Updated: 9/29/2010 4:00 PM ET|
Are you foolish to pay your mortgage?
If you're 'underwater' on your mortgage, walking away might make sense, but when is it OK to set aside your responsibilities to your lender, your neighbors and yourself?
Are you stupid not to walk away from an "underwater" mortgage, even if you can make the payments?
Law professor Brent T. White thinks the answer may be yes.
White doesn't actually use the word "stupid" in his recent paper, "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis." Instead, the University of Arizona prof blames emotion for clouding homeowners' judgment.
White asserts that the real reason more homeowners don't default is because of shame, guilt and fear, fed by misinformation about foreclosure's effects promulgated by the government, lenders and the media.
White doesn't just dismiss the idea that homeowners have a moral obligation to pay their debts. He thinks the idea of morality should be removed from their calculations entirely.
It's no wonder Washington Post columnist Kenneth Harney called White's treatise "incendiary." I can picture people's hair bursting into flame at the very idea of a law professor advising huge numbers of homeowners to strategically default.
Full disclosure: I'm one of the people White points to as trying to scare people into unnecessarily paying their mortgages. (I'm bemused by that, since so many readers think my writing about foreclosure and bankruptcy encourages people to abandon their obligations.) But that's not the only reason I found reading his paper to be a bit surreal.
White makes a number of valid points, and I'm sympathetic to his central theme: that lenders and the government are dumping the costs of the housing mess largely on the shoulders of homeowners, who are at a huge power disadvantage.
It's really worth taking the time to read White's paper in its entirety, and I encourage you to do so. But I'll provide the key points here -- along with why I think he's wrong.
What White gets right
Many homeowners would be financially better off walking away. There's no question that a good chunk of underwater homeowners likely would be richer in the long run if they abandoned their homes. Housing prices are unlikely to surge again soon, and it could be years, if not decades, before the value of some properties once again exceeds their loans. In the meantime, many people could save money by walking away and renting instead, or hitting the equity "reset" button by buying another house while they still have good credit and then defaulting on their earlier loan.
(I strongly question White's assertion that most people could completely recover from foreclosure's impact on their credit scores within two years. At best, they would likely have fair, not good, credit by that point. With continued good behavior, though, their scores could return to prime or near-prime levels by the time the foreclosure dropped off their credit reports in seven years.)
Lenders are unlikely to pursue lawsuits in many cases. Some states don't allow lenders to sue homeowners for "deficiency balances," or the amount still owed on mortgages after a foreclosure. Even in states that do allow such recourse, lenders may not pursue the option because it's not financially worthwhile. The Internal Revenue Service isn't a worry for most homeowners either; the tax liability for forgiven debt on most home mortgages has been waived through 2012.
A lot of those lecturing about the immorality of walking away haven't got a leg to stand on. Lenders showed an astonishing lack of morality and responsibility by pushing risky loans. They could have redeemed themselves by getting serious about restructuring mortgages to make them affordable, but their efforts so far have been pathetic.
Regulators, meanwhile, stood idly by while the foxes raided the henhouse, and lawmakers dropped the ball by not giving bankruptcy judges the power to modify home loans. (Bankruptcy judges already have the power to "cram down," or reduce, mortgage principals on rentals and vacation property but lack the ability to do so with mortgages on principal residences.)
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Your position that White is “wrong, wrong” is based on a false, one-sided morality. The banking and mortgage industry created a speculative market in the framework of a Ponzi scheme. By offering loosely backed loans to speculators and flippers, they heated up the housing market so that normal home buyers were forced to bid up home prices. As families that would have been able to afford a normal market home were confronted with houses going for 50-100% over value, the banks responded with sub-prime mortgage packages and even looser qualifying requirements. This only fanned the flames on the speculative buying of real estate and speculators would buy multiple homes with plans to turn them over in a few months or years for a quick profit. With the collapse of these illusionary home value increases, the speculators (corporate losses) abandoned or dumped homes. Financially strapped families, either unemployed or facing ridiculous balloon payments that were supposed to be refinanced with envisioned inflated home values, were forced into foreclosure that left many homeless.
This dumping of homes into the housing market with no moderating controls drives the home values back to mid-1990’s prices. Those who can make their inverted mortgage payments on homes, worth 30-60% less than they were forced to pay for them, are expected to “do the right thing” and keep paying the banks back for the investment scam the banks created. This is like expecting the investors in a failed bank to get their money back from the bank executives; not going to happen. The premise the foreclosure hurts the neighbors, assumes that the inflated home value is a status quo. Asking someone to keep a bad investment so it is not such a bad investment for others might be the nice thing to do, but it is not a moral obligation. As you pointed out, the banks did nothing to soften the fall. They took their profits when things were booming and stacked the deck (collateral, credit rating scoring, interest rates, moral responsibility propaganda) so the home buyer was left holding the bag. There is nothing immoral about passing the bag back to the bank. It might incentivize them to avoid creating such a calamity in the future. Probably not.
The idea that a mass walk out on inverted mortgages would cause serious damage is false for two reasons. First, the before mention banking credit process that stacks the deck against borrowers, puts a resistance or barrier to mass voluntary foreclosures. Second, if the there was an easy way to walk away from this wrongful debt, it would hurt the banks, but the money tied up in making inflated mortgage payments would be freed up to buy the reduced priced homes and other products, helping revive the economy. The banks could write off the losses against their profits from new loans.
Professor White is 100% correct. The false morality and fear are dragging down the economy.
Ms. Weston says:What we need is for lenders to start acting morally and responsibly by offering loan modifications that will actually keep people in their homes, if for no other reason than economic self-interest.
Well, yes, that would be nice. But it is not happening because lenders only care about their own bottom line (read: they do not care to “realize how interconnected we all are…”); and since Washington isn’t doing anything to help them see the light, you might consider the fact that brave, if unethical, homeowners may be doing the system a favor much like a civilian border control might be a means for fed-up citizens to compensate for government (and business) inaction. Strategic default is a symptom of a broken system, where otherwise financially responsible people feel the need to “take matter in to their own hands” despite their own reservations and the potential for community shame and shunning.
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How brilliant, now MSNBC is encouraging people to walk away and let the bank take thier homes. Are they crasy?? Or is this part of the liberal turn this country into a bunch of loser plan? I know if I walked away when the crash first happened I would not be draining my savings every month to pay my bills. But that is what an honorable person does and the way our country became the great nation it was before the liberal nutcases took over so much.
There must be a reason why regular loans get tighter and tighter and yet there are multiple government money hand outs and pressure on the banks to hand out ot the losers of this world. REWARDING failure and punishing success to the ninth degree is what it is. We would be better off to tear down those foreclosed dumps people wrecked because they didn't want to pay and were ignorant.
I am in this situation right now. Getting a divorce, am only $7,000 under water on mortage vs. what market appraisal is on house. Lawyer advising me to not pay the mortgage, live free for 2 years (time it will take for foreclosure processing to complete), save my unpaid mortgage $ and then walk away, or other option declare bankruptcy.
I am dead set against bankruptcy and have started the process for loan modification and/or selling via short sale.
I just can't NOT pay my mortgage.
I'm going to try my best to cut expenses, keep paying what I can on the mortgage (even if some payments are late or split between two paychecks), while keeping a roof over mine and my daughter's heads and hopefully do everything I can up to my moral standards.
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