Great stuff! It sure makes you think!
Owners that can actually make their loan payments, but choose to walk away, accounted for 1 in 4, or 25% of all foreclosures as of June 2009. That was over six months ago, and the numbers have probably gone up since the initial studies (these data can be easily verified via a quick Google search). Strategic default is an ethical dilemma, and the discussion is burning up cyberspace.
On one hand, there is a moral obligation to honor your contract. If you owe more than your house is worth, one way or other you gambled on your equity and came up short. Maybe you bought at the top of the market, or took out an equity line of credit and bought some stuff; a car or TV, or maybe even another house. Regardless, it’s not your lender’s fault that your property value went down. After all, if your property went up in value you wouldn’t turn around and give the bank extra, right? If you buy gold, and it loses value, you don’t get your money back, you wait it out. If you loan money to a friend, and he loses it all, you would still expect him to pay you back, especially if he can afford it. The value of a promise doesn’t flex due to circumstances, or whether you are the giver or the receiver. If you can make your house payments, it’s the right thing to do.
On the other hand, are the banks responsible for some of this mess? Should they share the burden? Didn’t they sort of tease us into all these high-risk loans and credit cards? In the first few years of the Y2K decade, the FED, major lenders, and real estate professionals convinced us that everybody in America could buy a home. They made you feel foolish if you didn’t. It was like manifest destiny, your birthright, your duty. You could get a home loan if you had a pulse. You could qualify just because you said so, no matter if you could actually afford one. Lenders didn’t seem to care if you were truthful in your loan application. Certainly they knew they were making questionable loans, gambling on equity just like us. Aren’t the financial institutions culpable, too? Didn’t they practically beg us into this?
The survival of our economy depends on everybody doing the right thing. Imagine the consequences if all borrowers that owe more than their house is worth but can afford the payments choose to walk away, or if all the lenders call in all the notes on properties that won’t appraise for the full amount.
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So, who gets the free morality pass? Who gets to choose what’s fair? Is personal credibility negotiable? Is the golden rule irrelevant? Do we just step off when times get tough? Is this the new American paradigm?
Not surprisingly, real estate professionals are leading the charge in advising people to walk away. Not ironically, real estate professionals were leading the charge 4-6 years ago advising people take on these same loans. Whatever it takes to earn a fee. Maybe it’s time for an industry gut check.
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- NYT: No help in sight, more homeowners walk away msnbc.msn.com)
- The Way We Live Now: Walk Away From Your Mortgage! nytimes.com)
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"Not surprisingly, real estate professionals are leading the charge in advising people to walk away. Not ironically, real estate professionals were leading the charge 4-6 years ago advising people take on these same loans. Whatever it takes to earn a fee. Maybe it's time for an industry gut check."
Not ironically? Maybe it's time for an industry gut check? I applaud you for reposting this Sandy, and I couldn't agree more with the last paragraph. But, I would add to it by replacing "not ironically" with "ironically". And I would take out the "maybe" in the last sentence...
The crux of the problem is the moral risk of someone walking away from a deal. But have they? The deal is, you pay your note, or the bank takes your house. That is what the banks agreed to.
The bigger issue is, Americans are watching as the moral hazards of investing in banks and insurance companies don't exist, because the game is rigged. Heads banks win, tails Uncle Sam bails out the banks, and the $100 million bonuses keep flowing. In Sept. 2008, with CountryWide getting crushed, AIG going out of business, Lehman Bros broke, and all the rest of the major banks insolvent over the next 90 days, the Fed could have allowed for it all to crash, which would have preserved the moral hazard of punishing bad bankers, and bad investors who took on too much risky behavior.
How can anyone chastise a guy who per their agreement with the bank, stops paying money on a really bad investment, and the bank gets the property back?
In my opinion it is a contractual obligation. If you go to court they will refer to the contract. If the value went up and you lost your job and failed to pay your mortgage, the lender would excerise their contractual rights to the property. The bank also based their interest rates on the risks they projected to the customer during the loan process. Unfortunately since the values went down the bank has to eat it. Imagine it in reverse, I've never heard of a bank foreclosing and then returning the difference of profit to the person who forecloses.
Should we meet our financial obligations, yes. Unfortunately the banks did not spell this our in clear language on their contract.