I’m losing my gruntles here. If you want to skip the next paragraph, I guess I’m just defining “moral hazard.”
Several weeks ago, an acquaintance who’s a real estate broker told me he knows “otherwise good, honest people” who were embarking on plans to game the system. His example was a dual income couple, both teachers, who had a fixed mortgage they could actually afford, who were planning to stop paying their mortgage so they could force their lender into a workout situation where they ended up with a lower principal. I’m not sure on the details, but apparently, from a dispassionate accounting perspective, it makes sense to them. They’re not hurting, but why eat a $200,000 loss when all it takes is a little game of chicken with the mortgage holder? He asked them if they were bothered by deciding not to honor their commitments, and I’m not sure what they told him, because at that point he drifted off into a very long rant that resulted in the decline of the western empire.
The question: will everyone who’s underwater on their mortgages, regardless of their ability to pay, decide to play the game and force their mortgage holders to lower their principal? Are there any good reasons for people to pay their mortgages?
Generally, I assume that a large group of people will continue to pay (e.g., the religious right seems to comprise about half the population, give or take), and people who will need untarnished credit records will want to stay clear of this, but I wonder how many people will just say, “it’s purely a financial decision,” and not say out loud that pretty much everyone who doesn’t do the same will be paying for this.
I don’t fully understand how this is meant to work, but then perhaps things work differently in the US. Wouldn’t continually defaulting on mortgage repayments end up with the mortgage lender repossessing your home? I would think that would be one large reason for people not to do this.
Lenders really don’t want to foreclose on your home. It’s a lengthy and expensive last resort process for them and they’d probably rather negotiate with you and work out an arrangement than have to deal with unloading a vacant house in this market.
This came up before. I actually started a thread about people who simply did not pay their mortgage and simply let the house go into foreclosure. The idea is that if you take out a mortgage on an investment property and it loses more value than you can sell or rent it for, there is no business reason you should continue to may that mortgage.
The reason you agree to pay your mortgage is that you want to keep using the house.
The reason the bank may negotiate with you is that they are in the mortage business, not the reclaiming and reselling your house at auction buisness.
I don’t really see it as a moral issue.
This is the only perspective one should have when it comes to money.
The bank can also take a look at your tax records, decide you are playing a game, and play a game right back. They can foreclose, ruin your credit, evict you from the home, and force you to start over again. If you had equity in the home, or put down a big down payment, it’s gone. Good luck getting another mortgage to get a new house, you’re renting for the forseeable future.
BTW, I also heard that if the bank forgives, let’s say $50,000 of your loan, you have to pay taxes on it. They gave you $50,000 and you aren’t giving it back, that’s income.
If the house-owner has negative equity in the house, then both sides took a risk and potentially will lose money. Why should it just be the house-owner? Especially since the house-owner is likely to have far less information about some relevant facts, such as the risk that the price of housing will go down.
Corporations, and even nations, routinely use threatening to default on loans as a bargaining tactic. It is no more a moral failing when an individual does it than when a multinational corporation does it.
Clarification: My understanding of the first housing bailout (from a couple of months ago) is that imputed income will not be taxed as of some date (probably Oct 1), and that the government will give the mortgage holders some sort of financial incentive (probably a tax break) to do the write-downs. The only “rules” I’ve read thus far are that there must be no second mortgage on the property, and the mortgage must have actually started going delinquent. That’s the motivation for my question: they put some new rules in place and as the system seeks a new equilibrium, there will be winners and losers, and people are busy figuring out how to benefit from the situation.
I’m still a little befuddled trying to grasp the enormity of all of the mortgages I accidentally co-signed over the weekend, so I’m sure I’m missing some details on the first bailout.
Residential Mortgages in the state of California are, as I understand, “Non-recourse”. In this case, there would be nothing to stop you from proceeding as you describe.
In most other states, upon default, the lender will also have recourse to sue the borrowers for the balance, if any, of the loan amount after the property is repossessed.
Obviously there are more legal nuances than that but that’s the general idea.
