Aftermath of 'walking away' from a mortgage?

Well, it depends on the exact language of the mortgage. In non-recourse states, that’s what it’s going to boil down to, but in recourse states the language could be more like:
You agree to repay the moneys owed (no matter what), and further agree that if you fail to do so the bank can take the house to recover whatever portion of the debt they can (but you’ll still owe the difference between the total current debt and the amount the bank gets for selling the house).

Now, practically, the bank may not think it’s worthwhile suing you for the difference between what you owe and what they get from selling the house, but in many cases the bank may indeed have that option.

It’s worth noting that the decline in the value of the houses themselves is not the only reason that people ended up underwater on their mortgages, and began to look at the option of strategic default.

If lending institutions hadn’t been so willing to issue 100% loans during the housing bubble, then there wouldn’t have been so many people who found themselves in a situation where they owed tens or even hundreds of thousands more than the house was worth. The lenders just assumed that house prices would keep rising forever, and that they would always be able to make a profit by repossessing the houses of defaulting borrowers. The fact that they got bitten when the bubble burst is, in part at least, their own fault for making 100% loans to people who really couldn’t afford the houses they were buying.

Another reason that mortgage default has been so prevalent is that so many lenders have shown themselves unwilling to renegotiate payments with borrowers who were having trouble. A couple of years back a professor of law at the University of Arizona published a really interesting paper called “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis,” in which he notes that lenders know that most borrowers will do everything they can to make the next payment, even if it means sacrificing something else. The social pressure to avoid default works in the lenders’ favor, because the borrower doesn’t want to be seen as a deadbeat, and often doesn’t even realize that walking away might be in his or her own best interest.

Well, quite a few borrowers eventually did work out that walking away was in their best interests, and lenders that refused to sit down with them and renegotiate the terms of the mortgage have themselves at least partly to blame in many cases.

One question I have is: is there typically a difference in mortgage rates between non-recourse states and deficiency states?

In theory there could be a difference because the risk of strategic defaults would be considerably minimized. If there is generally no difference, then this would suggest that as a practical matter, deficiency judgments are not pursued.

I don’t agree with this.

Consider a loan which contained no penalties whatsoever. All it said was “A lends B X amount of money, and B agrees to pay it back”. You’re saying in this circumstance B is doing nothing wrong by just deciding to not pay it back? By your logic it would seem that since there are no consequences specified, B has no obligation to pay it back.

I would think that if you’ve signed documents promising to do something, then you have a moral responsibility to do it, especially if it amounts to paying back money that someone else is giving you with that expectation. The only enforceable part is the consequences in the agreement, and it is indeed the bank’s tough luck that they can’t enforce it beyond that, but that doesn’t mean you’re not a scoundrel and a thief for taking the bank’s money while promising to return it to them and then deciding to keep it for yourself the minute it becomes convenient for you to do so.

But you’re comparing apples and oranges. A mortgage specifically outlines what happens if the borrowers fails to make the payments. It says, in effect, “If you stop making the agree-upon payments, the lender is going to take your house away from you.” The house itself serves as collateral for the loan. Similarly, if i offer something else (a car; a coin collection; whatever) as collateral for a loan, i know that i will lose those things if i don’t pay the loan.

See, this is precisely the problem that the author was discussing in the paper that i mentioned in my previous post. He argues that too many people turn what should be a business and financial decision into a moral decision.

Businesses themselves do this sort of thing all the time: they make decisions based not on some notion of what is morally right and proper, but based on a rational analysis of costs and benefits. Hell, the businesses behind the biggest residential property deal in American history did exactly the same thing. The group that paid over $5 billion for the Peter Cooper Village and Stuyvesant Town complexes in New York City effectively handed the keys back to the creditors when they found themselves in financial trouble on the deal.

The author of the paper, in talking about regular mortgages, argues that borrowers also need to focus on the economic issues, and do what is in their own best interests, rather than succumbing to the moral pressure exerted by certain institutions and social groups. In short, borrowers need to make the same sorts of cost/benefit analysis as lenders, and need to try and push aside the moral pressures and the social stigma attached to defaulting on their mortgages.

Of course, there are some people who will reject this argument, and who will continue to insist that strategic default represent some sort of moral failure. I guess i can see why people make that argument, but if i were hundreds of thousands of dollars underwater on my mortgage after the housing bubble burst, and was paying over $4000 a month on a house that was now worth less than half of what i paid, and that i could now rent for about $2500 (an example given in the paper, from the town of salinas, CA), you can bet your ass that i’d be walking away. The author of the paper notes that, in this situation:

As the author also notes, and as i said earlier, the lenders could have reduced their exposure on these loans by requiring deposits rather than lending 100 percent of the value of the house, and also by relying on more conservative estimates of likely house price inflation.

Lenders continued to lend as if the bubble could never burst, and every loan they made included the assumption that, if the borrower couldn’t pay, the lender would be fine because the house would be worth more than enough to cover the loan. When accepting something as collateral for a loan, a lender needs to be aware that, if that something ends up being worth less than the outstanding amount of the loan, he might have trouble recouping his investment.

If there were a thread on this topic in Great Debates, you could ask them and wouldn’t need to just guess. Does anyone know of a relevant thread in GD?

(I did do a search in GD on the word “mortgage”, and nothing seemed glaringly obvious.)

That doesn’t address my point.

Consequences are not the same as moral obligations. The fact that certain consequences are specified just means that these are the consequences. It doesn’t mean anything about moral responsibility. Just as having no consequences specified doesn’t mean there is no moral responsibility.

