I've ever heard.

    @Gorm

    "not willing to make a lifetime sacrifice paying up to 30 years for a bad decision."

    And you're suggesting that they should live as indentured servants to the banks? Not to sound like a broken record, but the homeowner doesn't twist the bank's arm to sign the mortgage contract. Two parties have voluntarily entered into the contract and you're suggesting that one party should "make a lifetime sacrifice" for a bad decision, while the other party, who was in on the same bad decision, gets to skate along.

    @damilkman

    "A home as a primary residence is a terrible investment."

    I suggest you rerun your numbers on this one. If you buy a house at a reasonable price, get it 80% financed, and benefit from the moderate 3.5% annual RE appreciation, you're not going to do badly at all. However, you need to bake in the fact that your house actually does have a theoretical income stream: you. If you weren't living in that house you own, you'd be renting somewhere else, so in effect, you're paying rent to yourself to live in that house. Factor that into your calculations and you'll see why a house isn't such a terrible investment.

    "Banks would demand more money down and a higher interest rate"

    But don't you see? This is what banks should have been doing all along. If you want to discourage defaults, particularly "ruthless defaults" as the HUD puts it, then make people put real money down to buy a home. As soon as you start letting people take "ownership" of a home with $0 down, or, worse yet, you finance them on 110% LTV, then you are only encouraging the view of a mortgage contract as an option on the underlying collateral. And as for interest rates, the banks should always be charging an interest rate that fully compensates them for the risk that they're taking on. Do you think initial teaser rates at 4% or lower really did that?

    @Turfscape

    "Oh, Matt....stepping back into this fray? A glutton for punishment you are...."

    :)

    What can I say? I enjoy a good exchange of views...

    @CaptainFiveBaggr

    "And make the ramifications of foreclosures more serious. Put a limitations on former foreclosed borrowers. Obviously pay a higher rate, but why not enforce a 35-40% down payment if they have foreclosed in the past 7-10 years.."

    Not a bad idea, but why won't this happen? Because interest rate and down payment become the prerogative of the lender and how much risk they're willing to swallow. Unless you actually instate laws that require a 40% down payment if you've foreclosed in the past 10 years, then you'll likely find some lender willing to step up and say, I'll finance you at 35% and another that will offer 25%. Why? They want the income stream, or they just want the origination fee. I'm not saying that's right or wrong, but that's the free market right?

    @wolfman225

    "Many of those who find themselves "underwater" now would not be in the situation they are if they had acted in a more fiscally responsible manner in the past."

    Yes, but many of them find themselves in that situation because of the excesses of others that you bemoan.

    "For those posting about the banks' moral responsibility in lending to those who couldn't afford the obligation, and about corporations who regularly "walk-out" on their obligations by going bankrupt.......didn't we all grow up learning that "two wrongs don't make a right"? The moral failings of another should in no way excuse (or encourage) your own."

    Yes, my mother drilled the "two wrongs don't make a right" well into my head. But the issue at hand is that the banks and corporations that default on a loan or "give back a property" are simply seen as making the best business decision under difficult circumstances. What I'm arguing is that the view should hold for the Average Joe as it does for the big bad banker. We're not talking about Jimmy borrowing money from his best friend Bob on a handshake and a promise -- that's a true handshake agreement and governed under its own set of rules. A mortgage is governed by a contract and what we're talking about here is choosing a certain clause within that contract and suffering the (not insignificant) consequences.

    @rogershera1

    "What would the Fool think of a company that walked away because it could? ... How they treat supplies may be how they treat shareholders interest!"

    Interesting question. Of course, I could point out that heading to the supplier with a lower cost is beneficial to shareholders.

    But more to the point, it's not like a contract is a contract is a contract. What are the terms of the agreement? What ramifications are written into contract for bailing?

    It's important to point out that I don't speak for The Fool -- we're a collection of voices, not a single, set viewpoint. But under the circumstances you describe, I would try to consider how badly the breach of contract (again, if it was truly a breach under the terms) hurts the perception of the company in the business community and asses what impact the company might see from other suppliers or customers. I would take another look at management to see whether this really is part of a pattern of shady dealings, or simply a business-savvy move to save costs.

    What I could tell you for sure is that I would have had a hard time ever investing in Company B. Customer concentration to that extent tends to be bad news.

    Additionally, what if we look at it like this.... Let's say that Company B (LittleGuy) is a small auto parts company employing 5,000 people and Company A (BigAuto) is a major automaker. As recession sets in, BigAuto is forced to make a choice between laying off 10,000 workers or cutting supply costs by X%. It spends a significant amount of money on LittleGuy's parts and since they know that other suppliers offer lower prices, they figure this might be an area they can save. They go to LittleGuy and ask for a 20% price cut, which is the savings they could get from another supplier. LittleGuy says they'll be unprofitable if they give anything more than a 7% price cut. The savings that BigAuto will get through a 7% price cut will mean that it would end up laying off 8,000 workers. What do you do?

    @50something

    "Haven't read every comment here, but unless the law in the US is fundamentally different from here in the UK the original article is badly flawed."

    It depends on the state. In some states, Arizona for instance, first mortgages are considered "nonrecourse" so they bank only has rights to take the property.

    @jrj90620

    "Just think if we could buy stocks with little to nothing down"

    Well.... actually, that's essentially what options are. You can pay just $75 for the rights to buy 100 shares of MSFT at $28. And if the price falls? Don't worry about it, the option just expires worthless.

    @50something

    "the US housing market could be more likely to go into total meltdown"

    Check out my exchanges with MKArch above. I don't think we're at risk of any sort of death spiral. We're simply experience the correction of a vastly overpriced market. As I cited in the main article, price/rent ratios are still above historical averages. So it's not that we're at risk of having housing prices spiraling out of control to the downside, it's simply that we need them to finish adjusting.

    Matt

  • Report this Comment On February 02, 2010, at 4:26 PM, samsonrodriguez wrote:

    @ Anyone who wants to know? Two scenarios here, My older brother is lower income,and bought big house with piggy back,before the housing issues,he couldnt even afford the darn thing,but enough said,any how after not being able to afford to even rent,he still managed to be Convinced by the bank to purchase his 250k home in the ghetto areas,and enjoyed his piece of American dreams briefly,until not able to stretch his dollars less than a year after purchase. short story he was made an offer by the banks to either purchase the house for peanuts,which he couldnt afford anyhow,despite being only 45k,as compared to the purchase! Or accept lower monthly payments of $800 for the remainder of his original contract!! I on the other hand have lost some value,but thankfully just a bit!

  • Report this Comment On February 02, 2010, at 4:41 PM, samsonrodriguez wrote:

    continued... Well no point in my story,just a pissed off me. I pay my bills,always have,and somehow it seems as if those who don't,get the red carpet? sad but somehow true? As I stated,my home purchased for 225k,is now worth 188k,thankfully, I say thankfully,because obviously, I could have chosen a much unsafer,and lower priced area for my children to be raised! My wife and I thought about the whole situation,and even laughed,but at the end,I wonder, why the hell does this kind of thing happen?why do bailing out losers,make more sense,than letting them achieve and learn from failures? I thought we had a grown up as a president?

  • Report this Comment On February 02, 2010, at 5:00 PM, miteycasey wrote:

    As I stated,my home purchased for 225k,is now worth 188k

    SO you should walk away....or is that not the point of the article? Just like selling a stock when it's down 15%. That's an automatic sell.

  • Report this Comment On February 02, 2010, at 5:59 PM, jclawsonPHN wrote:

    One assumption that seems to be imlied by most commenters is that when a person buys a home it is to be their one and only home for the duration of their lives, or at least their mortgage. Maybe that is true to some, especially to those of my grandparents generation but I do not believe it is true today. Has anyone else heard the term "starter home"?

    I bought my home in 12/04, and have since then never had any equity in it. When my wife and I bought our 2 bed 1 bath home we had only one 6 month old and had plans to live in the home for a couple years, build up some equity and savings and then in a couple of years we would look for a bigger home (knowing that our baby would grow and probably be joined by others). Fast forward to today and we have a 5 year old and a 3 year old in the same home, and you never know when another will join us. We would love, and have dreamt about, getting a bigger home to fit our family but are over $100,000 underwater. Is it unreasonable to to dream of a larger home (I'm not talking mansions here)? Most growing families, historically, go through some progression of homebuying from small starter, to large mature. I don't know many couples who buy their one and only home as newlyweds with the expectation that they will live and be buried there.

    We had NO expectations of "flipping" the home or even making gargantuan amounts of money on the home. I would bet that anyone buying a home makes the assumption or expectation that in buying the home they could expect some appreciation; that when they eventually sell the home it would return some equity or at least that it would remain of equal value to purchase price. Anyone that says that they did/do not expect the value of their home to increase is being untruthful. I've heard and understand the arguement that a person who buys a house with the intention of profit is simply a speculator not a homeowner, but that simply is not true. Most people don't live their lives in the extremes but somewhere in the middle. I never expected a massive return on my home but I did have some expectation of appreciation.

    Another point I'd like to make is a comment made by someone in the comments from the previous article, something about relying on the expertice of professionals when buying a home. Many commenters have stated that if someone bought a home that was overvalued then they should have to deal with that because nobody held a gun to their head and forced them to pay that much for the home. So, I guess I am supposed to be an expert a appraising property values, especially as a first time home buyer? When I bought my home there was not a single person that said to me, "You should wait because properties are overvalued and there will eventually be a correction and then you can get a better or equivalent house for the same price or much less." That includes, realtors, loan officers, FHA reps, property inspectors, etc. What I heard was, "Better hurry cause houses are going like crazy so if you see a house you like then you better bid on it." I put much of my trust in licensed professionals to make sure that I wasn't being conned or taken advantage of. Don't get me wrong, I did my own due diligence too but I was still a naive first time homebuyer. So, now I'm in a situation where I feel that I was decieved or conned into buying my home at the price I did. It wasn't any one individual that decieved me but the system that did. It is easy for me to see now that I overpaid for my home, and there are plenty of people out there telling me that I was stupid or ignorant for buying a home for that much money, but where were all those people in 2004? There are a lot of people claiming, "I predicted it way back then, I told everyone that the bubbl was going to burst." But that does little for me now other than feel more like an idiot for listening to professionals in the first place.

    If a person is decieved or conned into signing a contract or making a deal then is it right or moral or ethical to still hold that person responsible to live up to that contract? Even though "no one held a gun to your head" to sign the contract? I believe that I am an honest person, and I don't want to take advantage of anyone or "steal" from anyone but I do feel like I decieved and now I'm trapped.

    Do I love my home? Yes. Does it still provide the function of shelter? Yes. Can I "afford" to continue to live there and pay the mortgage? Yes. Do I want to live there the rest of my life? No. Do I want my boys and future children to grow up having to share one room and one bathroom? No. Am I going to walk away from the home with hopes to try again in the future? Undecided. I'm happy for the many who have commented that they are underwater and will be "responsible" and "keep their word" because they love their home and are happy to live there indefinitely. But what about those of us who bought a starter home with higher aspirations and bigger dreams? Are we to have are dreams squashed, and remain trapped because the experts that we trusted to guide us in the right direction led us astray?

    On a side note: I am quite surprised by some of the harsh reactions to the topic at hand. There are many people that have commented that are being very judgemental and believe that all situations are the same and fit into the same mold. I feel like very few people, who are claiming to be moral/responsible, really care about me and my family. They don't care that with the money I would save by cutting ties to my home could pay for my boys to go to college when they get older. They don't care that just because I can pay my mortgage now, doesn't guarantee I'll be able to do so in the future. That by waiting 5-10 years before defaulting, not buiding any equity, I could actually be in worse shape than I am now. I had plenty of help, advice, and guidance getting myself into this situation but very little now that I'm in it. All I get now is accusations, judgements, and berated. Very little helpful advice; too much "sit there and take it like a man" kind of stuff.

    I have more to say, but I'll save it for rebuttal and future comments.

    JJ

  • Report this Comment On February 02, 2010, at 7:21 PM, gunneraz1 wrote:

    Bottom line, homes are shelter for your family, but also investment for your future well being.

    The best thing anyone can do in this mess of a RE market is to take care of your families needs first. If that is walking away and saving your new gain and pumping money back into local businesses, so be it. We all benefit...unless you hold stock in the big banks.

    Maybe next time around the men that be will figure out that not everyone should own a home...especially with $0 down.

    Change that decision 5 years ago and where are we today?

    I'll tell you, those of us who bought modestly and are "moral" would still have equity in our homes and not forced to be "unmoral" by defaulting in order to get out.

    Those who bought becuase it was "cheap" and carried "no risk" would have continued to rent.

    Is it morally wrong to take care of your family before a bank you took out a loan with? We'll I would ask yourself that question. Each answer is different.

    JJ - you'll know what is best for your family. That could mean staying or walking away. If you walk, make sure you know the law in your state. You wouldn't want to walk and get a 1099 for $100K.

    A short sale attempt is always the "moral" way to attempt to get out. Showing some effort to make due with the situation we all are in.

  • Report this Comment On February 02, 2010, at 7:32 PM, Scottbrown11 wrote:

    What you do not seem to understand is that Big Government and Big Business (Wall Street and the Big Banks) saw and opportunity to make huge profits by conspiring to loot the retirement funds of the world by using American Homes as collateral for loans that would be sold all over the world

    Loans were made to anyone and everyone whether you had good credit, nor credit or bad credit for the purchase of a home or the refinance of a home and the loans were packaged and sold all over the world.

    America wiped out the savings accounts and pension funds of the entire world.

    There is not one teacher in Japan that now has a retirement account. Iceland went bankrupt as did other countries

    It was a planned and well executed conspiracy to loot the world.

    Homes and homeowners in the United States were just the vehicle to accomplish the goal.

    The Wall Street Boys went too far as we now know and couldn't stop the fire storm because it just got too big to stop.

    Goldman Sachs has even admitted all of this and even admitted that they quit retaining a portion of each of their huge CDO Bundles when they sold them all over the world, BUT KEPT SELLING THEM ANYWAY out of just unscrupulous, and uncontrollable greed.

    You see it was all planned, but when it could not be stopped it sucked all of us homeowners into the fire.

    You should be asking yourself the question: Why would America want to bankrupt the world?

    Not whether homeowners should continue paying on their mortgages.

    Homeowners were just pawns in the game.

    Who are the puppet masters?

    Fool me once, shame on me; fool me twice....

  • Report this Comment On February 02, 2010, at 7:53 PM, tkell31 wrote:

    Why bother to even have contracts anymore? Pay if you want right?

  • Report this Comment On February 02, 2010, at 10:11 PM, dragonite9009 wrote:

    Mr Koppenheffer, you must be quite young to be viewing a home as a financial instrument. Some years past, before this country's morals disappeared, homes were considered a place of shelter, not something to be used for financial gain.

    Real estate always has had cycles and during any given cycle, you may be underwater or not. That was never a reason to quit paying your mortgage, and how on earth could anyone hazard a guess as to whether or not they would be upside down in 5 yrs? To even consider walking on a contract when one has the ability to pay is nothing but immorality. Your type of thinking is what got us into this mess in the first place.

    If everyone followed your advice, there would soon be very few people owning homes. With this administration's idea to add a tax onto landlords and to remove the mortgage deduction, everyone who owns multiple homes will be selling, flooding the market with more homes and further depressing prices, thus adding to the number under water. Should we all just walk then?

    Stop looking at this from a selfish and greedy position... which is what you are doing. You are only considering the best financial path for one individual. By removing any moral obligation from your thinking, well, one might as well start condoning bank robbing because, after all, it would really benefit the individual and give the bank a write off, plus think of the individual putting that money into circulation by shopping and consuming!

    Start endorsing responsibility, not irresponsibility. Everyone, just grow up!

  • Report this Comment On February 02, 2010, at 11:08 PM, Unprotected wrote:

    The federal courts allowed Big Auto and Big Airline to void contracts and pension obligations, so why not let homeowners use "the economy" as their excuse as well?

  • Report this Comment On February 03, 2010, at 9:20 AM, mike19000 wrote:

    Remember This:

    The lenders have the right (in most states) to pursue a judgment against short sellers. This judgment may be sold to a collection agency and will hound you and your credit for years and years. Sorry your fairy tale (runaway from responsibility)is not happening for most people - and as always the responsible few pay for the deadbeat many.

    BTW I am in a slightly negative equity situation with my home but have no intent to sell short or run and hide from my obligation.

  • Report this Comment On February 03, 2010, at 12:19 PM, Scottbrown11 wrote:

    You are playing a game of cards and you catch someone cheating, they are sitting on three aces. What do you do?

    A individual approaches you about buying a really cool car for an incredible price. You arrange a loan with the bank, the Title looks good and is accepted by the registration agent. The car turns out to be stolen. Do you pay the loan? The police tell you that you should have know better and refuse to prosecute the con-man. Should you feel a moral obligation to pay in full?

    You are walking down the street and are beaten up and all of your money stolen. A police officer is within plain sight and you yell for help, the officer turns and looks the other way. Bloody and beaten you crawl up to the policeman and are told that you should have know better. The thug that robbed and beat you walks up and splits the loot with the policeman and they give you a lecture about morals and ethics and personal responsibility. You decide to be a better citizen with proper respect for government officials, thugs, criminals, bankers, mortgage brokers, appraisers, Realtors, Congress and the judicial system?

