# People who walk away from Mortgages that Can Afford it **URL:** \ **Category:** Great Debates\ **Created:** [October 21, 2011, 2:12pm UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357 "2011-10-21T14:12:29Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Kimmy\_Gibbler](https://avatars.discourse-cdn.com/v4/letter/k/bbe5ce/32.png) [@Kimmy\_Gibbler](https://boards.straightdope.com/u/Kimmy_Gibbler)\ **Post date:** [October 21, 2011, 4:10pm UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/21 "2011-10-21T16:10:41Z")
> [@John\_Mace](#): > > 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. I quite agree that contracts are not to be considered moral covenants (which, incidentally, is why breach of contract awards do not permit punitive damages except in the most extraordinary cases). If you feel you need to rely on moral suasion to get the benefit of the bargain underlying your contract, then you need to become a better negotiator or draftsman or get better insurance. But there does seem to be a game theoretic aspect to this. Or perhaps a sociological one. And that is that it might be easier to extend credit in a society where there are cultural norms that prod people to pay the debts they’ve agreed to pay, even if the debtor is better off defaulting. What I have in mind is an analogue to the prisoner’s dilemma. It is not a perfect analogue, of course, as I don’t see banks falling on their swords either. ---
**Author:** ![Cheesesteak](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cheesesteak/32/3694_2.png) [@Cheesesteak](https://boards.straightdope.com/u/Cheesesteak)\ **Post date:** [October 21, 2011, 4:18pm UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/22 "2011-10-21T16:18:49Z")
> [@not\_what\_you\_d\_expect](#): > > 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. > > the banks that loaned me this money in good faith. Interesting how the bank loaned you money in “good faith” then turned around and sold all interest in your loan to a third party. Get with it, the banks aren’t loaning jack squat on faith, it’s a business decision. Especially with a rental, they know damn well it’s a business decision on your part to invest in this building, they know if you can’t make it work, they risk becoming the owner of that building. They set their rates assuming that, and require insurance to boot. On the plus side, they’ve got you paying into their bottom line until you wind up settling for the “cheap” Ramen noodle brand, so you can keep their business decisions profitable. ---
**Author:** ![not\_what\_you\_d\_expect](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/not_what_you_d_expect/32/3246_2.png) [@not\_what\_you\_d\_expect](https://boards.straightdope.com/u/not_what_you_d_expect)\ **Post date:** [October 21, 2011, 4:22pm UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/23 "2011-10-21T16:22:18Z")
> [@Really\_Not\_All\_That\_Bright](#): > > 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? I could afford it when I bought it in 2007. I lost a high paying job in 2009. So my finances have drastically reduced. ---
**Author:** ![not\_what\_you\_d\_expect](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/not_what_you_d_expect/32/3246_2.png) [@not\_what\_you\_d\_expect](https://boards.straightdope.com/u/not_what_you_d_expect)\ **Post date:** [October 21, 2011, 4:30pm UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/24 "2011-10-21T16:30:31Z")
> [@Cheesesteak](#): > > Interesting how the bank loaned you money in “good faith” then turned around and sold all interest in your loan to a third party. > > Get with it, the banks aren’t loaning jack squat on faith, it’s a business decision. Especially with a rental, they know damn well it’s a business decision on your part to invest in this building, they know if you can’t make it work, they risk becoming the owner of that building. They set their rates assuming that, and require insurance to boot. > > On the plus side, they’ve got you paying into their bottom line until you wind up settling for the “cheap” Ramen noodle brand, so you can keep their business decisions profitable. Thanks. I am giving this considerable thought. But a big consideration for us is the credit issue. We’re in the process of opening a deli, so bad credit could hamper that. If we’re successful, I will then need to decide if I want to continue to let them make me eat this tremendous loss. If the deli fails, we’ll be pretty fucked then anyway. So we need to wait a few more months. This economy scares me to death. ---
**Author:** ![Alessan](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/alessan/32/465_2.png) [@Alessan](https://boards.straightdope.com/u/Alessan)\ **Post date:** [October 21, 2011, 5:28pm UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/25 "2011-10-21T17:28:06Z")
I agree that when you borrow money from a fellow human being, you are morally obligated to repay it. Banks, however, are not human beings. ---
