Thanks to Yahoo Finance, we can all sleep at night knowing it’s ok to walk away from our mortgage. Consider the video below:
With plenty of controversy, at You Walk away.com, we have been saying this exact thing since December 2007. Not tryingto brag, but just trying to share the change in consumer and media sentiment. Things are changing in this country. Like a persistent child trying to get attention…asking its mother over and over again, mom I’m thirsty, mom I AM thirsty, mom I’M THIRSTY MOM!… Finally the mom gives in and let’s the toddler have it. Foreclosures have been in the news and media heavily since February 2008 and it seems as though more and more media, law professors, economists are agreeing that it just might make the most sense for someone underwater to walk away. 2010 Foreclosures… there is no end in site.
Moral Obligation or Business Decision?
The question, and controversy for that matter, always revolves around this. The argument on one side is always… It’s immoral to walk away from this promise you made to pay this mortgage. You scumbag deadbeat… leaving us responsible taxpayers to foot the bill for your irresponsibility! The other side is… It’s a business decision. Why would I continue to throw good money after bad. It’s financially irresponsible to me and my family to keep paying on this house that was WAY over appraised and is 100k under what I paid for it!
People love to take sides and throw their extreme opinions at the situation. I think it’s important to use facts and not emotion when contemplating this matter. 1. If you asked your friend to lend you money, let’s say a few thousand dollars, to get you out of a bind. They didn’t ask for you to pay them back with interest. They didn’t look to profit from it. Then, you have a moral obligation to pay them back. Clearly. 2. If you signed a document that says I will pay this loan back under any and all circumstances and I can never satisfy this debt in any other way other than to pay it back in full, then it’s obvious that you have a moral obligation to pay it back. THIS IS NOT THE CASE WITH A MORTGAGE. Sorry. That wasn’t out of emotion. It was trying to get the point across for those of you who skim read. 
If you have read a Promissory note and a deed of trust, then you would clearly understand that this loan has collateral. The note maker has previously agreed that the property will be sufficient enough to satisfy the debt. PERIOD. The lender did not loan you the money without intent to profit. The lender DID risk their money in order to make a profit. They created the terms. They should live with the terms they created. SERIOUSLY. The homeowner is suffering the consequences. They are not getting off scott-free. Their credit will be damaged for a few years and they have to live with the fact that their home has been foreclosed on. Some people will have to deal with a deficiency judgment and possibly wage garnishment. In states where there is a non-recourse law, the lender cannot get anything other than the house. Why do you think that law was created? It was created to force the lender to have sound lending practices. Things such as requiring a down payment. Remember those? Imagine if the zero down loans were never created… or if the loans that allowed a janitor to say they made $8,000 a month were never allowed to fund. Do you really think that we would have had the bubble that we had? Think about the “responsible” ones… The ones who put 20% down and had proved their income. They did it right… right? Not if they bought a home between 2002-2007 and didn’t get out before the housing crash. They took a risk buying that home. It turned out to be a bad decision. Why? Because the lenders created bad loans. Those loans created a massive demand for housing because all of a sudden EVERYONE could have the American dream. Once again. The root of the problem is the ones who created the loan, YES the homeowner who didn’t prove their income or didn’t put any money down has some responsibility for the problem, but they did it one time. (or maybe 2) The Lenders did it thousands and thousands of times and made billions of dollars. Don’t be upset at a walker or strategic defaulter. Hope for them that they learned a lesson. Everyone else… you learn from this too. You got set up from the beginning. From the time you signed for that mortgage on a house that was worth double or triple the replacement cost. Don’t falsely put blame on your fellow American homeowner… Blame a corporation who’s only desire is to make a profit at any cost. They took advantage of you too, profited and are hoping to dear God that you don’t default on your mortgage as well.
Here is more from the Yahoo Finance article…
Specifically, when you borrowed money to buy your house, you engaged in a business transaction. The bank or mortgage-lender evaluated the risk of the transaction and concluded that it would was a risk worth taking. To protect its money, the lender also required that you pledge the house as collateral, and it required you to have some equity in the house as an additional cushion. In the event that you didn’t pay, the lender retained the right to seize the house, sell it, and pay itself off before you got your equity. The lender loaned you the money because it concluded that this was a smart business decision.
You, meanwhile, also made a business decision. You decided to borrow money to buy your house even though it meant risking your equity, home, and credit rating.
And now it turns out that both of you made a bad decision.
Bad decision. Lets try to learn from this and not repeat the past. Break free… Move on. The quicker you do, the sooner this mess will be over.
The simple fact that this discussion is starting to happen in newspapers and on TV is helping to validate walking away as a legitimate option for people in trouble.
