I can see both sides of this issue, but nobody has mentioned that if you walk away from your mortgage, you are also effectively screwing your immediate neighbors’ home values.
(And no, I’m not at all bitter that our upstairs neighbor went into foreclosure and then bankruptcy proceedings shortly after we bought our condo in a 4-unit building. Really! I mean we planned to stay quite some time when we bought it and all, so in theory it really shouldn’t matter that much if we aren’t planning to sell anytime soon anyway, but at the same time it’s more than a little frustrating to have the county assessor’s office raise our property taxes on the bizzarro assumption that the property value has gone UP by 10% in the 18 months since we bought it, at the same time that the property value is probably being dragged into the toilet by the foreclosure in our building. Not to mention all the other foreclosures in the neighborhood. I mean I realize someone has to make up for the drop in property tax revenue, but it would be nice if the county would at least be honest about what’s going on!)
No easy answers. FWIW, when we bought the rental, we already owned our home. I don’t mean us and the bank. I mean just us. Our credit score was about as high as a person could have. Still is, as far as I know.
If I remember correctly, when we bought the rental in 7/07, the interest rates were around 4%. Or would have been, had the house been our residence. But because it was an investment, our rate was set at 7.5%. That is still what it is. I can’t refinance to try to get some relief, I’m too upside down. That’s the other thing the rep at the credit union told us.
Mr Mangrove, I’m not sure if you’re being facetious or not with your fatherland comment, because we don’t know one other. But I am trying. I was born into a very poor household. Education was not a priority, so I didn’t get beyond the 11th grade. But I’m not lazy. I’ve worked hard. I begged for more work when things were slow at my job and was rewarded with promotions that bettered my position. I have been a good citizen. I’ve been responsible. I’ve never dodged a draft or deserted. I even voted.
And now I’m in a tough spot and I can’t get any help. I’m still trying though.
Alessan, I really like your comment.
Read post #13. 
Do the math. You’re rate is 3.5% higher because it’s a rental vs. primary home.
That is 87.5% more in interest dollars every month than you would have paid if it were your primary home (3.5 / 4). Why is that? Because it’s a more risky venture for the bank, so they make you pay 87.5% more than a person who takes on the less risky primary home. 87.5% more interest. Plus insurance, of course.
They make you pay more because of the risk of default, because a sensible business man would see his business venture losing money every month, and make an effort to change that situation. You need to take a hard look at your business options, because the bank sure as hell did when they charged you an 87.5% premium to give you the loan.
In a dealing between a person and a cooperate entity such as a bank, absolute not, a cooperation has no morals as a human does, so everything boils down to the contract.
I know, we’re trying. I feel like a hamster on a spinning wheel.
All I want from whatever is left of my life is decent health care coverage at an affordable price and not to end up in a senior citizens trailer park home.
We expect people to do the right thing. If they borrow money we expect them to pay it back. We have ethical standards for people.
Somehow we have none for corporations. We accept that their prime directive is to increase profits. They are merely trying to make money. So we have to depend on the government to keep these immoral ,unethical entities in line. But they can buy the government. They can end scrutiny by paying off politicians and judges.
That is why we have such a mess. We do not judge our corporations by how ethically they perform or whether they are considerate of the environment and their employees. We know they will not care. They were designed that way.
http://articles.boston.com/2011-08-12/bostonglobe/29881205_1_carpet-environment-ceo
That is why a corporate exec like this is a story. we are shocked to see a corporation deliberately go green and treat employees well. That is un-American.
I’m afraid someone has got hold of a random sentence generator.
Someone got a hold of a random thought generator.
After what has been going on the last few decades, I am afraid this is true. When businessmen themselves are saying there is no such thing as morals or ethics in business, that there is only the bottom line, I would say any moral argument they use to “castigate” someone who has burned them for a change, is a hypocrite.
You are not screwing your neighbors. The reality is their property value prior to your default is not indicative of the actual demand out there. Society sends signals about supply and demand via pricing. If you keep your house despite your desire to walk away, you are keeping prices inflated, thus “screwing” everyone else who comes along later that pays inflated prices for housing, and opens businesses thinking their customers have more disposable income than they really do. Ultimately, society is better off when individuals allocate resources and capital in the ways they find most advantageous. Although it sounds like a good idea for people to stick to a bad deal, it only prevents them from doing something more productive.