You could write a very similar paper about stealing. Sometimes it’s very financially worthwhile to steal. The problem is that too many people hurt themselves by turning what should be a business and financial decision into a moral decision.

A lot of business people are scum.

See above.

Note too that the same also applies to other so-called “crimes”, like rape and murder. Too much squishy sentimentality going on. Ignore the “moral pressure and social stigma”. Focus exclusively on what’s in your own best interest

If that guy didn’t want me to steal, he shouldn’t have left his door unlocked.

[I should also note, that in addition to rejecting the purely utilitarian outlook, as above, I also think these defaults hurt the honest borrowers, by increasing borrowing costs.]

Well, when i said “i guess,” what i meant was that i understand, at a certain level, the moral criticisms that people make of strategic defaulters, but i think that people should do what is in their best financial interests in cases like this.

We’ve had a few discussions about strategic defaulting over the past couple of years.

Is walking away from your mortgage unethical?

Can you abandon a mortgage without repercussions?

House worth less than I paid for it? Why, I might just stop paying my loan!

There wouldn’t be anything wrong with it if it was a bank because banks don’t lend money without collateral or cosigners. It isn’t an informal agreement between two family members. It is a strict rule-based system and the banks themselves designed most of it. The bank will always follow the rules when it benefits them so consumers should do the same if they want to be as equal as possible.

People that decide to take a strategic default aren’t taking the bank’s money all. They both agreed to buy a house together and the defaulter loses the house if they default. The banks were used to running a craps table with loaded dice before the houses market collapsed (they were also a root cause of that as well). It just so happened that a few customers were able to use the fine print to their advantage in markets where houses prices were artificially high. They had to the right use those contract terms to their benefit the same way the bank would if they had the advantage.

Strategic defaulters don’t actually gain any money from it directly. That is another reason the term ‘stealing’ doesn’t apply. They are just able to use their contract terms to make their financial future more certain by giving the house to the bank under the terms the bank itself spelled out.

It goes both ways too. Sometimes the bank screws over a homeowner and the homeowner finds a way to foreclose on the bank.

I sent this question - i.e. what’s the calculation of these defaulters - via email to a real estate wheeler dealer that I know. His response was:

If you don’t understand the difference between breaching a mutually-agreed contract and suffering the mutually-agreed penalties outlined in that contract, on the one hand, and committing crimes like theft and rape and murder, on the other, then you and i have nothing left to talk about on this topic.

It’s very possible that you and I have nothing to talk about.

But it should be clear that my position is that the reponsibility to pay people back money that they loaned you is not solely based on your “breaching a mutually-agreed contract” - that this obligation would be present (though hard to enforce) even if there were no contract. And that the “mutually-agreed penalties” are in addition to a moral obligation to pay others back their money and not a replacement for it.

In that context, looking at repayment solely in terms of how it benefits you is fundamentally similar to the other examples that I outlined.

if you mean similar in the sense of two things that are incredibly different, i agree with you.

So, Fotheringay-Phipps, you contend that someone in this situation:

Is a thief.

So in an unsecured loan, we both know the consequences too - the borrower will simply stop making payments, and the lender can go to court, get a judgement, garnishee orders, etc. etc. Or if that is immoral action by the lender, then only in “no recourse” states would walking away to let the lender foreclose be moral…" (assuming the borrower fails to keep making payments.)

But yes, there is always a “good money after bad” scenario. If a person is simply converting grocery money and credit card limits into mortgage payments, and there is no chance they will be able to keep paying for their mortgage unless their income situation changes - why not recognize the inevitable before you are completely broke?

I would tend to think so, yes. but I might be wrong, so I’m now asking a question which will help me formulate my opinion on this. Namely: Is the standard wording of a typical mortgage like this:

or is it more like this?

If the typical language is like the second wording, then I totally agree with those who think there’s nothing wrong with walking away, because the purchaser has met the terms of the agreement. But if the wording is like my first example, then he has made an agreement to pay, and the penalty for scoundrels who break that agreement is loss of the house. Just because one is willing to accept the penalty does not mean that the action is morally okay.

So a homeowner who,

  • like almost everybody else, failed to forsee the burst of the housing bubble, and
  • now has a house that is worth signifiantly less than is owed on it, and
  • will not see that ratio even out for a term of perhaps 10 years or more, and
  • who will therefore be unable to sell the house to get out form underneath it, and
  • must significantly restrict other expenditure and sacrifice the chance to make sound investments, and
  • who chooses to walk away from the house,

is…

a scoundrel and a thief.

Yes? I get that right, did I?

I was specifically talking about strategic defaults.

In general, I do think it’s somewhat less than an out-and-out thief, only because it’s become so common.

I took a look at a mortgage that I happen to have on hand. It’s very much like your first example, only more so.

But then, I’m not in a non-recourse state. I assume mhendo et al are only referring to non-recourse states.

I did not use the word “thief”. After all, when he moved in, it was with the best of intentions. And when he abandoned the house, he did not take it with him.

But at first glance, he does seem to be a person who broke his word. And not just a promise to pick up some milk on the way home from work, but a financial debt for many thousands of dollars. I certainly sympathize with the guy, but that is not enough to release him from his obligation to repay the loan.

It seems that forcing a person to be burdened with a house that would, effectively, prevent them from becoming financially stable in any other way in order to pay off the debt is effectively intentured servitude.