Would you Walk Away from your Home

[MonkeyMama]

Imagine that. Before making the largest purchase of your life, you took a moment to figure out if you could actually afford it. When you determined you couldn't, you didn't buy it.

If more people would have taken that simple step, the whole housing mess would have been a minor blip rather than the catastrophe it became.

The sad thing is we were only 23 when we made that decision. We probably knew little about personal finance. BUT, we did understand long-term consequences. There was just nothing we found desirable about a mortgage that was 7 times our income. & we understood the realtors and the mortgage brokers had a financial incentive to push us into something we couldn't afford.

Just to clarify that a little basic common sense would do people well. You don't really have to know anything about mortgage and finance to think this kind of stuff through.

[disneysteve]

The sad thing is we were only 23 when we made that decision. We probably knew little about personal finance.

You don't really have to know anything about mortgage and finance to think this kind of stuff through.

Exactly. This isn't rocket science. You don't need an MBA to figure out that you can't spend 50% or more of your take-home pay on your mortgage payment. Virtually everyone has internet access today. It takes 10 seconds to search "guidelines for mortgage payment" and find the 28% payment rule and 20% down payment recommendation.

[rj.phila]

we understood the realtors and the mortgage brokers had a financial incentive to push us into something we couldn't afford.

very important fact. i agree that people SHOULD have done their "homework"; i think its easy to overestimate peoples access to sound financial principles and advice. i would not underestimate the power of a guy in a suit and tie making a solid verbal case for someone to sign a loan that isnt in their best interest. have you ever been in that situation? i have, when i was younger and less informed. the fact that we are actually here on a forum discussing sound fiscal principles probably puts us in the top 10% of informed financial consumers in america, quite literally. in short, we're not just diligent, we're lucky, too.

yes, if people VOLUNTARILY adhered to avoid HIGH LEVERAGE(20% down), aspects might have been different on a personal level. it wouldnt have avoided the "great recession". SMART countries have laws requiring 20% down on a mortgage. smart countries also have limits on bank capital requirements. when you look at how highly leveraged the big firms were, and that mere shift of 6% on the value of a CDS can bring it to be literally worth $0, i dont think that the fault for the whole house of cards lies solely (or even primarily) with the average "consumer debtor".

[tripods68]

There is a big difference between walking away out of necessity for your family to survive and walking away just because you don't feel like paying anymore.?

If the intent is to be irresponsible I agree. I'm not here to justify those bad action made by others. But the final outcomes makes no distinction that "strategic default" would result in preserving capital in the end. But I'm not here to debate nor refer to those "who don't feel like paying anymore" or those who didn't do their "homework" as you put it.

I know a lot of people who made responsible decisions but ended handing their keys because they bought homes during peak years 2005-2006 ($400 or 500K worth and now homes dropped to $150-200K) losing $200-300K in equity. Many of them had every intention to live their entire lives in one home. But market forces have changed that went beyond their control. And this people made 20% down payment required, while some made even more. Yet their payments remain high because they put in interest-only loan when in fact they should not have put forth in the first place, even though they were qualified for low fix rate with excellent credit scores, amortized loan because their brokers got GREEDY. But then loss jobs in the process because they work in the housing industry that crumbled that could no longer afford their payments OR simply gotten furloughed or cut down from FT to Part Time work, forces beyond their control.

I still don't want to lose sight. My original premise of "walking away" = "strategic default" which is made on pure business economic sense and only this purpose. Strategic default process requires a thorough review of personal finance, "cost benefit analysis" if you will, in arriving to that final decision. To me, it's CRIME for a family NOT to give moral consideration on "strategic defaults" if that is the best possible option. Again, i'm referring to those family that can still afford their mortgage payments but see "strategic defaults" best solution, without judgement being clouded with their moral conviction. Strategic defaults represents a very thin sliced of population.

Companies don't make a habit of defaulting on debt when business is good and income is flowing. They default on debt when they get themselves into a situation where the debt obligations exceed their ability to service them.

Let's not lose sight WALL STREET helped put us into this mess. If Bear Stearns and Lehman's didn't put themselves into the position of over-leveraging (30:1 ratio) they would not have gone to bankruptcy. The point is they knew exactly what they were getting into (bundling and securitizing loan packages, paying rating agencies high fees marking them as TRIPLE AAAs when they knew they were mixed with JUNKS) but their sound minded business judgement were deeply clouded blinded by their OWN GREED. Do you think businesses doesn't make bad decisions? It happens all the time.

Family don't make habits of defaults either (apply to only very thin sliced of population) but the fact that companies are doing strategic default based on-sound business logic, can applies to family when the numbers do make sense.

I will continue to disagree with "strategic" defaults. If the value of my home drops, that doesn't make it any less my home. It doesn't change the practical value of the home to me and my family, even though it changes the monetary value. We have to live somewhere. Why not stay in the home that we obviously liked enough to spend 6 figures to purchase?

"Strategic defaulters" doesn't hold the same view that you have. They may have liked the homes they currently live it and afford it still under normal housing market condition. But market forces changed beyond control, family must change with it too. Once those numbers becomes out-of-whack and no longer makes business sense, logic dictate, it's time to think other option like strategic default. Again, this is just one option of probably dozens.

