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Morally Wrong....OR...Financially Sound?

Dillemma? Richard Zaretsky’s recent post..........

"WALK AWAY FROM THE PROPERTY - STRATEGIC MORTGAGE DEFAULTS GROW TO 26%"

got me thinking. His post is talking about the amount of people who are making the "Strategic” decision to default on their mortgages.

TheTruthAboutMortgage.com site had this to say about the topic.

“A new survey conducted by the Kellogg School of Management in Chicago suggests that more than a quarter of mortgage defaults are strategic, especially when negative equity exceeds 15 percent.”

Some of the comments on Richard’s post were calling this a moral issue. As in “It is morally wrong to strategically default on your mortgage”.

So…….my question is…“Is deciding to default on your mortgage, or not, a moral issue?”

Here are my thoughts: "Strategic Defaults" are rampant in my area. People are living in their houses as long as they can for free and saving their mortgage payments so they can move on with their lives and have a little bit of a nest egg.

These are people with families that have mortgage balances over $200,000 on homes that are now worth $60,000. Foreclosures and short Sales make up 90% of the market in Poinciana Florida and are still dragging prices down.

There is no chance in hell of these properties EVER being worth $200,000 again. At least not in the next 10-15 years..

These borrowers are so far underwater they will NEVER be back on top again. So…. whether they make payments or not, at some point they will have to sell, due to life circumstances i.e. job relocation, divorce, marriage, death.....it makes sense to take the hit now and start rebuilding.

To compound the issue....folks see all of the "bailouts" for the banks and start thinking "Where's mine?" So they create their own bailout.

Is this a moral issue? I don't think so. As much as I hate to say it…I think it’s a sound financial decision. What say you?

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Posted by Bryant Tutas Broker/REALTOR(R) Tutas Towne Realty, Inc on 07/05/2009 03:48 PM

Comments (213)

Short Sales in the Home Selling Channel

foreclosure, short sales, morals

Originally posted at: Central Florida Short Sales: Morally Wrong....OR...Financially Sound?

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213 Comments on Morally Wrong....OR...Financially Sound?

JUL

Reserved Parking For "The Lovely Wife"...TLW...ROAR!

Hun...

I believe that in the current economy the Consumer, and many of us here, are faced with tough decisions. Strategically defaulting on a mortgage could mean the difference between being able to feed a family or let them starve. It's a hard dilemma to be faced with. I'll be back Hun. This topic is deep for a Sunday afternoon.

TLW...ROAR!

Great blog and really a hard dilemma for most. Some here in our area have even chosen to take their life over this. It's a very sad thing and I think bailouts are making the decisions easier.

I disagree with you. The seller made a promise to repay a loan and is purposely not doing so for financial gain. What would your outlook be if you bought a house for 100k and when the market was hot, sold it for 300k only to learn that your lender decided to pocket the 200k profit? Is this a moral issue? I don't think so. As much as I hate to say it…I think it’s a sound financial decision. ;)

EDIT: To make my stance clear. I am talking about about cases where the borrower has the financial means to continue making their payments, but purposely does not because they feel that the loan amount is too much for the value of the property. My comment does not reflect hardship of the borrower.

Great post, Bryant! I used to believe it was Morally Wrong, but once I sat down with good friend of mine and had a good talk about our own money situation, I now believe it's a Financially Sound decision to "let go" of these real estate investments. Now, I'm still on the fence about doing this on your own primary residence, since you really should be paying to live somewhere. Because, even if you were a tenant, if you didn't pay rent, you'd get evicted. In the end, though, you gotta do whatcha gotta do, to provide for your family. Chances are, it'll take up to 9 months for a lender to foreclose. Saving up for 9 months, if done right, can really help out some people, get them out of debt. It's easy to find a place to live, especially with the competition on the rental market right now, and justifying a foreclosure to a landlord or property manager is very easy to do.

I look at it this way. I bought my little townhouse and promised to pay regardless how the market were to go ...up or down. I continue to pay because I made that decision. If hardship were to fall on us (one lost a job etc) one or the other would be having a hard time.

If our market were like yours I wouldn't be able to sell either.

There's a difference between someone not paying because they had something happen in their lives to cause a hardship. Another if someone just feels they made an investment and just flat didn't want to pay on it because prices went down.

Do people think just because of all the bailouts they're seeing for big companies that they're entitled? I'm sure they do. Does it make it right? No.

A great provocative post. For some there was deceit in the loans they obtained so I would be less likely to deem them leaving a really bad situation wrong. Others that wheeled and deal and got caught with their pants down when the music stopped that is a big greedy problem! I do not place those person in the same situation for those that landed in deep water by circumstance.