  • Report this Comment On February 03, 2010, at 2:37 PM, freemarketfool wrote:

    No matter how you feel about walking on your mortgage, remember two things. One, walking trashes your credit for seven long years, no matter where you live in this country. Two, some states, like Colorado, have a little thing called default judgement. If you walk on a mortgage here, and you owe more than the house sells for in foreclosure, you can be held liable for the difference. Don't worry, if you can't afford a lump sum they'll be happy to garnish your wages for as long as it takes.

  • Report this Comment On February 03, 2010, at 3:52 PM, Seering wrote:
  • Report this Comment On February 03, 2010, at 5:56 PM, nasis wrote:

    @Seering: I was just about to post a link to the same article -- definitely relevant.

    Also, I'm reminded of the documentary "Maxed out," in which they interview some third-party debt collectors who often succeed in making debtors' lives very difficult, using such tactics as calling neighbors, friends, etc. to shame them into paying. They do this even for debtors who are no longer legally liable, e.g. for mortgages in a non-recourse state.

  • Report this Comment On February 04, 2010, at 2:24 AM, BigBadTroll wrote:

    It looks like I'm late to this party, but I'm gonna toss my thoughts in anyway.

    Commenters keep bringing up applying the logic of walking away from your mortgage to credit cards and car loans, and Mr Koppenheffer keeps drawing on the difference in the respective amounts in an attempt to make a distinction between the two situations. It seems to me that it keeps coming back up because it really is the same thing. It reminds me of the old story about George Bernard Shaw - he supposedly asked a lady at a party if she'd sleep with him for a million pounds, and she said she would. He then asked if she'd sleep with him for one pound. She indignantly replied, certainly not - what sort of woman did he think she was? He said, "We've already established what you are - now we're just haggling over the price." So, Matt... ;-)

    Other commenters are claiming walking away from a mortgage is merely taking advantage of an alternate aspect of the rules spelled out in the mortgage. This seems to me an overly convenient way of looking at it. I don't think mortgages present repossession as an alternative to paying, I think they present it as a consequence of not paying. Saying that having consequences spelled out in the loan contract means it's OK to walk away from the loan seems to me kind of like saying it's OK to kiss a woman who has told you if you kiss her she will slap you - after all, you can handle being slapped, can't you?

    And no, "norm asymmetry" is not an excuse. The bank was perfectly happy to make its 5% profit while the value of your house doubled. The bank didn't sign up to participate in either your profits or your losses. What, exactly, did the bank do that was immoral in extending you a loan? If, as another comment suggested, the bank starts seizing any appreciation it considers excessive, then we can start talking about norm asymmetry - that would be the situation where the bank was working from a "strict profit maximization standpoint."

    I can't wait for future columns on the cost-benefit analysis of marriage versus, er, 'rental,' and on whether we should consider the cowbird's approach to the high cost of raising children! :-)

  • Report this Comment On February 04, 2010, at 3:20 AM, BigBadTroll wrote:

    It looks like I'm late to this party, but I'm gonna toss my thoughts in anyway.

    Commenters keep bringing up applying the logic of walking away from your mortgage to credit cards and car loans, and Mr Koppenheffer keeps drawing on the difference in the respective amounts in an attempt to make a distinction between the two situations. It seems to me that it keeps coming back up because it really is the same thing. It reminds me of the old story about George Bernard Shaw - he supposedly asked a lady at a party if she'd sleep with him for a million pounds, and she said she would. He then asked if she'd sleep with him for one pound. She indignantly replied, certainly not - what sort of woman did he think she was? He said, "We've already established what you are - now we're just haggling over the price." So, Matt... ;-)

    Other commenters are claiming walking away from a mortgage is merely taking advantage of an alternate aspect of the rules spelled out in the mortgage. This seems to me an overly convenient way of looking at it. I don't think mortgages present repossession as an alternative to paying, I think they present it as a consequence of not paying. Saying that having consequences spelled out in the loan contract means it's OK to walk away from the loan seems to me kind of like saying it's OK to kiss a woman who has told you if you kiss her she will slap you - after all, you can handle being slapped, can't you?

    And no, "norm asymmetry" is not an excuse. The bank was perfectly happy to make its 5% profit while the value of your house doubled. The bank didn't sign up to participate in either your profits or your losses. What, exactly, did the bank do that was immoral in extending you a loan? If, as another comment suggested, the bank starts seizing any appreciation it considers excessive, then we can start talking about norm asymmetry - that would be the situation where the bank was working from a "strict profit maximization standpoint."

    I can't wait for future columns on the cost-benefit analysis of marriage versus, er, 'rental,' and on whether we should consider the cowbird's approach to the high cost of raising children! :-)

  • Report this Comment On February 04, 2010, at 3:57 AM, TMFKopp wrote:

    @ commenters referring to default judgments

    Recognize that I'm not saying any given homeowner should walk away. For states where default judgments are allowed, that's a very important factor to consider when figuring out whether walking away makes sense. After all, if there's a good chance you get hit for the difference of the loan anyway, then your cost-benefit analysis shouldn't be steering you towards walking away, right?

    @BigBadTroll

    "And no, "norm asymmetry" is not an excuse. The bank was perfectly happy to make its 5% profit while the value of your house doubled. The bank didn't sign up to participate in either your profits or your losses."

    What you're describing is not norm asymmetry. Norm asymmetry is the fact that it's the normal course of business for a bank to go ahead and knock up that balloon payment, even if they know the borrower is struggling. Yet it's considered wrong for a borrower to work within the bounds of the contract to put themselves in the most advantageous position.

    Norm asymmetry is that we've got hundreds of comments between my two articles, many of which are saying that anyone that walks away from their mortgage is being amoral. At the same time, major financial players walk away from real estate transactions and it's considered just a part of doing business:

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

    http://www.marketwatch.com/story/tishman-speyer-group-abando...

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

    Note the language that they use in these articles...

    "Morgan Stanley... plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market."

    "The firm last month agreed to surrender 17 million square feet of office buildings to Barclays Capital after acquiring them for $6.5 billion in 2007 from Crescent Real Estate Equities."

    "But they will surrender the properties to creditors after they failed to make payments on loans due for it."

    "The fund, RREEF America REIT III, gave up the building in a deed-in-lieu-of-foreclosure transaction to Prudential Mortgage Capital Co., which held a $49 million mortgage on the property."

    Can't find any place where they castigate these borrowers as depraved deadbeats. Seems like the "surrender of property" is simply looked at as a business deal gone sour.

    Here's an article talking specifically about the double standard:

    http://www.insidebayarea.com/business/ci_14325323

    I could also probably point out that it was the banks' profit maximization motive that led them to lend to everything and anything in sight (I have to imagine there were some inanimate objects getting loans during the peak of the bubble). For borrowers that put 10-20% down and took out a reasonable fixed loan and are now putting on scuba tanks because they're so far underwater thanks to the waves of 110% LTV ARM-loan defaults around them, it might seem that they got pretty screwed over by the entity that they'd now apparently be wrong to screw over.

    Of course what's endlessly laughable about that whole situation is that the banks' profit maximization motive was so unbelievably shortsighted that they ended up shooting themselves in the foot. Which of course makes them all the more likely to lash out at any potential "unnecessary" walkaways because they're smarting so bad from the injuries they brought on themselves.

    Weird world we live in...

    Matt

  • Report this Comment On February 04, 2010, at 9:41 AM, ewent0 wrote:

    Is it just me or has that word "contractual" become a neo-excuse for lack of commitment? The government can't do anything about the finance wizards "contractual" bonuses, the state governments can't do anything about the bloated public worker union pensions and benefits and even Madoff's lawyer alludes to the "contractual" loophole that seems to say that investing is a zero because you only get the amount you put into a fund if it should become a fund manager's personal piggy bank. Say what?

  • Report this Comment On February 04, 2010, at 10:18 AM, poach wrote:

    Contractual and moral obligation is the backbone of America - whether its the bank or the individual. The moment you start abusing the principles on which this country was founded - and that starts happening every time we have a crisis, we lose a bit of ourselves. This is not Hugo Chavez's country and never will be as. There's no point being ambivalent about it and pretending that society as a whole will recover faster if we give in a little. There's nothing grey about a contract.

    Poach

  • Report this Comment On February 04, 2010, at 12:01 PM, wthomas46 wrote:

    Well, what's good for the goose also works for the gander. Banks and Insurance giants got bailed out, and were not allowed to fail as they should have, so of course people are waking up and realizing that it's all crony capitalism and why shouldn't they play the same game by protecting their best interests, and bail themselves out from underneath a mortgage and house that they will never get their money back from.

  • Report this Comment On February 04, 2010, at 1:19 PM, ATI2DE wrote:

    Matt:

    What are you going to do if the bank decides to pursue a deficiency judgment against you because of the foreclosure proceedings? They already went to court to process the foreclosure, while they are there they might as well ask the judge to help them recover some of the money they lost. Financial institutions are not completely without recourse.

    It is not as simple as walking away and taking a hit on your credit to save some money, you might have to declare bankruptcy. Try renting or buying anything of substance after that.

    Whether it is moral or not, is it worth it to you then?

  • Report this Comment On February 04, 2010, at 1:39 PM, ATI2DE wrote:

    Matt:

    What are you going to do if the bank decides to pursue a deficiency judgment against you because of the foreclosure proceedings? They already went to court to process the foreclosure, while they are there they might as well ask the judge to help them recover some of the money they lost. Financial institutions are not completely without recourse.

    It is not as simple as walking away and taking a hit on your credit to save some money, you might have to declare bankruptcy. Try renting or buying anything of substance after that.

    Whether it is moral or not, is it worth it to you then?

  • Report this Comment On February 04, 2010, at 1:46 PM, acslater2001 wrote:

    @jm7700229

    "The bank invested in the homeowner. The homeowner invested in the property and borrowed the money to do it."

    -Awesome point, well said. The bank simply uses the home as collateral for their investment. That does not mean the bank is investing in the home. The home owner is free to do whatever they would like with the home whereas the bank doesn't have that freedom. The bank couldn't care less what happens to home, as long as the person that received the loan continues to make their payments.

  • Report this Comment On February 04, 2010, at 2:39 PM, TMFKopp wrote:

    @ATI2DE

    Everybody's individual situation is going to be different and that's going to depend on factors like where they live, income, age, assets, etc. The point is that the homeowners should be able to weigh the factors and make that decision based on whether it all makes sense.

    If, in a hypothetical situation, a deficiency judgment seems highly likely and bankruptcy is not an option, then, no, it probably would be better to stay put and continue paying.

    However....

    "...you might have to declare bankruptcy. Try renting or buying anything of substance after that."

    This sentiment has been expressed by a bunch of people commenting and it's unfortunate. The country's dependence on credit seems to me one of the key ingredients in the mess that we've found ourselves in. Of course you can buy things without credit, you just have to do that old fashioned thing of saving up money before you buy them.

    As for renting, the hardest hit areas where you're most likely going to have people in the situation we're talking about are already flooded with people that have lost their homes because they couldn't afford them. Meanwhile, investors are swooping in to snatch up bargain-priced foreclosures and hoping to get renters in ASAP. I have a feeling the calculus of taking on renters in these areas has become more than "you foreclosed? sorry, no deal." Generally speaking, I'm pretty sure a poor credit score can usually be dealt with in a rental situation through a larger security deposit.

    A few years of bad credit is hardly akin to death -- even when it comes to buying a house. As far as I know, if you go through a short sale process you can get an FHA loan within two years.

    Matt

  • Report this Comment On February 04, 2010, at 2:47 PM, TMFKopp wrote:

    @acslater2001

    "The bank couldn't care less what happens to home"

    Sorry, but not true. Most loan/trust documents I've ever seen stipulate that the homeowner has to keep the property in good condition and that the lender has the right to do inspections to make sure that's happening.

    From the standard California Deed of Trust (from Freddie Mac's site -- http://www.freddiemac.com/uniform/):

    "Borrower shall not destroy, damage or impair the Property, allow the Property to deteriorate or commit waste on the Property. Whether or not Borrower is residing in the Property, Borrower shall maintain the Property in order to prevent the Property from deteriorating or decreasing in value due to its condition. ...

    "Lender or its agent may make reasonable entries upon and inspections of the Property. If it has reasonable cause, Lender may inspect the interior of the improvements on the Property. Lender shall give Borrower notice at the time of or prior to such an interior inspection specifying such reasonable cause."

    Matt

  • Report this Comment On February 04, 2010, at 2:53 PM, acslater2001 wrote:

    @jm7700229

    "The bank invested in the homeowner. The homeowner invested in the property and borrowed the money to do it."

    -Awesome point, well said. The bank simply uses the home as collateral for their investment. There is no signification that the bank has any vested interest in the home other than it's existence as a backing to the loan. In fact, in my experience, banks have zero say as to a home's maintenance or the act of value adding to the home. If the home gains value the bank doesn't come after the owner for a percentage of the increase, that would be ridiculous. If the home burns down, the bank doesn't say "oh well we both lost our investment, let's all go our separate ways and start over again". The banks full investment is on the person receiving the loan, the homeowner. A bank couldn't care less what a homeowner does with their home so long as the mortgage payments continue to come in with interest (the investment). Collateral does not equal investment.

    @TMFKopp

    "If the bank invested in the homeowner then why would the property be used as collateral? The bank is investing a bit in both. An unsecured business lender invests based on the financial health and prospects for the business. A secured lender invests both based on the financial health and prospects for the business, as well as the value of the collateral that's backing the loan.

    - Business lenders of any kind do not invest in the assets of the company. The lender is invested in the company for it's gains in revenue not the individual assets. The assets are only used as collateral to try and repay secured investors on a failed investment, or business. The bank does not receive a percent of the increase of a home's value and certainly does not share in it's loss unless the investment (the homeowner) walks away from the home resulting in a defaulted loan. The collateral is only there for the bank to recoup as much of its losses as possible and is never an investment of any kind for the bank. Imagine a society where the banks were investing in the homeowner as well as the home. You'd have to have any and all improvements or changes to the home approved by the bank, similar to the way many business investors approve changes to the invested business' plans, etc. And we thought HOAs were bad news.

    " If banks were actually investing solely in homeowners interest rates would be a heck of a lot higher."

    -Exactly right, interest rates rise when the risk is higher for the lender. That's why we have credit scores, to show the lender how much of a risk a home buyer would be to lend to. Many credit card companies, for example, adjust rates on the fly when a borrower becomes a risk or has a poor credit score. The credit card company doesn't care what the people purchase with the lent money, they only care about their investment, the person being lent to. And credit card companies can seize assets and garnish wages on defaulted payments if the so choose. They don't care what the asset is that they are repossessing they only care about recouping their losses from a bad investment.

  • Report this Comment On February 04, 2010, at 3:29 PM, revealedin71 wrote:

    Aside from the total lack of character espoused the author (harkening back to what your parents told you about two wrongs not making a right), here's another newsflash.. From the auto loan side, a prime lender may not be interested in you for a very long time if you walk from your house. Some of them have learned that the hallowed credit score did not fare so well over the past 2 years, there are literarry thousands upon thousands of chargeoffs from folks with scores in the 700s and 800s..They now use scoring strictly for pricing and nothing else...returning to judgemental standards (old school lending..you know.,job and res time, debt ratio,paymt/income ratios, income verification,etc...and credit history) And the two things that will serve to automatically disqualify an applicant is ANY Bankruptcy or Foreclosure/Repossession, that appears on the credit history...NO MATTER WHEN IT OCCURED. ..Just something to keep in mind when toying with a "walk away"....

  • Report this Comment On February 04, 2010, at 3:38 PM, BigBadTroll wrote:

    (Sorry about the double post last night - there was some weirdness with 'Refresh...')

    Matt says: "What you're describing is not norm asymmetry. Norm asymmetry is the fact that it's the normal course of business for a bank to go ahead and knock up that balloon payment, even if they know the borrower is struggling. Yet it's considered wrong for a borrower to work within the bounds of the contract to put themselves in the most advantageous position. Norm asymmetry is that we've got hundreds of comments between my two articles, many of which are saying that anyone that walks away from their mortgage is being amoral. At the same time, major financial players walk away from real estate transactions and it's considered just a part of doing business."

