Since the market collapsed back in 2008 we've seen the real estate market take a nosedive. People who bought at the height of the market (assuming that real estate would always appreciate) found themselves in a situation where their homes had dropped significantly in value. My wife and I are a part of the group who have taken a significant hit, our home value has dropped by over $40,000.
Many people, especially those who bought homes without a down payment, or with a sub-prime loan are now finding that they also owe more on the home than it is currently worth. According to a report by First American Core Logic, a real-estate data firm, more than 11 million families are in “negative equity”, that is, they owe more on their home than it is worth.
Thankfully we aren't underwater, but what about those people who are? What are they to do? A growing group of people are saying that for most of those people it would make complete sense to just walk away from their mortgage, stop paying, and take the credit score impact of a foreclosure. They call it a “strategic default“.
My question is this. Is it OK to walk away from your mortgage if you have the money to pay, just because you're underwater and have negative equity?
Credit Score Impact Of Foreclosure
There are a lot of things to consider when you're thinking about walking away from your home. First of all, you need to consider the financial impact of walking away from your mortgage.
One of the most obvious impacts a foreclosure will have on your financial life is on your credit score. Now, I'm not one of those people who will tell you to constantly check your credit score and rely on it for everything, but the fact is that it does play a part in a lot of things these days, so you can't completely ignore it. So what impact does a foreclosure or delinquent payment have on your credit? Fair Isaac pulled back the curtain a bit and revealed a little bit about what kind of a credit score impact those things might have:
30 days late: 40 – 110 points
90 days late: 70 – 135 points
Foreclosure, short sale or deed-in-lieu: 85 – 160
Bankruptcy: 130 – 240
So having a late payment, a short sale, foreclosure or bankruptcy can have a pretty significant impact on your credit score, and mean you'll have to improve credit score later. In any of those situations it is going to show up on your account and have pretty negative impact. What does a lower FICO score potentially mean?
Absorbing a big credit-score hit can make many transactions more costly. It's not just paying more for credit card debt and auto loans, insurance can cost more as well.
The average savings for someone with a good versus mediocre credit score is about $115 a year for auto insurance and $60 for home, according to Loretta Sorters, of the Insurance Information Institute.
A low credit score can even make it harder to rent a home because landlords often use credit scores to weed out prospective renters.
So having a foreclosure, short sale or even late payments can mean you'll end up paying more for a variety of things. Definitely a huge impact to consider when you're thinking about walking away.
Moral Dilemma Or Just A Contractual Transaction?
While walking away from your mortgage will obviously have a negative financial impact, especially as it relates to your credit score, this still isn't enough for many people to not consider it. There are still those who are just having a hard time making ends meet, and while they can still make the payments, they would prefer to just walk away from the hefty mortgage on their underwater home, because they don't want to lose upwards of $50-100,000 (or more) on their home value. Why take the hit when the bank can better absorb the blow?
It does seem to make sense on the surface, but now we need to ask the question, is backing out of a mortgage contract an OK thing for a homeowner to do, or is it morally wrong to back out of a contract you are still able to fulfill?
Personally I tend to come down on the side of paying your obligations if you're able. I like to think that a contract is something you live up to. You knew the terms of the deal when you signed up, and now you should live up to it if you can. We need to be responsible for the obligations that we've made.
Others would counter that a strategic default is a legitimate option that is even spelled out in the mortgage contract, where specific ramifications of a foreclosure or short sale are spelled out for the homeowner. To exercise those options is just a a part of the legal transaction.
I understand that argument, but don't agree with it. Just because the ramifications of missing payments or defaulting are spelled out in a contract, doesn't mean it is an acceptable or desirable thing to do. Also, there is nothing in the mortgage agreement that makes your continued payment contingent upon the value of the home going up! It is a risk that you take!
What do you think? Should morality come into play when making a decision about a strategic default? Is it just a contractual transaction, and should we not feel bad about defaulting or going into foreclosure? Tell us what you think in the comments!
I am not a home owner myself, so maybe if I was I would have a different opinion, but….
If I was in a non-recourse state like California I would have no moral qualms about walking. Both borrower and lender have agreed to the terms. The possibility of walking should always be considered when issuing a loan. If the issuer was worried, they could require a larger down payment. Those homeowners who put down 20% instead of 5% or even 0% are much less likely to walk. This is because the 20% down homeowner has much more invested. A loan is a contract, just like any business contract. Businesses default on loans all the time and no one raises a stink.
Just because the consequences of defaulting are spelled out in the contract doesn’t mean it’s OK to default – at least that’s my opinion. I think that if you sign up for a mortgage and agree to pay the mortgage, you should follow through – especially if you are able to make your payments. There is nothing in the mortgage contract guaranteeing that your home value will increase.
Tina Varwig says
Well , I pay my mortgage, on time. Never late , . I have 8 . and all ALL have clouded title, fraud all though them. You all better look. 400 more will be coming, foreclosure that is. The is forgery, Not assignmeting mnotes within the time they needed to put them in the pool. Hey I ask all u who has your note?. Will u get your after you pay 30yrs. Can you sell? Better look up clouded title 700 million tite are —–
I think the choice should be made on an individual basis. If you love your place and can afford it, you should definitely stay. However if you have to eat bologna sandwiches for every meal just so you can stay in the house I think that you should walk. Both lender and borrower made a mistake, you lose out on your down payment and all prior mortgage payments. They lose out on the money they could not recoup in the sale of the house. Walking away is definitely lose/lose and should be seen as your last option.
Mr. Money says
I think we can agree on that – that walking away should be seen as your last option, and it isn’t a “good” option.
Yes absolutely, definitely a situation I would not want to be in.
Great article by the way Mr. Money!
Mr. Money says
Thanks Rex, and thanks for adding your 2 cents. :)
Deacon Bradley says
Depends on whether or not you have the integrity to live up to your word. I’m with Peter, you signed your name saying you would pay for it and unless the contract included the words “unless I decide it’s not fun” then you’re out of luck.
