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News & ArtsMonday, January 25, 2010
Money Go Ahead, Default on Your Mortgage
Posted by Eli Sanders on Mon, Jan 25, 2010 at 11:04 AM
That's what the mainstream media has been repeatedly telling people over the last month, in an amazing—and very populist—spree of American myth unmaking.
In terms of my taking notice, it all began with an article in the New York Times Magazine titled, "Walk Away From Your Mortgage!" The piece put the situation plainly:
Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials.
Then there was this a few days ago:
A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a “norm asymmetry.” In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. It’s as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.
And then this morning, on NPR's Morning Edition, the first question a reporter asked about the news that purchasers of New York's Stuyvesant Town have given the property—bought for $5.4 billion four years ago, and now worth far less than that—back to their creditors?
It was something like:
Is this another instance of the financially powerful doing exactly what Americans are told is irresponsible and immoral?
Pay attention, people who owe more than your homes are worth. The mainstream media—that supposedly elitist peddler of corporate lies—is teaching you how to shed a fishy morality, outsmart shady lenders and their Wall Street backers, and come out better financially in the process.
1
Hell, if it's good enough for corporations and the Supreme Court thinks they're people, it's good enough for people.
Declare bankruptcy and walk away from your underwater house - corporations do this all the time.
Declare bankruptcy and walk away from your underwater house - corporations do this all the time.
2
Jonah Lehrer has an interesting article about power: http://scienceblogs.com/cortex/2010/01/p…
People who think they're more important than other people break the rules if it benefits them - but they don't think the "unimportant" people should do it.
People who think they're more important than other people break the rules if it benefits them - but they don't think the "unimportant" people should do it.
3
People (and corporations) do what they can get away with. What they have the power to do. Homeowners don't have any power; they're slaves to their credit rating. So, feel free to rant away about "morals", but if you walk away you will be fucked forever. Unless you think you can swing a cash-only lifestyle.
4
Actually, there was an article about Las Vegas in Time back in August, and they talked to either a realtor or lender (can't remember which) who was helping people do just that - AND get new homes to boot. I'll go look for the link...
5
I know several people doing exactly this right now, and it actually almost breaks my brain trying to process their decision-making -- I wouldn't be able to sleep at night (or possibly, even to live with myself) if I was doing what they were doing, and yet they have no apparent qualms with it, even discussing it openly as if it was only just another option, walking away from a debt promised to someone...
6
Here it is.
http://www.time.com/time/nation/article/…
The pertinent quote (from page 2):
http://www.time.com/time/nation/article/…
The pertinent quote (from page 2):
Boemio specializes in short selling, in a particularly Vegas way. Basically, she finds clients who owe more on their house than the house is worth (and that's about 60% of homeowners in Las Vegas) and sells them a new house similar to the one they've been living in at half the price they paid for their old house. Then she tells them to stop paying the mortgage on their old place until the bank becomes so fed up that it's willing to let the owner sell the house at a huge loss rather than dragging everyone through foreclosure. Since that takes about nine months, many of the owners even rent out their old house in the interim, pocketing a profit.
Tons of people were doing this, but there were consequences. Renters were being evicted, through no fault of theirs, with a couple of days' notice when the house finally went on the market. People are now paying a premium to live in apartment buildings, which in Vegas are almost always owned by a corporation. Sure, short selling damages the sellers' credit rating, but they just bought a new house, so they don't care.
7
My cousin and his wife just did this with a condo in Vegas. They are in their 20s, and owed much more than their place was worth. They were moving out of Vegas, and after evaluating their options and trying to get the bank to work with them, they decided to walk away. They did whatever purchasing they needed to beforehand, since their credit is now completely trashed.
This was maybe a year ago and I have to admit, my mind was a little blown. But, they weighed the amount it would cost them to keep/sell the place vs. the impact on their credit and figured walking away was the best thing they could do. Hopefully it works out for them...