    I thought I needed a bit more there! :) Let me take another shot at that. We, as humans, seem to have a relentless desire to anthropomorphize, to attribute human characteristics to things that simply don't have them. Among other things it's a very convenient conversational tool. We even grant limited aspects of personhood to companies for legal purposes. But a company - a bank - is not a person, it's a tool. Just like a hammer is a tool. When I'm driving nails and smack my thumb with a hammer, it's not the hammer's fault - it did exactly what I told it to do. It doesn't do any good to blame that @#$% evil hammer that must have it in for me, to get rid of that possessed hammer and get a new one with a hopefully more pleasant disposition, because the hammer has no disposition, the hammer has no self-awareness - no hopes, no dreams, no nothing - it's just a hammer. It's not the hammer's fault. The hammer does what it's told. Sure, if it's poorly designed, get a different hammer, but attributing any sort of conscious intent to a hammer is pointless. What we're doing is anthropomorphizing and projecting our own failures onto the hammer. Expecting a bank to act as a conscious human entity, to take into account that we did something incredibly stupid and help us out of it, makes as much sense as expecting that hammer to detect that it's heading towards our thumb and change direction out of the way, entirely of its own volition. Now, there are some people who are, in a sense, banks - as some other comments have mentioned, if you have a personal relationship with a senior loan officer, you can expect them to bend the rules a bit in your favor - but that's because you're dealing with the person, not the bank, and the person cares. The bank doesn't care - it can't. It's a bank, not a person. It's a tool. You assert norm asymmetry is in effect here, but I disagree - by definition tools don't have, can't have, morals, and to expect them to act as though they do is to anthropomorphize. I'm not blaming you for it - even I do it! (Note my "the bank was perfectly happy" above.) You then list numerous instances where companies break contracts - acting immorally, as it were - as a reason why we should do the same. (And it amuses me how those are all worded anthropomorphically, as though we were talking about people...) But the companies are just doing what tools do. Just as, when I accidentally let fly a hammer from the roof, the hammer follows the rules of gravity and aerodynamics, and those, not any sort of malevolent presence, determine whether or not it goes through the glass-topped coffee table on the patio, similarly, the company also follows the contracts and laws in effect to determine its path. This is done without regard to anyone else's feelings - because the bank has no feelings of its own. There's nobody home at the bank, it's just a bank. The proposed double standard of norm asymmetry would apply if there was a person on the other side of the equation - but there isn't. So the concept of norm asymmetry simply doesn't apply.

    The article you point to "specifically about the double standard" notes that Tishman is bailing on the Stuyvesant building mortgage "to avoid filing for bankruptcy protection." We do have an existing mechanism - bankruptcy - for dealing with people and companies who've gotten in completely over their heads. It seems to me that we're trying to promulgate some sort of 'bankruptcy lite' here - with 40% less guilt, perhaps? :-) Bankruptcy is meant for when you are actually unable to pay your debts; it assumes you have the obligation to continue paying them, no matter how stupid they may be, if you have the capability to do so. I don't like this proposed 'tactical defaulting' approach to contracts - as another comment points out (paraphrasing strongly here), for the system to work, we need to be able to believe in, and enforce, contracts. I would hope that Tishman's creditors would pursue their legal remedies to Tishman's default and push them to either pay or declare bankruptcy, though, being companies, they'll likely do the ol' cost-benefit analysis dance (maybe they can get more bailout money if they give in?) and decide not to. (Heck, if this means you can milk the system for more bailout, creditors may well start lining up at Tishman's door!) :-/ The article does at least note that bailing on their mortgage will result in Tishman having "a ding to its reputation."

    You talk again about profit maximization - as other comments have pointed out, profit maximization (within the law - the rules, as we have settled on them) is exactly what we expect a company we invest in to do. In this case, banks were presented with a scenario where they could make eminently stupid, completely ridiculous loans - and immediately sell them to someone else, so that they made a profit and retained no risk. This was within the rule set within which they worked, so they did so. Other banks were then presented with loans bundled in instruments that had high ratings from the agencies. These instruments fell within the range of allowable ratings for them to buy, and reported a more attractive return than other eligible and available instruments - so they bought them. This was all a mechanical process. There was no person there, just companies - tools - following the rules of the environment they work within. The failure was not with the tools, but with the rules.

    (In your response, you're again asserting that walking away from a mortgage is working within the bounds of the mortgage contract. I don't think that that's an entirely correct interpretation, as I noted in my previous post. Please do address the question before continuing to use the assertion in discussion with me.)

    Sorry I ran on for so long here - remember that quote from Woodrow Wilson about speeches? :-)

  • Report this Comment On February 04, 2010, at 3:48 PM, harvandtara wrote:

    Wow, Pretty crazy country we live in. I'm as far from a financial wizard as you can get (probably why I'm so damn broke). BUT, I have a ton of credit, credit score of 760+, and no debt except a 50,000 mortgage. It is obviously the financial, insurance and regulatory institutions that have zero morals, have been robbing the world citizens for decades, and are getting paid more than ever before for doing such a good job of it.

    All this talk about contracts... if it was in the institutes (any of them) best financial interest to break a contract they would wipe their @ss with it, and then get a big fat bonus. Morals and business in America aren't synonymous, so don't act all high and mighty about it.

    LIfe will go on, walk from your house if you feel you have too, the people who are going hungry and being evicted from their homes aren't going to care. It's only those that stand to lose some of their past profits, and not make 6-digits+ this year, that are going to care and try to hold you to your "obligations."

    By the way... Doesn't the community have a responsibility to take care of their community... no contract needed? I guess Americans don't feel they are responsible for for their fellow countrymen or their country, unless they're going to get a big fat paycheck for it, even better - cash, that way they won't have to pay taxes (heaven forbid)!

    It makes me sick, I need to start profiting off of virgin timer clear-cutting, clean-water polluting, and off the majority of Americans in general. So let's talk about which companies are going to profit big time off of everyones smashed hopes and suffering. I'm dead serious... if you can't beat'em - join'em. I want in.

  • Report this Comment On February 04, 2010, at 5:08 PM, ATI2DE wrote:

    Matt:

    If you notice, as objection after objection are raised to your original point of view, you keep winnowing and qualifying your argument to maintain some semblance of ownership. Now we are down to "Everybody's individual situation is going to be different and that's going to depend on factors like where they live, income, age, assets, etc. The point is that the homeowners should be able to weigh the factors and make that decision based on whether it all makes sense."

    At the rate you are going, as you keep adding in enough qualifiers to your argument, even I am going to agree that walking away is the best solution, but where we are now is not where you started out.

    BTW, do you have rental property? I do, and as a rental property owner, a bankruptcy in someone's credit history is considered a red flag and a good reason to find someone else. That is the whole point of a credit report, to help determine who is going to live up to their obligations and who is not.

  • Report this Comment On February 04, 2010, at 5:52 PM, jfrankh57 wrote:

    Crazy article from a crazy thought process. When is it permissible to be morally depraved...oh yeah, since the 60's and especially the me decade of the 80's to the present. I never thought to buy beyond my means---I bought a house in my time that was in the lower 1/3 of the local market, cost wise, and built it up when I had extra cash instead of buying high dollar. At that, I was 38 when I bought my house---yup, still in that first house because I couldn't justify 3000 sq feet in a gated community. Now, the house is worth less than it was three years ago, but I haven't become upside down in it...

  • Report this Comment On February 04, 2010, at 11:20 PM, TMFKopp wrote:

    @BigBadTroll

    Oh come on, you don't really believe that hammer bit do you? To take that analogy a little bit further, if you get irrationally angry at the hammer and toss it into your fireplace you might be considered a bit silly or irrational. But if you get angry at your bank and decide to go in and punch a teller...

    Sorry, the comparison just doesn't work. Corporations are staffed and owned by people, those people make the decisions that dictate the direction of that entity. It can seem a bit amorphous sometimes because some of these companies are so large and sprawling and are owned by a vast number of shareholders, but that doesn’t change the fact that the decision-making process within a corporation is always people-driven.

    Take the burger chain In-N-Out Burger for example. Besides having much better food than a McDonald's or Burger King, at first glance it may seem like a very similar organization. But look a little closer and you find things like Biblical passages written on burger wrappers and drink cups. And the employees that work there all make significantly above minimum wage. Why? Because this is another dumb tool corporation? No, because corporate policy is driven by the people that run the corporation and the folks that own and run In-N-Out have a different view on things from the people that run McDonald's.

    And hey, if none of this convinces you, just ask the Supreme Court -- apparently they're pretty convinced that corporations should be treated as people.

    "I don't like this proposed 'tactical defaulting' approach to contracts - as another comment points out (paraphrasing strongly here), for the system to work, we need to be able to believe in, and enforce, contracts."

    As other commenters have pointed out, we could also argue that the system is predicated on people lawfully working in their best interests. Isn't that capitalism? Or we might say that only if the banks face the legitimate threat of homeowners walking will they be sure to actually do the work they should have been doing all along on the front end of the loan -- that is, making sure that loan terms make sense and that the loan collateral is accurately valued.

    "There was no person there, just companies - tools - following the rules of the environment they work within. The failure was not with the tools, but with the rules."

    No to be too repetitive with what I wrote above, but this is a bit silly. Whether we're talking about a corporation or an individual, we're talking about people making decisions in all cases here. If you let corporate decision-making hide behind the "we were doing what was allowed and what was in our best interest" defense then individuals should be able to avail themselves to the same.

    Of course, I won't argue with you on the idea of "failure of rules." There are plenty that I can think of for the banks...

    On the borrower side, if you really want to stick homeowners with the bill and no chance of walking away, then maybe a rule change is in order there. If mortgage loans were really put on the borrower and -- barring deficiency judgment -- the transfer of collateral wasn't ever seen as the end of the lender-borrower relationship, then we wouldn't be having this conversation at all. The borrower would simply be on the hook for the full amount they borrowed and their only potential out would be full-on bankruptcy.

    "(In your response, you're again asserting that walking away from a mortgage is working within the bounds of the mortgage contract. I don't think that that's an entirely correct interpretation, as I noted in my previous post. Please do address the question before continuing to use the assertion in discussion with me.)"

    This is a repost from earlier, but this except is taken from a Department of Housing and Urban Development report titled "Report to Congress on the Root Causes of the Foreclose Crisis."

    "There is a rich economics literature examining the cause of mortgage foreclosures, generally referred to as “default” in the literature. Since the 1980s, this literature has been dominated by an option-based theory of mortgage default, where the mortgage contract is viewed as giving homeowners an option to “put” the home back to lenders by defaulting on their mortgage. In an option-theoretic view, the primary factor driving defaults is the value of the home relative to the value of the outstanding mortgage; when the home value falls substantially below the mortgage debt, owners are better off by ceding the home to the lender (a so-called “ruthless” default)."

    From Roger Lowenstein @ the NYT:

    "Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them."

    I'd also suggest you read the Brent White paper that originally sparked my article: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1494467

    @ATI2DE

    "At the rate you are going, as you keep adding in enough qualifiers to your argument, even I am going to agree that walking away is the best solution, but where we are now is not where you started out."

    I'm going to go ahead and disagree with this. The original message was that for homeowners for whom it makes sense, walking away should be seen as a profit maximizing decision, not a moral failing. The examples you started offering were those of homeowners for whom it might not make sense.

    But let's wipe the slate and start over here for a second. If I say "ATI2DE, if a homeowner runs all the numbers and considers all the pertinent factors and decides that strategically defaulting is in their best interest would you consider them an amoral individual?"

    If you say "no" to that then I think we're at least roughly in agreement. If you say "yes" then it doesn't matter what qualifiers are added.

    "I do, and as a rental property owner, a bankruptcy in someone's credit history is considered a red flag and a good reason to find someone else."

    This is one of the issues that has jumped out at me as a problem with a lot of the comments. There's a definite "this is what I do/did, so this is what everyone should do." Mostly it comes as something like "I've lived in my house for 35 years and never thought a moment about what it was worth on the market because, gosh darn it, I just love living here." Which is great, actually it's fantastic. It means you live in an area that you like, that you've had a solid, stable, good-paying job for a long time, and that you probably live close to family. What an ideal situation. Unfortunately, not everyone's situation is going to be exactly the same as that. But I digress... badly...

    I'm going to bet that your rental property is not in Florida, Southern California, Nevada, Arizona, or Michigan. Just a wild guess. Maybe I'm wrong. But the point is, if you can find folks with great credit and steady jobs to rent your place then bully for you. Many landlords in the most-effected areas will end up facing the decision between giving a thumbs up to someone with a foreclosure ding or keeping their property vacant.

    But more to the point, not everyone is going to do things the way you do. Many might, but many will be satisfied to get additional security deposit to protect their downside.

    Matt

  • Report this Comment On February 05, 2010, at 12:11 AM, VictorMFLA wrote:

    I am one of those severly underwater homeowners. I figure about 60% under if current comps. are accurate.

    I didn't buy "more home than I could afford" either. Back in 2006 the price I paid for my 1 bedroom condo was a good deal for the area. I expected the value to drop a bit, however I didn't expect it to tank. I can still afford the payments, have no credit card debt, no second mortgage either. Just a car payment and an income that comfortably supports this with a bit to spare. I wrestle with walking away primarily because if I compare my situation with that of large corporations it would be smart to cut my losses and bail. However... such "rational defaults" are the first ones the bank will go after with a lawsuit for the balance of the loan AND for additional legal fees. Currently my credit is excellent and trashing it with the prospect of a future lawsuit doesn't sit well with me. The moral aspect is there but it is not as strong as even I would have hoped.

    I believe that the majority of mortgage loans are still in good standing. It was close to 89% back in the fourth quarter of 2008 but I'm sure it's lower now. If a large percentage of loans underwater but still in good standing were to default I believe the result would be even more of a disaster than we are currently in.

    Do I want to be part of the problem or the solution? The end result of this is that I will continue my payments because I'm still happy here and I think that I can weather the storm. If the condo complex I'm in becomes trashed or if I feel my life were in danger than I wouldn't think twice about walking. So far so good

    I'm fairly optimistic.

  • Report this Comment On February 05, 2010, at 10:16 AM, DargFool wrote:

    Only a short comment. People own homes for other reasons besides investment.

    Most people own homes because they like living in a house instead of an apartment, with their parents, or on the street.

    If they can't afford the mortgage payments, then it really doesn't matter if the house is in the red or the black, the owners either have to default or find some other way to change the term of the mortgage (extend it to 40 or 50 years, get bank to take a writedown/interest rate hit, etc.)

  • Report this Comment On February 05, 2010, at 10:43 AM, atmusky wrote:

    The general answer to what should someone do is fairly simple - everyone should always do what is in their best interest.

    The hard part is determining what is actually in your own best interest. When it comes to staying or walking when you have an underwater mortgage determining what is in your best interest is neither self evident or easy to figure out. I wish all those is that situation good luck.

    However once you have determined what is in your own best interest do it. Period.

  • Report this Comment On February 05, 2010, at 10:47 AM, hvalfisk wrote:

    of course it is not in my best financial interest to repay a mortgage that is underwater.

    it is not in my best financial interest to pay my credit card bills.

    it is not in my best financial interest to pay taxes.

    it is not in my best financial interest to pay for any goods from a store - better to steal from costco or homedepot.

    it is not in my best financial interest to purchase a car when I can steal one from a neighbour.

    ... after all, everyone else is doing it!

  • Report this Comment On February 05, 2010, at 10:55 AM, Turfscape wrote:

    hvalfisk wrote:

    "of course it is not in my best financial interest to repay a mortgage that is underwater."

    It may be, it may not be. You haven't been clear about your situation.

    "it is not in my best financial interest to pay my credit card bills."

    It is in your best interest to pay your credit card bills.

    "it is not in my best financial interest to pay taxes."

    It MOST DEFINITELY is in your best interest to pay taxes...unless you really, really like the confines of prison.

    "it is not in my best financial interest to pay for any goods from a store - better to steal from costco or homedepot."

    Again, unless you enjoy the confines of prison...

    "it is not in my best financial interest to purchase a car when I can steal one from a neighbour."

    Wow...there's missing the point, and then there's you.

  • Report this Comment On February 05, 2010, at 11:15 AM, Ophidian wrote:

    Banks are amoral institutions. They are not evil, but outside any moral system. They seek only to maximize self interest -- generally, of mangement, not owners. Therefore, they are owed no "moral obligation." One can not have a moral debt to an entity divorced from morality. Banks do not act in the interest of their customers, so those customers are under no obligation to consider the interests of the banks.

    The "moral" concern is simply a smokescreen fesigned to hoodwink people into acting against their own best interests so that overpaid failed executives can continue to collect their bonuses.

  • Report this Comment On February 05, 2010, at 11:19 AM, TheOthermfa wrote:

    Seems to me there's a business opportunity here for a group to buy up underwater homes at negotiated prices, then rent them back to the former "owner" at negotiated rents. Probably a few devils in the details...

  • Report this Comment On February 05, 2010, at 11:25 AM, gdub123 wrote:

    A home mortgage is a legal debt obligation secured by real estate. Just because it's "secured" doesn't make it legal to walk away. Homeowners who CAN afford to pay the mortgage, but choose to walk away out of selfishness (leaving their debt to society), should be prosecuted and made to repay the loan. Walking out on a mortgage should not be an option. For those who CANNOT afford to pay, we have a legal process called bankruptcy. They should use the legal process which is a gift from society anyway.

  • Report this Comment On February 05, 2010, at 11:46 AM, YouHeardItFirst wrote:

    I'd have to agree with those who are rejecting the hammer argument. If anything, a corporate entity should have MORE responsibility than a human being for just the fact that it has more power than a individual. Using the hammer analogy, if you have a piece of power equipment and it fails horribly and scars you in the process, you are allowed to sue the company that made the machine. The reason for this ability is to keep companies from harming people, because otherwise they wouldn't care. We still end up having this problem anyway but at least the laws keep it under control. (Think PSE&G and Erin Brockovich)

    Asking the average Joe to maintain good behavior while a corporate entity can act immorally also reminds me of a psychologist experiment. A test was run to test the morals of groups versus individuals. In the test, a person cried out for help who was being attacked. One would think that the group would have felt more compelled to help, seeing as they could fall back on someone else to help them. The opposite happened. The INDIVIDUALS were the ones who helped the person, not the group. The group ignored it and kept walk. In other words, being in a group translated into no personal responsibility, just like BIGBADTROLL is trying to suggest. Corporations are just that, a group entity that can, in a moment of moral crisis, ignore personal responsibility.