In The Millionaire Mind Dr. Stanley studied first generation deca-millionaires. He discovered that the number one indicator in your character towards you becoming wealthy is integrity. You make the call.
It’s one thing if you borrow money from a close friend or family member and don’t pay them back, it’s another if you borrow from a bank. Banks don’t give out home loans out of the goodness of their hearts. They stand to make a great deal of money off the mortgage payments, and the larger the mortgage the more money they stand to make. Both lenders and borrowers were at fault for rising home prices and the resulting home bubble. Now each both parties are paying for their indiscretion when the borrower walks.
Do I think someone who walks lacks integrity? In a contractual sense…sure. Morally? Absolutely not. If walking away means you and your family are not barely eking out a living for the next 30 years I am all for it. You have an obligation to your family before you do any bank.
Like I said earlier however, I am not a homeowner. If my home value was demolished by this collapse I might have a different opinion.
Tony Elam says
I realize the numbers are a little different, but I had filed bk once and 5 to 6 years later was in the situation again. My car had been repo’d and everyone was telling me to just walk away, that Chrysler Financial was a big company and could handle it (that’s kind of debatable now!). Well having being in this situation for a second time I had to make a change this time, and I had a strong need to uphold my obligations. I ended up paying back the $8000, part of which I re-negotiated and I was fine with that. I didn’t get my car back, but I did gain a sense of integrity and dignity. I also am stronger for it, and will never get in that situation again.
I think if people walk away in a situation like the couple from the video, everyone loses. Great post, Thanks!
First, I don’t think that just because you signed a contract, it means you need to keep it to the death. People (and banks) make mistakes all the time and not having a way out can have detrimental effects on a person’s well-being. Plus, there are negative consequences, so it’s not like the person gets a free pass.
I think the choice really boils down to whether this going to effect my finances negatively for a long time (ie: 20-30 years). If you bought a house in CA for $700K and can barely afford the mortgage payment every month, it’s probably not wise to stay. I’d say anything over 40% of your monthly gross and it’s probably smart to walk. Yes, you can technically stay and afford the payments, but it doesn’t make financial sense for many reasons:
– The house may never reach $700k in your lifetime. Very possible in states like CA.
– You won’t be able to put any $ into your retirement.
– If you have kids, you won’t be able to fund their college.
Staying doesn’t make sense in situations like this.
Mr. Money says
I suppose in some situations, and in some of the worst states it may not make much sense to stay. I guess I just wish more people had used a little common sense when buying their homes in the first place. Far too many people got into homes and mortgages they couldn’t afford, and now when the market bottom has dropped out, they’re left holding the bag.
I agree. Unfortunately the only real solution is to let the market bottom out, which it hasn’t yet because of government intervention.
Derek Clark says
Everyone keeps talking about eating bologna and not being able to stay in the house and live a decent life. The value of the house has ZERO to do with whether they can afford it or not. The mortgage is higher than the value of the house, but it isn’t higher than when they signed up for it.
I unfortunately owe more than my house is worth (though I’ll be getting to even very soon), but that doesn’t mean I can’t afford it or have any intention of defaulting on the loan.
It is time to stop treating these people like victims and start making them deal with the consequences of buying homes they couldn’t afford. Yes the banks were stupid, but they have taken plenty of lumps for it. The homeowners signed on the dotted line so they need to start taking some responsibility as well.
Mr. Money says
I agree. the value of the house has zero to do with whether people can afford a house or not. If they had gotten into homes they could afford in the first place, on a nice 15-20 year fixed mortgage, they wouldn’t be having any issues or reservations now. Next time people, save up a nice big down payment and get into a mortgage no more than 25% of your income!
The problem is that you can’t really “make” someone deal with a house they couldn’t afford. They have finite income and if 90% would have to go to house, they have no choice but to foreclose. Now in some states, the bank can come after people who foreclose, but do you really think you’ll be able to recoup the loan balance? Most likely not, especially if the borrower declares bankruptcy.
I agree that people need to be held responsible, but when a bank looks at you and says you’ll be able to afford to live in a house when there is absolutely no way you’ll be able to afford it in 5 years, I think they deserve to end up with a foreclosure. When you don’t look at a person’s income when selling them a house, you are asking for problems.
No one is pretending that the bank is acting out of a moral obligation. In fact, many banks regularly do things that would be considered immoral from overdraft fees all the way up to the recent mortgage crisis.
The banks knew the laws in place, they knew that a portion of the people would default and they knew that these people could barely afford the mortgage to start with. Acting out of greed, they made the loans, for their own profit.
What you are proposing is that the consumers should be hindered by moral obligations while the banks are not. Consumer should act in their best interests not out of a misguided loyalty to a corporation.
If more people did this, the banks would tighten their lending standards and less people would be in underwater mortgages to start with.
This is especially true in a non-recourse states where there are already laws in place to protect the consumer. There is nothing ‘wrong’ with taking advantage of the laws that were in place before the mortgage was even made. The bank will certainly make use of every law in their advantage.
Len Penzo says
I think walking away from a home because your mortgage is currently underwater, even though you can afford to make the payments, displays a complete lack of personal responsibility.
It takes two parties to come to a contractual agreement. Unless the banks were holding a gun to the head of the lendees and forcing them to sign under duress, then people are just making poor excuses for bad business decisions on their part.
Hey, it happens. I bought a home at the top of the SoCal real estate market in 1990 and I was underwater for seven years. I didn’t make excuses. Although I wanted to move, I couldn’t afford to. So I sucked it up and made the best of difficult situation.
Remember, as long as you can afford to make the payments you’ve still got a tangible asset – your home. It’s not the end of the world.
It’s funny how many of the same people who would walk away from a home loan because they owe more than the house is worth have no trouble taking out an auto loan for a new car. More often than not, that loan is underwater as soon as they drive the car off the lot.