Because the lender did not get the benefit of equity ownership. Further, if you want them to take equity risks, you ought to be prepared for them to expect equity like returns (no more low interest rate loans).
In my experience as a commercial lender, I have never seen a company threaten to default on their loan as part of negotiation ploy. I can’t possibly imagine how that would be a good tactic. Also, realize that commercial loans are secured and documented very differently from a personal home mortgage loan. Usually as a commercial lender, you have the ability to take over the revenues of a company and foreclose on other assets than the main collateral for the loan.
I’m not religious and very left, and, like an idiot I went and paid my mortgage off in full.
So they won’t penalize the people who default and game the system. I wish that meant the honest people would get some kind of nice bonus present.
This thread is not about the average mortgage-holder. It’s about those who bought into markets that proved to be over-priced, so that they now owe more money on the mortgage than their house is worth. If your house is worth more than the mortgage, there is no good reason to default: at the very worst, you could sell the house, pay off the mortgage, and pocket the difference.
Remind me not to make any financial agreements with you that are not bound by an iron-clad contract. And even then, remind me not to sign it or to trust you. Thanks,
On preview, let me elaborate: a mortgage is a contract from which both sides benefit. The bank benefits to the tune of the mortgage interest, which should be equal to or more than they could get by investing in something else. The buyer benefits by titular ownership of the property, and the use of the property during the term of the mortgage; and then by outright ownership of the property when the mortgage is paid off. The value of the house, relative to the amount of the mortgage, is not relevant to this agreement, once the mortgage is signed. The buyer is taking the risk that the value of the home will (at worst) not go down; the buyer is the one who benefits if and when the value goes up. The bank does not expect to share in that benefit, why should it expect to share (or take all of) the loss? Your view, as you have expressed it, seems to me to be directly dishonest.
Further, if I were a bank that were agreeing to “reduce the principal” as outlined in the OP, as a general principle I would expect to be paid back that principal and some measure of interest if the market goes back up and the owner later sells the home at a profit. There could, of course, be many mitigating circumstances, but to my mind this holds as a reasonable principle.
Roddy
So it’s ok to cheat the banker if I really neeeeeeed it?
The buyer always takes the risk that the value of the house won’t fall (and lots of buyers got huge benefits when they sold their houses at inflated prices and reaped big profits). No-one forced anyone to buy a house at these inflated prices.
“Markets that proved to be over-priced”? That just means the price went down after they bought. Boo-hoo. Try making better decisions next time. Try taking responsibility for your own actions.
Roddy, a mortgage holder not a banker
I’m going to say that it is not just a financial decision, but also a moral decision. It has a moral component as long as we, as a society, feel that it’s worth crafting public policy to help people who are legitimately down on their luck keep homes that they want to keep and pay for. We as a society should look down on people who are “gaming” a system that’s set up to help the genuinely needy, just as we should look down on welfare cheats and tax evaders.
The proper solution to this problem, though, is to stop having society assume so much risk when there’s so much private gain possible. Regardless of what I feel the morality of a given decision is, it’s foolish to set the system up in a way that it gives huge financial incentives to people who game the system.
Hopefully this mortgage idiocy will result in lenders realizing that it’s not a great idea to lend hundreds of thousands of dollars to someone who only has a personal stake in any potential gains, and can walk away from any losses. They’ll start requiring substantial down payments again.
A friend of mine bought a house a few years ago, in an area of Minneapolis that was up and coming. Well, “up and coming” has hit the skids and now is “vacant, boarded-up, and vandalized”. He can afford to pay his mortgage and plans to, but it’s very likely that his house is now worth less then the remaining value on the mortgage.
Out of the blue, about a month ago, the bank that holds his mortgage called him up, thanked him for continuing to make payments and asked if there was anything they could do to help insure that he was able to make payments in the future. He was so caught off guard no thanks, he was fine. We’ve wondered what would have happened if he’d said “It would be really nice if my monthly payment was $100 less. Can you lower the interest rate?”
So at least that bank was trying to make sure that those who are still making payments can continue to. Not straight out autruism, but good business sense and a nice touch.