    Forget the hammer. This is human nature we're talking about here. Yes, it's cynical - but I don't believe you can count on groups to be ethical, and that puts the individual at a major disadvantage. It is likely they'll do the right thing anyway. They don't have the ability to deflect responsibility by being part of the group. We need laws to keep these entities on the moral path, and we need to figure out how to give the individuals a little more credit for holding the line instead of quitting, because if they didn't it would probably hurt us all.

  • Report this Comment On February 05, 2010, at 11:49 AM, YouHeardItFirst wrote:

    If homeowners were really smart, they'd work with other homeowners to form their own corporation and find a means to buy the house that way. Then they could pass the blame to the corporation, which is, after all - just a corporation.

  • Report this Comment On February 05, 2010, at 12:14 PM, tylee100 wrote:

    I think what most people are saying is:

    "Do what is the right thing to do". This argument is the difference between what is right and what is wrong.

    My grandfather always taught me to honor my committments, stand by my word, and that a handshake was as good as a contract. He did not ever equivocate. He didn't say well do these things but if the going gets rough then abandon them. Extreme circumstances harden a man.

    Paying on an underwater mortgage until it is paid off may be difficult but the rewards are great. You can sleep at night and feel like you did the right thing. That's all most of us are saying.

    The truth is absolute not relative to the situation--no matter how difficult the situation is.

  • Report this Comment On February 05, 2010, at 12:18 PM, gddunton wrote:

    The big problem here is that banks let people buy houses with little to nothing down. This helped to lead to the underwater mortgage problem we are currently debating. I think most of us can agree that if it wasn't for the lax lending standards, then most of this mess would have been avoided. (Most, not all).

    If people SEVERELY underwater continue paying their mortgages, it limits the incentive for banks to raise down payments and and reduce their risk to this underwater situation and get us away from this risky situation.

  • Report this Comment On February 05, 2010, at 12:23 PM, opedbyme wrote:

    " If banks start to get the sense that there is an increased willingness among this group to walk, the banks may decide that it is in their best interest to find a middle ground -- one that would potentially leave both the banks and the homeowners better off."

    This middle ground statement hits to the heart of the matter regarding: Wall Street, Main Street and The Hill. There is no middle ground any more; the radicals on both ends have the floor…..and the fringes don’t not want “middle ground”. I don’t think they see the big picture -they just see themselves in the mirror- Maybe they do see the big picture and I don’t…I don’t know any more…I’m bewitched, bothered and bewildered

    For a lot of folks the near and far term regarding salary increases looks bleak. Maybe a reboot and the tonic that ensues is the only way out of this mess. A reboot should get us back (eventually) to lower (affordable) home prices, lower affordable malls, lower affordable commercial real estate, (fill in the blank)…... Too bad folks like me that didn't bit off more then we could chew are gonna go down with this mess. Oh Well. Let's do it...let’s reboot and start over. Let’s default one and all. Folks like me have lots to loose (my job and my home price and my portfolio) but lots of other folks have lots to gain. So let the greedy folks that made bad decisions (both on Wall Street and Main Street) take me along for the ride.

  • Report this Comment On February 05, 2010, at 12:55 PM, mcrose wrote:

    @TMFKopp

    ", that the banks and the homeowners seem to be working off of a different set of rules. The banks operate based on cost/benefit analysis and profit maximization, while homeowners are operating based on a moral code. It doesn't make sense."

    It makes perfect sense if you're a banker.

    And that is the problem.

    The geniuses at AIG Financial Products Group had no problem writing contracts that they knew (if they ever bothered to look at the math) that they could never fulfill. Yet, they also have no trouble demanding their bonus contracts be fulfilled.

    These guys revel in the fact that they don't play by the same rules as everyone else. And we, for some reason, let them get away with it.

  • Report this Comment On February 05, 2010, at 1:08 PM, LodestarX2 wrote:

    I do believe it is valid for homeowners to look at the situation, and do what is best for themselves and their families after weighing the costs and benefits. I also believe it is valid as part of the analysis to set aside morality, and to exercise the rights afforded under the very contracts signed by both the lender and borrower. In this strict definition, it appears to me that borrowers really do have a "right" to walk away (albeit with some costs I will discuss below), and hence, both the author of this article, and the article that it is based on have a point.

    However, I would note that one of the few things that I have not seen addressed is the cost to our society. If everyone who was somewhat underwater (and unfortunately the article does not provide any sort of threshold as to how much underwater) which I would estimate to be a fair amount of people (let's call them Group B), were to walk away from their mortgages, even if they could afford not to, I believe this would drive home values even further down, and theoretically bringing more people into Group B. I wouldn't go so far as to suggest that this cycle would be indefinite, but I will simply suggest that this would be harmful to the economy as a whole, and would not serve to stabilize home values. No, it is certainly not Joe Citizen's job to stablize national home values, but in the long run, this is a bigger "cost" to him than he may realize.

    The second cost is not really addressed in the first article, but addressed by many in the comments, is the hit to your credit score. If a few years ago, you put 10-20% down, figured it so that you could reasonably make the monthly payments, watched the market drop 30-40%, what cost do you place in your clean credit record so that it is worth walking away from the mortgage simply because an appraiser tells you the property is now "worth" less than the total mortgage. Does that now change the monthly payments? Remember, we are not talking about people who can't afford it due to other circumstances. Those people need to do what they need to do. We are talking about people who set out to make the payments for 30 years, and not a single thing has happened to change that plan.

    Finally, I think the hammer analogy is at least partly valid. We can't control what the banks do, but we can control what we do. We have no problems using them when it fits our purpose. When we borrow, and make money from our investment, we don't send the bank a bonus payment. We take credit for making a "good investment". When things turn sour, well, bank shame on you.

    So, to conclude, I agree with the author on this point, our nonrecourse laws basically allow walking away. Perhaps we should change those laws, but they are what they are. But I would suggest we give more thought to th actual costs.

  • Report this Comment On February 05, 2010, at 1:12 PM, flierboy wrote:

    The unstated question of all this is who made all the money that ran home prices up so high. Some of it was distributed to pay for goods and services, a ton of it went to the oil companies when they ran up their prices to suck up the extra buying power the re-fi's gave so many people; and the banks made a killing for several years.

    The question becomes who should be left holding the bag? Personally I don't feel bad that some large corporation is struggling with their bottom line after making huge profits during the bubble. If they were greedy and spent all the profits before the rainy day came, they are more liable than any poor homeowner who is living month to month.

    The more you have, the more responsibility you have. Asking me to keep paying an underwater mortgage so a fat cat can keep an unsustainable life style is disturbed.

  • Report this Comment On February 05, 2010, at 2:05 PM, beccar wrote:

    Hello, I don't think these homeowners are idiots. They probably love their homes and want to keep them. And foreclosure is a terrible thing. I know because I was foreclosed in GA due to mortgage fraud back in November 1, 2005. It is one of the most stressful exoperiencesa human being can go through and should be avoided. Eugenia Renskoff

  • Report this Comment On February 05, 2010, at 2:41 PM, sacdfm wrote:

    There's a contract, if the borrower defaults, the lender has whatever legal recourse the pertaining laws allow. I think borrowing between friends/family carries a clear moral obligation, but between an individual and a corporation - not so much. Especially given the morality of most corporations: liar loans; credit card interest rates 30-40 times higher than they pay the gov't to use OUR money; using bankruptcy to cancel union contracts and promised benefits to empolyees; changing bankruptcy "reform" to protect them at the expense of consumers; etc; etc.

  • Report this Comment On February 05, 2010, at 3:01 PM, TMFKopp wrote:

    @brainsmasher

    "I just read an article on yahoo a few days ago about how the banks are going after homeowners who have foreclosed or walked away; and that they can do so up to 20 years later in all but a few states."

    I'd be curious to see a link to this article. One of the things that Prof White brings up in his paper is that one of the factors holding people back from walking is a misunderstanding of what consequences face them. The timeframe for deficiency judgment is very key in this decision-making process and the 20 years you cite is very wrong in many cases. Florida has a relatively long window -- 5 years from the date of foreclosure I believe. But California and Arizona are both nonrecourse on first mortgages after foreclosure and Nevada gives lenders six months. As I've noted before, anyone considering this course of action would be wise to seek legal counsel to get a clear understanding of the variables at play.

    @LodestarX2

    "We are talking about people who set out to make the payments for 30 years, and not a single thing has happened to change that plan."

    Well, yes and no. In many cases this is so. However, as I and some other commenters have pointed out, not everyone that takes out a 30 year mortgage intended to pay down that full 30 years. In many cases, buyers wanted to get into the real estate market and may have bought a more modest house than they'd eventually like to raise a family in. Or perhaps they were unsure about where they'd eventually settle down, but reasonably expected that they'd be in their current location for at least five years. Historically, people like this could buy a home and reasonably expect to build some equity over the years to come and then sell when they need to move or upgrade and use the equity they'd built to put toward a new home.

    I'm not saying that this is right or wrong, it is what it is...

    Some more general comments:

    The issue of credit score is one I've been thinking a lot about since writing these articles. Does it suck to have your credit trashed? Sure it does, particularly since it means that you won't have the ability to reenter the housing market for some time. But outside of housing, it seems to me commenters put way too much weight on the ability to borrow.

    The basic function of consumer lending is to allow you to pay more for a given item (that is, pay interest to the lender) so that you can get it sooner than you could otherwise afford. The typical item funded does not have an enduring asset value as a house does and so you're just agreeing to pay a higher price for a consumable good.

    Unfortunately, weaning yourself off of credit can be a difficult process. For someone that's in the habit of financing whatever they buy, they've now accumulated a bunch of stuff that they're busy paying down. If they want something new, it's unlikely they'll have the money (since so much is going to pay down what they already have), so they'll borrow to get the new stuff. It's a vicious cycle. To turn it around they'll have to pay down everything that they owe, and wait to buy new stuff until they've actually saved up enough to buy it. Of course, once you have turned it around and are in the habit of saving for what you want to buy it gets a lot easier.

    But I guess I digress a bit. The point is that the loss of credit standing doesn't have to mean that you're every prevented from buying anything.

    Another interesting thought that I'll just throw out there in passing is that there have been a lot of people out there complaining that our President is going to ruin our country by pushing us into a socialist system. Yet many commenters have decried the supposed "me, me, me" attitude and suggested that people should be thinking more about the "greater good." Maybe the people talking about the greater good support the supposed socialist actions of the President, who knows. But the way I understand the capitalist system is that those working within it shouldn't try to guess at what the greater good is, they should be working to improve their position and thereby be part of a fluid system that serves the greater good. And for those that read this and quickly retort, "then why live up to any agreement ever?" Simply, because in most cases, living up to agreements is in your best interest. Individuals have to consider the reputational risks associated with not honoring an agreement -- if they are known for habitually reneging on agreements, nobody is going to do business with them and that is generally not in their best interest.

    Matt

  • Report this Comment On February 05, 2010, at 3:42 PM, foolhardy7 wrote:

    I have a question. It has been touched on here, but seems to be totally ignored by the media (including two real estate professionals, a bank professional, and a lawyer I have heard interviewed on NPR over the past weeks). Walking away from a mortgage does not end the obligation. After foreclosure, there is a deficiency. It turns into a judgment, and it allows garnishment of the former owner's wages, and liens on other property, among other things. Unless the consumer files for bankruptcy (forget about having any credit for the next decade at anything less than usury rates), it's not just mailing the keys to the bank. Yet that is what we hear every day. Has something changed? Are the same banks that raised credit card rates to 30 percent no longer willing to chase a $200,000 deficiency? Why is this issue ignored by all the commentators? If someone knows the answer to what seems to me to be an obvious omission from all the news, please let me know. Thanks,

  • Report this Comment On February 05, 2010, at 3:42 PM, jm7700229 wrote:

    It has been amusing to read the backtracking and waffling done by the author since his original article. That article can be boiled down to a few words: "anyone who owes more on a house than the house is worth is an idiot for continuing to pay the mortgage."

    Now he responds to his critics by saying (among other things) that things aren't always so black and white. Excuse me, Mr. Koppenheffer, but you were the one who made the absolute statement that payng a mortage is irrational. I don't see any gray in your original article.

    And the moral relativism included in your article and the responses by your supporters is troubling as well as irrelevant. Some people in some banks made too much money(!) so we have a moral right to screw all bankers and their investors if it's to our advantage and we can get away with it. I wonder how many of you when selling homes (or stocks, or anything else) over the years have concluded that you made "too much money" on the sale and therefore anyone who enters into a contract with you is morally entitled to walk away from it if it becomes advantageous to do so? It also seems that you can walk away from a car loan if the car depreciates, from credit cards if the stuff you purchased with them is no longer worth what you paid. I can, in fact, do anything that I can't be sent to jail for. Exactly the same, in point of fact, as what you're complaining about bankers doing (although the banks aren't the parties dishonoring the contracts).

    I guess you are the same people who blame McDonald's for making you fat, tobacco companies for making you smoke, who drive your kids two blocks to the bus stop and complain about schools cutting back on Phys Ed.

    The most regretable legacy of the Great Society is the development of the twenty-first century philosophy:

    a. everything is someone else's fault

    b. government has to fix it.

    c. I must benefit from the good choices that I make and be compensated for the bad ones.

    BTW, there is an interesting corollary to this argument: "I should never have significant equity in an asset, because if the asset declines in value I want to be able to walk away from it with no consequences." This means, of course, that I should continue to milk my home for any increase in value to avoid owning anything.

    But the more troubling issue involves the question: where does it end? Are we expecting government to pass laws that will protect us not only from conceivable and known risks but from inconceivable ones? Obviously, if everyone is expected to put a dollar sign on their personal integrity, then contracts no longer have any value outside of a courtroom. This is not a trivial issue. Although I'm sure the author does not expect his advice to continue to its logical conlusion, what's to stop it?

    The day will not come that I will face this question. The level of personal integrity I learned at my father's knee will go with me to the grave. I'm not blind or deaf nor am I naive; I know my personal standards are higher than those of the general population, and my standards are their own reward. This isn't a religious or legal position but a firm belief that no one should have to suffer for having had faith in me and my word, even if they are unaware that I was the problem; even if they were unaware that a problem had occurred.

  • Report this Comment On February 05, 2010, at 3:42 PM, jm7700229 wrote:

    It has been amusing to read the backtracking and waffling done by the author since his original article. That article can be boiled down to a few words: "anyone who owes more on a house than the house is worth is an idiot for continuing to pay the mortgage."

    Now he responds to his critics by saying (among other things) that things aren't always so black and white. Excuse me, Mr. Koppenheffer, but you were the one who made the absolute statement that payng a mortage is irrational. I don't see any gray in your original article.

    And the moral relativism included in your article and the responses by your supporters is troubling as well as irrelevant. Some people in some banks made too much money(!) so we have a moral right to screw all bankers and their investors if it's to our advantage and we can get away with it. I wonder how many of you when selling homes (or stocks, or anything else) over the years have concluded that you made "too much money" on the sale and therefore anyone who enters into a contract with you is morally entitled to walk away from it if it becomes advantageous to do so? It also seems that you can walk away from a car loan if the car depreciates, from credit cards if the stuff you purchased with them is no longer worth what you paid. I can, in fact, do anything that I can't be sent to jail for. Exactly the same, in point of fact, as what you're complaining about bankers doing (although the banks aren't the parties dishonoring the contracts).

    I guess you are the same people who blame McDonald's for making you fat, tobacco companies for making you smoke, who drive your kids two blocks to the bus stop and complain about schools cutting back on Phys Ed.

    The most regretable legacy of the Great Society is the development of the twenty-first century philosophy:

    a. everything is someone else's fault

    b. government has to fix it.

    c. I must benefit from the good choices that I make and be compensated for the bad ones.

    BTW, there is an interesting corollary to this argument: "I should never have significant equity in an asset, because if the asset declines in value I want to be able to walk away from it with no consequences." This means, of course, that I should continue to milk my home for any increase in value to avoid owning anything.

    But the more troubling issue involves the question: where does it end? Are we expecting government to pass laws that will protect us not only from conceivable and known risks but from inconceivable ones? Obviously, if everyone is expected to put a dollar sign on their personal integrity, then contracts no longer have any value outside of a courtroom. This is not a trivial issue. Although I'm sure the author does not expect his advice to continue to its logical conlusion, what's to stop it?

    The day will not come that I will face this question. The level of personal integrity I learned at my father's knee will go with me to the grave. I'm not blind or deaf nor am I naive; I know my personal standards are higher than those of the general population, and my standards are their own reward. This isn't a religious or legal position but a firm belief that no one should have to suffer for having had faith in me and my word, even if they are unaware that I was the problem; even if they were unaware that a problem had occurred.