Len Penzo dot Com
Credit Card Chaser says
I think that based on the Christian principle found in Proverbs 37:21 that the right thing to do is to always pay back what you owe and keep the terms of any agreement that you have agreed to.
It seems that many other commentors are saying things to the effect of “well, the banks are not acting in accordance with any kind of moral obligation” but that is irrelevant as one should not behave in a way just to match the moral code or lack of a moral code of the other party.
In a related vein I also just wrote a post about Dave Ramsey’s view that it is a good thing to negotiate directly with lenders to pay less than what one originally agreed to pay. I would say that as far as Christian financial advice goes he is wrong: http://www.creditcardchaser.com/dave-ramsey-on-debt-negotiation-debt-settlement-wrong-again/
I think you meant Psalms 37:21, right? Great comments!
I love to hear people rationalize, rationalize, and yet still rationalize. The fact is – when you enter into ANY sort of contract, you are obligating yourself to one side of the contract. Rationalize all you want about how banks can afford to take the hit and all that, but that is such garbage. You guys who rationalize are in fact THE PROBLEM with why our real estate market is the way it is…people acted unethically to get us here. Now you want to behave unethically AGAIN! You kill me! When are we ever going to learn that we need to take PERSONAL responsibility for our actions. Yes, I am a home owner. And I have 2 neighbors voluntarily waling away from their homes in a short sale. They both have since purchase homes twice the size and doubled their mortgage. If we are going to rationalize everything, then explain to me where the line is drawn! The fact is – we have lost our moral compass and values, and America has such a problem with over-greed and trying to get the next best thing. I am a conservative and extremely capitalist, but in order for capitalism to succeed, it starts within the walls of our own homes. When in Main Street going to learn that lesson?? If Main Street can learn that, then Wall Street will follow. So c’mon people. Own up to your obligations. I will tell you – walking away now is a short-term solution, though you might not think so. Your integrity is not worth it. Remember that rationalizing now weakens you for difficult decisionsin the future. But making the right choice and living up to your obligations allows you to sleep at night in peace of mind, and also strengthens you significantly. If you successfully turn away from the temptation of acting unethically now, you will without a doubt be empowered to do so in the future to an ever greater extent. There is no question about it – walking away from a contract is unethical. That’s the principle.
So you are saying that no matter what happens, you should always have to hold to a contract? So if someone loses a job, what do you recommend they do?
Ideally, a contract is for the length of the terms, but guess what, things happen in life you can’t control. Forcing someone to remain in a contract can be detrimental to their well-being. It’s like saying that someone should stay in a marriage even if there is physical abuse because they formed a contract.
Forgot to mention that that reason we are in the place we are is that banks made credit easy to obtain and were willing to give anyone a loan without verifying income. Both borrowers and banks were greedy. Borrowers wanted bigger houses for less $ and banks wanted more loans, which brings in more income. For some reason some people believed that real estate would never go down in value.
The reason that many people are “strategically defaulting” is that they feel that banks were given a bailout from the government and borrowers were given nothing. Correction, they were given a HAMP program that was doomed from the beginning and has been a miserable failure. People aren’t stupid and when they see things as being unfair, they have very little sympathy for banks.
Noah, we are not here to judge the bank’s motives. When you enter into a binding contract to purchase a home, like a marriage, you keep your side of the deal. I had that contract in my hands to read over and view. I knew what I agreed to. Let the other side do as they may. Why is it EVER my prerogative to breach a contract? And don’t bring up extrenneous circumstances in which, yes, I would have to walk away. Like an earthquake flattening my home. If that happened, I would have to walk away because I simply don’t have enough money in my bank account to legally be able to rebuild and inhabit my home again. Even earthquake insurance holds deductibles beyond my ability to pay, so that is not an option. So yes there are circumstances where it would be appropriate to walk away. And losing your job could certainly be a reason. You no longer can honestly repay that loan, no matter how hard you try. In both cases, understand that you would INVOLUNTARILY be walking away. I understand your comparison to marriage, and of course you would leave in the instance of abuses. You are taking my point out of context. Not to mention, your argument is bunk anyways, because if I get married, I entered into the agreement to treat my wife as a spouse should. If I abuse her, then I have already breached the contract. If the bank breaches our contract, then yes I will walk away from our home. Are you kidding me with your arguments? Stop while you are ahead. Who cares why people are strategically defaulting. The point I am discussing is the ethics of walking away from a binding contract. Your problem is the same as the rest of the nation. Rationalize away.
Trent, first of all I don’t own a home and wouldn’t enter into a mortgage if I didn’t think I could afford it.
There are definite cases where a strategic default is unnecessary and unethical:
– if you bring in enough income so that you can easily meet the monthly payment
– if you cashed out equity to upgrade your home
– if you took out a 2nd mortgage
For those cases, yes, it’s pretty cut and dry. However, where it becomes a little fuzzy is when the borrower is barely making ends meet and interest rate keeps rising. I understand it’s a whole different conversation whether they should have signed up for this loan, but the truth is that being intelligent isn’t a requirement for qualifying.
For example, if a person is in a situation where 60-90% of their monthly take home pay is used up for the mortgage, there are 3 different possible scenarios:
– walk away, move in with family/friends, and take a huge hit on his/her credit score
– incur large credit card bills in order to make ends meet and deal with emergencies
– continue to pay 60-90% of their take home and neglect future plans and an emergency fund
If you would choose the 3rd option, are you willing to live your life paycheck to paycheck, and forgo any plans for your future? Are you willing to give up having children so that you can instead pay your mortgage? If you have children, are you willing to give up Christmas and birthdays forever so you can stay in the house? Also, what happens if there is a medical emergency and since you couldn’t afford health insurance, you are now not only stuck with a $200K mortgage, but also a $100K medical bill.
