If you think it's OK to walk out on a mortgage that you can afford

Great Debates
101

I apologize in advance, because my post is going to sound callous and very Dr. Manhattan-y. In reality, I’m closer to your point of view than not, but for argument’s sake, I believe you’re making three mistakes there :

  1. when the board of directors of a corporation points it in an unethical direction, the corporation’s not evil. The corporation is a simple machine that, much like a computer, does what it’s instructed to do - the errors and their guilt rest on the shoulders of the people at the helm, and in smaller part on those of the major shareholders who let them do it. Enron’s not good or evil, but at one time its directors were indeed sacks of shit. They probably still are.

Yes, I know that for the most part it’s a purely semantic distinction, and that when people say “Enron does foo”, they usually mean “the board of directors of Enron does foo”. However, “Enron does foo” often leads to anthropomorphism over time, even unconsciously, so the distinction is not an entirely empty one.

  1. The intent of corporations never varies, and all share that singular purpose : making money. Anything beyond that is meaningless from their point of view, and they can fulfil that purpose in more or less “evil” ways (more on this later), but evilness is the means, very rarely the end. It just so happens that, usually and barring scrutiny or public reaction, lack of compassion pays more.

  2. I believe you’re conflating unsavouriness, self-interest, and evil. Evil is a word that’s brandished about willy nilly, and losing its meaning a little more every time. I would define evil as something purely destructive and intentionaly harmful to others. Not caring for the well being others is not evil, it’s just selfish. In people, it’s sociopathy. In business, it’s just business.

So, to go back to your examples :

But to the company making and selling sniper rifles, whether those rifles are used for display, for shooting clay pigeons, hostage takers’ heads or babies is absolutely immaterial - the point is to sell the weapon. The heads of that company do not set out to kill the most people possible with their products, and how those are used in entirely out of their hands. When all is said and done, these companies only take advantage of that pressing need we seem to have to maim each other in creative ways, they didn’t create it.

So, yes, they are unsavory, and I don’t like merchants of death any more than the next guy. Not evil, though.

It obviously does, but again, the corporation doesn’t set out to cause a nuclear meltdown. If the buyer’s willing to overlook inspections, buy and activate a shoddy reactor, it’s his problem. Caveat emptor also applies to governments ;).
Evil would be to construct a deliberately, stealthily faulty reactor and sell it under the guise of a good one.

Is it really different from modern US insurance companies who gladly suck money in, but find all manners of ways never to give it back ? And if so, do they do it because they wish you to die painfully ?
Of *course *they won’t pay out unless someone (be it a competitor, or the government) forces them to pay out. The little guy will always get fucked without the backing of other little guys, and lots of 'em. Is it sickening ? Sure. I wouldn’t call it evil, though.

That’s only the to-be-totally-expected result of a monopoly, and again they didn’t intend to screw people’s lives, it was merely expedient for them to do so. Bear with me here :
Following the laws of supply and demand, a guy buys bread where it’s cheap, loads it in his truck, then sells it at a very inflated price where people are hungry and don’t have bread : is that evil, or unsavory ? Same guy buys out every loaf of bread in the cheap town, then waits until everyone’s hungry to sell it back : evil, unethical or unsavory ?
To me, evil would be buying every loaf of bread in town, then destroying it all in front of the hungry populace. Or buying all the bread, torching the bakeries and keeping it all to yourself.

Yes, but they’re only noticeable on account of their scale. That’s the real danger of corporations - they tend to affect a lot of people, and when there’s people without consciences at their heads, then a lot of people get fucked over and/or die. That’s why oversight and regulations are needed and overall good things - because if a corporation can get away with murder and it’s in its immediate interest to do so, it will. Like the proverbial scorpion, it’s its nature.

But person-to-person business deals involve exactly the same unsavorinesses, yet we don’t dub them “evil”. So is evil only a matter of scale ?

102

Excellent!

May this life bless you.

OP - may you never need to explore the options… But, in case you do, you might want to first see if you can make the world a bit less ugly for those who do…

103

May saying that I believe that if you can afford to pay your mortgage then you should has really made the world an ugly place. People considering not paying their mortgage now take my opinion into consideration. What have I done? :eek:

104

Banks can (and often do) process checks in a manner to cause more overdrafts and collect more fees. Average bank overdraft fee is $39. per check…and the actual cost to process an overdraft is estimated at less than $1.00. Immoral? Hard to say, but congress is considering limiting the practice.

105

Off topic, but many years ago I had an account with Bank of America. At the time I didn’t have direct deposit so I would have to give them my paychecks in person. I always kept the receipt as well as receipts from deposit slips because I could deposit my paycheck, a day or two later withdraw some money from an ATM, and have that go through before my paycheck and quiet a few times I’d go in the negative.

Of course having the receipts I would go in and demand a reversal of charges. They always did because I had proof that my deposit came first, but it got real old, real fast.

