walking away from a mortgage

[markusk]

markusk - We bought our house because we wanted to live there. We didn't buy it as an investment or to make a profit. Whether it is worth more, less or the same as we paid for it is irrelevant because it is our home. Whether it is worth more, less or the same as we paid for it has no bearing on us making our monthly mortgage payments. We paid what we felt was a fair price. We borrowed the money we needed to borrow and committed to making the payments for the term of the loan. Walking away is a criminal act IMO and should be treated as such.

DS, so okay you wanted to live in the house and you did not see it as an investment or to make a profit. I am going to read between the lines and assume that the decision to buy your home also made financial sense to you.

Here is a real life example from page 9 of Brent T. White's paper "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."

Sam/Chris, a professional couple with 2 kids, bought a home in Salinas, California at the height of the market in 2006 for $585,000. They had excellent credit and income so qualified for a 30 year fixed, no money down loan for 6.5% with monthly payments of $4300 (31% of gross income). After the market crash, they still owe $560,000 but the house is now valued at $187,000. A similar home around the corner just listed for $179,000. If one were to buy that house with 5% down, this would translate into a monthly payments of less than $1200/month. They could rent a similar house in the same neighborhood for $1000/month.

Assuming Sam/Chris intend to live in their home for 10 years, they would save approx $340,000 by walking away (including monthly savings of at least $1700 on rest vs mortage payments even after factoring in mortage interest tax reduction).

If they stay in their home, it will take about 60 years to recover their equity assuming they live that long, the market has bottomed out and their home appreciates the historical average of 3.5%

In many examples like this across hard hit areas of the country, it does not make finacial sense to stay. In doing so, you are risking your families future and your retirement.

I think villifying people who walk away is too simplistic.

[ActYourWage]

Not all crimes are punished with jail time. There can be fines. Wages can be garnished. Something could be done to make the deadbeat repay what is owed. Skipping out on a loan that you can afford to repay isn't okay no matter how people try to justify it.

I agree.

DS you are always one step ahead with your statements and answers -

[wnlbutterfly]

The time to walk away from a home that costs too much is when you are shopping for it in the first place. Like DisneySteve said, they bought it because they wanted to live in that house in that neighborhood, and they paid what they thought was a fair price based on all the info they had at the time.

Now it would be different if the owners lost their jobs or had to take lower paying jobs and there would be no way to keep the current mortgage, but that is when you sell short instead of just walking away.

I really think the media is doing a disservice to homeowners by showing stuff like this and not following through on the consequences.

[ActYourWage]

DS, so okay you wanted to live in the house and you did not see it as an investment or to make a profit. I am going to read between the lines and assume that the decision to buy your home also made financial sense to you.

Here is a real life example from page 9 of Brent T. White's paper "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."

Sam/Chris, a professional couple with 2 kids, bought a home in Salinas, California at the height of the market in 2006 for $585,000. They had excellent credit and income so qualified for a 30 year fixed, no money down loan for 6.5% with monthly payments of $4300 (31% of gross income). After the market crash, they still owe $560,000 but the house is now valued at $187,000. A similar home around the corner just listed for $179,000. If one were to buy that house with 5% down, this would translate into a monthly payments of less than $1200/month. They could rent a similar house in the same neighborhood for $1000/month.

Assuming Sam/Chris intend to live in their home for 10 years, they would save approx $340,000 by walking away (including monthly savings of at least $1700 on rest vs mortage payments even after factoring in mortage interest tax reduction).

If they stay in their home, it will take about 60 years to recover their equity assuming they live that long, the market has bottomed out and their home appreciates the historical average of 3.5%

In many examples like this across hard hit areas of the country, it does not make finacial sense to stay. In doing so, you are risking your families future and your retirement.

I think villifying people who walk away is too simplistic.

One of the problems people overlook is these people DO NOT need to buy that much of a house in the first place. Having no money down and paying 31% of gross income should have been reason enough not to purchase such a house.

[Mantaray14]

One of the problems people overlook is these people DO NOT need to buy that much of a house in the first place. Having no money down and paying 31% of gross income should have been reason enough not to purchase such a house.

