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Should more homeowners walk away?

When businesses do it, they're smart. When homeowners do it, they're morally bankrupt.

By MSN Money Partner Feb 9, 2012 11:40AM

This post comes from Marilyn Lewis at MSN Money.

 

Economics writer James Surowiecki wondered out loud in The New Yorker why more homeowners don't default on their underwater mortgages.

 

After all, Surowiecki says, ditching unmanageable debt is common practice in business, where no stigma is attached:

We normally say that a company "went bankrupt," implying that it had no choice. But when, recently, American Airlines filed for bankruptcy, it did so deliberately. The airline had four billion dollars in the bank and could have kept paying its bills. But it has been losing money for a while, and its board decided that it was foolish to keep throwing good money after bad.

Post continues below.

For a business, bankruptcy can be seen as a smart decision. For a homeowner, strategically defaulting -- you can afford to pay but walk away in the interests of the bigger financial picture -- the decision is characteristically deplored in moral terms.

 

Those who object on moral grounds usually say it creates a damaging social climate, a "moral hazard."

 

Bloomberg Businessweek describes such objections, by banks and some state attorneys general, in an article about discussions between banks, federal officials and states over lenders' foreclosure and mortgage-servicing practices. (A $26 billion settlement has been reached as a result of those talks.) Consumer advocates pushed for bank forgiveness of mortgage principal for underwater homeowners.

A key objection is the "moral hazard" created by the proposal to reduce homebuyers' loans because it "rewards those who simply choose not to pay their mortgage," the attorneys general said.

In an another denunciation of strategic defaults, here's David Walker, president and CEO of the Peterson Foundation, on CNBC's Squawk Box remembering when debtors' prisons encouraged a more responsible public. Walker "leads the Foundation's efforts to promote federal financial responsibility today in order to create more opportunity tomorrow."

You talk about debtors prisons, we used to have debtors prisons, now bankruptcy's no taint. Bankruptcy's an exit strategy. Our society and our culture have changed.

Speaking with a Wall Street Journal reporter in 2009, John Courson, the head of the Mortgage Bankers Association, evoked the moral argument against strategic default:

Defaults hurt neighborhoods by lowering property values, he says, adding: "What about the message they will send to their family and their kids and their friends?"

But, as Surowiecki points out, Courson's own organization recently negotiated a reduction of its mortgage debt:

Sometimes the hypocrisy is staggering: last winter, the Mortgage Bankers Association -- the very body whose president attacked defaulters for betraying their families and their communities -- got its creditors to let it do a short sale of its headquarters, dumping it for thirty-four million dollars less than the value of the building’s mortgage.

"It's a double standard that says corporations can look out for their best interests, but individuals can't," says Brent White, a University of Arizona law professor. He's the author of a much-discussed paper that examines homeowner motives, "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis." (Here's a .pdf version from The Sacramento Bee.)

 

White and Surowiecki don't appear to be urging homeowners to bail on their homes. They're just pointing out the hypocrisy of moral arguments against it.

 

Homeowners who are considering bailing on a home have a decision to make that's a lot more complicated than just judging this dubious ethics contest. They also have to consider other arguments against walking away -- ones that at least make rational sense:

  • Erosion of trust. A "wide-scale walkout would damage the mutual sense of trust and confidence in contracts that makes it possible to do business," Phoenix Realtor Bob Stahl, who has blogged about strategic default, told the Journal.

 

  • Endless housing glut. If we all start treating our homes like investments, we'll never see the end of all the homes dumped on the market, Felix Salmon wrote at Reuters:
There would also be a huge rise in foreclosures, evictions, and fire sales -- with the result that house prices, which are still falling alarmingly, could see another stomach-churning lurch downwards. . . . … If Surowiecki wants millions of Americans to walk away from their underwater mortgages, I hope he knows where the buyers of those homes are going to be found. Because if they don't appear, we could have another massive housing crash and another huge recession.
 
  • A home's just a home. Research by the Federal Reserve Bank of New York suggests that investors bringing bottom-line analysis to housing -- the practice of "flipping" homes -- was a big force in the bubble and bust. Salmon argues that a home is different from an investment, and if we all start treating our homes like investments, the housing market will become an endless and inhospitable cycle of volatility.

 

  • Your credit will be demolished. There's a powerful personal reason for staying in an underwater home: damage to your credit. Foreclosure subtracts 85 to 105 points from a 680 FICO score and takes 140 to 160 points away from a 780 score, says MSN Money columnist Liz Weston. Getting new loans probably wouldn't be possible for at least a couple of years after foreclosure.