The one common thread is personal responsibility. If my neighbor next door had a perpetual gambling problem...how much of that should be societies problem? I am afraid I could not come up with one answer. Each situation should probably be weight on its own merits.

At the begining I was mad people were making this kind of decidion - now with all that has happened and what the government is doing I say do what is best for your family - if that is to walk away - walk away.

Moral issue? Poppycock!

This is a civil matter. If mortgage fraud is involved it becomes a criminal matter.

The home owner who makes the strategic financial decision that it makes no financial sense to continue to pay for a home that has lost half it's value is simply managing their money by unloading a property that will usurp their assets for years and perhaps decades to come.

Where is the "morals clause" written in the deed of trust and note??

Is anyone pulling a "morals clause" on the banks that took bad loan applications?

Is anyone pulling a "morals clause" on the Wall Street Gangs that created the mortgage mess?

Is anyone pulling a "morals clause" on the government regulators who received sweetheard loans from mortgage companies that were commiting mortgage fraud?

Shall I go on?? Oh, I don't want to gorget Franklin Raines who received $50,000,000 in income while he was falsifying the financial statements of Fannie Mae.

Most of the above is illegal.

All the home owner is trying to do is recover what dignity he can by unloading a bad loan. Of course, his credit and his home has to be sacrificed along the way.

How much can the American home owner be expected to endure?

The only thing I know for sure is that I'm far too imperfect to sit in moral judgment of anyone else.

All I can say is "wow" does that make me think. There are 100 ways to slice it. This should be an awesome post to watch and come back and read. Good stuff BB.

There are 100 ways to slice it, there was fraud, and there is a decline in personal responsibility. all is true. I agree it depends on the situation. I do agree that a deal's a deal, and if prices had gone up, the bank wouldn't have gotten a cut of the action. Since they went down, they are getting creamed.

On the other hand, when you are so upside down, and you are unable to make your payments, what else are you going to do.

Bryant, Great post!! Thank you. I do try to avoid "judging." People do what they do for their own reasons. I sleep better believing everyone is doing the best they can. I am generally happier when I accept all things.

..."Is deciding to default on your mortgage, or not, a moral issue?" It is what it is ... however anyone wants to judge it. I still cannot help but think "this was someone's home" every time I am in a bank-owned or short sale listing. No matter how it is judged by others, or the homeowner's reasons, they still lost their home and my heart goes out to them.

BB...

A "Promissory Note" is a promise to pay. In GA, the note is separate from the deed to secure debt. Where is it written in the note "unless the property loses value."

Your word NEVER depends on what someone else does or doesn't do, so the banks' behaviors are irrelevant.

A borrower made a promise and deliberately broke it and that is immoral.

What a great post to make you think. Even if people are defaulting on purpose and trying to move on to another home....they will run into issues with credit, etc.., I am sure anyone taking this route has thought through the consequences and is doing what they think is right for their family. They made a bad choice as well as our government, and the entire situation is sad, very sad.

This is a tough call, but I have to agree with Amiri Properties (blog above). I do understand that there are issues bigger then we may know about in everyones lives, but you did make a promise to the bank, try to fulfill it.

BB, both your post and Lenns comment have such merit. I am not qualified to judge what choices people are having to make. This issue is so complex, so many things that make a black and white judgement call impossible. Very thought provoking!

We first of all must preserve our families and ourselves. Everyone/everything else becomes second.

It is a shame that these decisions must be made at all. But if someone's back is so against the wall that it's feed your kids or pay the mortgage, you feed your kids.

That said, walking away has its price. If they're willing to accept the credit hit, the black mark on their credit file, the stigma that comes with defaulting... that's their choice.

Let's pray that none of us is ever in that situation. All it takes is a job loss or a hospitalization or a divorce maybe, and you could be there.

I'm with Jim(#6) on this one - I think each situation needs to judged on its own. Defaulting because you want to save money is not a valid - You made a bad decision and you've got to live with the consequences. Defaulting because you're up against a wall and it's either pay your mortgage or feed your family - Well, that's a no brainer- Feed your family! Let's hope we're all never put in that position.

I have to agree that it is, in many cases, a sound financial decision. In the case of defaulting on a mortgage, the moral issue is a luxury that many borrowers can no longer afford. Defaulting for many is purely a business decision and it allows them to re-allocate their continually diminishing financial resources.

Any business would more quickly and easily come to the same decision (to default), as morality would not likely be as great an influence in the decision.

