I am a condo owner who has done nothing wrong. I put money down, I did not buy over my means, and I did not attempt to use my house as a credit card. As a matter of fact, I am still employed and I still continue to make payments on my mortgage. All that said, I am at a loss of over 100K and the banks are unwilling to work with me because of the loss of equity.
I've actually had one loan officer laugh at me when I called to discuss the refi...
...I simply - simply - cannot see a good business reason to continue paying on my mortgage. I try to rationalize the situation, but there is *NO* good business reason. Please understand I say this as a person who has NEVER missed a bill in my life. My credit rating is 780 (averaged between all three agencies). I've always taken pride in paying and making my own way... but I've reached my breaking point.
Remember, 60% of Sonoma County homes sold in the last 5 years have negative equity. This could very well be another driver of foreclosures in the future.
Even the SF Chronicle, the pompom paper all through the bubble, has written that for some families, the right financial decision is to walk away, even though the right moral decision is to keep making the payment.
ReplyDeleteWhen you tack on 30 years of interest to $100,000, it's closer to $200,000 that you're actually paying. Who in their right mind is going to keep sending in their mortgage payments year after year when the loan is hugely underwater with no sign of recovering?
I think as the mess continues to worsen, folks will start to look at housing and savings very, very differently. What's the appeal of a big mortgage when there is NO payout in sight?
Lisa,Tanta discussed the Moral Obligation to repay a mortgage at some length at Calculated Risk.She had 20 years in the business of underwriting loans.Her position was simple,mortgages are secured debt and there is an explicit put in the contract.This is why for many years 20% down and reserves were required.I spent more than a decade in the collections business as a qualified manager (equivalent to a RE Broker)and I wholeheartedly agree.LENDERS decide what criteria are used to make these loans.when LENDERS found a way to lay off the risk they no longer cared how risky the loans they made were.When the contract clearly states "Make the payment or give back the collateral" there is NO moral obligation to pay when the property is so far underwater.Now the losses are being socialized (surpise!)but that is another matter and not one that I can discuss in polite terms.
ReplyDeleteIn 2001, I bought a new construction Santa Rosa house for $300K. I sold it at the end of 2005 because I knew the market was going to crash. Perhaps the moral decision should have been don't sell on speculation, but I made a business choice.
ReplyDeleteThat same house is worth $275K if you're lucky. The same model, but newer and upgraded (A/C and backyard at least) has been on the market for over a year and is in escrow for the third or fourth time now is listed at $285K.
That means that an entire 8 year old neighborhood has all owners underwater. How many of them are going to stick through it? I would estimate that the house I'm talking about will be worth around $200K; maybe even $180K.
If I was still there, I would have defaulted and seen how long it would take to kick me out.
Great comments.
ReplyDeleteI'm in Tom's camp that there is no moral obligation to pay back the loan. The bank gets the collateral if default occurs... they knew that going in.
Think of the guy that pawns his guitar at the local pawnshop. He has no moral obligation to pay back the loan, but that's why he gets 50 cents on the $1 for the value of his instrument. Pawnbrokers price for default. Bankers should have done the same. What obscures the whole issue is deposit insurance (did any of us worry about what the banks were doing with our paychecks once we deposited the $ in our checking accounts?).
As for entire neighborhoods being underwater, this is a fascinating dynamic. If you look at some of the newer developments in Windsor finished in 04, 05, and 06 not only is everyone underwater, everyone is already massively underwater. As foreclosures progress there will be no denying the value of your home. Faced with that reality 80%+ of the owners on a block could walk away.
HHB,the social consequences of having so many people who "made It" and bought in those neighborhoods walk away will not be small or short term.If the "Cram-Down" of mortgages on primary residences were allowed in Bk we might avoid some of the most damaging effects.If you oppose cramdowns,yoou might consider that they are allowed on yachts,second homes and cars,all other kinds of secured debt,but not on your primary residence.
ReplyDeleteIf you want to speculate in real estate, then get serious and start playing. If you bought a home to live in for a while and you are worried about values during a crashed market, then you aren't serious and might do something stupid like walkaway and ruin your credit for 5 years. Don't forget to hide your other assets and income - BK isn't what it used to be, and you can be sued for fraud.
ReplyDeleteIf the market doesn't "come back" then there are going to be a whole lot of people in a whole lot of hurt, wait them out. If it does come back (even after 5 years), you are going to be relieved you didn't walk away.
If you purchased to live - then the criteria should be how the neighborhood is doing and is it a place where you can stay for a while. If you have to sell for some reason, then if you have a short sale, you will find the bank "somewhat" more willing to talk. Take advantage of the fact that many are walking away - you always have that option if you absolutely need it.
The exception to this advice is if you are in a new development that is only partially built and sold - I would not want to be in that situation for very long.
pebird,if you bought at $600k in windsor,and the current price for similar homes is $300k,just how long will it take to recover in real,not nominal dollars? Do you expect real incomes to quadruple, making these loans sustainable?As far as fraud the courts have ruled that lying about your income on a Stated Income loan does not constitute a reason to set aside the debt in a bankruptcy because the borrowers income was not material in the decision to grant the loan.The factors considered by the lender were the appraised value and the FICO score,Give me a break.Real estate math with the exception of discounted cash flow analysis is simple.The numbers work,or they do not.Right now in sonoma county they do not work when an acceptable premium for risk is part of the analysis.
ReplyDeleteCorporations rarely act solely out of moral obligation. A deal/sale/transaction either furthers them to their purpose of existing which is profit...or it doesn't. When it comes to an R/E transaction decision buy/sell/walk-away, individuals should follow suit and act accordingly.
ReplyDeleteIt is funny, I have struggled with this as a moral issue as well: currently I have around 10k in credit card debt from the likes of WAMU/Chase and HSBC. While I continued to make greater than minimum payments on the cards (with the idea of quickly paying off) both creditors continually layered on un-explainable fees, restructuring of terms, and exponentially increasing opacity. I am walking away because I feel like I can't do much else. My point is this: why do we continue to struggle with the morality of this, while these institutions financially rape us? Stockholm syndrome?
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