  • Report this Comment On February 05, 2010, at 3:50 PM, miteycasey wrote:

    Unless the consumer files for bankruptcy (forget about having any credit for the next decade at anything less than usury rates), it's not just mailing the keys to the bank. Yet that is what we hear every day. Has something changed? Are the same banks that raised credit card rates to 30 percent no longer willing to chase a $200,000 deficiency? Why is this issue ignored by all the commentators? If someone knows the answer to what seems to me to be an obvious omission from all the news, please let me know. Thanks,

    The law varies by state. Some states have non-recourse mortgages like the ones the talking heads are mentioning.

    http://www.mortgagereliefformula.com/recourse/

  • Report this Comment On February 05, 2010, at 3:52 PM, miteycasey wrote:

    Unless the consumer files for bankruptcy (forget about having any credit for the next decade at anything less than usury rates), it's not just mailing the keys to the bank. Yet that is what we hear every day. Has something changed? Are the same banks that raised credit card rates to 30 percent no longer willing to chase a $200,000 deficiency? Why is this issue ignored by all the commentators? If someone knows the answer to what seems to me to be an obvious omission from all the news, please let me know. Thanks,

    The law varies by state. Some states have non-recourse mortgages like the ones the talking heads are mentioning.

    http://www.mortgagereliefformula.com/recourse/

    Of course this includes Cali., Arizona, and Nevada(to an extent).

  • Report this Comment On February 05, 2010, at 4:11 PM, foolhardy7 wrote:

    Ah-HA! So the banks that pushed the legislatures to allow them to take away someone's home without judicial process, got the right to do so with a catch---no deficiency judgment. That makes eating the difference the banks' choice, and definitely something the taxpayers should not have to pay for.

    That said, I also agree with jm7700etc. There is a fundamental issue here of integrity that is very important to how this country works (or used to work). Respect for financial obligations, like respect for the rule of law, is on the down-swing, and it worries me.

    Thanks miteycasey, for the answer.

  • Report this Comment On February 05, 2010, at 4:45 PM, LodestarX2 wrote:

    @Kopp:

    I really think some of your detractors go too far, Matt, but I will address two items in your response:

    "The point is that the loss of credit standing doesn't have to mean that you're every prevented from buying anything."

    No one is suggesting the loss of all future buying power, but I think you underestimate the impact of having a bad credit score. A credit score may be used to evaluate a job candidate in some lines of work, a potential tenant for an apartment (I use this as a landlord), a new credit card, applying for insurance in some states, or a future business loan.

    To sabotage this score because at one arbitrary point in time the value of the underlying asset fell to below the mortgage balance (even if we came to an agreement on the % under), seems a little short sighted. At least to me.

    A nice website I visit often has an entire section dedicated to maintaining that score, and you can find it here:

    http://www.fool.com/how-to-invest/personal-finance/credit/in...

    "But the way I understand the capitalist system is that those working within it shouldn't try to guess at what the greater good is, they should be working to improve their position and thereby be part of a fluid system that serves the greater good."

    We can debate at another day whether this is the correct definition of capitalism, but even if it is, I would expect any article (whether yours or Mr. White's) addressing human behavior to at least make a mention as to the impact their recommendation may have on our society as a whole. You don't need to be an Obama supporter to do that, do you?

  • Report this Comment On February 05, 2010, at 4:54 PM, LodestarX2 wrote:

    @Kopp:

    I really think some of your detractors go too far, Matt, but I will address two items in your response:

    "The point is that the loss of credit standing doesn't have to mean that you're every prevented from buying anything."

    No one is suggesting the loss of all future buying power, but I think you underestimate the impact of having a bad credit score. A credit score may be used to evaluate a job candidate in some lines of work, a potential tenant for an apartment (I use this as a landlord), a new credit card, applying for insurance in some states, or a future business loan.

    To sabotage this score because at one arbitrary point in time the value of the underlying asset fell to below the mortgage balance (even if we came to an agreement on the % under), seems a little short sighted. At least to me.

    A nice website I visit often has an entire section dedicated to maintaining that score, and you can find it here:

    http://www.fool.com/how-to-invest/personal-finance/credit/in...

    "But the way I understand the capitalist system is that those working within it shouldn't try to guess at what the greater good is, they should be working to improve their position and thereby be part of a fluid system that serves the greater good."

    We can debate at another day whether this is the correct definition of capitalism, but even if it is, I would expect any article (whether yours or Mr. White's) addressing human behavior to at least make a mention as to the impact their recommendation may have on our society as a whole. You don't need to be an Obama supporter to do that, do you?

  • Report this Comment On February 05, 2010, at 4:57 PM, foolhardy7 wrote:

    Ah-HA! So, the banks that lobbied the state legislatures to let them take people's homes without going to court, got the right to do that, but with a catch---no deficiency. That makes it the bank's choice, and certainly nothing that the taxpayers should have to pay for.

    On another point, however, I agree with jm700etc. There is a fundamental issue of integrity that underlies all contractual relationships, and is important to how this country works (or used to work). The same could be said about the rule of law generally, which is under attack by as many non-violent ways as it is challenged by violent crime. Historically the United States rated second only to a few other countries in ethics and honesty.

    (See, for example, the Corruption Perceptions Index, http://www.transparency.org/policy_research/surveys_indices/... )

    That culture seems to be changing. It's not a good sign.

    Thank you miteycasey, for the educational tip on non-recourse foreclosures

  • Report this Comment On February 05, 2010, at 5:24 PM, NoOracleHere wrote:

    @TMFKopp:

    You wrote: "On the borrower side, if you really want to stick homeowners with the bill and no chance of walking away, then maybe a rule change is in order there. If mortgage loans were really put on the borrower and -- barring deficiency judgment -- the transfer of collateral wasn't ever seen as the end of the lender-borrower relationship, then we wouldn't be having this conversation at all. The borrower would simply be on the hook for the full amount they borrowed and their only potential out would be full-on bankruptcy."

    Actually, that is exactly how I feel, and that is the letter I will write to my representatives in government. All morality aside, I believe bankruptcy court is a legitimate and proper way to pass judgement on these difficult issues.

    Not long ago, it had become a national agenda item that perhaps the bankruptcy option had over the natural course of time, become to lenient on companies that become unable to pay their obligations, and that was disrupting the balance of competition in the marketplace. Bankruptcy had become just another business decision, a decision of how to transfer wealth from creditors to the creditee - not an intended use of the system. Some of that logic applies here. By allowing the deadbeats to avoid bankruptcy altogether, we have the ultimate in leniency. Then only the penalties imposed by the credit rating system provides any negative consequence to failiing in your obligations. That's in my opinion an insufficient consequence, especially in those cases where the individual has no stake in his future credit rating (terminal illness one such example, albeit extreme).

    You've compared mortage default with options trading. With an option, there is essentially a plan A and a plan B written into the contract, either being perfectly acceptable. I don't think in the norms of our society, that many people will view mortgage default as simply a "plan B" written into the contract. If so, then we shouldn't call it "default". We should call it the return option. But I don't believe that way, and we don't call it the return option. It's defaulting on a contract, same as defaulting on any contract. Only thing special here is that this default carries only light consequences for some. When I contract with a surgeon for an appendectomy, I trust that he doesn't consider it just a plan B when in the middle of the surgery he finds a more profitable use for his time. Ok, I've gone too far. But have I?

  • Report this Comment On February 05, 2010, at 6:27 PM, TMFKopp wrote:

    @jm7700229

    "That article can be boiled down to a few words: 'anyone who owes more on a house than the house is worth is an idiot for continuing to pay the mortgage.'"

    How about this? Instead of putting words in my mouth and misrepresenting what was written, we look at an actual excerpt from the article:

    "For many of the underwater homeowners in today's market, paying down their mortgage isn't really in their best financial interest."

    I don't see any absolutist statement there. It says exactly what I meant and continue to assert in my responses -- if the homeowner sits down and figures out that not paying would be in their best interest, then they should do that.

    As to the rest of your comment, I've addressed a lot of those points time and again, including the issue of auto loans and credit cards.

    "The level of personal integrity I learned at my father's knee will go with me to the grave. I'm not blind or deaf nor am I naive; I know my personal standards are higher than those of the general population, and my standards are their own reward."

    The best thing that I can say here is that I truly hope that you're never in a situation where you have to consider violating your high personal standards so that you can protect the interests and future of you and your family.

    @LodestarX2

    "A nice website I visit often has an entire section dedicated to maintaining that score, and you can find it here:"

    Haha, well played! Believe me, I think it's a great thing to be able to keep up your credit score and I don't mean to completely downplay its significance. I only mean to break the idea (not that you were going this far) that a loss of credit is paramount to death. A solid credit score is a great thing to have, but is losing it for a few years really priceless?

    "the impact their recommendation may have on our society as a whole."

    I love the debate (and I realize that in your previous post it sounded like you agree more with me than not... maybe), but to a large extent there is an ideological gulf that is going to keep many commenters from agreeing with me no matter what I say.

    In the end, pretty much any agreement, whether dictated by contract or not, is revocable in some way, whether through default outs as in the mortgage situation or some other route (ok, except maybe a contract with the devil, he's got his ways). If nobody ever lived up to any agreements it would be very difficult to have a functioning society or economy. But the fact is that most people stick to agreements most of the time. At issue here is what you do when the consequences of holding up that agreement are far more onerous than the repercussions from not.

    Personally, my belief is that when push comes to shove, people need to look out for their own best interests and the interests of their family. Normally it will be in their best interest to stick to agreements they've made because it will make business and life in general easier for them in the future. Sometimes, though, circumstances may dictate that they consider exercise outs of an agreement. To emphasize, I'm not suggesting that this suddenly means that all agreements should be broken, nor am I suggesting that this decision will ever be any easy one, even when circumstances are extreme.

    But for the absolutists out there, consider that traditional wedding vows usually have some version of "for better or worse, through thick and thin, for richer or poorer, in sickness and in health till death do us part." Based on that, it would seem that there would be no excuse for ever getting a divorce. Spouse cheats on you? Well, it would seem that falls under sticking by "for better or worse." Spouse develops a ruthless gambling problem that threatens to bankrupt the family and he or she refuses to get help? That definitely seems to fall under the "for richer or poorer." Spouse starts using heroin and spends most nights passed out on the floor of the dealer's apartment and, again, refuses help? Well, that sounds like a sick individual so it would fall under the "sickness and health" clause. So sorry, pretty much no matter what that spouse does, you need to hold up your end of the bargain.

    I'm not looking to get into a debate about the ridiculously high divorce rate in the U.S., but the point is that suggesting that folks should evaluate their outs in any agreement under extreme circumstances is not the beginning of the end of society as we know it.

    Matt

  • Report this Comment On February 05, 2010, at 6:36 PM, TMFKopp wrote:

    @NoOracleHere

    "Only thing special here is that this default carries only light consequences for some."

    Change the rules of play and the circumstances will have to be that much more extreme for a homeowner to consider walking. Which is perfectly acceptable. What I'm saying is that there are currently certain rules of play, so participants should feel free to act within those rules. If the overwhelming portion of the population feels that those rules are too lenient or generally improper, then, by all means, we should change those rules.

    So let's go ahead and bring back debtor prisons, that's fine with me -- just so long as that's a clear outcome at the outset of the contract. The problem is when the rule is, say, non-recourse return-of-property, and then folks are shouting, "yeah, but they should be thrown in jail anyway!"

    Matt

  • Report this Comment On February 05, 2010, at 6:53 PM, jm7700229 wrote:

    @Lodestarx2, I agree that the consequences of a bad credit score go well beyond borrowing power. I am now retired, but I was CFO of my company, and as a matter of course, every new hire was subjected to an in-depth background check going far beyond the credit score and going back a lot further than seven years. Our auditors also checked credit, civil and criminal records annually on all of our employees. Although Mr. Koppheffer does not think that walking away from an obligation reflects negatively on anyone's integrity, many other people who could be important in people's lives don't agree. I'm one.

    I haven't raised the issue of consequences in my posts because I believe in the aphorism "character is what we show when no one is looking." I would far rather know people who are honest because it's the right thing to do, not because they are afraid of the consequences. That's the difference between me and Mr. Koppheffer.

  • Report this Comment On February 05, 2010, at 6:55 PM, NoOracleHere wrote:

    @TMFKopp:

    Debtor prisons are not "fine with me" unless it is for those who walk out of choice, like you say. It is for those, I would reserve a normal prison, as well as for any type of theft. The alternative to debtor prisons for most is a bankruptcy court where the hard decisions are made as to who gets paid and where the losses must fall.

    This debt crisis was not unforseeable. Also what was forseeable is that when the stuff hits the fan, that our economy will spend the next 5-10 years feverishly passing losses around, everyone with their own version of "not me, sucker". That's the society we live in either by choice or by default. But we do have the right to write our congressman. Mind if I use your article as evidence?

  • Report this Comment On February 05, 2010, at 6:57 PM, jm7700229 wrote:

    @Lodestarx2, I agree that the consequences of a bad credit score go well beyond borrowing power. I am now retired, but I was CFO of my company, and as a matter of course, every new hire was subjected to an in-depth background check going far beyond the credit score and going back a lot further than seven years. Our auditors also checked credit, civil and criminal records annually on all of our employees. Although Mr. Koppheffer does not think that walking away from an obligation reflects negatively on anyone's integrity, many other people who could be important in people's lives don't agree. I'm one.

    I haven't raised the issue of consequences in my posts because I believe in the aphorism "character is what we show when no one is looking." I would far rather know people who are honest because it's the right thing to do, not because they are afraid of the consequences. That's the difference between me and Mr. Koppheffer.

  • Report this Comment On February 05, 2010, at 7:12 PM, ATI2DE wrote:

    Matt:

    Your original article did not list any pertinent factors other than being underwater and not even by how much, that was it. If it was cheaper to rent than buy because the value of your house dropped, do it. Otherwise, you are an idiot.

    Now you are adding in "qualifiers" such as job loss or relocation. And you are right, I don't own rental property in any of the depressed areas you listed. So, what are you going to do if you have to move away from an area where rental property owners are not so desperate, because that is where your job is?

    All I am saying is, it better be worth it before you walk away from your obligations. If you do walk away just to save a few bucks because some guy wrote an article on the internet, then you are the idiot.

  • Report this Comment On February 05, 2010, at 7:12 PM, wolfman225 wrote:

    @TMFKopp:

    You wrote: "On the borrower side, if you really want to stick homeowners with the bill and no chance of walking away, then maybe a rule change is in order there. If mortgage loans were really put on the borrower and -- barring deficiency judgment -- the transfer of collateral wasn't ever seen as the end of the lender-borrower relationship, then we wouldn't be having this conversation at all. The borrower would simply be on the hook for the full amount they borrowed and their only potential out would be full-on bankruptcy."

    How about this additional change? Make it mandatory that the banks and mortgage lenders actually hold the note to maturity. If you prevent the lenders from being able to package the mortgage(s) for resale to other financial institutions, a direct consequence would be a more rigorous vetting of the borrowers in question. Perhaps it wouldn't be "fair" that some would be disqualified from borrowing due to insufficient income, an over-large debt load, or bad past credit histories, but the result would be a much more stable financial system.

    Of course, we'd have to get these changes through Congress first. I'm not holding my breath.

  • Report this Comment On February 05, 2010, at 7:48 PM, ricks2foolish wrote:

    As almost always, you guys at Fool.com are only interested in the companies that are involved as opposed to the human beings that may be involved. If a family can afford the payments on their home and are not FORCED to leave the home, they should stay put and bite the bullet. In most cases, the home owner as well as the builder and holder of the mortgage are equally responsible for the predicament they are all in. It seems to me that it is time for all concerned in this fiasco to step up to the plate of honesty and morality and live up to their obligations: the homeowner to the fact that they bought the home and "said they could afford it; the builder for encouraging the home buyer to buy the home even though it should have been apparent to even the dumbest person that the buyer could not afford the home; and the bank for being even more stupid than the buyer and the builder for lending the money to a family that could not afford the house. All the participants to this fiasco should be ashamed of themselves for being so dumb, stupid, or ignorant of the situation to allow it to have ever reached this point

  • Report this Comment On February 05, 2010, at 8:32 PM, jm7700229 wrote:

    @ricks2foolish, I don't agree. The family which should never have gotten the loan in the first place will never be able to repay it. That family should and will walk away because it will have no other choice. Tough luck for the bank for making a bad investment. It would be absurd, however, to hold the builder responsible for a buyer's inability to pay for his purchase. The builder has no business questioning they buyer's ability to repay the bank.

    The article's author keeps trying to avoid the central issue; that people who would continue to make their mortgage payments if the value of the property hadn't dropped, have no legitimate reason for ceasing to make payments just because the value of the property has dropped. The author's arguments simply set any notion of conservative use of credit on its head; the irresponsible buyer can walk away from a bad investiment while the people who make sure they have plenty of equity on a property on which they can make the payments must continue to do so.

  • Report this Comment On February 05, 2010, at 8:54 PM, TMFKopp wrote:

    @jm7700229

    "I haven't raised the issue of consequences in my posts because I believe in the aphorism "character is what we show when no one is looking." I would far rather know people who are honest because it's the right thing to do, not because they are afraid of the consequences. That's the difference between me and Mr. Koppheffer."