Now, many people are still willing to stay and that’s great. However, what happens if you are barely making it and can see that in a year or so, the interest rate will raise by 1-2% or even 5%? There is no possible way someone in that situation will be able to stay current. The end result is that they will have to foreclose, even though they are fully employed and may still want to remain in the house.
Even though those scenarios may seem “extreme”, they are fairly normal in America today. The economy isn’t healthy yet and for many, it’s a day to day struggle to meet their mortgage. Yes, people were irresponsible and they signed up for more mortgage than they could afford. Yes, they should have read the fine print.
However, banks should not have been allowed to let these people sign up. They did and now they are dealing with the consequences. How can you expect people to remain loyal to a bank who presented them with an unethical loan and didn’t look at any of their financial data.
Oh, and by the way, there are plenty of ethical reasons to break the marriage contract other than having a spouse do something illegal, such as physical abuse:
– workaholic (doesn’t ever spend time with other spouse)
– alcoholic or another other type of drug
– decides doesn’t want children even though said he/she did before getting married
None of those characteristics are illegal or considered “contract breeches”, however, I’d say if a young woman married some guy who had any of those issues and counseling had no effect, they probably shouldn’t stay together. Being mature enough to recognize bad characteristics before getting married is whole other conversation.
While it’s unfortunate, foreclosures are here to stay for at least another 3-5 years. Whether people like it or not, it’s healthy for the housing market to drop to a more realistic level.
One word: commitment. Answers all of your issues above, particularly, and way more important than the home contract, the marriage contract.
Like I said, there is a line drawn between voluntary walking and involuntary. That is a personal decision and requires honesty with one’s self.
100% agree. I’m all for commitment. I take choices like buying a house and marriage very seriously, which is why I am married, but not living in a house yet. It just doesn’t make sense when the market is going to continue down for a few years, especially in CA, where I reside.
All I’m saying is that for people who are struggling and will probably not be able to continue payments for 5 years anyways, there isn’t much of an incentive to stay, especially if it’s going to affect their family negatively.
Something else that irritates me about the banks is that the people who really want to continue living in their house are refused loan modifications while those who miss a few payments are granted them. The system is really screwy. I have a friend who wanted to get a loan mod to stay in his condo refused a loan mod, even though he had perfect credit.
I just do not see anymore a reason in continuing to pay high interest rate loan back on the assets which is losing value at this rapid pace. Credit scores are not the most important thing in this world. They have been created to trap us all into a debtor circle. People should act in their best interest following the contract their signed: bank takes the property if they do not pay the loan, end of story. Banks are not being reasonable to refinance loan into current interest rate of below 5%, they are not reducing a principal to the current value of the home, they are not doing anything to help the economy at this point. Walking away is an option, it saves a lot of money to a borrower: first trough free living of up to 2 years in the house, then in the unpaid interest and the difference between current high mortgage payment and current rent payment which is about double. In the several years all these defaulting borrowers will be byers again for a much lower purcahse price and with a downpayment and banks will be happy to lend them their 80% LTV loans.
Market has to reset itself to the point that median income borrower can buy a median home price. Until this happens, market will keep going down and down. So if our median income is $33K, house (3bed/2ba) will have to drop to the $99K value to be affordable and reasonable for purchase.
So since our incomes stagnate or even decrease so have to home values too. That’s Economics 101.
I am in the position of negative euqity, I bought a house with zero down at the height of the prices, but it was also the height of easy credit. Yes prices are about $50,000 less now but credit is no where to be found. I bought this home for the kids and me to live in , not to make money out of so I am happy to just plod along paying for it. I could get a better house now for much less money, butis it really worth the hassle? I chalk it up to “the luck of the draw” for everyone that made a killing in real estate someone had to make a loss.
Shelia Horak says
It kills me to know someone that stopped paying their mortgage a year and a half ago who could afford it and is still living in that home.But bought a business,car,cosmetic surgery and private personal training for him and his spouse.And now are also buying a new house in her name.How is all that possible.
Douglas Dahlin says
I’m one of those whose paying much more than my home is now listed. I’m looking forward to the good years again. I’m predicting it turns around by 2020 and maybe those of us who pay our way will see some kind of reward. Dreaming?
My situation is one where, we have no problem making the mortgage payments and making the payments doesn’t leave us strapped, but our house is way too small for my family. We have been trying to sell for over 2 years and nothing. Our mortgage balance is $20,000+ more than what houses this size are selling for in our neighborhood. Even though we don’t have a problem making the payments we don’t make enough to rent our house and still be able to get a mortgage for a bigger house. So, walking out on our mortgage is an option that is starting to creep up to the top of the list. Any suggestions would be appreciated.
I have read some of the opinions on this site and cant help to ask.Why are you debating right and wrong, moral or unmoral. To give an opinion in this dilemma you have to ask your self this question. What tools were available to a buyer of a home that would have lead that buyer to think that it was possible for a home to depreciate? At 19 I bought my first home and made some money then moved to Tampa bought another home, that house appreciated $60,000. I had no intentions on leaving that home but had no choice i couldn’t keep it cause of a divorce. Then at the the height of the housing market I bought the house I now live in. The house was an inventory home from a builder, the intended buyer didn’t qualify any more for the loan so it was offered to me at the same price she had agreed to 4 months prior ($20,000) less than what houses were going for at the time. At 31 I bought that home. Historically why not the buyer says, its a good investment the bank and realtor says. Me the buyer is ($90,000) neagative in the value of my home, I’m currant on my morgage and have never been late. The realtor got his money and the bank is still getting thiers, being in sales means my pay is less than it was 7 years ago like most people that still have their sales jobs from 7 years ago . If my morgage was 300 bucks less per month thing would be better but the bank wont reduce the morgage more than 50 bucks a month.. What would you do?
Ethics, morals? The contract stipulates that if the borrower stops paying the lender gets the property.
Is it really “walking away”? I’ve been paying the bank 2000 a month for 7 years. Therefore they have accepted $168,000 from me. If I walk they still have that $168K and the house, so how are they harmed?
