This is something that while I can understand somewhat it really annnoys me. When you buy a house you agree on the price up front. Just because the value drops doesn’t let you off the hook for the original price. I get it your house was worth $100,000 and now it’s worth $50,000 but, you agreed to pay the $100,000 price tag. So people walk away from the mortgage screwing up their credit and screwing the bank. If you bought a house in the first place don’t you intend to live there for 30 years anyway? That is the length of most mortgages. Who cares what your house is worth if you have no intention of selling it at the current time? Probably in 30 years time the price will increase again. Who else thinks that if a person can afford their mortgage that they should be obligated to pay it? Or at least try and work with the bank to get their mortgage payment lowered? I’m sure the bank would at least appreciate you trying to negotiate? I know a lot of money is involved but, with everything else you can’t just decide you want to stop paying because it’s not worth as much anymore. With everything else it’s pretty much worth less as soon as you buy it. Does anyone else feel the same way?
Yes, many people feel this way, I am not one of them.
The way I see it, it’s a business deal. As long as the actors are working within the confines of the contract documentation, and relevant laws, then nobody gets to whine about the outcome.
This is especially true when you’re talking about banks, who write the contract language, and have multiple lawyers who specialize in contract / real estate law, and who deal with mortgages constantly.
Commercial Real Estate Holders Decide to Walk Away: The Continuing Double Standard from the Banking Industry. Debt Ceiling Raised to $12.4 Trillion Making Room for more Bailouts. Banks have little room to criticize home owners when they have done the same thing with properties they bought. If it is a good business decision for them, how is it not one for you? They are not willing to honor a contract that would cause them to overpay for a property, yet they expect you to stay and overpay. Is it right for your family to pay double for a mortgage for 30 years because you have signed a contract and the property value sunk. The reason it sunk was the policies of the same bankers who expect you to honor your deal.
No it is not so simple.
No. It is a financial decision to be evaluated just like the banks do. If they reform their policies and do everything in their power to assist homeowners, then I would feel differently. It is obvious though that they do not care one whit, and will drop an account to save a buck. I see no ethical quandry with doing the same.
I’d be willing to guess the contract documentation does not include a clause that lets the homeowner walk away because the value declined. The OP says that it’s not right to walk on your contract, you say you disagree, but that the parties to the contract should be regulated by it.
I used to feel the same way. Then I learned that banks are willing to walk way from properties they own when they’re worth less than what they owe. Quite frankly, I was incensed when I heard about it. The rank hypocrisy just boggled my mind.
It doesn’t let the homeowner “walk away”, it specifies what happens if the borrower does not pay. Motivation is irrelevant, it does not matter if you stopped paying because the value declined, or if you lost your job, or if you decided that checks were the Devil’s Instruments. Stop paying, and you are subject to specific contract terms and State Law, both of which were known inside and out by the bank prior to them agreeing to cut the borrower a huge check.
The contract doesn’t need to include such a clause. It’s a secured loan. A borrower has the right to default on any loan in which the contract doesn’t explicitly state otherwise (cf., federal student loans).
The contract spells out specific penalties for defaulting on the loan, which are seizure of the underlying asset (ie., the house) and a negative credit report. The borrower makes an economic choice to accept the penalties or to continue paying on the loan.
Banks are making an economic choice when they extend credit. In the case of mortgages, they’re making their own gamble: that the collateral will appreciate, so they can turn a profit on the loan even if the borrower defaults.
This isn’t Bedford Falls, and a mortgage doesn’t come with moral implications. It is a purely economic instrument.
I think that, in principle I am not disagreeing with the two posts above me. Defaulting can be looked at as a option of the contract but doesn’t that seem akin to buying life insurance specifically to collect the death benefit? In other words, it’s a viable last resort but it’s not the intended outcome?
A mortgage is a business contract. If the contract allows you to walk away forfeiting the house, there is no moral failure in doing so. If the contract doesn’t allow you to do so, there is a moral failure in doing so. You’re in a contractual relationship with a bank, not in a social or emotional one.
I’m pretty sure that is the intended outcome of life insurance purchases. I know it’s often sold as an investment but it’s a pretty terrible one.
I’m actually very conflicted about this. I’m buried, really buried, in a rental house. I am continuing to pay for it. Unless a change to the good happens with my finances in the pretty near future, I’m going to have choose between that and food soon.