But it should also have been reason enough for the bank not to lend! Rates were held too low for so long that after prime borrowers were already fat with debt, that liquidity started to flow to subprime borrowers and 0% down etc.. That caused the 175 house to be bid up 584,00 - I'm sure it's not that much house but just a run-up price caused by too much liquidity. So if the corporation walks away from a bad deal with impunity, why should the individual not do what's best for their family?

My point is...I believe in individual responsibility but it has to work both ways. If individuals are held to morality and corporations are not...the American middle class will just have one more thing working against them - we're quick learners though.

[disneysteve]

Sam/Chris, a professional couple with 2 kids, bought a home in Salinas, California at the height of the market in 2006 for $585,000. They had excellent credit and income so qualified for a 30 year fixed, no money down loan for 6.5% with monthly payments of $4300 (31% of gross income).

The time to walk away from a home that costs too much is when you are shopping for it in the first place.

One of the problems people overlook is these people DO NOT need to buy that much of a house in the first place. Having no money down and paying 31% of gross income should have been reason enough not to purchase such a house.

Sorry markusk, I totally agree with wnlbutterfly and ActYourWage. The couple in your example bought a grossly overpriced home that they couldn't afford. Now they regret that decision and want a do-over. It doesn't work that way. As the old saying goes, they made their bed and now they have to sleep in it.

When we were home shopping, we sat down and ran the numbers and figured out what we could comfortably afford - NOT how much we'd be able to borrow. We then made sure we had a 20% down payment for the price range we were looking at. Never would we have even considered taking a loan for 31% of income or buying with 0% down. Folks who do that deserve what they get.

[markusk]

One of the problems people overlook is these people DO NOT need to buy that much of a house in the first place. Having no money down and paying 31% of gross income should have been reason enough not to purchase such a house.

The house in question was reportedly 1380 sq feet. It's not that much house. We are talking about California.

[markusk]

Sorry markusk, I totally agree with wnlbutterfly and ActYourWage. The couple in your example bought a grossly overpriced home that they couldn't afford. Now they regret that decision and want a do-over. It doesn't work that way. As the old saying goes, they made their bed and now they have to lie in it.

When we were home shopping, we sat down and ran the numbers and figured out what we could comfortably afford - NOT how much we'd be able to borrow. We then made sure we had a 20% down payment for the price range we were looking at. Never would we have even considered taking a loan for 31% of income or buying with 0% down. Folks who do that deserve what they get.

I actually don't disagree with you.

But the same can be said of the banks that gave them the money and agreed to the terms of the mortgage. The mortgage contract has actually been fulfilled -- it just did not go the way the banks wanted. But those are the breaks in any business transaction.

[disneysteve]

The house in question was reportedly 1380 sq feet. It's not that much house. We are talking about California.

Not everybody can or should own a home. Forget the whole American Dream garbage. Part of the whole housing mess was pushing people to buy who really shouldn't have been buying. If the only way that couple could buy was with a 0% down loan and a payment of 31% of income, they should have walked away and kept renting.

[ActYourWage]

The house in question was reportedly 1380 sq feet. It's not that much house. We are talking about California.

I was referring to the price not necessarily the size.

[markusk]

Not everybody can or should own a home. Forget the whole American Dream garbage. Part of the whole housing mess was pushing people to buy who really shouldn't have been buying. If the only way that couple could buy was with a 0% down loan and a payment of 31% of income, they should have walked away and kept renting.

Agreed.

But DS, people didn't. Now what? Stay and continue paying and hopefully in 50-60 years make up the loss? What about your responsibility to your family now? Shouldn't you now make the wise financial decision? Or are you suggesting following one bad financial decision after another?

[markusk]

What I find most interesting is that although it makes financial sense for many people to simply walk away, the fact of the matter is the vast majority stay and continue paying their mortgages. Brent White's research paper that was referred to earlier indicates that a major factor is the sense of "moral obligation" (and shame) the borrower feels so they don't walk away..