There are 2 facts that must be understood before blame can be placed. Number 1. The earlier comment about the banks taking their share of the “lumps” is false. In fact the american taxpayer took the lumps for them because they were too big to fail. Secondly, is quite a bit more complex and certainly worth your time to investigate yourself. The matter i speak of is how money is created. The bank literally created the money you needed to purchase your house in the first place out of thin are through a process called fractional reserve banking. This is a widely known fact however few take the time to understand what this means. I am not lying and have no gain in doing so. So lets look at the dilemma again. The bank lent money it did’nt have (why wouldnt they when they can also collect interest on it) so you could buy a house u couldnt afford( thats right they knew but its theirs now) and the lie “too big to fail” banks that absorbed many of the smaller ones were paid in full by the taxpayers primarily through the 0% loans. note: The 2trillion was nothing and has mostly been repaid. The loans at 0% with no ceiling with a rotating balance of 700Billion (read the bill) that is continually repaid/borrowed via fractional reserve system, and has made some record profits for wallstreet at the expense of mainstreet. Tell me again who loses when you walk from your house. The bible also talks about a borrower being a slave to a lender. We live in a country that allows you to leave that paradigm without criminal ramifications. (which is not true for most countries). If you plan is to simply go back into usury to another you get what you deserve. If you plan to end your own slavery to another…..permenantly then I say go for it while you still can.
My daughter in law has accepted a terrific job in CO. Their home in GA is underwater and needs much work. They have never been late on a mortgage payment but now can not afford rent in CO and the houste paymenb in GA. Would walking away hurt them.
Mr. Money says
I think walking away would definitely hurt their credit/etc – and make it tough to buy another house anytime soon..
Ima Walkin says
I’m completely sick of all of you people asking “Is this a moral dilemma or a transaction?” The fact that you have to even ask this shows that you don’t understand what’s happened, and therefore that you are in no position to give advice. Face it people, the investment BANKERS did this. They lumped mortgages into tidy failurepackages for the consumption of overly zealous and greedy meatheads to buy up like some kind of candy covered poop.
Figure it out- there is no question abou who has been injured and who caused it. Ethics be damned. They don’t want you to do to them, what they did to you. That’s whos really pushing the “ethics” question. Grow up.
Lakita | Personal Finance Journey says
I have mixed feelings about this! Here are some random questions / comments:
The person who can not afford to pay their mortgage because of whatever circumstance….would they be judged (for lack of better word) the same as those who choose to strategic default?
I think part of the problem is looking at the house as strictly an investment rather than a place to live. We have been conditioned to think houses appreciate. The reality is houses MAY appreciate. But like anything else, you buy it at its current value and you are expected to pay what it’s worth when you buy it. People don’t stop paying on their cars when they go under water.
The interest rates that the banks charge….isn’t that partly to absorb the risk? Isn’t that why “high risk” borrowers have higher interest rates? If that is the case it seems there is a calculated risk involved on the part of the banks.
A few years ago, a terminated a contract early with my cell phone provider. I paid the early termination fee (consequences outlined in the contract) and kept it moving. I didn’t feel the least bit convicted. But with housing, I would feel convicted about walking away from my mortgage, even though there are consequences outlined in the contract. Is it really any different from my cell phone contract? Besides a larger price tag?
My thoughts are basically, if you can afford to pay your mortgage: pay it.
I’m thankful not to be in the position to have to make that decision!
Credit Score is Over-rated says
Moral issue aside…”about $115 a year for auto insurance and $60 for home” is hardly a complelling reason to remain committed to $10k’s or even $100k’s of “underwater mortgage” debt.
Personally, I have come to the conclusion that my home which is now underwater nearly 40% which amounts to over 180,000 is not worth the financial stress in keeping. I had down payment when I bought it and No I did not have an option ARM. My home which was 670,000 is now worth less than 400K. The market here is made of mostly of destressed sales. This was my buy up home and I have owned it since 2004. 7 years and being negative this much is completely distressing. Moral obligation needs to be to myself and my daughter right now. That is where my moral obligation is. The banks that created this mess, sub prime stated has effected fully documented loans here too! Yes there MANY of us that fully qualified at the time. My income has been impacted greatly and so has the value of my home. I see NO other choice here!
Montague H. Chapin says
My problem is not only I owe more than my house is worth but that I’m 80 and I’m not going live to be over 100 when my home would be paid off, I see no other way than to walk away from my home.
Why are individuals suppose to live up to a higher standard than say big business or our government? How many businesses walk away from bad investments? They didn’t sign contracts, they didn’t take a risk? Individuals are suppose to have morals and big business can do whatever, whenever. What a pile of Cr*p!!! Save your, “it’s the right thing to do,” speech for someone who cares.
Touche John!!! We had to pay $70K for a 1/2 acre prop. before they would build our home ($270k) in May, 2005. We are now in a community of half empty lots and our home and prop. is now worth $172K. We are in our 50’s and can’t wait for the market to recover, if ever. We asked the bank to refinance our 30 yr. loan to a 15 yr. term at 1% less than our current rate and no refinance charges(since we’re already so far under). They said we didn’t qualify for any modifications and they REFUSED to honor any of our offers. Therefore, we were willing to ruin our 840 credit score and walk away. We are now saving $2K per month for the past 14 mos. while still living in the home. We hired an attorney and to date, the loan is still in the pleading stages because they can’t seem to find who actually owns the loan and the attorneys for the bank have not responded to our First Discovery Requests that were filed 8 mos. ago nor the Discovery Good Faith Letter. We have not even begun the Foreclosure process. Since the banks force you to destroy your credit before they’ll even CONSIDER working with you, we decided to let them keep the home and we’ll move on with our lower credit score which will recover before we retire. We’ll pay cash for what we need and help the economy in the long run.