    Unfortunately, there are a great many folks out there that look great on paper, but are shady folks when nobody is looking. At the same time, there are other people that may have a ding on their paper record because of extreme circumstances, but lead very admirable lives otherwise. You seem to want to boil down the entire character of a person to a single event in their lives.

    I also think you overstate your case when you say "I would far rather know people who are honest because it's the right thing to do, not because they are afraid of the consequences." Consequences include the self-inflicted shame of thinking that you've done something morally wrong. I think we'd all like to believe that we're inherently good people doing all the right things for all of the right reasons, but at the end of the day we're mostly responding to rules and consequences.

    But beyond all of this, it's kind of funny to me that in all of the talk of morals and age-old lessons that nobody has mentioned some of the classics like:

    "Judge not lest ye be judged"

    "Don't criticize before you've walked a mile in their shoes."

    "Don't judge a book by its cover"

    "Why do you see the speck that is in your brother’s eye, but do not notice the log that is in your own eye?"

    Hmmm... maybe you're all right, maybe we have forgotten many of the great moral lessons of former generations.

    @ATI2DE

    "Your original article did not list any pertinent factors other than being underwater and not even by how much, that was it."

    My original article was something like 800 words long. Brent White's paper was 54 pages. If I wrote a comprehensive piece outlining all of the factors at work and exactly what variables a homeowner should be weighing my editors would haves strangled me. Besides, the point of the original article was to argue against the uneven playing fields that consumer borrowers and corporate borrowers find themselves on, it was not mean to be a field guide to determining whether you should walk away.

    I'm getting the sense that you may agree with me that homeowners that do weigh all the factors at play and do determine that it's in their best interest should walk away. No?

    "So, what are you going to do if you have to move away from an area where rental property owners are not so desperate, because that is where your job is?"

    Interesting you should ask. I've actually spoken to people who were in this situation. They actually had their pick from among a number of great apartments in nice areas.

    Of course, what other choice does that homeowner have? They could a) walk away so that they could move for their job and hope that they can get a rental in the new state or b) quit their job and struggle through trying to scrimp and make payments only to likely end up defaulting anyway. Note for point B that most of the areas that have these foreclosure problems also have much higher unemployment than the rest of the country.

    Seems to me like choice A would be the clear favorite, not only do you still have a paying job, but I'll bet in just about any relatively metro area, you will be able to find landlords willing to take on an iffy credit history if you put some extra money down as a security deposit. I also wouldn't be surprised if there are a good number of landlords out there that are reasonable and willing to listen to a potential renter say: "My job relocated me and I was $100,000 underwater on my house. It was a gut-wrenching decision, but I really had no other choice."

    "If you do walk away just to save a few bucks because some guy wrote an article on the internet, then you are the idiot."

    Hahaha, amen to that.

    @wolfman

    "Make it mandatory that the banks and mortgage lenders actually hold the note to maturity."

    I wouldn't be against that. But of course I could go on and on about potential rule changes for the banks. How about requiring that borrowers put down at least 10% (or at least 20%) when they buy and never allowing loans to go above 90% LTV through home equity borrowing? The people commenting here seem outraged at the view of mortgages as having put options built in -- well, if banks want to discourage that then the easy way to do that is force homeowners to have significant skin in the game. If you lend at 100% LTV the homeowner loses absolutely nothing by saying "sayonara sucka!"

    Or how about doing away with these silly ARM loans with teaser rates? That's been a sure-fire way to encourage people to try and buy more house than they can afford.

    @ricks2foolish

    "you guys at Fool.com are only interested in the companies that are involved as opposed to the human beings that may be involved."

    That's an odd comment. As far as I know, I've been focusing primarily on the individuals involved.

    "In most cases, the home owner as well as the builder and holder of the mortgage are equally responsible for the predicament they are all in."

    I'm not going to disagree with you, but then why do you say:

    "If a family can afford the payments on their home and are not FORCED to leave the home, they should stay put and bite the bullet."

    What you're saying, then, is that all are responsible, but only one should bear the consequences...

    Matt

  • Report this Comment On February 05, 2010, at 9:15 PM, TMFKopp wrote:

    @jm7700229

    "The article's author keeps trying to avoid the central issue; that people who would continue to make their mortgage payments if the value of the property hadn't dropped, have no legitimate reason for ceasing to make payments just because the value of the property has dropped."

    The thing is that they do have a legitimate reason. From Prof White's paper:

    "...the value of a home, even an owner occupied one, is 'the current value of the rent payments that could be earned from renting the property at market prices.'"

    For many of the folks we're talking about here, the net present cost of keeping the home is much higher than renting -- in some cases for considerable periods of time. For a family that can save $100,000 by walking away and renting, that $100,000 could go towards college education, rebuilding retirement savings, or a great number of other things. To many people that's a pretty legitimate reason.

    Of course, savings aside, being in a home that will conceivably have negative equity for the next decade makes for a pretty good reason to leave. The homeowner that stays is essentially paying above-market rent for the next ten years and if they sell at the end of that period they'll maybe, just maybe, have enough equity to cover transaction costs.

    But interestingly, you give those who clearly got in over their heads a free pass. Something like "they made a mistake, they were stupid, but the bank was also stupid for giving that loan." So what you're saying now is that it's all dependent on how big of a mistake you make? For the homeowners that you're suggesting stay put, they would have been in better graces in your eyes if only their mistake had been much larger. But it seems like we could say say, "hey these folks made a mistake too, and the bank made a mistake here as well since it didn't accurately evaluate the value of the collateral. Sucks to be them, sucks to be the bank, but that's the way it goes."

    But it seems to me like your view is very consistent with how the government has been handling things. If your mistake was big enough -- like the major banks or the homeowners that got greedy -- then it's ok, you get some help to get you to the other side. But if your mistake wasn't big enough to doom you right here and right now, then you need to suck it up and take your medicine.

    Seems like a recipe for encouraging people to take massive risks. If they risk big and lose, somebody will probably bail them out. But if they're conservative and stay small-scale, a slip up will be met with "shut up and deal with it."

    Matt

  • Report this Comment On February 05, 2010, at 11:31 PM, jm7700229 wrote:

    @TMFKopp -- Well, first, you are quoting a lawyer. American law schools all require that their students have their morals surgically removed in second year, so what remains is someone to whom morality is strictly defined as legality. My argument is that there is a morality, an integrity, a level of honesty, a path of ethical behavior that transcends the moving target of legality. And his definition of value is not only absurdly simple and naive, but clearly designed to support his thesis.

    The Prof lives in Arizona, as do I. This is one of several states that require mortgage loans to be "non-recourse." The purpose of this provision in our law is to protect homeowners who may suffer reverses and lose their homes to foreclosure. It will often prevent the need for bankruptcy and gives a chance to recover financially a bit earlier than might otherwise have been the case. I support this.

    The sad fact is that our legislature has recognized that many of the foreclosures ocurring in our state are not of people who have suffered reverses but rather are people anticipating the good Prof's advice and walking away from their obligations. As a consequence, the legislature is in the process of reversing that provision of the law.

    So -- the people who are genuinely desperate will get no relief, because a law intended to benefit them is being misused by your adherents.

    The issue, by the way, is not how big a mistake was made. The point may be a bit subtle for you, but I feel there is a moral (there's that evil word again) distinction to be made between someone who, through lack of financial sophistication, is sold a loan that he doesn't understand that he can't afford, and a person who can afford his loan and understands just what he was doing. The first will necessarily fail and that is the bank's fault for taking on too much risk. The second does not fail but quits simply because it is to his benefit and he doesn't care that he is harming his neighbors and the financial system. The harm is the same in either case, but in one case, the borrower is the victim, and in the other case, the borrower is the victimizer.

    I'll bring it back to me, personally. Two of the houses very near me were foreclosed. Neither of the debtors suffered any reverses, they simply walked away from their obligations. As a consequence of these and others like them, I think the selling prices of a couple other houses that went on the market were probably $100 to $150k below what they would otherwise have been. That means that the people who did NOT get in over their heads lost a lot more than the people who did. Of course, the lawyer's mentality says "tough beans, suckers; I got mine!".

    You say: "But it seems to me like your view is very consistent with how the government has been handling things. If your mistake was big enough -- like the major banks or the homeowners that got greedy -- then it's ok, you get some help to get you to the other side. But if your mistake wasn't big enough to doom you right here and right now, then you need to suck it up and take your medicine."

    That's quite the opposite of what I am saying about homeowners. As far as the banks are concerned, talk to your colleagues. I hated the bailouts as much as anyone, but I would have hated sinking into another Great Depression even more. .

    And THAT is what is consistent with the way government handles things. Businesses that began to rehire early pay the full payroll; businesses who hire later get subsidized. People who buy their health insurance pay full price; those who go without pay a small fine (assuming one of the health care plans passes). People who are frugal and save for retirement will pay taxes on their social security, including most of the part that they already paid taxes on. Those who spent everything they earned will not be taxed.

    Life is inequitable, and that's sad but unavoidable. Much of the unfairness can be mitigated by dealing honestly with one another. Making a bad bargain and deciding unilaterally to pass the injury on to others is not honest.

  • Report this Comment On February 06, 2010, at 4:47 AM, johnnymiami wrote:

    The homebuyer should have high morals, unlike the bankers who jump your credit cards from 4% to

    30%. After all who can take the hit with the least damage? The little guy of course.

    Why do the bankers put foreclosed property up for sale so quickly, rather than renting it out and waiting for the value to go back up?

    If you bought the property from your best friend and he made out like a bandit on the price, what makes his artificially inflated profit moral?

  • Report this Comment On February 06, 2010, at 8:42 AM, wuff3t wrote:

    "I hate banks but no bank forced you to buy a house you could not afford. Suck it up."

    I hear this a lot, but by definition anyone who takes out a mortgage is buying a house they can't afford. That's pretty much the point of a mortgage - to allow you to buy something you can't actually pay for.

    And the fact that the housing market was allowed to develop into such a bubble meant that lots of people WERE forced to buy property they couldn't afford, in order to try to get a foothold on the property ladder before the ladder was pulled even higher, completely out of reach. Sure, some people overstretched themselves financially for aspirational reasons - wanting somewhere bigger they really couldn't afford; but a lot of people overstretched themselves out of desperation - feeling that if they didn't buy now they would never have the opportunity.

    Don't blame the little people for this. They may have become swept up in the madness, but on their own they could never have created the housing bubble - it took lax and greedy mortgage-lending standards to provide the foundation for all this to take place...

  • Report this Comment On February 06, 2010, at 12:57 PM, wolfman225 wrote:

    @TMFKopp:

    @wolfman

    "Make it mandatory that the banks and mortgage lenders actually hold the note to maturity."

    I wouldn't be against that. But of course I could go on and on about potential rule changes for the banks. How about requiring that borrowers put down at least 10% (or at least 20%) when they buy and never allowing loans to go above 90% LTV through home equity borrowing? The people commenting here seem outraged at the view of mortgages as having put options built in -- well, if banks want to discourage that then the easy way to do that is force homeowners to have significant skin in the game. If you lend at 100% LTV the homeowner loses absolutely nothing by saying "sayonara sucka!"

    Or how about doing away with these silly ARM loans with teaser rates? That's been a sure-fire way to encourage people to try and buy more house than they can afford.

    Absolutely! It's what I posted way back :) All of these "creative financing" options came about as a result of pressure to open up credit markets and relax restrictions on borrowers. Nice to see that I can eventually come to agreement with someone here.

  • Report this Comment On February 06, 2010, at 7:15 PM, jetmacjoe wrote:

    The Lenders got what they wanted thanks to they're lobbyists. They bet on and took a risk on questionable borrowers with fancy loans that the average person doesn't even understand. That's Capitalism.

  • Report this Comment On February 07, 2010, at 12:56 AM, fford wrote:

    What has happened to the ethical oasis?

  • Report this Comment On February 07, 2010, at 11:38 AM, mrjama wrote:

    There's a simple fallacy to the authors argument. By defaulting on a mortgage, the credit rating of the defaulter will dramatically lower their purchasing power. It is not a zero-sum game. You can't simply stop paying your obligations and not accept ramifications. So to claim that the homeowner will "put back" his or her new found money into the economy is a fallacy. There will be no "new money". America runs on credit, not cash.

  • Report this Comment On February 07, 2010, at 1:50 PM, pcs623 wrote:

    Here’s your wake up call. It’s high time you all heard from someone who actually has a dog in this fight. Middle America!:

    @wolfman225 "Many of those who find themselves "underwater" now would not be in the situation they are if they had acted in a more fiscally responsible manner in the past."

    Actually, precisely the opposite is true. We have paid a mortgage for 20 years, sold for X, bought for X. Is it fiscally irresponsible to put down 33% and have a mortgage payment you can handle? Cars that you own? That’s the group the article is written about. When the loan to value drops more than 50%, now almost 60%, you are “underwater”.

    The fiscally irresponsible ones are the banks, appraisers, speculators who bought and sold mortgages to any wannabe who waved a dollar in their face. The inception fees and interest upfront in the payments is what sparked this mess. Greedy banks. Also,the homeowner, who put 0 down and had no credit history to speak of yet showed up at the bank posing as adults ready to take on financial risk buying more than they could afford, is irresponsible. Greedy unqualified homeowners. Please, stop blaming the homeowners who acted in good faith. Even the “responsible” were strong armed. You can’t make this stuff up! (The builder wrote a contract including extras if we used their lender. Though we did ultimately get a conventional loan, the lender repeatedly tried to talk us into an ARM or a Balloon mortgage. But they only did that when we threatened to walk and to bring another lender to the table. No lie. They attempted to hold the house we contracted to buy ‘hostage’.)

    Here’s what really ticks me off JM77….<a lawyer> Why does everyone get a pass but the responsible? Does it really go to the “greater good” to financially handicap a family for the next 10 years? …one that might be purchasing college and cars, technology and appliances.

    You wrote: “I feel there is a moral (there's that evil word again) distinction to be made between someone who, through lack of financial sophistication, is sold a loan that he doesn't understand that he can't afford, and a person who can afford his loan and understands just what he was doing. The first will necessarily fail and that is the bank's fault for taking on too much risk. The second does not fail but quits simply because it is to his benefit and he doesn't care that he is harming his neighbors and the financial system. The harm is the same in either case, but in one case, the borrower is the victim, and in the other case, the borrower is the victimizer.”

    So, if I “lack financial sophistication”, the bank must be responsible, I’m a victim and moral. I ‘am sold’ a loan; I didn’t buy it, where buyer beware might come in to play. But, if I “can afford [my] loan and understand what [I] am doing...but quit because it’s to [my] benefit (and my families, and societies, as I am a consumer).” I am a “the victimizer”, because it goes against the “greater good” and thus a-moral, without morals. Really? Let me ask you something. Who entered into the agreement with intent to defraud thereby making them negligent? (not I) When do we stop the pity party and insist on intelligence, especially in people’s financial lives? They can sit on the side and watch till they learn enough to “play”. It was the job of the banks to make them do exactly that. There’s the negligence. The banks have been given our money to accommodate the financially unsophisticated, but is that happening? No. They continue to do what is morally wrong, against the “greater good”, but financially sophisticated. Instead of accommodating they foreclose. Negligence.

    In the meantime, in Arizona, people will be relieved of the contractual right to return the property to the bank. Sounds like a class-action to me. The fool legislators of AZ are actually going to allow this. Why is all the legislation written for the people and not for the businesses that do business in the state? Many commonsensical laws have been written for the population (seat belts, helmets, parenting). Now we have to legislate for financial institutions operating in our state. Protect the people. Clearly the banks are not a service industry anymore but are ‘for profit’ institutions and need to be regulated.

    Snapshot. Now neighbors are Canadian. The house is empty. The plants are dead. Other homes are rented because investors are buying the foreclosures and fighting for anyone who can pay to cover their expenses. Some are HUD homes now. Many more are empty. The grocery chain and pharmacy pulled out of the deal to occupy the retail space that was to serve our area. Why do I need to wait for this area to come back and live in these conditions? The local bond order that was to support local infrastructure is depleted due to falling home values and a law that local govts. can’t spend more that the market value of the bonds. Schools and libraries are forgoing maintenance and repairs.

    We had the misfortune of relocating to Phoenix for career reasons. What few understand is that it is unique to our generation that we are pulled all around the globe for our skillsets. These are the salaries that support families. Many posting here enjoy the benefits of the programmers, tech gurus, medical researghers of our generation, but count our costs. Especially hard hit areas for this disaster are the Silicon Valleys and Peachtrees.

    The cost for this ‘Global economy’ is being borne on the backs of the post ‘baby-boomer’ generation. Manufacturing jobs are extinct due to global competition. Many smug people on this forum have their pensions, union benefits, and social security that we will never enjoy. The game has changed. Don’t think for one minute that the bank doesn’t realize it. We are the primary consumers in the economy now. Homes have become disposable and there’s profit to be made in selling mortgages. Still, our reputation and virtue are in tact. Yet Countrywide is where? BofA? Chase Morgan? Citi? Oh, we may have to pay an extra percent or two, but 20 years of credit ruined over this mess?