Bryant,

This is a decision that one must look back on in history to figure out WHY prices and those Mortgages became so High to begin with. When you study it like I have you have a firm belief that real recovery comes from getting out of Debt.

We are in a SERIOUS economic problem due to being leveraged to Death... AKA Mortgage which is derived from the French definition of "to death".

LAX lending standards and artificially low interest rates promoted from within the Beltway of D.C. in bed with financial institutions created the problem...

Those $200,000 homes in your area should have NEVER been priced that high... much like the $300,000+ homes in my area.

Personally... I think it's a sound financial decision and the many clients that I have helped out in a short sale are MORE then happy that they are now free of a Mortgage on an overpriced home created from bad economic policies.

I GUARANTEE you that all of them will be in much better Financial Shape in five years then the ones that hold on due to "Moral" beliefs created with contracts with some not so Moral or ethically minded people... AKA Banks and lending institutions such as Countywide where executives were selling off their stock faster then Brokers could sell it...

In other words... it's financially sound if the Mortgage is killing them and their family.

I say it would be more morally wrong to keep paying your mortgage until you couldn't and have no home, no money and no way to take care of your family. Their home was purchased not only as a place to live, but usually people think of it as "the biggest investment" they will ever make. Well their investment has gone belly a$$ up. And why throw good money after bad. I would not take my kids college fund, or my retirement to pay on a mortgage that I was upside down in and saw no way out.

I do take issue with people with NO type of hardship and no family to take care of walking away. I don't see it as the same. I still don't see it as moral issue, but for me personally taking care of my family comes before worrying about my credit being hit by a foreclosure. But in having seen a news piece (local) about a couple with no kids who went out and paid cash for a $300,000. lake house and then stopped making payments on their smaller $550,000 mortgaged lake house because they didn't want to keep loosing money... I see that as wrong. I see that as a different situation altogether.

I feel their should be some reason you default other than JUST negative equity. JMO

What a thought provoking post. While I do think I am a very moral person, who knows what I would REALLY do to protect my family, if it were me in their shoes.

I was appalled when I first heard of this happening, lumping everyone that even considered defaulting when they could pay in to the "scum bag" category. Now, I can't say that.

If a person was fraudulent in obtaining the mortgage in the first place, I do not pity them one tiny bit.

I have to agree with Lora about saving our family.

Hi guys. Very good commnets. I wrote this to make you think.

Richard I personally feel your "immoral" comment is a pretty broad stroke. Is it immoral to put one's family ahead of a promise made to an institution? Would you? Would you jeopardize the future of your children over a promise you will not be able to keep?

Ok I'll be back.

A personal confession: I let a property go back in 1992. The real estate market had dived back then and I just couldn't keep up .... After 17 years, it is gone from my credit report ... but not from my memory ... it's always there at the back of my mind ... a little flutter of a thought on the edge of my awareness that asks "what should I have done differently" ...

Boy this was interesting and challenging. How can a person know unless they walk in that persons shoes...what they would do?...what is it they say " walk a mile in my shoes " Wouldn't it be based on a one on one and what happened up to the problem? It can not be an easy decision...morally or financially. It is tough there are those who are victims and those who know how to milk the system. How do you determine what the answer should be. I do not know.

Good post! I love my home and bought it to enjoy it. My wife and I spend most of our time together at our house. We skip going out to dinner to cook in our house and we pass on going to the bar to be safe and drink at home. My home is currently worth less than what I owe. I do feel obligated to continue to pay on my loan because I really love where I live. It's sad to hear stories about families that can't make their payments and are forced into foreclosure. I don't think "giving up" when there isn't a hardship and intentionally defaulting is the right thing to do. I always think of this picture and it motivates me to be strong. The good things in life are worth the fight.

There is no single answer to this question as there is an infinite number of possible scenarios and individual stories.

Do I believe it is morally wrong to break a promise? Sometimes. Depends on the promise. Some should never have been made in the first place.

Do I think it's irresponsible to throw good money after bad at the expense of one's family? Possibly. Depends on what the options are.

Do people with the IQs of inanimate objects and all the good sense God gave a crowbar have the qualification to purchase properties that they were ill prepared to manage thru good times and bad? Hmmmm . . .

There but for the grace of God go I . . . or anyone.

