Walking away from an underwater mortgage is one way in which normal homeowners may be able to both help themselves and the economy.Although I still disagree about the ethics, I'm starting to warm up to this type of argument.
The logic is straightforward. As many as 20 million people owe more than the current value of their homes. In most cases they have little hope of ever accruing equity in their home. There continues to be an enormous glut of housing. Nationwide, vacancy rates are at record highs. Rents are actually falling for the first time since we have reliable data.
Also, temporary government supports in the form of extraordinarily low interest rates and the first time buyers' tax credit are about to end. It is virtually certain that house prices will soon resume their decline and will remain low for many years to come. This means that people who are underwater today are likely to be even further underwater five or 10 years from now when they plan to sell their homes.
Not only will people end up losing money when they sell their home, but many underwater homeowners are likely to pay far more on their mortgage and other ownership costs than they would to rent the same unit. We did calculations recently that showed that homeowners who bought near the peak in many bubble markets could easily save themselves more than $1,000 a month by renting equivalent units. This means that these underwater homeowners could be throwing out more than $12,000 a year in a desperate effort to keep up on their mortgages. Since most of these homeowners will never have any equity in their home, the mortgage check they send to the bank is money thrown in the garbage. ...
Not only would it benefit millions of homeowners to send the keys back to the bank, it would also benefit the economy. The money that homeowners save by not paying their mortgage is money that could instead be used to support consumption and boost the economy. ...
Unfortunately, the current policy from the Obama administration goes in the opposite direction. Rather than realistically assessing what is best for homeowners, the policy seems intended to do everything possible to persuade people to keep sending checks to the banks, even using taxpayer dollars as an inducement. ...
Walking away from a home may well be the best economic choice, and in such cases, it is also likely to be the best choice from the standpoint of the economy as a whole. This may not be advancing God's work, but if millions of people walked away it might educate Goldman Sachs and the rest of Wall Street bankers about what happens when everyone plays by their rules.
Wednesday, February 03, 2010
Dean Baker's take on walking away
Economist Dean Baker, one of the first people to publicly warn of the housing bubble, disagrees with me on ethics:
Subscribe to:
Post Comments (Atom)
Posts
Perfect plan! As I have been saying all the while, don't buy into the "American dream". It only lines the pockets of others who don't care about you. It's such a pleasure to look out my window at the beautiful snow and not hav an disdain about having to shovel. Rent, rent, rent...and enjoy life!
ReplyDeleteWell IANAL, but Maryland is a full recourse state:
ReplyDeleteRule 14-201. Applicability; Other Remedies.
(a) Applicability.- The Rules in this Chapter apply to foreclosures under lien instruments and statutory liens.
(b) Not exclusive remedy; exception.- The foreclosure procedure set forth in the Rules in this Chapter does not preclude other remedies available by law, except that the procedure is the sole remedy for the repossession of property sold under a land installment contract executed pursuant to Code, Real Property Article, Title 10, Subtitle 1 or its statutory predecessor.
So after the lender seized your house and sells it, they can still demand the rest of their money. So bankruptcy is probably necessary.
--Jim A.
Another supporting argument is that even when it comes time for the homeowner to move out of the house for whatever reason, they will still most likely be underwater, and there will still have to either take on a loss at that point, or the bank will have to agree to a short sale. It is better for the homeowner to get the loss out of the way sooner, rather than later.
ReplyDeleteI'm so glad I never listened to the people who kept saying rents would go up.
ReplyDeleteThink about this: if someone is so far underwater, they will have to make a choice between paying that mortgage and paying for their kids to go to school, paying insurance premiums for health or long-term care, not to mention discretionary spending that our economy needs in order to continue to have jobs.
Like most things in life, it's not a binary black/white choice of letting the bank take the loss or not. It's probably in most cases the choice of screw over your own family or let the bank take the loss that they have underwritten and contracted for. In those cases, regardless of how wrong it was to take on the mortgage in the first place, I think it is clear that the moral choice is to take care of your family and not be a burden on society rather than legally turning over the collateral of your loan over to the bank.
I am so glad I sold in November and am now renting. My new neighborhood is so much nicer, I have an acre, and the house is more comfortable. We are also saving $1,200/month that would normally go into a mortgage black hole, giving profits to bankers. We broke even on the house as an investment, but when you look at what we paid to live there, we spent maybe $80,000 too much over the time we were there. We could have rented the nicest home in the neighborhood and come out farther ahead.
ReplyDeleteI am a fan of home ownership, but not of mortgages. Our plan is to buy all land and RE in cash, going forward. Our next purchases will be land to build on. In the meantime, interest rates will skyrocket, and then they will eventually come back down, and by then we'll be ready to build a house to retire in, depending on which lot in which country, we want to build on.
Screw the bankers. The money changers have been pure evil since the time of Christ.
I am no fan of the UN's Agenda 21, either, which seeks to remove private property rights, worldwide. I see the world RE crisis as intentional, due to Agenda 21 and the bankers behind it, who stand to gain immensely from a world financial oligarchy managed behind the scenes and hidden by the media.
I think one thing that has become very clear is that there is certainly a definitive relationship between rents and home prices. As illustrated by numerous articles including the referenced one in this post, people will walk when you can rent for less.
ReplyDeleteYeah, ethics aside, the transfer of more underutilized capital to banks seems quite silly. Banks aren't lending it out because there's insufficient demand. Moving that money back folks who are going to spend it immediately seems like a good idea.