Luis Diaz says
One of the problems that I see when I have a home owner call me for advice on short Sale or Forclosure, is that most home owners want to stay in their homes but just can’t afford to. Most everyone that I talk to has had some type of financial downfall. Either loss of employment or medical emergency or loss of a loved one. The thing that bothers me is that the Banks are for the most part not willing to work with the home owners. They make it very difficult to get a loan modification or help in any way the home owner that has been paying that mortgage for X amount of years and now is in need of some help. I think that if the Bank is not willing to work with the owner there is very little the owner can do and sometimes the Walk is the only solution.
A Friends Dilemma says
A very close person I know, who saved diligently for 25 years, took 300K equity out of his home for a (1 year) real estate investment to help get ahead on retirement .. The market crashed and he lost it all (along with another 700K in real estate investing) loosing nearly 25 years of saving. He went from a debt free conservative investor into serious debt — His home is valued around 350K and now has a 600K mortgage. The payments are affordable now, although, once the interest rates go up (which is surely on the horizon) his payment is soon to be out of range. At that point, he will be left as a non-homeowner probably the rest of his life. He has tried to negotiate with the lender in 2008 to transfer the loan to a fixed rate. They were willing to do so but advised him to wait (1 month) until the “Obama” administration takes over, when they expect greater opportunities to be in place. My friend listened and 1 month later was informed by his bank, they were no longer doing loan conversions. My friend was devastated, knowing he is now sitting on a ticking interest bomb which will soon explode. Right now he has the opportunity to buy another home for 325K (1/2 his mortgage) at 4.5% interest. He will try to rent his home hoping he can buy enough time for values to rise, but realizes this is a futile anticipation. He is a man of integrity and struggles with the decision for this reason. His choice boils down to either stick it out in his present home until interest goes through the roof and he will no longer afford to pay, and then he is left a renter for the rest of his life. Or make the choice to walk away, buy a new home at 1/2 price, which will eventually gain equity, suffer the consequence of bad credit for 5-7 years,, then move on with life. (By the way, he lives in a no penalty state) Either case, he will likely foreclose yet, one choice with a home, one without. What is moral and where does integrity lay when staring in the face of prudence? I guess the question is,,,, what would the reader do? This man lived an entire life of conservative saving (and saved a lot) drove old cars etc .. One mistake lost it all .. and he has fallen into a very large hole, but has opportunity for a way out .. Should he choose to grab the rope and climb out, or live his days out sitting at the bottom of this deep hole?
Homeowners in AZ
My wife and I have no credit but our house. We have never financed anything else we own (cars, computers, tvs, etc.)
We bought a house when the market was only about halfway down at 5.75% in 3/08. In six months, our home lost 60K in equity. Two years later, our friends 8 houses down bought the same house for just over 50% of the price with 1.5% lower interest rate.
Our mortgage is only 18% of our income, but we are paying way above market value. We bought for 165K and it is now worth 63K! We did not do anything that wasn’t modest. We bought the house we could easily afford at time. No 2nd mortgages, no HELOC, paid extra on principal about five times in three years.
We can easily pay for our house but feel extremely wronged in terms of the market. BOA refuses to even talk to me unless I’m delinquent for months.
We feel penalized for doing everything right and, as a capitalist, I feel like I am contributing to the necessary market correction by “buying and bailing” as we can easily approve for a second mortgage at 50% of our current price in house that is the same size.
I am a believing Christian that struggles, but I don’t really feel guilty about this. I think the moral obligation argument is convoluted. As a steward, I wouldn’t stay in a bad investment and watch it lose money. My home is a bad asset. I feel kind of like a fool to try and pay it off.
It’s amazing the generalizations posted. How about my situation:
Underwater 66% on a home that I could afford, put 20% down fixed 30 year mortgage. I LOST MY HIGH PAYING JOB after 15 years. In the past, one would sell their home and be able to pay the mortgage note. But FOR THE FIRST TIME IN HISTORY, this is not possible. How am I unethical that I want to save my savings instead of spending it down and still not satisfying my note?
Most posters don’t get this. If you bought a home before 2003, you don’t have this issue. I wasn’t investing…I was just buying a home to live in.
Don’t make judgements until you are in someone’s shoes. The banks are making as much money now as when they created this bubble. Didn’t the Realtors Association or Mortagage Association default on their loan? Why is that ok?
I think it’s unethical for me to deplete my life savings.
Are all you people forgetting that the Banks had an obligation to us as well. Unfortunately, our government bailed them out and left millions of homeowners out in the cold. This is America; a place that you should feel safe and know that your government is not going to leave you homeless. Banks suck!!
I own my home. I took out a loan in 2007 that was considerably less than the amount of the loan I was offered, based upon the logic of what I could afford monthly with my wife at that exact snapshot in time and not what future salaries would be for the both of us. We now make considerably more money than we made in 2007. We can easily afford a much larger loan. Unfortunately, we are approximately $40K underwater. This means I cannot sell my home. This means I cannot take out more money to improve my home (and put people to work at the same time) and increase its value. This means we must save money for many years to do anything to my home or even sell it, unless I want to kill our credit scores to default on purpose to qualify for a government program. What did we do wrong in 2007? We were financially responsible in taking out my loan. How did we contribute to this housing mess at all? We are of the class of the ONLY TRUE victims in this process, period!
In some states like Minnesota borrowers can obtain loans without the permission or signature of their spouse. This is lunacy to put someone on the hook who had no say so in the transaction. Finally, many people did buy homes they could afford and refinanced into better loans even after they were taken by predatory lenders through no fault of their own. Still they pay as long as they can to their own detriment. Their homes may be many 100s of 1000s of dollars underwater due to the bad behavior or the banks they are currently attempting to bail out. Banks aren’t working to reduce the loan amount and it makes no sense to keep paying if you can not replace lost income or ever retire after chronic job loss. The market isn’t coming back & wall street and the white house need to get a clue. Yes, there are situations in which it is the only thing you can do after all due diligence has been done.
steve shutt says
Why would the opposing lawyer call mine and say “she is off the mortgage note”.