More on MSN Money:

6Comments
Feb 10, 2012 5:58AM
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And when pushed to the limit over greedy banks wanting as much interest as they can get, why should I maintain a morale standard to appease them.  My property, my home, not an investment was devalued by all these crooks and they expect me to have morale values to prop them up with the high interest that I am paying and which they will not combine and refinance me.  My credit score is 820, I have no other debt except to the greedy bank called CHASE, I have 2 mortgages which I owe, all I ask for is to have them combined at a lower interest rate, if they are not willing to do this, then I am spinning my wheels giving them money I can no longer afford to give away in interest, so walk away seems to be the best math that I was taught.  Does anyone out there know how to dicpher through the mess the government has caused and will eventually be pocketing but continue to confuse us and try and make us think they are helping us because they need our help this year at the ballot box, I will not vote this year I will be taking care of me.
Feb 10, 2012 10:18AM
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I owe Citicorp and I wish to God I didn't. They are the biggest hypocrites you can imagine. I ask for a modification because I've lost 600.00 month in pay and it's extremely difficult to manage our finances loosing that much. We gave up pay and much more to keep our company floating. I tried to explain that to Citicorp and they turned a deaf ear to us. Why we, America, bailed this bank out is just insane. I don't have words to express my anger. A nobody, like me, can make things hard on my family so I do have a job and this company is not willing to bend with the wind to ease our pain is just beyond reason. There is no morality when it comes to thievery, just ask, Citicorp. I don't think voting will change how business is done in this country. As far as I'm concerned every friking politician is bought off, that's why we need to keep our arms. I feel sorry for the next generation and ones to come. We've dealt them a terrible hand. Americans think people are smart because they are rich, well ask Jesus about the rich and I think you will get a great definition of these souls.
Feb 10, 2012 9:54AM
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Why shouldn't we run our finances like a business. According to this, business owners have no morals. Nice to know.
Feb 10, 2012 10:07AM
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A petition has been started on moveon.org to prevent the return of debtor’s prison in the USA.  Once enough


signatures are obtained, it will go to the US Congress and President Obama.



To sign the petition go to:


signon.org/sign/outlaw-thereturn-of



Feb 10, 2012 8:21AM
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we need to run our homes like a business. we are be forced by illegal hiring practices ( illegal immigrants ) to work for less money. if we have to cut our expenses  (and i know i am) then we should stop paying for the business that screwed us to begin with.  buy american products from american workers at a fair price. if you need to downsize then do it.  save the difference between rent and mortgage plus maint and taxes.  at the current rate of appreciation of home values this will net you more money than reselling your home in 20 years.  do your own math and stop listening to the media. my fathers home 17,500 plus int after 30 years 67,000 plus 10 00/year in maint and a 15,000 remodel that is another 45,000 so total was 112.000 sold house for 132,000 profit of 20,000. if he just put maint and remodel money in the bank he would have had a prfit of 45,000 plus any interest earned.
Feb 10, 2012 2:41PM
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     DON'T QUIT!!!!  IN 1981, I WOKE UP TO THE FACT THAT-BESIDES MONUMENTAL PERSONAL DEBT-I OWED $750000 ON REALESTATE I COULDN'T SELL FOR $500000. I WAS IN A HOUSING RELATED BUSINESS THAT WAS GOING DOWNHILL RAPIDLY.  AFTER MUCH SOUL SEARCHING, MY WIFE AND I DECIDED TO TRY TO TOUGH IT OUT AND MEET OUR COMMITMENTS HONORABLY.  WE CHANGED OUR BUSINESS MODEL, ROLLED UP OUR SLEEVES AND WENT TO WORK.  IT TOOK UNTIL 1995 TO PAY OFF THE LAST OF OUR DEBTS-WITHOUT GIVING ANYTHING BACK OR STIFFING A SINGLE PERSON WHO HAD TRUSTED US WITH CREDIT.  WE ARE NOW RETIRED-VERY COMFORTABLY- AND CAN EASILY FACE THE PERSON WE OCCASIONALLY SEE IN A MIRROR.  WAS IT HARD?  YOU BET!  WAS IT WORTH THE HARD WORK AND SACRIFICE.  ABSOLUTELY.  I WOULD DEFINITELY SUGGEST A SIMILAR COURSE TO ANYONE THINKING OF TAKING THE "EASY" WAY OUT.  SHOULD YOU TRY, YOU WILL FIND THAT YOU WILL DEVELOP BOTH A WORK AND A  PERSONAL ETHIC THAT WILL REAP FANTASTIC REWARDS IN THE FUTURE.
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