David you are a smart cookie :)

This situation was creadted by the appraisers and lenders in the area. I alway wondered how long it would take for this tocatch up with people. It's amazing how you can buy a house and then wait 30, 60 or 90 days and sell the same home for 20, 30, 40 or more thousand dollars higher. I seen this happen in new construction too. Builders were actually loosing money when the had a pre-sold. Someone would buy it, have it built and them close and re-sell it for profit. One builder I spoke to in the Apopka area actually had the same floor plan in various stages listed at 4 different prices. They had a set date that each price increase was to kick in. These were usually 7 to 10 thousand dollar increases. Also the simple fact that a cul-de-sac lot was worth 10 to 20K more... Hmmmm

Bryant...

You didn't ask the question: "does it make sense" or "is it better for your family" in your post. You asked:

"Is deciding to default on your mortgage, or not, a moral issue?"

How's this for an example:

You send me a referral for a buyer and I sign it, agreeing to pay you 25% of the commission I collect. At closing, I decide that I need the money for my family so I just don't pay you You call and ask about the money and I tell you that "the client was more work than I expected, you didn't screen them, and you didn't tell me that they would want to see 50 houses."

So I decided that I need the money more than you and since you "misled" (my opinion since yours doesn't matter)me at first and the situation was different than I expected my decision is a moral one.

That doesn't fly.

For quite some time, there was media predicting of the balloon in real estate about to pop. If no one paid attention, and purchased anyway . . . hmmmm . . . I have had over a year of health issues. I didn't plan for them, and I have to take this in stride (and it's very painful!)

Bryant~I think that the problem is that the problem is feeding itself. Everytime some defaults the value of everyone elses home goes down a little more. I lived in my first very small home 18 years, payed it off and then used it to upgrade to a more comfortable home, I only took a 30% mortrtgage but everytime someone walks away I lose more 20 years od 70mand 80 hour weeks down the drain. Why is our country going down the tubes? Maybe because morality and integrity have become situational.

This is not a moral question at all. Two parties enter into a transaction for their mutual benefit, both take risks, both accept obligations and there are consequences if either fail to perform..In this case both parties made a mistake. They over-estimated the value (and future value) of the collateral.

BB, good for you for putting it out there. Morally wrong? I don't care WHAT the circumstances are- everyone was affected by decisions made by banks/wall street, and the result of poor planning and BIG bucks on the part of these entities carried the very real risk that borrowers upside down would walk away. The whole thing was a gamble- I'd call it a calculated risk, but the warning signs of irresponsible lending were present well before it got out of hand. Whether it was an investor, homeonwer, or anyone else that found/finds themselves stuck, the morally bankrupt system wanted the fast buck, and it's not possible (for me) to locate sympathy for anyone other than those stuck with the albatross (having to now wonder if walking away makes them morally corrupt). Not my call to make- and a "situation by situation" assessment gives me a headache. It's too big for that now.

The banks are going to want to lend to those that walk; I'm waiting for a "program" that reduces the penalty for walking away, so that these same people can get a credit card at 22%, and a home loan at 19%. If they take the bait, they learned nothing, and my attitude will change, I'm sure!

I agree with you. I don't think it's the wrong thing to do but the only thing to do.

Patricia Aulson

It's really hard for me to judge, especially since I am not in those shoes. I am not sure this is a moral issue at all, rather an issue of survival.

BB...

Can you clarify something because I believe that your premise specifically refers to borrowers that have the ABILITY to pay but CHOOSE not to do so. Is that correct?

Bryant, I'm not sure what's moral or immoral or what's right or wrong. But after reading your post, I started to think.

I bought my house before the big run-up and put a lot of money down, so my monthly obligation is roughly the same as renting a comparable house. That's my position.

What about the guy next door, who bought his house in 2007 and probably took out one of those no-money-down ARMs with escalating interest resets? How does paying through the nose for a 3-bedroom home sit with him? Not very well, I'd suspect. I'll bet he's going to eventually reach the breaking point, especially when he knows he could rent the same darned house for half of what he pays now with no added HOA fees, property taxes, or HO insurance. Who could argue that wouldn't be a sound financial decision?

Wow...where to start...where to start??? The whole mortgage mess is such a huge mess of grey area. There is no black and white. There were lenders who were misleading in some cases. There were irresponsible consumers who mortgaged themselves up to their eyeballs on unneccessary equity re-fi's in other cases. There were innocent victims whose property values just crashed in some others cases. The list goes on and on. I think that when it comes to moral issues that boils down to each person and what their circumstances are and what their conscience dictatates they do in their particular case. There are some people that I have no sympathy for because they got greedy and made really stupid financial decisions. There are others who just got stuck in a bad place through no real fault of their own. I am not in a position to judge motives, so I won't but, there are certainly cases where I can understand the motivations behind a planned default. Great post that makes you sit an think...perhaps if more people had sat and thought back in 2003-2006 we wouldn't be in this mess right now.