**Author:** ![TriPolar](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/tripolar/32/3008_2.png) [@TriPolar](https://boards.straightdope.com/u/TriPolar)\ **Post date:** [October 21, 2011, 5:37pm UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/26 "2011-10-21T17:37:22Z")
> [@Alessan](#): > > I agree that when you borrow money from a fellow human being, you are morally obligated to repay it. > > Banks, however, are not human beings. They are according to the Supreme Court and Mitt Romney. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [October 21, 2011, 5:38pm UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/27 "2011-10-21T17:38:12Z")
> [@Kimmy\_Gibbler](#): > > But there does seem to be a game theoretic aspect to this. Or perhaps a sociological one. And that is that it might be easier to extend credit in a society where there are cultural norms that prod people to pay the debts they’ve agreed to pay, even if the debtor is better off defaulting. What I have in mind is an analogue to the prisoner’s dilemma. > > It is not a perfect analogue, of course, as I don’t see banks falling on their swords either. I don’t think it is prisoner’s dilemma, because there is a clear economic answer here which the banks trust people not to choose for social reasons. That lets the banks maximize their profits by engaging in riskier mortgages with the assurance that the consumer will not act in his own best interests ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [October 21, 2011, 5:43pm UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/28 "2011-10-21T17:43:28Z")
> [@TriPolar](#): > > They are according to the Supreme Court and Mitt Romney. Not exactly. They have some of the rights of “persons”, but not all. And the SCOTUS is not engaged in the morality business. They are engaged in the legal business. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [October 21, 2011, 5:46pm UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/29 "2011-10-21T17:46:43Z")
> [@Strassia](#): > > T > > 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. Not only that, but the banks had models to predict the maximum amount of debt a credit card holder could afford, and they set credit limits based on this, not on prudence. Thus it was natural that in a downturn people could no longer afford their debt. The banks could have mitigated the problem simply enough by pulling back on credit limits (like they did after the crash) but that would have hurt the bottom line. With their models, banks can probably predict how much debt the consumer can handle better than the consumer can. BTW, it is common to renegotiate loans in times of economic hardship. Banks could easily reduce the balance of a mortgage in return for a share of the upside benefit if and when prices recover. They’d probably put a floor on the market, reduce defaults, and save money on foreclosures. But then they would have to admit the true value of their mortgage portfolios, so it is unlikely. The other problem is that with the chaotic nature of the market, it is impossible to tell who need to approve such deals. Again, their own fault. No one forced them to slice and dice mortgages. ---
**Author:** ![jsc1953](https://avatars.discourse-cdn.com/v4/letter/j/5daacb/32.png) [@jsc1953](https://boards.straightdope.com/u/jsc1953)\ **Post date:** [October 21, 2011, 5:54pm UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/30 "2011-10-21T17:54:32Z")
> [@not\_what\_you\_d\_expect](#): > > Thanks. I am giving this considerable thought. But a big consideration for us is the credit issue. We’re in the process of opening a deli, so bad credit could hamper that. If we’re successful, I will then need to decide if I want to continue to let them make me eat this tremendous loss. If the deli fails, we’ll be pretty fucked then anyway. > So we need to wait a few more months. > > This economy scares me to death. FWIW, I lost a house to foreclosure (attempted short sale, but the bank declined all offers) in 2008. My credit score is currently in the mid 700’s. Granted, I haven’t tried to apply for a mortgage since then – mortgage lenders may look at the foreclosure on my history much more closely than a car dealer or credit card issuer. ---
**Author:** ![villa](https://avatars.discourse-cdn.com/v4/letter/v/bc79bd/32.png) [@villa](https://boards.straightdope.com/u/villa)\ **Post date:** [October 21, 2011, 5:56pm UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/31 "2011-10-21T17:56:06Z")
If the bank wants to give me a mortgage secured by more than my home and credit rating, they are entitled to ask for more collateral. In that case, they must offer me a lower interest rate. The ability to walk away like this is priced into the loan contract. Not exercising it when rational to do so is giving the bank the benefit of a restriction they neither negotiated nor paid for. ---