ReplyDeleteAgreeing w/ Catherine above, when you do the math using the numbers in the article (losing $1000/month, $12,000/year) and multiply over the length of a 30 year mortgage, it ends up meaning that you'll be paying the banks an extra $360,000 over the life of the loan. $360,000 not going to retirement, to your kids' college, to replace the clunker in the driveway, to fix the roof, etc. When the move that saves the bank screws your family, the ethical choice for most people becomes clear.
ReplyDeleteSeveral articles out recently about banks seeking full recourse after the forclosure sale. Unless you are in a position to file for bankruptcy, walking away may prove to be very uncomfortable.
ReplyDeleteI'll bet that just moving money around, ie. setting up accounts in the kid's names for college, will not be enough to hide it from the court.
Why go through the "borrowing" portion? Just steal money whenever you feel like it, say you need it for retirement or college education in order to rationalize it. Everyone will understand.
ReplyDeleteStrategic defaulters are people who can't live up to their word, want to blame others for the risks they took. I guess I shouldn't expect more from a society that encourages people not to take responsibility for their actions.
In this country there were people (like my grandparents, now deceased) who lost everything in the Depression but paid back every cent they ever borrowed. It is those people who made this country what it is, and now people without morals or character will destry it.
"Why go through the "borrowing" portion? Just steal money whenever you feel like it"
ReplyDeleteAs you sit idly by doing nothing to change it. Your complaint moves keys ona keyboard but will not result in action. Instead of complaining, do something about it.
Judging from the comments here there is a mistaken impression that the "banks" would be taking all the losses. When people default the bag holder is not necessarily the "bank". In many cases the bank is just servicing the loan. A lot of the debt was packaged into CDOs and passed along to institutional investors like State pension funds. Many of those pension funds are now going belly up.
ReplyDeleteJust be clear who it is that is being screwed over with all these strategic default. It is not a bunch of bankers at Goldman Sachs. It is the people who were counting on the assets in those pension funds.
7:36
ReplyDeleteStrategic defaulters are people who can't live up to their word, want to blame others for the risks they took. I guess I shouldn't expect more from a society that encourages people not to take responsibility for their actions.
12:30
Just be clear who it is that is being screwed over with all these strategic default. It is not a bunch of bankers at Goldman Sachs. It is the people who were counting on the assets in those pension funds.
By now we know that the housing bubble was the unintended (but certainly greed-driven) coordination of a lot of interests that led to out-sized profit for banks, hedge funds, real estate firms, and their respective employees. With that in mind, I can't find fault in the counter-argument, that the mortgage a homebuyer agreed to originated from misinformation. And as such, that someone paying into that scheme is actually perpetuating a fraud. So I completely understand if someone feels just as ethical in stopping that cycle of fraud.
The pension fund argument just doesn't make much sense. You would willingly overpay for ahome, perhaps at the risk of diminishing your quality of life gravely, so that pensioners you don't know can live the quality of life THEY want?
Thus, the wealth transfer continues....
To my mind, full recourse changes things. Not much point in walking away if they can still get your money. As to whether banks or pension funds get hurt, when it comes down to throwing your family under the bus or someone else, I'm always going to pick the someone else whether it be a bank, pension fund, orphanage, the Pope, a car full of clowns,a basket full of puppies....
ReplyDelete"The pension fund argument just doesn't make much sense. You would willingly overpay for ahome, perhaps at the risk of diminishing your quality of life gravely, so that pensioners you don't know can live the quality of life THEY want?"
ReplyDeleteYou missed the point to reach for a conclusion that wasn't there. The point is that a BIG PART of why people feel morally justified in strategic default is because they think they are sticking it to the bankers. Just read through the comments above and argue that that is not the case or argue that it is in fact the "bankers" who are taking the lion's share of the losses. Do what you want (within the boundary of the law) but the self-deception stuff going on here (and everywhere else you look) is just a bunch of crap.
"You missed the point to reach for a conclusion that wasn't there. The point is that a BIG PART of why people feel morally justified in strategic default is because they think they are sticking it to the bankers. Just read through the comments above and argue that that is not the case or argue that it is in fact the "bankers" who are taking the lion's share of the losses. Do what you want (within the boundary of the law) but the self-deception stuff going on here (and everywhere else you look) is just a bunch of crap."
ReplyDeleteThen I believe it is you who has missed the point. This is so NOT about moral justification. Strategic defaulters are not willingly ruining their credit just to spite the bankers. They are doing so because they see it as the best option for protecting their long term financial security. Thats the TRUE justification they seek, to be enriched and wealthier. Sticking it to the bankers is merely icing on the cake. But the point is that all of this is driven by the need for money, not by the need for moral justification. And given the choice of enriching oneself or enriching others (bankers, pensioners, or whomever), the choice is simple.
If anyone, its been the bankers that have injected morality in this discussion. It obfuscates the issues. In the end, you're wealthier or you're not. If you're not, then someone else is.
If all people with house underwater walk away, our financial system will be broken for sure.
ReplyDeleteI fail to see any moral element in this - at least for continuing to pay. A mortgage is a simple contract that says a) continue to pay a monthly fee or b) we'll take the asset.
ReplyDeleteBusinesses and pension funds make the rational economic decision to walk away all the time. It's just good business.
If you want to get into the morality of it - all three of the major monotheistic religions have very, very strong prohibitions about debt - and the advice is to do whatever it takes to get out of debt.
I applaud people walking away, and if anything, it is the moral action.