106

Why thank you, but the moderator has disapproved my statement because it could be interpreted as an insult, which I didn’t intend. Personally I don’t consider poverty ennobling, but some people do. I consider it an unfortunate circumstance.

107

Is it me, or has it become passive aggressive in here?

108

I didn’t intend to make it passive-aggressive, and I apologize if you gathered such meaning. I doubled checked my posts to avoid just that. I can see that perhaps usedtobe may have done that, but I cannot speak to his intentions or those of any other poster. Just myself.

109

Yip, the reason no one in my family will use Bank of America. They did that to me, and when I didn’t fix the balance in time, they pulled money from my parents account, and got us behind on our house payments for the first time. And that’s all I’ll say about that in this forum.

110

Why is this morality discussion seemingly limited to the ex homeowners’ morality vis-a-vis the lender?

the ex-homeowners aren’t the only ones who suffer the effects of foreclosures/giving up houses, especially if it’s done in sufficiently high concentrations.

to act as if there isn’t some morality calculus just because it’s a voluntary contract between business parties is, imo, incorrect.

111

What does this mean?

112

Nobody’s premise is deeply flawed. Where is the contract between the thief and the victim? Nowhere. Where is the collateral offered by victim signed over to the thief in return for the use of the collateral in the first place? Nowhere.

Now, if Nobody is trying to argue that the bankers are thieves then HECK YA, I’m with you Nobody! Because contract law stipulates that both parties put something of value up on the block. Banks don’t. It’s a scam. So the second you feel like it’s to your advantage to scram…do it baby! Better yet, don’t pay and stay put. Their certificate of ownership is probably in some far away land as part of a toxic asset the pawned off on some other thief. Often times they simply can’t produce it and then you get to stay put!

113

Uh, my back came up with a big check that allowed me to buy my house. I certainly valued that check.

114

other homeowners in your neighborhood are negatively affected by foreclosures as they typically have a depressing effect on house prices. it’s not like the banks and the homeowners are the only ones with a stake in your piece of real estate.

115

The concept that corporations can be treated like people, people without morals and values seems to be accepted. They are just people who want to do everything they can to maximize profits and salaries… But real people who think the same are castigated. Why should someone do financial damage to themselves and their family, if they have a choice? A bad mortgage can harm your family for 2 decades. If you can get out ,do it. You owe it to yourself and kids. The banks don’t want to change mortgages. If they can keep their hooks in you they would love it.
If enough people walk the banks will reluctantly start to refi. Not only would the banks have people in homes making steady payments that would help stabilize the financial industry, but the money wasted in foreclosures would be saved. But, corporations do not think long term. If they can get a lot of money now ,as opposed to delaying it a while, they will take it now. Even if long term it would be a smarter decision.

116

I think this is getting out of hand for such a marginal situation. There are very few circumstances where it would make financial sense to walk away from a house if you don’t have to. I could only see it making sense if you already owned another house and never planned move or borrow money again.

Lets look at an example:
If you had a 250000 loan at 5% now with a payment of 1300 a month and your house had dropped to 150000 in value. If you walk away, how much can you save assuming you buy an equivalent house at 150000? Well first do you have 15,000 in down payment and the $2000 in fees? If so, you might get an interest rate of 8% now that you have a foreclosure on your credit, so that takes you down to $990 a month. At that rate you will have made up the 16,500 outlay in 4.4 years (not counting opportunity cost of removing that much from savings). That is best case and assumes you don’t generate any new debt such as a car loan or credit card debt. Without the cash up front you are unlikely to get any loan at any rate right now. But best case you get that loan of 135,000 at 8% and another loan of 15,000 at 15% or so (good credit used to get you about 10% on a second) and you have to come up with more money for fees. So you end up with 1180 in payments (990+190) after ponying up $3000 in fees. You end up paying only $120 less a month. That would get eaten up pretty quick in higher rates on other things.

For most people, it would be much better to sit tight or at least attempt a short sale. 5% on that 135 would save you $265 a month over the 8%. Even if the short sale takes a whole year, you would make up the difference in 14 months just on mortgage payments. And if prices go up, you may not need to sale short after all.

Jonathan

117

And in that, they’re just like people :wink:

ETA :

**Defero **here believes that fiat money is a sham. Which I guess means a check, that is to say a fiat of fiat money, would be a sham squared.

118

well, first, your rates are off.

But even with some of your assumptions - the closer math is - you walk away from the house and rent an equivalent house at $800/month, saving $500/month ($6000/year). Assuming the home (and similar homes) appreciates 3% a year. 7 years from now, it will be worth 185,000 or so - you’ll have 42K (+ interest) in cash - well over the 20% downpayment needed, enough time will have passed for your credit to have recovered and can buy a new home with at least 20% equity.

On the other hand, if you stay and pay 1300/month, at the end of 7 years, even if 75% of your payments are going to principal (which is unlikely if you’re that underwater), you have about 10% equity in a 185,000 house. If you’re closer to the beginning of your loan, you’re still underwater in a 185,000 house.

