With her being a CPA, if she ever wanted to get another job and a prospective employer decided to do a credit check, I’d imagine a foreclosure would raise a major red flag.
It doesn’t seem like a good business decision. Her family has to live somewhere, so her only savings will be the amount between her current mortgage and the rent wherever they move to. Since they haven’t had any financial reversals, I’ll assume they don’t mean to move to a crappy duplex in a dodgy part of town, so anyplace they rent which is comparable to where they are currently living will only be marginally cheaper.
A foreclosure is not a good thing for your credit rating. Admittedly, their credit will recover from the hit after 7 years – but, then, in 7 years, it’s likely that their house will have recovered its value, anyway.
And I don’t see how defaulting on a loan you made in good faith, when you can afford to keep making the payments, can ever be classified as a morally righteous thing to do. They made an agreement with the lending institution to make those payments. The fact that many banks and lendors have proven themselves to be douchbags doesn’t make her any less obliged morally to follow through on the agreement which she made.
Finally, a foreclosure will not be doing their neighborhood any favors. Foreclosures in an area bring down appraisals. So their foreclosure will further damage the value of their house AND the houses of their neighbors.
She is screwing the bank, she is screwing her own credit rating and she is screwing her neighbors… she seems like a dummy to go on TV and try and justify this.
Ten years ago, you’d be right. In a year or so, when everyone knows at least a dozen people who’ve walked away from a loan or been foreclosed upon, the social stigma isn’t gonna be as severe.
But the problem here isn’t that they don’t have enough money. They’re both employed. They’re not otherwise suffering financially. As I mentioned above, I’d feel more sympathy for them if they had to relocate for work and just couldn’t unload the house.
Hey, I’ll be the first to admit that worrying about ethics when dealing with big business is like showing up a gunfight without a gun. I don’t care about what moral obligations you may or may not have to the bank. Fuck 'em.
But I don’t really this as a moral issue, so much as just two people who are being shortsighted and all too eager to run at the first sign of trouble, rather than nurturing what should be a long term investment. You could argue that this is also one of the big problems with corporate America these days - a fixation over today’s stock price but no long term vision.
I’m by no means an expert on this topic, and I agree with the general sentiment that bankers shouldn’t have protected rights the rest of us don’t get, but my understanding of the OP is that the woman in question is NOT having trouble or struggling to pay the mortgage – she’s just no longer anticipating a financial windfall, and that’s affected her enthusiasm.
edit–joebuck20 said it better.
I think that’s going to be far less true in a couple of years, what with the large number of people in underwater mortgages who are faced with this decision. The whole credit scoring and credit score manipulation industry is starting to come under attack and will likely continue be attacked as a significant part of the problem, and I think a result of this is going to be a diminished significance of credit scores as a measure of personal worth. For example, some states (e.g. Illinois, as of 1/1/2011) prohibit the use of credit reports as a part of evaluating potential employees, except in industries where their use is mandated by federal law.
Started reading. Here’s a quote from the second page which makes me hesitate in going any further in the article: Underwater homeowners aren’t knowingly making bad choices; they just don’t cognitively grasp that they would be better off if they walked away from their mortgages.8
That’s a pretty broad brush to paint all homeowners with and not really an accurate one to boot.
Take my situation for example. I’m in the process of refinancing my mortgage and so in probably 3 weeks we’ll get our house appraised. I sincerely hope to find out that we’re not upside down on our mortgage because it will make the deal fall through and, well, I’d be kinda disappointed.
But regardless of what I discover, I’m not moving. I “cognitively grasp” all the mathematical implications of being upsidedown and it makes perfect financial sense for me to continue to live in my home and pay off my mortgage.
For others? Maybe not so much. That’s for them to decide. But to write an article where the basic thesis is how insane I’d have to be to make such an illogical choice when it’s really not illogical at all defeats the whole purpose.
I’m not sure I understand why this is being pitted? She has a contract (mortgage). She owes more on the contract than she will get out of the contract. She is unhappy about this. If she terminates payment, she faces consequenses. She is considering doing just that.
What part of this is pit-worthy? The term “moral hazard” was probably just invented to guilt people into abiding by contracts that no longer made good financial sense. If she is willing to give up the house and take the hit to her credit rating, what’s the problem?
Hypothetical: You are selling a house to a bank. They are making monthly payments to you and you have a lien on the property. Before the ink dries on the contract, the bottom falls out of the housing market and the value of the house collapses. Do you really think that the bank is going to keep paying you? They will be reluctant to walk away from the contract, even if it constitutes a good decision, considered in a vacuum. It’s bad PR and bad business. But, if there are numerous such contracts and their competitors are relinquishing financed property in such a manner . . .