Jeani

Hi Richard, That's right. This post is addressing "Strategic Defaults". I'm not saying it's right. But I am saying I understand it and I ceratinly don't consider someone immoral because they made a difficult decsion. Remember in my area even if they continue to make payments there will come a time when they need to sell. When this time comes they will STIL be underwater and will either have to walk or do a short sale. So why wait? Why continue to throw good money away?

BB I think it is both. It is immoral and it is a sound financial decision. It's a no brainer. You agreed to pay a certain amount of money in order to purchase a house. Terms were set and you agreed. Clearly letting a home foreclose when you can pay is a moral issue.

All of us everyday make moral decisions...do we go through that red light because we are late for work and hope we don't hit anyone? Do we speed on the highway because we are late for an appointment? Everyday, WE ALL make judgment calls. Sometimes they work in our favor and sometimes they don't. Ask anyone that has gotten a speeding ticket. Some situations are so extreme and I think our economy is one.

Most people would agree that killing someone is immoral, but take those same people and most will say is it moral to kill someone if they break into your home and try to kill your family. Most people would agree that you have a right to defend yourself and your family. That is an extreme situation, but I think it applies in areas like yours.

So let's say there is a family in your area that is 75% upside down. They can make their mortgage payments, but they have a special needs child. If they walk away from their home and rent one of those $60,000 homes, they can save $1,000 a month. With that $1,000 a month, they can afford more treatment for their child because their insurance won't pay for certain treatments. They have gone without those treatments but they can now afford them...if they walk away. Immoral to walk away from that mortgage, yes. Is is the right choice? Absolutely.

Generally speaking, people that walk away from their mortgage when they can pay really bothers me because that bailout money comes from their neighbor, family, and friends who are working to pay taxes. Their friends and family are funding their ability to walk away . I really despite that lack of respect. BUT I do appreciate that the world is not black and white, as much as we try and shove it into the black and white box. The world is most definitely a series of grays and as such, I'm not willing to be so arrogant to think that what might rankle my morals, might end up being the right choice for someone and their family.

LEt me throw a thought experiment out there:

If the shoe were on the other foot, do you think the banks would take advantage of the situation? Suppose that during a run-up in home prices owners were gaining all sorts of equity and the banks had the right to foreclose the home and take the equity or even to simply raise the balance on the loan, all because the banks weren't making any money and were in bad financial situation. DO you think they would take advantage of that? DO you think they would even blink before doing it?

You bet they'd do it and as fast as they could. Your mortgage is a contract between you and the bank and sets forth the terms, conditions and recourse for failure to live up to those terms & conditions. If the bank wanted more protection against this type of situation, they could have asked for mmore collateral or charged a higher rate or so on. They didn't - tough.

How about the last year plus when banks chopped people's HELOCs down? I had mine whacked to about 15% of what it had been (and frankly, I expect it to be eliminated any day - I now pretend it isn't even there). Did they not promise to lend me money at my discretion into the future?

IF that thought experiment sounds unrealisitc, consider what is happening in the credit card industry. Congress passed a bill limiting the rate increases and fees that credit card companies could implement. It doesn't take effect until next February so in an effort to make hay before the bill takes effect, many credit card companies are bumping rates to the absolute maximum limit they possibly can. I have a friend who has a significant balance on his credit card and and always paid it on time every month. They just bumped his rate from a market rate of 8% or so to 24% which was completely within the boundries of the contract. He can' tpay it off and now is likely going to have to file bankruptcy to wipe it out.

Banks have made tough and unpopular business decisions every day for centuries.They refuse to lend money or or cut off promised lending or raise interest rates or foreclose on truly unfortunate people who would pay but can't. They do all this because it is the best business decision for them.

Shouldn't we as consumers be expected to do the same?

BB...

OK, because it's completely different if you don't have a choice ... some of the comments are food v. mortgage payments which is not the case here at all.

Hugh said it best:

"Maybe because morality and integrity have become situational."

That's really profound!

BB--

Seems to me that once the financial powers that be decided to go the "morally unsound" route of creating toxic loans and throwing them into the well, everything became poisoned.

Homeowners who wouldn't normally in a million years even THINK of defaulting on a home loan had to make the "financially sound" decision to walk away for the good of their families.

We all need each other. When we forget that, and thoughtlessly decide to poison the well on behalf of our own self-interest, everyone suffers.

I wonder if that's a lesson we'll ever learn, even in the midst of this tragedy.