But from the bank's perspective, if the vast majority continues to pay and only a small minority simply walk away, there is less incentive for the banks to compromise with the borrower to decrease the terms of the loan. I've heard so many stories of people sending in requests after requests for loan modifications, but the banks are not in any rush to help, because for them this is a business decision: make as much money as you can/minimize your loss and make the borrower pay for the loss [of the value of the home].

I have to agree with Mantaray14. Individual responsibility is one thing but the deck is stacked against the middle class borrower. We are asked to look at this from a moral point of view, but for the banks it's only about business.

[disneysteve]

But DS, people didn't. Now what? Stay and continue paying and hopefully in 50-60 years make up the loss? What about your responsibility to your family now?

If you bought a house with a payment that you could and still can afford, how is it harming your family if you continue to live there and continue to make that affordable payment? Remember, we aren't talking about people who lost jobs or had income cuts. We're talking about people who still have plenty of money available to pay the loan under the terms they agreed to.

But from the bank's perspective, if the vast majority continues to pay and only a small minority simply walk away, there is less incentive for the banks to compromise with the borrower to decrease the terms of the loan.

Why should banks have to change the terms of the loans? You applied to borrow a certain amount with specific repayment terms. They agreed to make that loan under those terms. Just because you later have buyer's remorse and decide you don't want that loan anymore isn't the bank's problem. It is your problem. The responsibility lies with the borrower.

That is not to say that banks didn't get greedy. They certainly did. They made loans to people who clearly couldn't afford them, but that's not what we're talking about here. Again, we're talking about people who CAN afford their loans but are just choosing not to repay them. I have a problem with that.

[markusk]

I was referring to the price not necessarily the size.

I stand corrected.

[markusk]

If you bought a house with a payment that you could and still can afford, how is it harming your family if you continue to live there and continue to make that affordable payment? Remember, we aren't talking about people who lost jobs or had income cuts. We're talking about people who still have plenty of money available to pay the loan under the terms they agreed to.

Why should banks have to change the terms of the loans? You applied to borrow a certain amount with specific repayment terms. They agreed to make that loan under those terms. Just because you later have buyer's remorse and decide you don't want that loan anymore isn't the bank's problem. It is your problem. The responsibility lies with the borrower.

That is not to say that banks didn't get greedy. They certainly did. They made loans to people who clearly couldn't afford them, but that's not what we're talking about here. Again, we're talking about people who CAN afford their loans but are just choosing not to repay them. I have a problem with that.

You are indirectedly harming your family because the money saved could be used for somethingelse: EF, Retirement, 529, etc. You are making a financial decision based on the best return of your money (kind of like a bank or a corporation).

The banks do not have to change the terms of the loan (even if it's in their long term interest and even if it maybe the moral thing to do). That's okay; they wrote most of the terms of the contract and signed on the dotted line just like the borrower. If the borrower walks away, the banks have to live with the consequences of the contract, which is being fulfilled, just not in the way they thought it would pan out.

In the micro, there is the question of personal responsibility. But it's also not that simple. This is my point. I understand why people are walking away. It's not a clear black and white decision, but then again what is?

In the macro, when people walk away from their homes, everyone suffers because now there are more foreclosed homes on the market which affects everyone's home prices. But the flip side is if everyone stays in their home and continue paying, there will be a prolonged continued slowed spiral as the housing market corrects itself in slow motion. And the borrower will have less disposable income to buy, eat out, delay purchases, vacation, etc -- prolonging the down turn in the economy. If more borrowers walk away then the housing market will more quickly "correct" itself, and we can all as a country just move on.

This is somewhat analogous to the business reasoning behind JPMorgan walking away from the $2.43 billion deal near the height of the real estate boom. They just don't call it a foreclosure or a default. A spokeswoman interviewed by Bloomberg News called it "a negotiated transfer to our lenders."

As White notes in his paper, "there is in fact a huge financial upside to strategic default for seriously underwater homeowners -- an upside that is routinely ignored by the media, credit counseling agencies, and other political and economic institutions in 'informing' homeowners about the consequences of default." White adds that walking away is nothing more than an "efficient breach" -- a legal theory that calls for parties to sunder a contract if the cost of breaking the deal is less than the cost of maintaining it.