    Hey I know! How about if all of us 2 parent working households walk on our mortgages and rent and you who earned your houses (because that’s what happened right, you deserve yours, but those of us who have been paying for 20 years deserve to be screwed by the banks) leave 50 percent of your house value to us tax payers who are paying for your social security and the bank bailout. Sound good? What’s wrong? Isn’t that what you’re asking us to do? Only we have 40 more years to live and families to raise. At least this way you’ve had your resources while you’re alive. ...too much like Socialism? Well that’s what you get when government colludes with the banks. Isn’t that what they do when they fail to regulate them?

  • Report this Comment On February 08, 2010, at 11:15 AM, weiwentg wrote:

    The banks could get out of this by offering to both write down the principal on underwater mortgages AND requiring mortgagees 50% of the upside when the house is sold. This idea was floated by some economics professor (either Thaler or Sunstein of "Nudge" fame) in the NY Times. The banks won't deal - so I say let folks start walking away until the banks do deal.

    Face it, if it was the banks who were buying the houses and we who were funding their mortgages, they would have walked away long ago.

  • Report this Comment On February 08, 2010, at 12:49 PM, damilkman wrote:

    I am allready on record that if you have to move or can't afford it, I don't have a problem with someone walking away. The actions below are what I have a problem with.

    I buy a house for 500K and put very little down. However, I can easily afford the payments. I am not in any fiscal turmoil. Later I decide to get my house appraised because it is an investment and the aprraiser says its only worth 300K, because the house across the street is selling for that and is identical.

    I go to a different bank and buy the house across the street. I secure financing first because I can afford to carry two mortgages. Then I walk away from the first mortgage.

    What this author is saying is if you can get away with it, go for it. If you can cheat on your taxes, your neighbor or anyone, and know the risk is zero, go for it. One might say one action is against the law and the other has a loophole that allows you to not be prosecuted if the bank is not allowed to come after you. But we all know that law and morality are not always in line. You can do inmoral things and its not against the law.

    I really dislike it when people or organizations find creative ways to get around laws or take get some special provision written in such that they have a finacial advantage. I really did not like that some of the banks were not penalized and were helped out by the Federal government. Just because they partake in bad behavior and potentially have an unfair playing field, is not justification for me to emulate their behavior. At best, I am no better then them.

    If that is the cost of finacial well being, I would ratther be poor. At least I can go to sleep each night knowing I did not rip off anyone, not even a bad guy.

    hfhmilkman

  • Report this Comment On February 08, 2010, at 1:34 PM, zonadude wrote:

    As a college student, I spent multiple semesters compiling research on the economic value of bankruptcy. Most notably, the research pointed to the fact that allowing a financial reset button to investors has almost always helped spur future economic growth. In fact, it is usually the risk-takers who most often help the market grow, and then it is the risk takers who most often require a bailout of sorts when hard times hit the economy.

    Combine this with the knowledge that commercial investors are almost universally considered unwise if they fail to renegotiate or default on expensive loans (and often have default clauses in their contracts to accommodate such decisions). Like those commercial loans, a home loan is a collateralized debt instrument -- and some states, like Arizona, wisely protect homeowners from undue recourse after the collateral has been converted to the lender's ownership. This means no risk to one's credit score for turning over the keys to a money trap.

    So blame the banks. When they put forth 80-100% of the values that their misguided appraisers projected on bad investments, they made much poorer decisions than the homeowners who submitted the remainder. So from an both an economic and ethical perspective, why should we insist that there be a false moral obligation on the part of the downtrodden homeowner to help the bank that refuses to renegotiate a bad loan.

    Read more of Professor White's argument about "efficient breach" and non-deficiency in last weekend's local paper: http://bit.ly/9CIHoK.

  • Report this Comment On February 08, 2010, at 2:44 PM, mrwizard555 wrote:

    while there are a number of reasons to strategically defautl, there are also some good ones to not do it.

    1. for the next seven years, you will be a renter, with zero opportunity to participate in any price appreciation in housing.

    2. for the next 7 years you had better get used to living on cash only, because your credit score will be so far down the toilet, you can't even see the paper roll.

    3. the housing market might pick up next month and get you some equity back, but you just blew it.

    4. you have to live somewhere, and landlords are starting to check credit scores.

  • Report this Comment On February 08, 2010, at 3:19 PM, zonadude wrote:

    By the way, I deposited my part of this dialog on my personal blog: http://bit.ly/aHyrcO. There, you will find an expanded version of my above comment as well as a reference to yet another local story citing Professor White's controversial call to homeowners, suggesting that they walk away. From an Arizona perspective, we absolutely need solutions, and I'm quite passionate about this subject as a wannabe academic and "recovering" hospitality real estate professional.

  • Report this Comment On February 08, 2010, at 3:22 PM, zonadude wrote:

    @mrwizard555: If your state, like Arizona, provides for efficient breach of bad contracts, then there should be no additional recourse in the form of a damaged credit rating. Further, in the case of collateralized debt (like real estate), the collateral itself should be all that is needed to secure a loan in most cases. This is why banks and investors spend so much on obtaining appraisals, right?

  • Report this Comment On February 08, 2010, at 6:00 PM, capitalisttoday wrote:

    Homeowners should act as corporations act, analizing what is best for them and acting in their self interest.

    Given that, many more homeowners are bound to walk away from their mortgages.

  • Report this Comment On February 08, 2010, at 6:59 PM, Tammy819 wrote:

    Well, I guess I might become an "idiot" homeowner. I bought my home 3 years ago. I put it under contract 5 years ago (new construction) , and *at that time* I could afford it. I was qualifited to buy it, and my job (in real estate) more than qualified me to make the payments very comfortably. 3 years after buying my *dream* house, my income is less than half of what it was, I have put tenants in my home, and I have moved into something cheaper. When the tenants leave, I will struggle once again to make the payments. I find myself faced with this question: Do I keep borrowing from my retirement to pay for a home that I will eventually not be able to afford to pay for anyway? Or do I default sooner, and at least save the money that I built into retirement over the past 20 years? It will take me approximately 1 year to run completely out of all money (including that retirement account) and I feel that I will not be able to rebuild that. I fear that I'll be totally financially devastated and still facing foreclosure. It seems to me that I can go into foreclosure NOW, or LATER. At least going into foreclosure sooner will keep me out of the unemployment line -- having the taxpayers pay for me that way. Incidentally, I am not behind on my payments yet. Like many homeowners, I *do* feel that I made a committment that I should keep. And I have a very good credit score of 755. However, the whole concept changes in one's mind when faced with a situation like this. I start believing that I'd rather take the credit hit for a few years than face the absolute scary uncertainty of wondering HOW I will ever rebuild the small retirement that it took me 20 years to build. I think if you were in my shoes, you just might be contemplating the same thing. At some point, there is just no more money to make the payments. Even if there was recourse by the bank, I can't make money appear out of nowhere. So, all "theoretical" discussions aside, there is a reality that some of us face. And if you've ever been faced with something as terrifying as financial insecurity, you'll know that you can behave very differently than you normally might. And you can argue all day long that I am a "bad" person, but I'm really not, and I do not see myself that way. So, the idea posed by the article becomes more practical than may be evident if you are not personally touched by the housing situation.

  • Report this Comment On February 08, 2010, at 7:20 PM, zonadude wrote:

    I agree with Tammy819, even sharing a very similar story with regard to timing. The main difference is that my home purchase 5 years ago was rather modest, so my benefit from walking away or renting out my house and moving elsewhere as a tenant would be rather marginal, if indeed there is any benefit.

    However, if I were to find a better deal in my community, to which I am fairly committed, it would be a tough decision to not take advantage of the relative gain. Meanwhile, I would be taking one house off the market in exchange for another being added. This looks to me like a relatively neutral action as it regards my neighbors.

    So again, it is my choice, and mine alone. If my financial hardship increases, there becomes even less choice. My inner rational thinker would require that I walk. Hopefully, my lender understands this fact and works with me on a mutually beneficial outcome that preserves both our positions on the asset. I hope the same is true for Tammy819.

  • Report this Comment On February 08, 2010, at 8:00 PM, Will1544c wrote:

    Look folks ... this is a no brainer

    over the lifetime of your loan you are repaying 3, 4 5 times the amount of the loan you took out in the first place.

    then there is maintenance, new furnace, hot water heater etc ...

    then there are taxes insurance, more simple maintenance and upkeep.

    Working , Striving your entire life to pay the bank while at the same time giving away generations of your familys money to an institution that could care less about you.

    The banks are about numbers, profit and loss, HUGE profits and you are all about doing whats right. Honor your committments.

    WRONG, WRONG, WRONG.

    The banks will ONLY work with you due to the imposition of federal law that protects your investment in your home ... different states have different lengths of time ... but in the end you still lose.

    Why do you go to work everyday to make banks wealthier and wealthier?

    Why do you go to work everyday to make the Auto companys wealthier and wealthier?

    Why do you go to work every day to make the Credit Card Companys wealthier and wealthier?

    Clearly, no matter how much money they make they will fail as well ... so why induldge them to induldge in things you THINK you need?

    Walking away from your home is not in any way a bad thing and if enough folks do it then perhaps the end result would be a SENSIBLE restructuring of Banks and Lending institutions that would actually lend to the long term financial stability of this country and the next home you purchase.

    OH Im sorry ... stupid me.

    We are conditioned to spend foolishly, we are easily led and would gladly sell off the future of our children if we can have the house and cars we dont need ... FACT. As proven in the present economic fiasco.

    Oh but please ... I have to feed my ego, i have to have the best no matter what, the people don the street do ... why not me?

    We will fight and die in the streets to defend our God Given Right to be over our heads in debt ... by god its our right.

    OH ... Im so sorry ... i slipped again.

    Actually ... we need to take a good hard look at what money we spend and why. We need to make banks Earn our business and we need to make them earn our business on SENSIBLE terms. Stop selling out for the almighty dollar and this column wouldnt be necessary.

    Now ... call your local Senators and start raising hell ...

  • Report this Comment On February 08, 2010, at 8:04 PM, Will1544c wrote:

    Over 200 years ago Thomas Jefferson warned of Banking Institutions and their ability to cripple a nation and the freedoms therein ....

    He could see it coming then ... why cant we?

  • Report this Comment On February 09, 2010, at 2:55 AM, inverse137 wrote:

    I see a lot of idiot posings here along the lines of:

    You signed the contract, honor it.

    You have a moral obligation to honor it....

    You can't just walk away when things don't go your way...

    Blah blah blah.

    Here's one for you:

    When I signed that contract I did not expect that the bank I was dealing with would ACTIVELY be trying to collapse the economy.

    The bank's irresponsible actions wiped out my retirement account, depreciated my house 45% and I, stupidly, used my savings to keep paying my mortgage when my revenue dropped because my clients were going out of business.

    Ask me if I have any moral issues whatsoever about walking away from my house.

    My biggest regret is that I didn't do it 12 months sooner. At least then I still would have had my savings.

  • Report this Comment On February 09, 2010, at 2:55 AM, knechod wrote:

    Not only is the world going to hell in a handbasket, but we have the peanut gallery cheering on the process.

    Treating breach of contract as a strategic option is death to the soul of our culture, and it doesn't matter if the action comes about via corporate or individual action.

    Deciding that I can act as badly as another when I see them acting poorly is participating in their thuggery. Arguing that it is acceptable is sophistry. It grieves me how easily we have slid into utilitarian thinking.

    I have seen the proper use of a bankruptcy, and I have seen dishonorable dealings. Over time, I collect the experiences to know who I will continue to do business with, and who I won't. Curiously, I prefer to deal with honorable people.

  • Report this Comment On February 09, 2010, at 3:14 AM, theswimmer wrote:

    I'm about to become a strategic defaulter. Let me tell you why.

    We (young couple, average age 27) bought a house in West Oakland in September of 2006 for 500K. That was stupid. Good things happened because of our house, but financially it was an idiotic decision.

    We made pretty good money. We took out two 30-year loans with nothing down (who has 100K in the bank?) The neighborhood was undergoing serious redevelopment. We're adventurous, we decided to try to make the neighborhood better. The house is 10 minutes from downtown SF by public transportation (and car, too). Hipsters were moving in, yuppies. Lots of murders as well, but we're adventurous.

    Then our baby was born three months early. OK, no big deal, after three months in the hospital he is fine -- but one income is out the door. No problems there, I sort of still make enough to afford the mortgages. Money is tight, but doable.

    But our house is 80% underwater. EIGHTY PERCENT. We could sell it today for 100K, no more. When I started really thinking about this -- about a year ago -- it was only 50% underwater. I knew the banks would never talk to me -- I make way too much money. I actually tried calling Chase once, took five hours to get to the right department where the lady told me I don't have hardship. Fair enough.

    I decided to bail ourselves out. I made a busking website, hoping that passers by would buy a small piece of my house in return for music and spectacle.

    (http://pleasehelpmepayoffmyhouse.com).

    I made three grand. I needed 100, to get rid of the small loan, at least. I tried to bail ourselves out, but it didn't work.

    We have to walk -- do you see? Our investment -- our home -- makes no sense. We can rent for 1000 / month across the street. We'll save tons of money. My wife is not on the loan, we'll buy another house when we save 20% (very doable with 100K homes).

    If both banks offer to cut principal by half, we'll take it. We'll still be ridiculously underwater, but money won't be so tight. But the banks won't do it, I am sure. So they'll sell at auction for 80K, maybe.

    But we have to walk, I'm pretty sure even Jesus would walk in our case.

  • Report this Comment On February 09, 2010, at 3:20 AM, Doug504 wrote:

    This article ignores the boring truth that many/most "underwater" homeowners just want to live in their home for many years. They are not looking to sell and they don't really care if they are "underwater" today.

    I've lived in my house for 18 years and I expect to live in it another 20+ years. I can pay the mortgage.

    "Underwater" has no meaning for me. It's like unrealized gains/losses in the stock market or Monopoly money.

    The advice in the column only applies to people who flip houses. Most people don't do that.

  • Report this Comment On February 09, 2010, at 3:24 AM, inverse137 wrote:

    @knechod, so you're saying we should honor our obligations with dishonorable people?

    The banks screwed MILLIIONS of people AND then gave there CEOs multi million dollar bonuses for doig it!!

    You think we should honor our obligations with them? You are a crazy little man if you do!!

  • Report this Comment On February 09, 2010, at 3:56 AM, cyberdell wrote:

    Lets stick to the facts:

    25% of US homeowners are underwater.

    15% of US homeowners are 75% underwater.

    By the end of 2011 50% of US homeowners are expected to be underwater

    The Large Banks have "Walked Away" from their Billion dollar properties without any moral qualms at all because it was best for their business.

    However the American Homeowner who is largely in trouble with his mortgage because the banks engaged in ultra aggressive marketing of exotic mortgages to make profits. This same reckless bank and Wall Street actions helped to precipitate the current severe recession. This recession is the cause of over 8 million Americans losing their jobs which are the key to paying their mortgage.

    However if the bank walks it's ok but if the homeowner walks then he is morally bankrupt.

    Nice logic.

    Trust me lose your job and try finding another one and you may leave the high moral ground to others after the mortgage eats away your savings...

  • Report this Comment On February 09, 2010, at 4:38 AM, TMFKopp wrote:

    @mrjama

    "You can't simply stop paying your obligations and not accept ramifications."

    The point isn't that these people are avoiding ramifications, it's that they're accepting that the ramifications of walking aren't as bad as the ramifications of staying.

    "There will be no 'new money'. America runs on credit, not cash."

    A very sad state of affairs for sure... But I'd still say you're wrong. If someone can pay a $3,000/mo mortgage, but is suddenly renting for $1,500/mo, they don't need a lick of credit to put that extra $1,500 back into the economy.

    @pcs623

    A bunch of good points in there!

    @damilkman

    "What this author is saying is if you can get away with it, go for it."

    Thanks for sharing your thoughts, but this is hardly what I'm saying.

    "If you can cheat on your taxes..."

    Hmm... a pretty big jump there from what I'm saying. What you're saying is illegal, what I'm saying is working within the bounds of a contract. I can understand that there are folks here that may not agree with the spirit of what I'm suggesting, but it's a little ridiculous to suddenly say that I'd endorse blatantly illegal activities.

    Of course it's probably silly for me to even respond to something like that.

    @mrwizard555

    "1. for the next seven years, you will be a renter, with zero opportunity to participate in any price appreciation in housing."

    Probably not true in most cases. If we're talking foreclosure, it's most likely more like five years. If the homeowner is able to negotiate a short sale, it's more like two.

    "2. for the next 7 years you had better get used to living on cash only, because your credit score will be so far down the toilet, you can't even see the paper roll."

    As Prof White points out in his paper, this generally is more a scare tactic than anything else. Most people are able to start rebuilding their credit score fairly quickly after a foreclosure. Besides, it might be a nice change for more people in this country to stop relying so heavily on credit.

    "3. the housing market might pick up next month and get you some equity back, but you just blew it."

    We're talking about homes that are worth less than 50% of the mortgage principal, so it's going to take a huge upturn to bring these people back into an equity position. And if you look at most of the housing numbers, it's clear that the only way that would happen quickly is if we had yet another housing bubble.

    "4. you have to live somewhere, and landlords are starting to check credit scores."

    In the hardest hit areas, many landlords will end up with the choice of a tenant with a foreclosure ding or no tenant at all. In other areas you can generally find landlords that will take an extra security deposit to make up for a low credit score.