A person will never know until they are the one in the tough position.

This will surely make you think.

Jody Moore

I also love that line "Maybe because morality and integrity have become situational." It is so true in todays world.

Seriously, people need to stop blaming the banks and wall street and mortgage brokers, and Realtors and the sun and the moon, and the stars etc. etc. Wouldn't the world work better if we all took personal responsibilty?

I will give $100 to the first person that can show me anyone that was FORCED to buy a home.

While people weren't "forced" to buy a home, once their pulse was confirmed, they WERE ushered into a bubble that was initiated by an entity other than themselves. The frenzy was created by the gov't, encouraging relaxed standards while providing no oversight, and then by Wall St. making millions on the gift of a bubble without the pin being too close- but in sight- in conjunction with banks that decided "loose" wasn't loose enough.

Maybe I have the wrong order, or view. It's quite difficult to make judgements on decisions made by home owners who are looking at the reality provided in this post- those are serious financial losses. "It's only paper" is fine unless it has to be cashed in. While Ward Cleaver would likely encourage the Beave to keep a stiff upper lip, and offer good money after bad in the name of integrity, they didn't live in a time where bills aren't being passed in NY because our state government refuses to speak to one another at the moment. No digressing.

$200k homes now worth $60k? With each neighbor taking the hit for the last, lowest foreclosure sale? Horrible. Whatever people have to do in order to keep sanity/food on the table is what they have to do. Personal responsibility is EXACTLY the point of the post. You're good, BB.

This week I encountered my first "strategic default" seller. The Dallas/Ft Worth area isn't experiencing what you are in FL, so until this week I thought we had escaped some of that kind of thinking. But, after hearing this sellers story, which is identical to what you described (living in his home for as long as he can for free while saving for the future), I now am leaning towards sound financial planning. It's sad. Very sad.

Bryant- I don't look at it as if it is moral or not. We list those that are strategic defaults and those that are not. I don't put one or the other above the other. I do have some of my own thoughts as to the work out solutions for hardships vs non hardships and have my pet peeves with sellers as you well know, who renig on their deal to add cash to the deal in the form of promissory notes, etc, once they agreed to do so and then we work double hard for them breaking their end of the deal. But we move on. Like Lenn tells me, just drop them and move on.

But I do think that homeowners need to know where they are going when they are making these decisions. LIving free in your home for a year or even two here in Florida is very tempting however at the end of the day, where are they going to move to. At that point, they won't be buying a home for a while if they are behind on mortgage payments... and are they going to rent like forever or move in with their parents or?

And then, what did they buy the house for in the first place? For us, our house is our home so it does not matter much whether the value goes up or down. We have to live somewhere. We love our home. We want to pay it off and have it for our kids when we get older. So free mortgage for a couple of years does not fit into our plans even though it may be tempting. At the end of the day, we still need 4 bedrooms and 3 bathrooms. Rent for what we have is not going to be what we would want to pay.

SO homeowners need to look at a lot of other variables besides just market value.

Hi BB... Here's my 2-cents (for whatever they are worth)... I think that far too often we try to apply our personal ethics to other people's business decisions and we must understand that ethics vary from individual to individual (that why NAR wrote their's down and codified them for REALTORS). For some people, using the bankruptcy laws to restructure debt is something they would never do, it doesn't meet the ethical standards, while others don't even bat an eyelash at the thought. So while we can all disagree on issues such as "Strategic Default", the only barometer that has a significant impact is whether the decision is legally allowable... and, at least for now, it is.

It is better to never make a vow, than to make a vow and not pay it. That's what the book of books says. The signing of a mortgage note is a written vow to make payments on a loan. So deliberately deciding to break that vow is immoral, even when the reasons for doing so - providing for your family at the expense of losing the house, loss of income due to death, illness, layoffs, etc. - are not immoral. Or rather, which vow do you honor first? The one with God between you and your spouse, or the one with the bank, when things force you to make a choice between the two? It is a tough one, that's for sure. But most people I gather would be more comfortable keeping both if they could, and if they cannot, then the one that will bring the greatest benefit to them in the long run. Doing what's best for one's family trumps the bank on any day.

This could be a very long discussion... And I don't project my morals on everyone. But let's say that the foreclosures work through the system and the people left are into their houses for more that "they are worth"... and so homes don't come on the market... prices could rise if there is a draw to the area.

Or not.

I don't think it's a moral issue. If anyone were in the shoes of the situation you just described, morallity doesn't enter the picture, survival and defense mechanisms take over.

I agree with your line of thinking. People can't just keep going down, down, down. For many people, the only way out is to just jump ship and start over.