I realized "strategic default" isn't for everyone. And i'm not here to promote it nor to change anyone's mind. You have to play the numbers that makes sense to your own family situation. At the same time, I try to be open-minded and to view other people's perspective to understand.

[tripods68]

Under normal free market conditions, I would agree with you. But, we did not have normal free market conditions which caused the housing bubble.

Definitely agree with you.

How is someone to blame for buying a home at the peak? The government caused a situation where there would be extreme winners and loosers. I have no problem with those caught in the net wishing to get free.

The blame the FEDs a great deal more, for keeping low interests, hyper-inflating the economy that turned out to be a house of fallen cards.

[DebbieL]

I absolutely DO blame people who bought at the "top" (by the way, we're still there here in Canada unfortunately). They helped blow up this ridiculous bubble. Average house price here in Victoria was around 240K in 2001-2002 (which I thought was expensive enough, lol), and is over 600K currently. There is no sane reason for this. The average household (not individual) income here is only somewhere in the upper 60Ks. How is it not their responsibility too? I'm assuming they have the same 5 senses I do. Why is it that I refuse to buy an overpriced box, but they don't? Without them willing to take on stupid loans there wouldn't be a problem. Easy credit and loose lending is causing it, but they should be able to reason just like I can. Maybe I'm just cheap, but I absolutely refuse to pay more than I think something's worth. I cannot stomach the idea of giving someone else a $350K profit for just buying a place 4-5 years ago and doing NOTHING to warrant that much of an increase. Not going to happen.

So what causes them to buy at the top? For some it is lack of logic and reasoning ability. They fall for stupid lines like "Buy now or you'll be priced out FOREVER" - yawn. They don't even think about if that makes sense. The market would have to come to a complete standstill if nobody could afford to buy, then guess what happens? Prices come down (duh).

The ones I have absolutely no sympathy for, and I hope get burned badly for driving the market up and up, are the speculators. These people are just pure greedy. They think a house in Victoria/Vancouver is their ticket to easy riches. It's easy, just buy today (even though you can't afford it - who cares, fundamentals are so "old school" don't you know) and in 6 months to a year you can flip it for massive gains - puke. I really will have some schadenfreude when these people finally get what's coming to them.

I personally think if you have any sense, then buying at the top of an obvious bubble is not something you will do. Anyone with a memory that goes back 8 years (which should be anyone that's buying) should be able to see the same facts as me. I have no sympathy - they are a huge part of the problem. This isn't going to end well here any more than it did in the US, although Canadians love to pat themselves on the back for avoiding the financial irresponsibility that happened "down south". Trust me, they are so deluded. We are every bit as bad, and actually our price to income ratio for homes is worse than it ever got in the US at their peak. Actually, Canadians must be incredibly stupid, because we can see what happened in the US and we've still convinced ourselves "It's different here" lol, lol.

[littleroc02us]

I'm sure that people can come up with every excuse in the book on why they think a strategic default is o.k., but I think that's ludacrouis. It doesn't matter that your house went down in value from 500k to 230k, that doesn't give anyone the right to walk away no matter how it may affect them in the long term. It's called decisions and personal responsibility. If anyone in the future needs help calculating a mortgage payment here is one: Mortgage Calculator and if you need to be able to subtract your income from your expenses to figure out your disposable income then I would try this: calculator.com************************************ *. If you are unable to read the terms of a loan agreement, then I would recommend getting a lawyer. The math is simple and I believe it's completely unethical to do a strategic forclosure.

[littleroc02us]

very important fact. i agree that people SHOULD have done their "homework"; i think its easy to overestimate peoples access to sound financial principles and advice. i would not underestimate the power of a guy in a suit and tie making a solid verbal case for someone to sign a loan that isnt in their best interest. have you ever been in that situation? i have, when i was younger and less informed. t

Maybe big Government should step in and represent those who are uncapable of making their own educated decisions, then at least they could put the blame back on them if they can't make the payments.

[wincrasher]

Here's a new twist on this discussion.

I've been reading about all the paperwork mess on these foreclosures.

Some judges have begun just throwing out the mortgages entirely and letting the people keep their houses.

So the question is, if you thought strategic default was a moral conundrum, what do you think about this?

Suppose you knew for certain that the chain of ownership was screwed up by the bank and you had a real shot at keeping your house, but having the mortgage thrown out?

I think that would give most people a bit of a pause....

Talk about your high stakes crap shoot! It's one thing to walk away from a huge loss with nothing but the shirt on your back and ruined credit. It's another to walk away with a $300k house scott-free (and maybe not with ruined credit).

If many people get away with this, legislation may sure follow, or the mortgage industry is virtually destroyed.