    @Tammy819

    "Do I keep borrowing from my retirement to pay for a home that I will eventually not be able to afford to pay for anyway? Or do I default sooner, and at least save the money that I built into retirement over the past 20 years?"

    This is exactly the kind of heart-wrenching decision that I'm referring to in the article. I'm very sorry for your situation.

    @Will1544c

    "We are conditioned to spend foolishly, we are easily led and would gladly sell off the future of our children if we can have the house and cars we dont need ..."

    I agree 100%. "conditioned" jumps out at me as the key word there. The banks have done a good job at it.

    @knechod

    "Curiously, I prefer to deal with honorable people."

    Don’t take this the wrong way, but in light of that statement I'd be interested to hear what bank you'd be comfortable doing business with.

    @Doug504

    "This article ignores the boring truth that many/most "underwater" homeowners just want to live in their home for many years. They are not looking to sell and they don't really care if they are "underwater" today."

    While I don't deny that there are many in this (your) position, I'd argue that many commenters here seem to assume that this is the way everyone looks at their home. It's not that new of a concept to have to move around for your job, to be nearer to family, or to buy a house to build equity in the housing market and later hope to move into a home more suitable for a family -- actually my parents did all three at various points in their lives.

    Matt

  • Report this Comment On February 09, 2010, at 4:53 PM, knechod wrote:

    @inverse137:

    Then I am a crazy little man. While I do not think it is crazy or idiotic to gauge my character by my own actions, rather than by others, I certainly understand others may think so.

    Also, my decision does not mean that no action is possible. I have contacted bank management and government agencies to voice my complaints about predatory practices. I have not yet contacted my congressmen, but I certainly have that avenue. I will also vote in light of positions on our country's fiscal responsibilities and viability. I am not mute.

    Finally, though I want to aim for high character, it is a particular failing of mine that I do not reach it.

    @TMFKopp

    I am happy to tell you that I am incredibly impressed with America First Credit Union here in Salt Lake CIty, UT. I wrote my response on the day that I had hurry up and find cash for a family emergency. The staff at AFCU did their best to help me, and other places where I have done business (which I will not name) were locked into their bureaucratic thinking, or worse, were deceptive in discussing why they could not help. In the second case, I may continue with them; in the third, I am actively severing my relationship, and I will work with AFCU as much or more than I have over the last 25 years.

  • Report this Comment On February 09, 2010, at 8:05 PM, TMFKopp wrote:

    @knechod

    That's really great to hear about AFCU. It would be great if more banks acted that way. Perhaps if enough customers get fed up with the big banks they'd finally wise up.

    Matt

  • Report this Comment On February 11, 2010, at 2:11 AM, BigBadTroll wrote:

    Matt: You didn’t like my analogy! (And after I worked on it for so long! <sob>) :-) As you may have gathered, I liked it - I really, really liked it! :-) But you're in good company - my wife didn't like it either. (She says saying “just because the banks are being immoral doesn't mean that we should be immoral” should be sufficient, but I figure that isn’t going to fly with you, because your position is essentially already just responding “why not?” to that.) And I'm stumped for a better analogy at the moment. Sigh...

    But on to your comments. “Corporations are staffed and owned by people” - true enough. “Those people make the decisions that dictate the direction of that entity. It can seem a bit amorphous sometimes (...) but that doesn’t change the fact that the decision-making process within a corporation is always people-driven” - yes, people decide, but in the context of the company’s interests, not their own. As a stockholder (or, for that matter, as a manager) I'd expect them to make the most fiscally responsible choices, without much if any regard to their personal preferences. Doesn't matter if the buyer has stock in P&G, if Northern has a better price than Charmin, I expect ‘em to get Northern - absent any overriding instruction from management, as per In-N-Out Burger. But even that doesn't empower the buyer any more than they would otherwise be empowered - they still have to follow the corporate rules in their actions. Should the In-N-Out buyer be personally enthused with the teachings of Buddha, they will insert them into the list of Biblical quotes on the packaging at their own peril.

    To my comment about my not liking tactical defaults and the need to be able to enforce contracts you replied "we could also argue that the system is predicated on people lawfully working in their best interests." If someone defaults on a contract, laws specifying performance can be invoked, so I don't see how this is a contrast to what I said. You then note "If mortgage loans were really put on the borrower and -- barring deficiency judgment -- the transfer of collateral wasn't ever seen as the end of the lender-borrower relationship, then we wouldn't be having this conversation at all," which is sort of my point! Then, though, in response to my complaint to your failure to address that walking away from a mortgage is in fact not working within the bounds of the mortgage contract, you quote a HUD report stating the "literature has been dominated by an option-based theory of mortgage default," meaning a bunch of people are behaving like mortgages say that, whether they actually do or not. Sigh. You're really gonna make me do it, aren't you? So to the filing cabinet I go. There are multiple documents involved, so, first, some sections from the "Note" (a surprisingly short document, actually):

    1. BORROWER'S PROMISE TO PAY

    In return for a loan that I have received, I promise to pay US$ 1##,###.## (this amount is called "Principal"), plus interest, to the order of the Lender. (...) I will make all payments under this note in the form of cash, check, or money order.

    (...)

    6. BORROWER'S FAILURE TO PAY AS REQUIRED

    (...)

    (B) Default

    If I do not pay the full amount of each monthly payment on the date it is due, I will be in default.

    (...)

    (E) Payment of Note Holder's Costs and Expenses

    If the Note Holder has required me to pay immediately in full as described above, the Note Holder will have the right to be paid back by me for all of its costs and expenses in enforcing this Note.

    (...)

    10. UNIFORM SECURED NOTE

    (...) In addition to the protections given to the Note Holder under this Note, a Mortgage, Deed of Trust or Security Deed (the "Security Instrument"), dated the same date as this Note, protects the Note Holder from possible losses which might result if I do not keep the promises which I make in this note. (...)

    Seems straightforward enough - I must pay as the terms specify, and specifically in money, or I will be in default. If they have to come after me for the money, I also owe them their costs for coming after me. Nothing in there about dropping off the keys and walking away being an acceptable alternative, was there? But wait, the "Security Instrument" - maybe it's in that? So let's go on to it - in my case, of the three documents listed, I have the "Mortgage." <sound of many pages flipping> Ugh! But, no, it's not there either. The closest I can find is in Section 22, where it says "Lender shall give notice to Borrower prior to acceleration following Borrower's breach of any covenant or agreement (...) The notice shall specify (...) that failure to cure the default (...) may result in acceleration of the sums secured by this Security Instrument, foreclosure by judicial proceeding and sale of the Property." Then, a little further on, "If the default is not cured on or before the date specified in the notice, Lender at its option may require immediate payment in full of all sums secured by this Security Instrument without further demand and may foreclose this Security Instrument by judicial proceeding." To repeat, nothing there about just dropping the keys off and both you and the bank going on your separate ways whistling merrily. You owe them the money, not the property; they can foreclose on the property as part of the process of getting the money you owe them, but don't have to. I know that varies on a state-to-state basis, but that's what I've got. Now, maybe it's in there but I just can't find it - will you please tell me where in my mortgage the turning-over-the-keys clause is, or, show me a mortgage that specifies that you're borrowing the house, not the money, from the bank, and that they're happy with you simply turning the keys back in to them? If you can't, please stop asserting walking away is within the contract bounds.

    Now that we've got that cleared up, back to this "norm asymmetry" business. You asked that I read the Brent White paper, and I tried, but I stopped almost immediately, when I saw that following through on your contractual obligations "may appear irrational on its face," and those that do so "simply suffer from the same kind of cognitive biases that lead individuals to make other suboptimal economic decisions." So it's now a "suboptimal economic decision" to be true to your word! The things that pass for knowledge I can't understand...

    I can't convince you that you're anthropomorphizing banks - so be it. YouHeardItFirst also doesn't like my hammer analogy (curse him/her!) :-) and says "We need laws to keep these entities on the moral path." Fine - but what's the moral move in this situation? Let's illustrate the scenario by using a lender about whom there's no question but that there are moral obligations going in both directions - your mom. For the sake of discussion, say you couldn't get a mortgage when you needed one, and your mom, your dear old mom who bore you and raised you up from a pup, cashed in her retirement savings in order to loan you the money to buy a house with, and her income for her retirement is the mortgage payments you're now making to her. And - surprise - the housing bubble bursts, and you're now "under water" to the tune of, oh, $200k or so. What should you do? What should mom do? is it somehow mom's fault you're now underwater? Sure, mom has a moral obligation to you - but what, exactly, is hewr obligation to you in this scenario? Is it "moral" for you to say, "Tough luck, mom, I'm walking away from the loan?" Where exactly is the high ground in walking away?

    gddunton commented "The big problem here is that banks let people buy houses with little to nothing down. (...) If people SEVERELY underwater continue paying their mortgages, it limits the incentive for banks to raise down payments and and reduce their risk to this underwater situation and get us away from this risky situation." I agree with the statement of the problem, I just don't agree with the solution, because I don't see it as directly addressing the problem. The people we're talking about walking away from their mortgages in many cases have well-underwritten standard mortgages, not those silly less-than-zero-down ones. Much better if the banks only get burned on the silly ones and so learn to not make them any more, without having it impact the rest of our ability to get regular mortgages.

    There have been a number of other commenters who have presented positions similar to mine (in one way or another) much better than I've managed to - kudos to them!

    This whole discussion seemed vaguely familiar to me, and I finally figured out why - this approach to mortgages reminds me of the Cloward-Piven Strategy approach to a "guaranteed national income." But that would be a much longer post... :-)

  • Report this Comment On February 11, 2010, at 2:19 AM, BigBadTroll wrote:

    And again posting problems - apologies in advance if this is a duplicate!

    Matt: You didn’t like my analogy! (And after I worked on it for so long! <sob>) :-) As you may have gathered, I liked it - I really, really liked it! :-) But you're in good company - my wife didn't like it either. (She says saying “just because the banks are being immoral doesn't mean that we should be immoral” should be sufficient, but I figure that isn’t going to fly with you, because your position is essentially already just responding “why not?” to that.) And I'm stumped for a better analogy at the moment. Sigh...

    But on to your comments. “Corporations are staffed and owned by people” - true enough. “Those people make the decisions that dictate the direction of that entity. It can seem a bit amorphous sometimes (...) but that doesn’t change the fact that the decision-making process within a corporation is always people-driven” - yes, people decide, but in the context of the company’s interests, not their own. As a stockholder (or, for that matter, as a manager) I'd expect them to make the most fiscally responsible choices, without much if any regard to their personal preferences. Doesn't matter if the buyer has stock in P&G, if Northern has a better price than Charmin, I expect ‘em to get Northern - absent any overriding instruction from management, as per In-N-Out Burger. But even that doesn't empower the buyer any more than they would otherwise be empowered - they still have to follow the corporate rules in their actions. Should the In-N-Out buyer be personally enthused with the teachings of Buddha, they will insert them into the list of Biblical quotes on the packaging at their own peril.

    To my comment about my not liking tactical defaults and the need to be able to enforce contracts you replied "we could also argue that the system is predicated on people lawfully working in their best interests." If someone defaults on a contract, laws specifying performance can be invoked, so I don't see how this is a contrast to what I said. You then note "If mortgage loans were really put on the borrower and -- barring deficiency judgment -- the transfer of collateral wasn't ever seen as the end of the lender-borrower relationship, then we wouldn't be having this conversation at all," which is sort of my point! Then, though, in response to my complaint to your failure to address that walking away from a mortgage is in fact not working within the bounds of the mortgage contract, you quote a HUD report stating the "literature has been dominated by an option-based theory of mortgage default," meaning a bunch of people are behaving like mortgages say that, whether they actually do or not. Sigh. You're really gonna make me do it, aren't you? So to the filing cabinet I go. There are multiple documents involved, so, first, some sections from the "Note" (a surprisingly short document, actually):

    1. BORROWER'S PROMISE TO PAY

    In return for a loan that I have received, I promise to pay US$ 1##,###.## (this amount is called "Principal"), plus interest, to the order of the Lender. (...) I will make all payments under this note in the form of cash, check, or money order.

    (...)

    6. BORROWER'S FAILURE TO PAY AS REQUIRED

    (...)

    (B) Default

    If I do not pay the full amount of each monthly payment on the date it is due, I will be in default.

    (...)

    (E) Payment of Note Holder's Costs and Expenses

    If the Note Holder has required me to pay immediately in full as described above, the Note Holder will have the right to be paid back by me for all of its costs and expenses in enforcing this Note.

    (...)

    10. UNIFORM SECURED NOTE

    (...) In addition to the protections given to the Note Holder under this Note, a Mortgage, Deed of Trust or Security Deed (the "Security Instrument"), dated the same date as this Note, protects the Note Holder from possible losses which might result if I do not keep the promises which I make in this note. (...)

    Seems straightforward enough - I must pay as the terms specify, and specifically in money, or I will be in default. If they have to come after me for the money, I also owe them their costs for coming after me. Nothing in there about dropping off the keys and walking away being an acceptable alternative, was there? But wait, the "Security Instrument" - maybe it's in that? So let's go on to it - in my case, of the three documents listed, I have the "Mortgage." <sound of many pages flipping> Ugh! But, no, it's not there either. The closest I can find is in Section 22, where it says "Lender shall give notice to Borrower prior to acceleration following Borrower's breach of any covenant or agreement (...) The notice shall specify (...) that failure to cure the default (...) may result in acceleration of the sums secured by this Security Instrument, foreclosure by judicial proceeding and sale of the Property." Then, a little further on, "If the default is not cured on or before the date specified in the notice, Lender at its option may require immediate payment in full of all sums secured by this Security Instrument without further demand and may foreclose this Security Instrument by judicial proceeding." To repeat, nothing there about just dropping the keys off and both you and the bank going on your separate ways whistling merrily. You owe them the money, not the property; they can foreclose on the property as part of the process of getting the money you owe them, but don't have to. I know that varies on a state-to-state basis, but that's what I've got. Now, maybe it's in there but I just can't find it - will you please tell me where in my mortgage the turning-over-the-keys clause is, or, show me a mortgage that specifies that you're borrowing the house, not the money, from the bank, and that they're happy with you simply turning the keys back in to them? If you can't, please stop asserting walking away is within the contract bounds.

    Now that we've got that cleared up, back to this "norm asymmetry" business. You asked that I read the Brent White paper, and I tried, but I stopped almost immediately, when I saw that following through on your contractual obligations "may appear irrational on its face," and those that do so "simply suffer from the same kind of cognitive biases that lead individuals to make other suboptimal economic decisions." So it's now a "suboptimal economic decision" to be true to your word! The things that pass for knowledge I can't understand...

    I can't convince you that you're anthropomorphizing banks - so be it. YouHeardItFirst also doesn't like my hammer analogy (curse him/her!) :-) and says "We need laws to keep these entities on the moral path." Fine - but what's the moral move in this situation? Let's illustrate the scenario by using a lender about whom there's no question but that there are moral obligations going in both directions - your mom. For the sake of discussion, say you couldn't get a mortgage when you needed one, and your mom, your dear old mom who bore you and raised you up from a pup, cashed in her retirement savings in order to loan you the money to buy a house with, and her income for her retirement is the mortgage payments you're now making to her. And - surprise - the housing bubble bursts, and you're now "under water" to the tune of, oh, $200k or so. What should you do? What should mom do? is it somehow mom's fault you're now underwater? Sure, mom has a moral obligation to you - but what, exactly, is hewr obligation to you in this scenario? Is it "moral" for you to say, "Tough luck, mom, I'm walking away from the loan?" Where exactly is the high ground in walking away?

    gddunton commented "The big problem here is that banks let people buy houses with little to nothing down. (...) If people SEVERELY underwater continue paying their mortgages, it limits the incentive for banks to raise down payments and and reduce their risk to this underwater situation and get us away from this risky situation." I agree with the statement of the problem, I just don't agree with the solution, because I don't see it as directly addressing the problem. The people we're talking about walking away from their mortgages in many cases have well-underwritten standard mortgages, not those silly less-than-zero-down ones. Much better if the banks only get burned on the silly ones and so learn to not make them any more, without having it impact the rest of our ability to get regular mortgages.

    There have been a number of other commenters who have presented positions similar to mine (in one way or another) much better than I've managed to - kudos to them!

    This whole discussion seemed vaguely familiar to me, and I finally figured out why - this approach to mortgages reminds me of the Cloward-Piven Strategy approach to a "guaranteed national income." But that would be a much longer post... :-)

  • Report this Comment On February 11, 2010, at 11:27 PM, zonadude wrote:

    More on this subject, featuring Brent White and including greater detail, from ABC News: http://bit.ly/cINAnn.

  • Report this Comment On February 15, 2010, at 3:05 PM, ynotc wrote:

    What everyone in the conversation seems to be forgeting is that when one makes a committment they should fulfill it when and if they are able. This is not just a moral comment. When people have to persevere in the face of adversity it makes them better and smarter. There is a synergy that occurs when one is required to go through, rather than around difficult situations. Not only does the situation change you but in working to resolve the problem you begin to change the situation. What ever happened to taking a stand like they did at the Alamo even when it seems that victory is out of reach? Does everyone act on expedience alone? This is exactly the problem; people throwing principal out the door when it costs too much.

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