Trying to enforce marriage settlement agreement.
She wants me to sell the house (at a loss of 50%).
I want her to pay (Appendix A) the funds due to me. (the money to be used to refiance the house).
Clearly, her father, a real estate agent for over 20 years, knows that while you can remove a name from the mortgage, you can not remove a name from the promisary note without refinancing.
So what game is her lawyer up to?
M Dumm says
I have read that Association of Mortgage Brokers walked away from an office buiding contract after the housing crash. I guess they had no moral obligation just good businss move
Here we go again. It’s always the consumer who has to be moral. Big business walks away from bad contracts daily. If you have mortgage insurance, your mortgage company isn’t losing a thing. In my neighborhood, it’s common to find homes 400K underwater. Did these people want to pay what they did, no that was the asking price at that time. I bought after the balloon and still have seen a drop of over 170K. I pay my mortgage but I would like to scale down. No way I can sell. I’m not bring 100K to closing to pay off the loan. I will wait and see what happens in the next year. In the end, I may just say screw ‘um!
I purchased my home 5yrs ago with a 30yr mortgage. For 2.5 years i’ve been trying to refinance my home only to be told that I don’t qualify because i’m current on my payments. My interest rate was at 6.75%. I continued to chase all the home assistance programs but none were for me. I can afford my home but it’s tight.. i’m renting rooms out and i’m getting by. My anger for Chase and Citi has grown over the last 2 years for several reasons. First they accepted the bailout money and yet it seems impossible to get help. Secondly, they have no desire to help the homeowners who are current but way upside down… like myself.
For 2yrs i’ve been told by Chase & Citi, friends in the mortgage and real estate biz, to stop paying my mortgage. I struggeled over the idea for 2yrs and finally decided to stop looking at my mortgage as a moral obligation. Its fair to say Chase knows they are making a killing off of my mortgage. They have every right to, i signed the deal. When I called to ask about help with my refi, they said no, you’re current on your mortgage we can’t help you.
A mortgage is a contract. Both parties take a risk. I don’t feel that my home has dropped over $100m in value because of anything i did…in fact i’ve dumped at least 20g in myself. When i asked why this is dropping so much they said it’s because of all the foreclosures in your area. So because of all the greedy mortgage companies combined with all the ignorant borrowers, my home is taking the hit… doesn’t seem fair to me. I’d feel alot more responsible if I had been recklace with my money, pulled equity out of my home and purchased a bunch of toys. But I didn’t, and yet i’m stuck holding the bag of debt.
My point is their is no moral obligation on the side of the mortgage co. They will make stict biz decisions. If i had $100 grand in equity in the home , lost my job and couldn’t pay the mortgage, do you think they would give some of that equity money back? No chance!
In conclusion, i stopped making my payments, and both Chase and Citi have been more than a pleasure to work with. For me personally I had to understand that it is strictly a biz transaction. It’s legal, and i’m folllowing my mortgage down to the letter. The consequences for defaulting on my loan are steep but it’s 100x better than dumping money into a sinking ship. That’s what made the decision easy for me.
It’s not the right deal for every one, but it gives me some hope a few years down the road.
My experience is the worst case scenario. I was Divorced in 06 and bought a home so I could be close to my kids. My ex-wife moved and left me our orginal house so I’m stuck with two homes. I try to sell the home I purchased in 06 but it was at the worst possible time 09. I had three short sale offers submitted to BOA and in all three cases BOA’s imcompetence caused delays and all three offers left the table. Keys were sent to BOA. Now move to 2010, I take a new job and try to sell my orginal home. Again BOA’s lack of competence causes two offers that were on the table to pull out. I can not tell you how many phones calls, letters, faxes, I have sent to BOA to try to do the right thing. People, if you have the opportunity to walk, do it because in the end, you have to take care of yourself. Let the banks take care of them. I will never purchase a house with a mortgage, I will pay for it with cash when the time comes.
What if you and your husband are both driving over an hour a day paying an exorbitant amount on gas just to get to work because u cannot sell your house due to being underwater on your house…… The banks won’t do anything to help unless u r not paying your mortgage… I† is unfair…. in my opinion… We want to sell our house to move but cannot! So soon we will be paying not only our mortgage but they predict 5 dollars per gallon and then we will loose our house so why not!
Your article makes a point on the moral obligation of the borrower…but where is the moral obligation on the banks?
John Doe buys a house that he can afford, that appraises more than he is paying and that is only 25% of his gross income four years ago. Home aAppraised at $150, bought for $140, mortgaged $110. He makes $50k a year and his payment is $800.
The bank let all his neighbors buy houses. Except they make $30k a year, no money down, and have a loan for everything in their life.
The neighbors lose their houses and there are 10 houses in John’s neighborhood for sale. They are either short sales, abandoned, foreclosures, etc. and can be bought for $40k. John has to move for work, family or whatever and lists his home for $95k, about what he owes. No one will buy John’s house when they have the pick of the neighborhood for half that.
Is it John’s fault the bank gave all the bad loans? No.
But the banks aren’t out money, because many of those people had mortgage insurance because they didn’t have a down payment or were first time buyers.. The banks got paid off by the insurance, and will still sell the homes, get government bailout money and still sue the old homeowners in a few years when they are back on their feet.
John short sales his house, doesn’t make a dime from his investment, the bank makes him give up his savings to approve the short sale and John moves into an apartment with his family to start over. He will need to wait a few years and save up another even heftier down payment and deal with stricter regulations for his mortgage.
John is hardly the victim.
Thank you! This is exactly my situation. We need to move for job reasons and can’t. We did everything right – 20% down, no home equity lines, bought much less than we could afford – and now we are trapped.