This was maybe a year ago and I have to admit, my mind was a little blown. But, they weighed the amount it would cost them to keep/sell the place vs. the impact on their credit and figured walking away was the best thing they could do. Hopefully it works out for them...
8
Vegas is, as always, a special case. 60% underwater, that's incredible. I also read that TEN PERCENT of Nevada homes were foreclosed in 2009. The total is much less than big states like Florida or California, but the percentage, Jesus.
9
your building is next on cap hill in seattle.
the stranger and the phone wars. a study on hard line mis-representation special investment cabal for anti petergabriel.com :(
the stranger and the phone wars. a study on hard line mis-representation special investment cabal for anti petergabriel.com :(
10
Short selling/bankruptcy does not hurt your credit as much as corporations want you to believe. Most of the comments on here are completely wrong. Wtf- "cash-only lifestyle" when 2 or 3 Gs is going into a debt that you will never recover from. That's right, most of you will never recover but lenders hope to recover as much as possible before you finally bail out. For many people credit actually improves vs. continuing to be late on your bills. But go ahead and listen to Fnarf, who boasts giving at least 20% tip on his meals no matter how bad the service is. Life is pretty fucking rosey from the pathetic peanut gallery.
11
@3- You're not fucked forever. In fact, you're probably less fucked if you just walk away than if you limp along making late payments for a decade.
12
It's one thing to walk away if you can't make your payments or you're in a situation where you have to move, but walking away does have consequences. The consequences aren't insurmountable, but if you can afford to stay, even if you're upside down, there is no reason to move. Real estate will slowly come back, and in the mean time you're paying your principle down instead of just giving it all away to a landlord.
Do the math and decide whether you can afford to stay. Also, talk to an attorney first before you default because there is a process known as a "judicial foreclosure" that banks to occasionally choose to take. It's way more painful than a typical (non-judicial) foreclosure, and banks decide to use it in situations where they think they can recover more money.
Do the math and decide whether you can afford to stay. Also, talk to an attorney first before you default because there is a process known as a "judicial foreclosure" that banks to occasionally choose to take. It's way more painful than a typical (non-judicial) foreclosure, and banks decide to use it in situations where they think they can recover more money.
13
It is called a 'Deed in Lieu of Foreclosure" and is not a new idea.
Execute it, move out and deliver key to the lender.
Clears away many paper work problems for all.
In many cases the decrease is over $100,000. And payments are too steep. Common sense here, people need to move on.
Execute it, move out and deliver key to the lender.
Clears away many paper work problems for all.
In many cases the decrease is over $100,000. And payments are too steep. Common sense here, people need to move on.
14
If it didn't affect the value of other people's property, it wouldn't be such an asshole move--that is, if you can still afford the payments, but wish you didn't owe so much and would rather have more disposable income for vacations, etc. It's a whole different ballgame if you lose your job or become disabled, which is risk that the lender assumes when handing over a ton of cash. But, unfortunately, walking away from an expensive mortgage does affect the rest of us, and it increases our insurance rates at the same time it devalues our property... which, yeah, we can still afford with a tighter budget, just like the voluntary defaulters.
15
@13 - That's not something you can impose on the lender though. The lender has to elect to allow you to do it which is not an easy process.
16
The Brent White article linked by the NY… is worth skimming, at least. He makes a really strong argument that the damage to your credit rating - which you can recover from - is far less expensive than continuing to pay for tons of debt on a property that won't recover its value for many years.
White also argues that the "couldn't live with myself if I backed out" feeling is actively encouraged by lenders and government, despite the fact that banks and other corporations regularly feel free to back out of unprofitable relationships and contracts. Or, as the NYT puts it, "It’s as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical. "
White also argues that the "couldn't live with myself if I backed out" feeling is actively encouraged by lenders and government, despite the fact that banks and other corporations regularly feel free to back out of unprofitable relationships and contracts. Or, as the NYT puts it, "It’s as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical. "
17
@13. That doesn't work. A deed in lieu will not effectively transfer title unless and until the grantee (the lender) accepts it.