**Author:** ![Strassia](https://avatars.discourse-cdn.com/v4/letter/s/e8c25b/32.png) [@Strassia](https://boards.straightdope.com/u/Strassia)\ **Post date:** [October 21, 2011, 7:17pm UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/32 "2011-10-21T19:17:06Z")
> [@Lare](#): > > 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? I missed this before, but what exactly do you think people are buying life insurance for? It is specifically to collect the death benefit. That is the only reason I pay my premiums. Whole life is a terrible investment. ---
**Author:** ![brocks](https://avatars.discourse-cdn.com/v4/letter/b/7feea3/32.png) [@brocks](https://boards.straightdope.com/u/brocks)\ **Post date:** [October 22, 2011, 1:36am UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/33 "2011-10-22T01:36:41Z")
> [@Odesio](#): > > 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. So you’re implying that the fact that you are dealing with someone in the same profession as some other asshole, gives you the right to be an asshole? Surely there are better arguments than that. ---
**Author:** ![joebuck20](https://avatars.discourse-cdn.com/v4/letter/j/74df32/32.png) [@joebuck20](https://boards.straightdope.com/u/joebuck20)\ **Post date:** [October 22, 2011, 2:05am UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/34 "2011-10-22T02:05:06Z")
> [@brocks](#): > > So you’re implying that the fact that you are dealing with someone in the same profession as some other asshole, gives you the right to be an asshole? > > Surely there are better arguments than that. I think he’s just making the same point as many other people in this thread - that banks are by their very nature immoral entities, so that worrying about morals when dealing with them, rather than simply what’s in your own best interest, is ridiculous. ---
**Author:** ![Throatwarbler\_Mangrove](https://avatars.discourse-cdn.com/v4/letter/t/8c91f0/32.png) [@Throatwarbler\_Mangrove](https://boards.straightdope.com/u/Throatwarbler_Mangrove)\ **Post date:** [October 22, 2011, 2:13am UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/35 "2011-10-22T02:13:26Z")
> [@not\_what\_you\_d\_expect](#): > > 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. FNMA has been nationalized and the money you owe is now to the government and people of the United States. What about your patriotic duty to the Fatherland? If you don’t pay, one of your compatriots must pay for you, so this seems to be akin to desertion or draft dodging. ---
**Author:** ![The\_Lovely\_Margo\_Lane](https://avatars.discourse-cdn.com/v4/letter/t/34f0e0/32.png) [@The\_Lovely\_Margo\_Lane](https://boards.straightdope.com/u/The_Lovely_Margo_Lane)\ **Post date:** [October 22, 2011, 2:44am UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/36 "2011-10-22T02:44:53Z")
> [@Alessan](#): > > I agree that when you borrow money from a fellow human being, you are morally obligated to repay it. > > Banks, however, are not human beings. Moreover, If a human being lends you money on the condition that if you fail to pay, she gets your house, then if you fail to pay she gets the house and shouldn’t get to come after you for more on top of that. This is why it would be very unwise for me to lend you money to buy a depreciating property, like say a laptop, under similar terms. If that’s my collateral I’m screwed, since there’s pretty much no way it will be worth what you owe if you stop paying. A house is different. The house is still a house even though the market drops. In a non-recourse state, the bank is taking a risk that the property will lose value just like the borrower. I see no reason why banks should not have to assume this risk, especially as they can set the interest rates to take said risk into account. In a way I’m glad all this is coming to light at this stage in my life, well before I’d want to buy a house. Now I feel pretty strongly that I wouldn’t want to take out a mortgage in a recourse state unless the house was an unbelievable bargain or the one I planned to die in (and knew I could afford the payments on my retirement income). Not that I’d go into the transaction planning to default, but I’ll be damned if I’ll pay the bank for the pleasure of losing my home. Fuck that noise. Of course, I’d like to think that hypothetical future house-buying me would be diligent enough to research these regulations and such before getting a mortgage, but clearly recourse is taking lots of people by surprise and I’m glad I’m able to think about it now and plan ahead. ---