JUL

BB~Thought provoking indeed! Even a year ago, I would have strongly argued that this was a moral issue. However, my mind has been changed as I begin to look at this issue from other perspectives. Really, what bigger moral obligation do we have than to look after the well-being of our families? As Katerina states, the financial aspect is not the only consideration in this scenario, but it is a pretty big one!

Thanks for bringing to light "the rest of the story"!

Wow, this is one of those posts, where you have to read the comments to be able to leave a comment yourself.

Is it a moral issue? Of course. However, when you quote that strategic default reaches 26%, then we need to understand that such a huge part of population can't be bad in moral terms. Morals (and ethics) reflect the status of the majority, so things widely acceptable among people change from immoral to moral. I think this was the case with gays and lesbians.

26% make it an integral part of our community being, and by mere numbers it becomes acceptable in the eyes of people, and, hence, moral.

How did we slide to that is a different story. Note that we are talking about big numbers now. Why not before? Because we had hope, and because of our... morals. But seeing the values going down, and down, and down, people come to a sober realization that keeping it the same way would drain their resources, and if it keeps falling, they will eventually be forced to walk away from the property anyway. And they will be idiots.

So, what was by many considered immoral just couple of years ago, became moral today. We can't demoralize such a huge number, it does not work this way.

I think that what happened.

BB - I agree with Lenn. And, I was told by an attorney that agents are not being careful enough to discourage people to go this path. Maybe not enough people are giving consideration to renting out their properties when they can't sell. There are other options than just walking away. During the great depression 60% of the population were renters. Today, 60% of the population own. Some of these properties that aren't selling could be rented out to those who have lost their own homes due to REAL financial hardship. Are we headed towards another great depression? I hope not. But, there sure are less people who can own a home these days, and the homeowners who can't sell should recognize this and become landlords - let's not forget that real estate is a long term investment.

Great responses! I love Jon's comment:

"Is is a moral issue? Of course. However, when you quote that strategic default reaches 26%, then we need to understand that such a huge part of population can't be bad in moral terms. Morals (and ethics) reflect the status of the majority, so things widely acceptable among people change from immoral to moral."

This comment thread reiterates what Jon is saying. Just look out how many people on here are changing their opinions since last year.

Unfortuantely. I have a very busy day so will have to come back later.

This is a really good discussion and I appreciate you participating. Well done!!!

I'm pretty humbled that people are wiring posts about my post. By the way BB, my name is spelled ZARETSKY.

Also, I removed the article and then reposted it this morning to improve its grammar and content. It is now posted at WALK AWAY FROM THE PROPERTY - STRATEGIC MORTGAGE DEFAULTS GROW TO 26%.

Thanks Richard. I added the link in my post.

Lots of opinion expressed in these comments. Moral responsibility - perhaps that is a bit strong. When I get involved in a transaction involving selling short, I never judge the person's motives. The more people do it (walk away), the easier it is to join in!

This post as definately received a lot of response, but if you sign an agreement to pay it doesn't matter if the property has decreased in value or not.

The only issue I could see would be if there was a legal issue in obtaining the loan in the first place.

Perhaps mortgages should be restructured all together. From now on when we sell whether the property is worth more or less than it was when we bought we just walk away.... I remember a day when peoples promises held value. I'm appalled that this discussion is even happening.

If someone cannot pay their mortgage and it's the difference between feeding their family or not then I can understand it. If that's not the case then I believe that they should pay.

Based on this logic, the credit card companies perhaps shouldn't get paid either. That steak dinner you charged last month isn't worth anything either is it???

BB - I wrote a blog last year called "Is Walking Away the Financially Responsible Thing to do?" and I remember you commented that we were in for a wave of Alt-A foreclosures - that is - people who were not drowning, but realized that their stated-income loan got them into a bad deal. Any real estate agents relate??

Fantastic post and I agree with Lenn - when you take out a mortgage, you sign a document outlining the mortgager's (ee's? I'm always confused) rights if you default. If you're willing to deal with the consequences, you have every right to default. It's a legal issue, period.

Bryant, It can be both a moral issue and a financial decision, not mutually exclusive. "Morals" means "based on what is right and wrong". In our society, breaking a promise would seem to be "wrong". Financially, it may be a necessity. Over 90% of the short sale sellers I have feel very bad about defaulting. Very few are trying to live for "free" as long as they can in a property where they defaulted. They want to get out and pay a rent they can afford somewhere else. Spectacular topic :)

What a great post. If it was me, I don't think I'd have too hard of a time letting go, especially if I was really underwater with no chance of ever getting back to having equity in a reasonable time. I definitely agree that seeing huge bailouts & programs from the government that help almost nobody with getting loans worked out makes this an easier call for most.