Mike P says
Hey, did you ever consider the Federal Reserve Bank that raised the interest 17 times in a row. Almost doubling the cost of money. Those in contracts like reverse mortgages or adjustable rate mortgages had nt choice but to pay this heinous crime. It is the banks that make the rules and when it comes to their advantage to ream us like sheep they do it , over and over and over. And yet people like you say to honor your contract. A contract is only valid when it is two sided. When one side, like the mafia, can change the rules and double your payment I would call that a crime. When in the hell are we going to wake up and see that we are all sheep to the banks. 30% interest rate on a credit card. If that is not a crime there are no crimes. Its just screw everyone when you have the gold and make the rules. Give me a break. Either the banks lower your principle to the current market or we should all walk away. When you are getting screwed you don’t have to stand there and take it. The banks didn’t, we as taxpayers payed for their screw ups and now you are telling us to pay again. Get a brain.
Many neighbors in the area I am renting are $150,000 to $275,000 or more upside down (they bought houses for $300,000 to $425,000) which are now worth $150,000 on a good day. A few have even recently sold for $125,000 so they are walking away left and right. Asked if they would walk if they were $50,000 to $100,000 upside down many would probably say no, but these houses are now valued at early 1990s prices in that area. Who wants to pay in for 20 years to get back to where you started from? They have been going down for 4-5 years as it is so they are even further behind.
When you make a deal with the devil(banks) that make money out of thin air and leverage it out 100 times and don’t even have a note/deed to back it up, then wouldn’t we be foolish to keep paying into a mortgage that at the end has no authority to return wet note/deed.It should be noted that on a $ 200,000 mortgage the servicers (banks) leveraged up to 800,000 dollars from securitizing,hamp,illegal forcloser insurance,and forecloser itself. NOW when does the major money interests take part of the equity hit or does home owners take it all by themselves(stinks). to promote such a system is insane.
Lenders (banks) are concerned with money being paid back from loans, period. Your home purchase agreement states that if you don’t pay, they have the right to foreclose to get repaid. There is NO moral clause. If a person is not repaying the loan, what’s the difference whether it’s by choice or not? The debt is still not being paid. By your reckoning, a person who cannot repay his loan because of a hardship is a man with integrity, but a person who puts his family’s needs before the bank’s, is not. Hogwash! I’m retired and just don’t have the money. I will be walking away even though I make”enough” to keep the mortgage. I am going to spend my remaining years financially happier than I am now.
The question is: did all parties in a the transaction enter into the contract in good faith and with full disclosure? I can tell nearly everyone not in the banking industry did not know what was truly going on with the mortgages after someone was approved. I had no clue 10 homes on my street were purchased by people who could not afford them. So, the moral question is who has a higher moral standard the bank or the home owner? I don’t see the banks coming to the responsible buyers saying we lied to you, so here we’ll reduce your principle…. No they are working with the irresponsible buyers and allowing them to stay in their homes or short sell them… So I am not sure what the right answer is, but I can tell you the contract I entered into was not in good faith by the banks or the government, they lied, which inflated prices by creating false demand… so you be the judge….
I agree with Kev ..House is the collateral in the loan so if I do not pay Bank get the property .. In the end when I terminate the contract (Not breach) here is the loss and gain for each party
Lender got the down payment , Years of mortgage payments , Property and a tax write off on mortgage related losses ..
Home owner losses his home , mortgage payments , down payment , credit rating and after 2012 law is sunset a tax bill to pay on debt relief ..
So while Bank got all the benefits and I am taking all the negative part of the contract why my integrity should be questioned ..
There are a lot of good comments here.
I am struggling with the moral dilemma vs the financial survival. It made total sense to buy the house (actually build) at the time. My plan was simple. I had plenty of income to make payments, plus bonus money was promised that would allow me to pay down the mortgage, live in it for 8 to 10 years, sell and make a killing, then downsize and live happily ever after.
To my surprise the company I was working for went bankrupt so I was out of a job and no bonus money. I drained all my savings to keep up cobra and mortgage payments until I found work with health insurance at 34% pay cut plus no bonus action (A group health plan was needed because of my wife’s pre-existing cancer). So now I struggle to make mortgage payments but I am not paying on other debt right now because there isn’t enough to go around. The house is worth maybe 60% of what I paid for it and the interest is going up in a few months so I won’t be able to make the payments.
What else can I do but walk? The bank isn’t interested in lowering the payments. The sad thing is it will sit forever before they clear up all the legal mess, then someone will get it for around 40% of what I paid. The bank will lose a chunk on it.
Like someone else said, the 2012 law is going away so now I will be stuck with a tax bill on top of my other losses.
I have not walked yet but I see no way around it in the next few months.
Another thing thing missing here (at least I didn’t see it in the other replies) is that the whole system was setup allowing for walking away in the late 1800 to ensure that those who have the power to control and move the market have a vested reason to intervene during any type of speculative market with a negative effect directly undermining the positive effect of fueling the run up for quick profits. They did have the power. They appraised my house and countless millions at speculative values that they knew of and encouraged. Non-recourse is the only check mechanism that works against this and gives them an incentive to balk at speculative valuations and lose credit standards and the argument that once these players (financial institutions) have forgone this risk and participated in the run up that we should now remove the main mechanism for ensuring they don’t do it again is absurd.
The laws were not put in place to be nice they were put in place to protect the market from just what happened. I think the players should be put in jail but at the very least the financial institutions should have to suffer the consequences of trashing the market for their own gain with an eventuality that was spelled out long ago if they did do so.
It really surprises me that folks that write these post do not do some research on the origins of the non-recourse laws before they espouse an opinion on them and go off into moral responsibility. The individual buyers have no power to halt a runaway market and THATS what caused the deficiency in the first place and now its time for these institutions to get exactly what the laws envisioned.
Concerned son says
Curious on this situation. My retired father (84). Just lost his second career job in New York State. Owes about 50k more on his house than it is worth and he can’t afford the payments anymore. He is already 2 years behind on property taxes. Should he walk?