“If they’re talking about it on TV, then a lot of people must be doing it…and if a lot of others are doing it then maybe I should too…”
With 25%+ of homeowners underwater, mass walk-aways are a real threat to the housing market in the coming couple years.
Changing social mood and public opinion about strategic foreclosures will probably impact the real estate market more than any other single factor over the next 2-3 years.
If everyone felt this way, then the whole system falls apart. There is in fact a promise to pay which creates a moral obligation. The note may be secured by a mortgage on the property, but that does not negate the borrowers obligation to the terms of the note. The mortgage just provides leverage for the lender to enforce the terms of the note if the borrower does not fulfill their commitment. If the asset is worth less than the remaining balance on the note, the bank loses their leverage.
Justifying walking away relies upon situational ethics which move the boundaries defining right and wrong based upon the individual’s perspective. No lender in their right mind would loan money in an environment where walking away is OK. This type of justification is really no different from the mentality that everything is ok as long as you don’t get caught. It is like the mentality of looters during disasters and riots and such.
It is interesting to consider who or what a homeowner is morally obligated to…is it the bank? maybe the hedge fund that bought a slice of their loan? Their neighbors? or the “whole system”?
Or their family’s best interests?
“The note may be secured by a mortgage on the property, but that does not negate the borrowers obligation to the terms of the note.”
Exactly. And those terms specifically spell out the consequences if the borrower stops paying. The concept of “home” is emotional, but the terms of the mortgage note are all business.
Why is the lender allowed to treat it as a pure business decision, while the borrower is expected to treat it as a decision? Why the double-standard?
I’m not saying that people should walk from their homes. However I do agree with Henry Blodget’s perspective that the decision should be a “business decision” – the same way the banks look at it. (and consult an attorney)
The definition of right and wrong can change when times are tough. It is wrong to steal…but is it wrong to steal food when your kids are hungry?
Besides…
Is it right for us a as a society to enforce this double-standard?
Is it moral for us as a society to guilt an individual into paying a crushing debt?
On some level, are we shaming potential defaulters to prevent our own home prices from going down more?
Again, how social mood evolves around this debate will have a huge impact on real estate in the coming years.
>>>>If everyone felt this way, then the whole system falls apart.
Unfortunately many on Wall St don’t understand economics. They spent too much time trying to make money based purely on sociology and now it looks like they have a socio-problem because they collectively made horrible economic decisions. …..and that brings me to the root of the political argument. Do we fix the problem with social policies or economic policies.
Greg, I totally agree with you. Families are going to extremes to hold on to houses that are ruining them financially…dipping into their 401k’s to pay for a house that they may lose anyway. It’s not good business for most, yet they feel an obligation that lenders do not.
If everyone felt this way, we would hit bottom much faster, the lending industry would change. There would be more responsible lending. Bigger down payments required. Home ownership would become like it was in the days of our fathers and grandfathers. There wouldn’t be another housing bubble. Unfortunately this housing bubble made a lot of people rich, while ruining a lot of others lives. Housing was never meant to be like las vegas casino, but to be a home where you put roots down and have thriving communities that help each other. I believe that the only way to make change is to let the banks fail and let the free markets correct themselves. But until that happens, I will continue to try to make money off the housing market, because you can. People need to do what they can and be financially responsible. Don’t exhaust your life savings or your 401k or your kids college fund, just so you can be “responsible” to a lender that doesn’t care if you default anyway, because they don’t carry the loan, they only service it. A foreign or outside investor does and they had it insured and knew it was a risk.
The lending industry HAS changed. Some people just don’t know it because they’re not in it as a career, or aren’t utilizing it as a borrower, but anyone that thinks it’s business-as-usual on the mortgage front isn’t in touch. The results of the walk-aways, foreclosures, and short-sales are evident in every loan being underwritten today, and the notion that lenders are nothing more than servicers who don’t care about defaults couldn’t be further from the truth.
Regardless, what’s never addressed in this debate are the “other” elements of homeownership, like the NET cost of owning a home (tax benefit divided by 12 months, subtracted from monthly mortgage payment) and the fact that home prices have, and always will, rise and fall periodically. The notion of “I only want to be a homeowner in good economic times and a renter the rest” is based only on using one’s property as a cash machine for periodic cash-out or flipping for profit and nothing more, such as we saw from 02 – 06. Owning a home is still the largest deductible expense most people have for tax purposes, and thankfully most people actually LIKE their homes for the personal security and comfort of owning rather than renting. Markets rebound too — those who endure will profit in the future. Those who walk will find themselves hard-pressed to obtain traditional financing in the coming years, barring some government “stimulus” incentive that would forgive previous deed-in-lieu, foreclosure, or short-sales but that’s most unlikely.