This woman is simply making a financial decision. It’s not personal, just business.
In California, the mortgage holder can pursue a judicial foreclosure. They generally don’t because its expensive, but they are more likely to do it if the home owner has significant assets.
Just jumping in to point out that this may be the first time in the history of the internet that someone used “lose” instead of “loose” and not the other way 'round.
RS
Oooh, a “moral difference,” oh noes!!!
Sailboat, you may be right. If the house was a speculative investment, she’s losing in this market. But, the contract gives her an out. She allows foreclosure, counting past payments as a sunk cost, taking a hit to her credit and stopping future loss. It’s all there in the contract. Banks have no mercy when an ARM balloons to a sum that homeowners can’t manage, why should consumers have pity on the banks when foreclosure costs them instead of profiting them? I’m not slamming the banking industry, but they (more than anyone) should have been aware of the risks they were taking.
She might be a putz, but it is not too absurd to say the banks did her wrong. BTW, a $1 million dollar house in many parts of California is not a mansion. Many in my neighborhood sell for that, even now. My house was close to that at the height of the bubble.
Anyhow, one way banks have done people wrong is in refusing to renegotiate loans, even if foreclosure means they lose more money. If the bank would cut the principal to the current value of the house, and have a contract saying they get 50% say, of an increase in value, all parties come out ahead.
Second, the banks helped cause the bubble through shoddy lending practices. It seems perfectly reasonable for them to feel some of the consequences. If you loan someone a million bucks with a color by number picture of the Mona Lisa as collateral, don’t cry if you don’t get your money back.
Third, as we see from the foreclosure mess, the banks cut corners big time on both lending and foreclosing. Perhaps the reason they don’t make deals is because they don’t know who has the note. Can anyone dispute that the old boring file the paperwork with the city way works better than the new release industry from constraints MERS way?
The banks brought this on themselves. I’m not crying for them in the morality sense. If these people make a business decision to walk away, appreciating the financial consequences, I’m fine with it. There is no morality in business, it seems, unless your company is going to lose.
As a financial decision, it is easy to make. Walk. They could waste hundreds of thousands of dollars overpaying for a house. It is not in their financial interest to stay.
This depression has been going on for a few years now. If they walk now, it is certainly not at the first sign of trouble.
You could buy a home next door and be able to save money for the future.
I have heard of people declaring bankruptcy and the day after it was granted, they get tons of loan and credit card applications.
Folks bought houses with the expectation they would go up in value, but you know what, the banks made those loans with the exact same expectation. That is why they were so loose with them, the house as collateral would go up, in their estimation and so there was little risk involved even if there was a foreclosure.
I see nothing wrong with what they are doing.
And for those who think it makes no economic sense, imagine a savings account that offered negative interest, that’s exacty what is happening when you pay your mortgage on a house that is underwater.
Another factor in a decision to stop paying is the fact that the banks have been screwing around so hard that there’s a decent chance that the bank she’s been paying to doesn’t have any legal right to her money. If that happens to be the case, then it might even be considered prudent of the woman to cease payment. What if someone, other than the bank she’s paying to, comes along with legal proof that she owes them for the mortgage? What are the chances her bank would say ‘oh my, our mistake’, and cut the real creditor a check for everything the woman’s paid them wrongly?
But unless they plan on moving back in with their parents, they still have to pay to live somewhere. And as someone mentioned above, if they plan on getting a similar sized apartment in a decent neighborhood (in the Bay Area no less), they’re still going to be shelling out a lot of coin, and in that case, getting no return on their investment.
And you mentioned people going bankrupt and getting a ton of credit applications. Well, there’s a world of difference in applying for a credit card (which pretty much anyone capable of fogging a mirror can do) and applying for a mortgage, especially these days. With an $800,000 foreclosure on her credit report, there’s no way any reputable institution is going to give them another home loan in the near future.
Again, I’m not shedding any tears for or otherwise defending the banks here. They too fouled up in their assumption that the home would only continue to appreciate. It’s just a pretty shortsighted move on their part.
:smack: What’s even funnier is that I actually stopped to think about it to make sure I had the correct spelling, and I still got it wrong.
I’m not sure that’s much of an option, unless the person is paying cash to buy the house back. You don’t walk out on a loan and then turn around and get another one very easily. At least I hope not!
Can you imagine the confusion, though, given the state of the foreclosure process these days? There was a guy in Florida who was served foreclosure papers on a house he bought in cash for a short sale.
I’m imagining a situation where this California person has a hoard of cash, buys the house she walked away from on a short sale from her mortgage company. Then, foreclosure papers are (improperly?) served on the new owner of the house who happens to be the old owner who walked away from the mortgage. It would be a legal singularity and the universe would no doubt be destroyed.