[rj.phila]

Maybe big Government should step in and represent those who are uncapable of making their own educated decisions, then at least they could put the blame back on them if they can't make the payments.

i sense a slight tone of sarcasm, but even still, im gonna run with it cause i actually think there's some truth to what you're saying.
as stated before, if the US-and all the other countries who also had similar incentives in place-had a MINIMUM LAW-20% down, PERIOD, it would have changed the situation of FORECLOSURES alot.

and we still need to recognize that the same thing applies to banks/investment firms. if lehman/wachovia/GS/et al werent allowed to be leveraged (what, 50 or 60 to 1?!?!) like they were by the govt, a US housing bubble bursting probably wouldnt have pulled the entire global economy into recession. but i digress, dont mean to pull this off-topic....

the "100% forgiven loan" thing, while distressing to someone who has completed 2 mortgages to date, is understandable, considering how complicated the securitization issue becomes. imagine trying to lay claim to 1/1000th of a CDO that represents 1/1000th of a bunch of peoples loans? its a brain scrambler, really. but yes, there could have been a better comprehensive plan put on the table. AFAIC, rep or dem, lots of balls are getting dropped on the whole thing.

[Snodog]

Let's not lose sight WALL STREET helped put us into this mess. If Bear Stearns and Lehman's didn't put themselves into the position of over-leveraging (30:1 ratio) they would not have gone to bankruptcy. The point is they knew exactly what they were getting into (bundling and securitizing loan packages, paying rating agencies high fees marking them as TRIPLE AAAs when they knew they were mixed with JUNKS) but their sound minded business judgement were deeply clouded blinded by their OWN GREED. Do you think businesses doesn't make bad decisions? It happens all the time.

In addition to all your excellent points ....

I agree that Wall Street deserves the majority of the blame. The homeowners can at least claim ignorance, banks...not so much. I can understand how some folks thought- "Well the bank approved me so I must be able to afford it. Why would the bank loan me money that I can't pay back?" Granted, these are not the astute folks who frequent this board, but there's more than a few that think like that.

That said, not all were ignorant. Some knew what they were doing and also got caught up in the greed.

I don't think I'm letting government off the hook, they messed up too.

[snafu]

What role did Big Government play when they determined to close the minority, home ownership gap?
What role did commission based Mortgage Brokers play? How effectively did they explain SubPrime Mortgages to their clients with 'blemished' credit histories? How many commissions were paid in exchange for predatory loans? How many folks understood ARM, balloon payments, and other shenanigans. Where is truth in lending? Our bank said...$300,000. mortgage @ 4.5% interest amoritized over 35 years required a monthly payment of $ 1,412.05; the total amount of interest would be $293,059.17.

If potential buyers were given the facts needed to make a decision it would have prevented a whole lot of heartache. I can remember how excited we were when we signed the papers to buy our 1st home. All those people who were turfed must have been heart broken to lose their dream. A large percentage also lost their jobs, their very livelihood. How sad.

[maat55]

[QUOTE]

I agree that the government dangled a bunch of carrots in front of the American people. Still, though, I come back to personal responsibility.

I would not buy a home with zero down.
I would not buy a home with an interest-only loan.
I would not buy a home with a payment that exceeded 28% of my monthly income.
I would not buy a home costing more than 2.5 times my annual income.

There are and were plenty of people who would take advantage of these loans if given the chance. Human nature is to get by with doing the least. The free market is what defends against these products. Only through GSE's could this happen

The government can offer me anything they want to offer. It isn't going to get me to make a move that isn't in my own best interests. Millions of Americans, however, allowed themselves to get sucked into the madness. They didn't do their homework. They didn't follow the rules. They didn't take 5 minutes to run the numbers through a simple online calculator to determine whether or not they could actually afford the deal they were signing up for. That isn't the government's fault.

You are nowhere near representation of a majority of the country.It is incumbent upon the banks to not give risky loans with their money, but that was thrown out the window due to GSE's.

If you get rid of F&F and FHA, you will see a stable responsible housing market that practices your fundamentals.

[maat55]

[QUOTE]

Had they done their homework, it wouldn't have been too hard to see that prices were skyrocketing for no fundamental reason, which is what defines a bubble. That isn't the time to buy. It is just like all of the lemurs out there buying gold today, whose fault is that? When people get blinded by greed, bad things happen in the end.

We have no history of a major housing bubble in our past to judge from. The real estate market has been very constant to move up, the fact that it was moving faster is not that easy to recognize by normal people just wanting a house.

I don't look at our home in either of those ways. We have no plans to "move up" and I don't count the value of our home in our retirement planning at all. It is simply a place to live. Yes, someday we may sell it and it will have some value at that point. I don't know how much and it really doesn't matter. Whatever value it has will be more than if we had rented for 30 years. Plus, if and when we do sell, we will then need to live somewhere else so the money obtained from selling the house will likely just get turned over to pay for the next place. We'll never actually see that money in our pockets.

Your not in the shoes of many of those who bought at the top. And again, without serious government intrusion, there would not have been this huge bubble.Not everyone has the luxury of staying in one home for many years. Unfortunately, to many, their home is their biggest investment, and is not one they can loose large sums of money on.

[maat55]

I don't think that walking away would be in the homeowner's best interest. Does it suck that your house lost a lot of value? Absolutely. It'll suck more if you walk away and it ruins your credit. Then, you can't do anything really! I would pay off the house, then look into selling it. That way, it's as close to pure income as you can get.

I can easily see many situations where walking away from 50k to 200k in losses is well worth a shorterm credit score.