18
@ 14, I'm all for considering others on most occasions, but home ownership (specifically your own finances) is not one of them. If I become upside down on my mortgage (which fortunately isn't happening, partly because Denver's bubble burst before the rest of the country) I'm considering all my options, and screw it if my neighbors see their values go down just a tiny bit. (Unless you can show that this has the same impact that, say, having a halfway house on your block, I doubt that this one move by one homeowner really affects property values like you say it does.)
19
From much reading (with light understanding, I fear) of the glorious Calculated Risk over the last few years, I believe your advice @12 is strong.
Bank of America's unlamentedly former CEO warned insiders a couple years ago that, as waves of adjustable mortgages continue to hit their recast point (new peaks for for various types will hit later this year and again in 2011), mortgageholders will be facing not only suddenly much higher monthly payments, but the downward pressure (from ongoing foreclosures and short sales) on what they could get for their home if able to sell at all.
His greatest fear was that the social stigma against walking away would erode to the point where large numbers of homeowners transferred their loss risk back to the banks in this way.
And here we are, with the clock ticking.
Bank of America's unlamentedly former CEO warned insiders a couple years ago that, as waves of adjustable mortgages continue to hit their recast point (new peaks for for various types will hit later this year and again in 2011), mortgageholders will be facing not only suddenly much higher monthly payments, but the downward pressure (from ongoing foreclosures and short sales) on what they could get for their home if able to sell at all.
His greatest fear was that the social stigma against walking away would erode to the point where large numbers of homeowners transferred their loss risk back to the banks in this way.
And here we are, with the clock ticking.
21
@18, of course a single foreclosure isn't going to affect property values all that much. Unfortunately, we're not talking about single houses here and there, but entire communities that are underwater and an emerging trend of people being just as assholey as banks have been. We wouldn't be talking about this at all if it were a non-issue.
For example: A bunch of foreclosures pulled down values in my neighborhood by about 10-12% this fall (couldn't have been the halfway houses... we already have those heh). As a result I will likely be paying PMI premiums instead of additional principle for a lot longer than I would have, had values stayed constant or risen.
If I walked away, I could get out of a pretty sizable long-term mortgage. But I tend to take a longer view (eventually I'll own it completely; I can afford it, but I may have to go without some things I would like to do or have in order to fully fund my retirement; I don't need an iPhone as much as I need a place to live) so I wouldn't walk away unless I really had to.
Besides, unless you plan on renting forever, which is just as risky price-wise, it's not going to get any cheaper for a first-timer to buy a house if insurance premiums go up enough to reflect the newer, greater risk of default.
But in the end, a contract is a contract is a contract, and there is generally a good faith clause in there somewhere. And you signed the damn thing about 80 times when you bought the house.
For example: A bunch of foreclosures pulled down values in my neighborhood by about 10-12% this fall (couldn't have been the halfway houses... we already have those heh). As a result I will likely be paying PMI premiums instead of additional principle for a lot longer than I would have, had values stayed constant or risen.
If I walked away, I could get out of a pretty sizable long-term mortgage. But I tend to take a longer view (eventually I'll own it completely; I can afford it, but I may have to go without some things I would like to do or have in order to fully fund my retirement; I don't need an iPhone as much as I need a place to live) so I wouldn't walk away unless I really had to.
Besides, unless you plan on renting forever, which is just as risky price-wise, it's not going to get any cheaper for a first-timer to buy a house if insurance premiums go up enough to reflect the newer, greater risk of default.
But in the end, a contract is a contract is a contract, and there is generally a good faith clause in there somewhere. And you signed the damn thing about 80 times when you bought the house.
23
Sounds like game theory. There is often a strong incentive for an individual to bend or break rules to their own advantage but the system can only support so many rule-breakers. So the winning strategy would be to encourage everybody else to follow the rules while making a private exception for oneself, as long as this exception is concealed from the other players. Hypocrisy works.
As long as the rank and file maintains a strong Protestant work ethic and plays by the rules, the sociopaths at the top can continue to fleece them with impunity.