So, what are my options? I did talk to a rep at my credit union. I learned a few things. First, they don’t own the mortgage. I didn’t know that. They sold it to Fanny Mae.
Second, part of the payment that I make every month is insurance for just this sort of problem.
So I don’t know what to do. I’d love to sell the rental, but I don’t have the $85000.00 short fall tucked away. If I make a claim against the insurance I’ve been paying for all these years by doing a short sale, I’ll ruin my credit and I’ll be sticking it to them and the banks that loaned me this money in good faith.
Stuck in a bad spot.
Yes, this is it. For some reason people think of it like not paying child support or not paying for something you bought but still keep. Only you don’t keep the house. The bank gets it. That was the contract: You keep the house as long as you pay the mortgage. If you stop paying, the house reverts to the bank. It’s that simple.
Now, if you want to look at the moral aspect of it, you might focus on what your action does to home prices in your neighborhood. OTOH, what happens to home prices in your neighborhood if a bunch of people start outbidding each other to buy homes? Do they have a moral obligation to future home buyers not to bid up the prices too much? I don’t think so. The market sets the price of your home, and if the market (which includes people with underwater mortgages) tanks, then your home price tanks, too.
BTW, this exact subject has been done here at least once in the last 6 months. Probably more than once.
Out of curiosity, why would you buy a rental property you can’t afford? Or is it just that you can’t find any tenants?
They’re probably just following the examples of the banks:
And
Yes, you can in fact decide to stop paying for pretty much any reason whatsoever. It’s right there in the loan contract. Of course you’ll lose your house and sterling credit rating in the process, but you’re well within your rights to walk away.
Well luckily we have a set of laws that doesn’t require bankers, realtors, appraisers, or lawmakers to abide by any system of ethical obligations in the contract process. Otherwise they might be on the hook for the financial mess that is clearly the responsibility of the individual homeowner to resolve. I think we should strengthen this system so that all homeowners have to purchase real estate at artificially inflated prices that will drain the overall economy for the benefit of a few. This surely must be what our founding fathers intended when they established our system of law.
People who can afford to pay the mortgage but deliberately refuse to pay are known as strategic defaulters. Banks are now going after strategic defaulters by selling the property and if the bank incurs a loss on the sale, the banks are now beginning to sue the strategic defaulters to recover the loss.
Exactly. Worrying about morals when dealing with big business is like walking into a gunfight without a gun.
This of course depends on the state. Some states (California for sure, and I believe 6 others) do not allow this. If a loan is secured, then all they can take is the collateral (in this case the house).
This brings up a bigger issue for me. The whole point of credit reports and setting interest rates is to price the risk of an investment. That is why credit cards should have higher rates than mortgages and people fresh out of college should have higher interest than someone who is established with a long work history and a large asset pool. But every time the banks get clever and figure out how to pass on the risk they forget this and focus on loaning as much as possible. Then we they get in trouble, they push to change the rules to reduce their risk.
The first time I was aware of this was when they changed the bankruptcy rules about ten years ago. It was the same deal, but with credit cards. In the nineties they started bundling credit card debt and then all of a sudden they were sending cards to everyone (in 95 as an E4 in the Navy, I go offered 5 cards in one week and ended up with credit lines totally 3 times my yearly take home). Then when people with massive credit card started going bankrupt, they lobbied Congress to tighten the rules to prevent it. Never mind that they gave out the cards and they set the interest rates.
Bottom line, it is the banks job to set interest rates correctly to compensate for their risk. If the it turns out they were wrong, it is not our moral responsibility to make sure they don’t take a loss.
Watch that daily show clip. The basic argument is the banks are making is that it if you are a human being you have a moral duty to take a loss that corporations do not.
All that said, it is a complicated decision for everyone. Walking away from an underwater house does have costs. Even if they can’t sue you, you will pay more for any future loans. You will still have to rent a house. But you should not bankrupt yourself because you believe you are morally obligated to an amoral entity.
The repubs redid the bankruptcy rules. They disallowed discharge of student loans and prevented "cram downs’ on residential homes. They allowed it commercial.
A cram down allows a corporation to wipe out loans at a rate greater than the evaluation of the property. If home owners could do it, bankers would surely have to renegotiate home loans.
The businessmen and their workers ,the politicians do not work for the people.