Banks and borrowers is not a coordination problem like the Prisoner’s Dilemma. It’s a bargaining problem in which both sides choose an acceptable cost of capital. If the borrower and the lender can align on a number ex ante, they make the deal. Then some time goes by and they view the contract ex post and can choose to break it or not.
It’s easy to imagine how a norm of repayment would lower the cost of capital. The benefits of this norm are very diffuse. Maybe everyone’s interest rate goes down a few basis points. Most people are going to repay their mortgage whether there is a norm or not because the deal is still good for them. In other words, external circumstances don’t typically make the contract bad for them ex post. So the repayment norm only really kicks in when external circumstances do make people worse off ex post. Now the people who really need to get out would have to overcome a social norm to do so.
I’m not sure that it’s such a good thing for social welfare to have a norm that only bites when people are in dire straits. I
That would be faulty thinking. That $120k is a sunk cost. If you owe $480k on a house that is worth $200k, then you have to make a decision on whether to continue to pay $280k more (excluding interest) over the term of the loan that what the house is worth.
That’s no different than if you had zero down, a house worth $100k and a $380k mortgage.
Sure there is something emotional about walking away from the $120k that you put down, but economically speaking (and thinking) it should not make a difference in your decision to stay or walk. And keep in mind that the law prefers efficient breaches of contracts. It is better for everyone else in the whole world (except the bank) for you to put that extra $280k to a productive use instead of throwing it down a rathole.
Thing is, though, that housing price declines have not been the same everywhere.
In your scenario, it would still make sense to walk away, but in places where prices did not decline so precipitously, the $120,000 deposit might actually be the difference between being underwater and not, or between being a lot underwater and a little underwater.
Unless the house has declined in value more than $120,000, you won’t be underwater. Underwater means that the value of the house is less than your total future obligation to pay.
So, if the house is worth $200,000, and you owe $300,000, you are underwater by $100,000 dollars. But if you bought the house for $300,000, and it’s worth $200,000 today, and you’ve already sunk $120,000 into the house, you’re not underwater, in fact you’ve got equity of $20,000. Yes, you’ve lost $100,000, but it wouldn’t make sense for you to default, you’d be much better off selling at the current value and eating the loss and getting your small remaining equity than handing the whole thing over to the bank.
This is why bankers used to require large down payments. Even if the house declined in value, the buyer would have so much equity already in the house that it would almost never make sense for them to default. Even if they had to do a quick sale of the property at a loss, they could at least walk away from the house owing nothing, or with a bit of extra cash.
But then the bankers started assuming that the value of the house could never decline, and so it made no sense to require a large down payment. If the owner defaulted, or had to make an emergency sale, the house would be worth a lot more than the mortgage, and so the bank would be protected from loss.
Of course, this was a gigantic mistake. It turns out that houses can decline in value, and when you haven’t required a down payment, or there’s a delayed down payment years down the road (a balloon payment), then the owner of the house has negative equity and therefore no reason not to default.
And so, the bank is screwed when someone defaults, but they screwed themselves. You lend a million dollars to your gambling addict friend and he blows it all at the track. Yeah, he’s to blame for blowing the money. But you’re to blame for lending your money to a gambling addict. And your job is supposed to be assessing the risk of lending money, then you’re horrible at your job.
This first part, may or may not relate to the discussion directly, but similar…
I put my other things into storage when I moved into smaller place.
I intended to only be there for a little while.
I paid every month $100 for the next 10 years.
10 years later when I had room and I cleaned it all out…
All my stuff became boxes of garbage and bugs.
In at no time did I even think or see the deterioration of my stuff during that time.
I had gone there every other week to grab something or put something in.
In hindsight it would have been better just to toss it all in the garbage in the beginning and save the $10,000 and buy it again later. :rolleyes:
I see no problem to skip on a Home that devalued to the point of forget it.
It wasn’t the Home Owner that did that, it was the very bank that over valued it, and then devalued it.
I don’t mean a few $1K…
I mean exactly what happened here to me…
Homes used to appreciate at a normal rate, but in one year they doubled in price, Homes went from 56-80k to 150-180k…at the very time I was looking to buy.
Now, a few years later, all have devalued back to 50-60k or in some cases less…
People who bought at that time got Forked Like a Baked Potato. :mad:
I got lucky and didn’t have the credit at that time.