As long as the rank and file maintains a strong Protestant work ethic and plays by the rules, the sociopaths at the top can continue to fleece them with impunity.
25
If you do a short sale, the lender can come after you years later and sue for the remainder of the loan. They can get a judgment against you that will put a lien on the new property you own (assuming the Vegas scenario). Do the research folks - the banks have got their butts covered! I weighed my options and decided to rent out my house until the market recovers and it is back above water - even if that takes 5-7 years, my credit will still be perfect, and hopefully I can at least get my down payment back.
26
There's a poster over at the SeattleBubble blog who is fond of saying, "Relax and go hiking". His point being, if the majority of folks do act in their own self-interest and walk away, then everyone's credit will get trashed. In a system that is built on credit, yet no one can qualify, then that system must collapse and will be replaced with something that does work for the majority. So relax and go hiking instead.
28
Someone once said "If you owe the bank 200 dollars, it's your problem. If you owe the bank 2 million dollars, it's the bank's problem." A house an ownwer can't pay for is the bank's problem if they knowingly made a sub-prime loan. that's why there's no WAMU anymore.
29
@12, it depends on where you live. If you live in Seattle, yes, property will come back. If I lived in Vegas, I'd look at this a lot more closely, because property ain't NEVER coming back there -- the average home is worth something like 45% of what it was at the peak. People aren't just abandoning their mortgages, they're abandoning the whole state. So these arguments make a lot more sense there.
My reaction was to the situation here, which in most cases is something out from under you can get (a prize if you can parse that sentence).
My reaction was to the situation here, which in most cases is something out from under you can get (a prize if you can parse that sentence).
30
I have never been sorry I opted for a 15-year mortgage when I did. The payments have been a bitch, but I owe about half what the house is worth, even in this market. If things went totally to shit, I could still sell the house and go live in a motorhome or something and not starve to death.
31
@23: You said what I wanted to but much more eloquently. Nicely done. One is not obligated (except when it's legally forced) to deal honorably with those who will not deal honorably with you.
32
Washington is an antideficiency state if you have a deed of trust.....good news if you want to walk away.
Oh by the way you're not breaking your contract, the note and deed of trust in fact provide expressly for whath happens if you walk away,...they get a deed of trust foreclosure....and you don't have to pay the balance.
f you want to really, really be a ruthless defaulter, this is what you do:
1. rent out the place.
2. keep the rent.
3. stop paying the mortgage.
4. it will take them about 9 months to get around to foreclosing on that deed of trust
5. at that point throw it on the market and seek a short sale .....you'll probably get about 80% of the principal value of the loan plus in the meantime you could have pocketed 9 montths of rent.
6. if you feel like renters have a right to live in a property to which you have been enslaved, and that you have some obligation to help them out, you can lower their rent during those nine months and they will happily go along with your plan....when there is a notice of foreclosure you can give them three months notice...so this stuff about renters being harmed is kind of wrong.....
7. note that you already paid higher closing costs and higher interest rates because you live in an antideficiency state....
8. you are helping society as a whole by forcing the dumbass bank to finally write down the value of your mortgage instead of continuing to foster the illusion is it full value, too.
Hey thanks!
Oh by the way you're not breaking your contract, the note and deed of trust in fact provide expressly for whath happens if you walk away,...they get a deed of trust foreclosure....and you don't have to pay the balance.
f you want to really, really be a ruthless defaulter, this is what you do:
1. rent out the place.
2. keep the rent.
3. stop paying the mortgage.
4. it will take them about 9 months to get around to foreclosing on that deed of trust
5. at that point throw it on the market and seek a short sale .....you'll probably get about 80% of the principal value of the loan plus in the meantime you could have pocketed 9 montths of rent.
6. if you feel like renters have a right to live in a property to which you have been enslaved, and that you have some obligation to help them out, you can lower their rent during those nine months and they will happily go along with your plan....when there is a notice of foreclosure you can give them three months notice...so this stuff about renters being harmed is kind of wrong.....