119

Actually I made quite a few mistakes (including only putting 10% down instead of 20%). But the point still stands. Rental outfits check your credit and you lose your tax deduction. How much credit debt makes a big difference, as does how much exactly you owe on the house and what the housing market in your area looks like. There are some people who would be better off walking away, but I doubt it is a huge number.

Of course if more people do start walking away, you have confounding effects on the calculation. On the one hand, house prices will be further depressed, pushing those considering this further underwater, but it will also drive up rental rates considerable. My sister in OH is actually in a situation where it is cheaper to buy a house with no money down than to rent.

120

Well, I walked away from my mortgage. I bought a condo at the peak in 1989 with 10% down, then watched its value gradually drop to about 55% of the price at which I’d purchased it. Back then, I had this weird mindset that “real estate never goes down” and that if I didn’t buy then, I’d be priced out forever. Yeah; the strange things that get inside peoples’ heads. The neighborhood wasn’t the greatest, but because of the increasing real estate prices, dodgy neighborhoods bordering nicer areas were expected to improve. So I stretched farther than I could, just barely able to pay the mortgage if I scrimped on everything, but after about seven years in, I had some medical problems that (a) cost money and (b) caused my income to drop. So I started borrowing money. First I took cash advances from credit cards, then I started borrowing against my 401K.

I could actually have afforded to keep the place if I stopped spending money on anything but my mortgage, food and utilities, but along with the price of all SoCal rel estate going down, the neighborhood started going downhill. Eventually (because of ever increasing gunfire and because I never got over the LA riots), I decided it just wasn’t worth it. I’d rather take a hit on my credit record than live in hell, and the foreclosure would fall off my credit record in less time than it would have taken me to get up to zero equity.

I worked with my mortgage holder on a short sale for eight or nine months, finding a buyer willing to put up with the process and providing all sorts of documentation of my income and expenses, and just as the sale was being finalized, the bank said that since I could theoretically pay off my mortgage (with a 45% DTI, assuming I earned my base yearly salary, which I couldn’t), they wanted me to take on an additional $19,000 unsecured loan. I’d worked with someone at the bank for all those months, and we’d talked about numbers all the time; but she’d never mentioned anything about an eleventh hour mandate that I take on extra debt in order for them to do the short sale.

I got so angry that I stopped paying & let it be foreclosed. We could argue whether or not it it was the best decision from a financial perspective, but money wasn’t the only problem I had at the time. I think that continuing in that situation would have broken me.

Back then, before foreclosure became fashionable, the IRS taxed you on imputed income related to debt forgiveness. Counting an $17K in extra federal taxes, my original $19K costs (downpayment plus closing costs) and all of my payments over the years, I’d paid out $144K on a $150K condo. (That neglects the tax savings I received and what I would have paid in rent on an equivalent place, so it really wasn’t as bad as this. But the day I summed up all the checks I’d written was a very sobering day).

When the recent crisis hit, they changed the rules and eliminated that imputed income for people whose forgiven debt (canceled by either foreclosure or short sale) is less than $1 million.

My credit was in shambles (aided and abetted by my going slightly crazy sometime in that period and racking up even more consumer debt), but about three years after the foreclosure, I got religion about spending money wisely (the secret being: don’t spend it). Some time in 2005 (five years after the foreclosure), my credit score was in the high 600s, and though I still had a sizeable amount of debt, I was told I could qualify for zero-down mortgages (or even the 125% mortgages offered by Ditech). But I couldn’t forget my own lost decade, and ended up sitting out that real estate bubble. I’d set some specific rules for myself: I needed to have zero debt, six months’ expenses saved up, and I needed to have a minimum of 10% down on a place I could actually envision living for fifteen years or so, if it came to that.

Well, it’s ten years later. I still feel some shame over the foreclosure, because at the time, it was shameful. Only about half of my friends know about it; I no longer feel the shame, but still feel the stupidity of going along with the crowd back in 1989. My FICO is now over 800, and I could afford even 20% down on a humble condo in a nice neighborhood nearby, but I’ve changed my definition of “emergency fund” to now be two years of expenses, because I’ve come to think that no one in government or industry is telling me anything truthful about the economy. So I’m saving until I’ve got the six months expenses AND a 20% downpayment, and then only if I still think my income will be stable. It seems stable right now, but who knows?

But back on topic: There are consequences for people in the banking industry if they do perfectly legal things that might seem rather mean-spirited, in order to come out ahead on deals: they get bonuses. If someone is at the point where I was, i.e., screwing myself by borrowing against my 401K just to forestall foreclosure, they should definitely walk. If they do the math and realize that their credit score will heal in less time than it takes for them to get back up to zero equity, they should walk. Morgan Stanley bought some buildings in San Francisco at the peak, the property lost about half its value, and they walked. They do not say they’re defaulting on a contract; they say, “We are going to give them the properties to get out of the loan obligation.” It sounds like they have no problem walking away.