As a 12-year CA mortgage lender I’ve financed plenty of homes for people who put down 20% or more from 2000 – 2007, and most of those same people have lost that sizable equity in the current market. However, it’s a statistical fact that those who HAVE vested capital in their homes are still far less likely to walk away than those who leveraged with less down, or obtained gift funds from family to get them into a home with little or no cash at risk. Hard money lenders have always operated from a position of lending no more than 65% of the ultra-conservative value of a property, and for good reason. When someone has 35% or more equity at stake in a property they’ll do WHATEVER it takes to keep from losing it, including working a 2nd job and making other budget cuts as needed.
The rhetoric about liar loans and greed is old hash. We’d simply not be in the position we’re in today if minimum EQUITY standards were adhered to in the last housing run. It’s one thing to make a no-doc loan to someone. It’s another thing altogether to allow that same person to buy with 0% to 5% down as we saw in 05-06. In practice, very few “liar loans” would have ever been approved if those applicants had to come in with 25% or more down payment, and secondly, if they did they’d be far less inclined today to walk away from that investment later.
It’s a simple principle: nothing vested = nothing to lose.
A commitment to righting the housing crisis today should start with an increase in down payment/equity for all current loan products that allow for highly leveraged financing and minimal credit scores, such as we see with FHA, VA, and USDA rural housing loans. There are newly-increased MI premiums and risk-based down payments taking effect now for FHA-insured loans, but everyone should be required to have a minimum 10% vested capital at risk for insured loans in my personal opinion. Pending discussions in Congress will soon see FHA-insured loans with minimum down payments of 5.00%, and for those with sub-standard credit 10% or more down will be required.
A lifting of restriction on the limit on the number of financed properties professional investors can have and still qualify for traditional financing (currently 4 – 10 properties, depending on the lender) should also be enacted. Doing so would allow those investors with capital to absorb much of the pending and coming REO inventories.
Yes, housing prices go up and down, but when you are in a loan where even after 30yrs you have 0 equity, what’s the point in staying in the loan? You can NEVER move from that location. What is job requirements require a person to move, they can never sell the home w/o taking a loss.
Sure, buying a home for $200k and it slipping to $190k for a few years and coming back, no big deal. Buying a $200k home and now it can’t be sold for more than $100k and probably will never recover the $100k is just ridiculous to stay in.
Coulda, shoulda, woulda… Just walk away, let the banks deal with it. If you are financially secure otherwise it shouldn’t be a big deal.
When all of this settles, I would bet on the lenders “excusing” a foreclosure during a particular time period. Otherwise, there will be very few to lend to.
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If borrowers have a moral obligation to pay on their underwater mortgages, then the banks should have a moral obligation to foreclose on the defaulted mortgages. However, they don’t in many cases and allow for it to drag on to their own benefit. Banks will do only what is in their best business interest and that is exactly what homeowners should do. There is no moral question about it. Case in point: I was hit by an unscrupulous business associate and contractor (out of my control) in a residential development project. Upon finding out what was happening, I terminated the contractor, notified the construction lender, and worked out a deal to continue construction of the project (which at the foundation stage). Off-course to be able to continue the project, that meant I had to make up for the shortfall of funds (which was considerable) that the original contractor had taken, causing me to poor every penny I had from my accounts and credit lines. Flash forward a year later and the project was near completion, with about 10% of common improvements remaining. However, I had to file Chapter 7 because of my financial situation. Now, I still have the properties, which are upside down with bank liens preventing me from being able to dispose of them. I tried to give the deeds back to the bank, which will not take them. Nor are they starting the foreclosure process.
Note: I could have just walked away when the properties were only at foundation stage and with multiple mechanics liens for non payment of sub-contractors. Instead, I chose to try and do the right thing by pouring every resource I had in it and finishing the project on my own.
Now with over two years of my life put into this project from the time I stepped in to try and save it, I am in limbo because the bank wont take back the properties or release their liens. They were happy to work with me when I was dumping more of my money into the project and finishing the construction, which improved their position. However, now I am broke, unemployed, and just out of bankruptcy; because of this situation I lost everything I had and just want to try and start my life again.
So if borrowers are to have moral feelings, then so should the banks. However, they don’t and they will do whatever is best for them. Therefore, I say there is no reason at all for anyone to feel morally wrong by walking away. However, I would say dont walk away from your home… just stop paying your mortgage and wait until it finally one day is foreclosed. As in the interim, you may as well live for free if the banks are not going to be responsible and foreclose. Especially since the process may go on for years….