7. note that you already paid higher closing costs and higher interest rates because you live in an antideficiency state....
8. you are helping society as a whole by forcing the dumbass bank to finally write down the value of your mortgage instead of continuing to foster the illusion is it full value, too.
Hey thanks!
33
@29 - Fair point about vegas, but there is still some math that would have to be done. First, what would it take to pay rent somewhere? If that amount is significantly less, then it might not be a bad idea to take the hit on the credit, as long as you're sure a foreclosure isn't going to come back and bite you. For WA State, they can't come after you for a deficiency if they non-judicially foreclose, but I'm not sure what the laws in vegas say. How much would it suck to be foreclosed upon, lose the house, and, oh by the way, turns out you still owe the bank something.
Also, if you can afford it, and you're not paying too much more than the prevailing rents, why not stay? There is the chance the market may come back (even in Vegas, its possible). If you still pay your mortgage, you're paying down your principle along with your interest. When you pay your landlord, 100% of that goes to pay his mortgage.
Also, if you can afford it, and you're not paying too much more than the prevailing rents, why not stay? There is the chance the market may come back (even in Vegas, its possible). If you still pay your mortgage, you're paying down your principle along with your interest. When you pay your landlord, 100% of that goes to pay his mortgage.
34
@23: Your point is valid, and reminds me of what got us into this mess. If only one mortgage broker had been willing to give zero down mortgages on wildly overvalued homes to miserably incapable borrowers, everything would have been hunky-dory. Housing prices would have continued their slow, steady advance, and when those miserably incapable borrowers had to sell, they would have covered themselves.
But every borrower did it, and as a result, we got a housing bubble. When a bunch of people had to sell quickly, prices went down, credit clamped up, prices went down further, etc., etc., and still going on.
So yeah, why not use the same method to screw them that they used to screw us? What's good for the individual is fine, as long as only a few people are doing it. When we all do it, we're all fucked. (Look up game theory on the "prisoner's dilemma".)
Oh, and for the rest, talk to a lawyer. Laws are complicated about whether the lender can come after you for any unpaid balance. In some states, in some circumstances, they can. In other states, in other circumstances, they can't. It would definitely be a good thing to know before you walk away.
But every borrower did it, and as a result, we got a housing bubble. When a bunch of people had to sell quickly, prices went down, credit clamped up, prices went down further, etc., etc., and still going on.
So yeah, why not use the same method to screw them that they used to screw us? What's good for the individual is fine, as long as only a few people are doing it. When we all do it, we're all fucked. (Look up game theory on the "prisoner's dilemma".)
Oh, and for the rest, talk to a lawyer. Laws are complicated about whether the lender can come after you for any unpaid balance. In some states, in some circumstances, they can. In other states, in other circumstances, they can't. It would definitely be a good thing to know before you walk away.
35
The place next door (it's a townhouse) just short sold for $150k less than I owe on my place and all development within a couple of miles of here is city sponsored low-income housing. My wife and I took our life's savings and bought at the height of the boom, 12-2006, and now it's going to be a decade (if we're lucky) before we get back to where our home can sell for what we owe on it.
36
Well, if the banks aren't going to lend out the money *we* leant them, or be as generous to people as they were to them, fuck 'em. Every suffering soul ought to walk away.
Rentals will come back. I doubt the banks will burn the houses. Though maybe I shouldn't give them any ideas.
Rentals will come back. I doubt the banks will burn the houses. Though maybe I shouldn't give them any ideas.
37
I hope Obama tells us the American people to walk away and fuck the banks during his state of the union. That would be awesome.
38
If I declare BK, taxpayers foot the bill. If I let house go into foreclosure, property values of neighbors houses will lose around $7000 in value. Lost property values = lost tax revenue. Lost tax revenue = cuts in government services. I have a different system to get mortgage paid down (with a little help from alot of friends). http://outrunthestagecoach.com/Registrat…
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