**Author:** ![The\_Lovely\_Margo\_Lane](https://avatars.discourse-cdn.com/v4/letter/t/34f0e0/32.png) [@The\_Lovely\_Margo\_Lane](https://boards.straightdope.com/u/The_Lovely_Margo_Lane)\ **Post date:** [October 22, 2011, 2:48am UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/37 "2011-10-22T02:48:43Z")
> [@Throatwarbler\_Mangrove](#): > > FNMA has been nationalized and the money you owe is now to the government and people of the United States. What about your patriotic duty to the Fatherland? If you don’t pay, one of your compatriots must pay for you, so this seems to be akin to desertion or draft dodging. Fatherland? Also, and more to the point, **if not what you’d expect** ends up walking away, the government will have the property! And Fannie Mae took on the risk when it bought the loan. Again, why should the lender get the property and more money? Why should one party shoulder all the risk? ---
**Author:** ![Odesio](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/odesio/32/20003_2.png) [@Odesio](https://boards.straightdope.com/u/Odesio)\ **Post date:** [October 22, 2011, 3:18am UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/38 "2011-10-22T03:18:34Z")
> [@brocks](#): > > So you’re implying that the fact that you are dealing with someone in the same profession as some other asshole, gives you the right to be an asshole? What’s good for the goose is good for the gander. If the banking industry as a whole is comfortable with practicing strategic mortgage defaults then they have no business complaining about people strategically defaulting on home mortgages. The Mortgage Bankers Association of America was perfectly willing to default on a building of theirs while at the same time chastising Americans for deciding to walk away from homes that were underwater. I have absolutely zero sympathy for the banks. ---
**Author:** ![Odesio](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/odesio/32/20003_2.png) [@Odesio](https://boards.straightdope.com/u/Odesio)\ **Post date:** [October 22, 2011, 3:24am UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/39 "2011-10-22T03:24:23Z")
> [@joebuck20](#): > > I think he’s just making the same point as many other people in this thread - that banks are by their very nature immoral entities, so that worrying about morals when dealing with them, rather than simply what’s in your own best interest, is ridiculous. I wouldn’t say morality doesn’t enter the picture at all. I just don’t think strategic defaulting is necessarily immoral. Mortgage companies have contributed to the current spate of people strategically defaulting on their loans (in addition to strategically defaulting when it suited them). They’ve made their bed and can lie in it. ---
**Author:** ![mhendo](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/mhendo/32/3159_2.png) [@mhendo](https://boards.straightdope.com/u/mhendo)\ **Post date:** [October 22, 2011, 4:20am UTC](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357/40 "2011-10-22T04:20:38Z")
> [@Kimmy\_Gibbler](#): > > And that is that it might be easier to extend credit in a society where there are cultural norms that prod people to pay the debts they’ve agreed to pay, even if the debtor is better off defaulting. But this assumes that an easy willingness to extend credit is, in fact, a good thing. It seems to me, though, that a willingness to extend credit to people who probably shouldn’t have received it is a significant part of the problem. Another one was that banks, knowing that the mortgage contracts provided for the borrower handing over the house in lieu of repaying the loan, continued to give loans with little or no money down, ensuring that, when the crunch came, borrowers had little or no equity in the house and, therefore, little or no incentive to keep paying the loan. I know house prices have declined a lot in some places, but someone who borrowed 80% of 600,000 (meaning that they had to come up with $120,000 of their own as a deposit) would think a lot harder about defaulting than someone who borrowed 100%. The lenders have themselves largely to blame for the fact that so many borrowers see no reason to hang on to their houses. There’s a really interesting article on strategic defaulting available [here](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1494467). (You can sign up for free to download a copy.) It was written by someone from the Law Faculty at the University of Arizona. I gave a summary of the author’s main arguments in [this post](http://boards.straightdope.com/sdmb/showthread.php?p=11980671#post11980671), in a similar thread at the beginning of last year. [Previous page](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357.md?page=1) [Next page](https://boards.straightdope.com/t/people-who-walk-away-from-mortgages-that-can-afford-it/600357.md?page=3)