I think everyone in this industry has considered this question once or twice in the last 2 years.

I think one way to look at it is this:

If you were president of a corporation that had a note on an obsolete piece of equipment, and it was a matter of: 1) default on the note and let them come pick up the useless piece of junk that is taking up space where you could have productive employees doing productive things, or 2) close your company and put hundreds of people out of work... which would you do?

Most people had the best of intentions when they took out their loans and DID fully intend to pay for 30 years... but when it comes down to giving up and investment house vs. losing your own residence... I know which one is going!

Good comments, great to see everyone's ideas.

Few borrowers entered the contracts to borrow the money with the same level of moral compass that you now question the morality of strategic default. Greed drove many of borrowers to do many things.

Is it right, no. Will many do it, yes. Do I blame or fault those who do it to "feed their kids", not even slightly. Life is more precious that any possession.

Is it a moral decision to default on a loan that you can afford to pay? The answer is yes and no. As many have already said in some form or another, morality on the subject changes. To some, this is still a moral obligation, and thus, a moral decision. However, it is primarily a financial decision. Financially, does it make sense to pay a on a $200K note when the security of that note is only worth $60K? Hard to say, but unless you plan on living in that property for at least the next 20 years, then I doubt it, because you will never be able to sell for payoff.

Walking away has financial concerns for the seller/borrower as well as the lender. Just one is the impact it will have on the seller's credit report and their ability to borrow funds again.

I don't really think morality plays a part here. A loan is a business transaction. Businesses only do transactions that make sense to both parties. When that transaction ceases to make sense to both parties, then it must be re-negotiated or abandoned. Since the majority of lenders are not wanting to re-negotiate, then abandoning the transaction is the only way to go.

It seems to me that willingly defaulting when you have the means to pay is morally wrong, because you are defrauding your lender of money you agreed to pay. On the other hand, I don't believe a short sale is necessarily morally wrong. A short sales requires mutual agreement between all parties as to how to resolve the hardship and settle the debt in a way that satisfies everyone.

I believe for most people their financial and mental well being are at stake. They are in over their heads with no relief in site if they stay in their mortgage. Yes they made some wrong decisions and sometimes it was circumstances beyond their control.

BB...

Being the devil's advocate that I am, let's take this to the extreme:

Murder is not a moral issue, it's a legal issue. If you are willing to deal with the consequences then it's just a choice.

How can you separate the two? Your word either has value or it does not! I don't care if people pay or don't pay but what I am hearing hear that it is the "right" thing to do and dare I suggest that is why we are in this mess today.

Think about this when you are teaching your children about right and wrong.

And once again, it doesn't matter what the other person does to you ... your promise must stand on its own and must have meaning, or why make any promise at all!

Sorry I missed a great discussion yesteryday. I was having family time.

It depends on the situation. Most of the folks up here in Michigan are not just walking away. They are loosing jobs and have to get out of the state.

We do have a buyer client that is walking away from their 2nd home in Florida. There relative is buying them a home, cash in Mi because they don't qualify.

For folks who need to sell, and can't we are encouraging short sales and foreclosure's. If they can't do a short sale, they will walk away.

Hi BB! I'm not 'passionate' about this topic either way--that generally means that I can't make up my mind! I'm not in the position that many of these people are in so, my 2 cents doesn't mean a hill of beans anyway.

I do see their position to some extent, HOWEVER, when I purchase a stock, I'm taking a gamble--and if I lose money on that investment, I CAN'T walk away from it--it's just that, an investment--I may suffer loses but, I have to suck it up and move on. Investments don't always make us money but, we take that risk just as we do when we purchase real estate. Real estate IS an investment--yes, my home is a home but, when I'm dead and gone, no one is going to care whether I cooked lunch for my family every Sunday afternoon after church or not; they're going to sell it to make MONEY.

As well, I'm not sure how these people are going to start the re-building process by having to pay rent either--is rent really cheaper than homeownership in all cases?

I don't know exactly what I'd do if my home was now worth $60K and I owe $200K on it--I've not been faced with that a dilemma that dramatic, nor have any of my clients. Therein lies my lack of passion on the topic--who knows how soon I'll have to finally make up my mind on this topic!

Excellent post and excellent comments!

I agree with Richard. Your word isn't of much value if you only "keep" it in the good times. When life circumstances results in folks legitimately defaulting, that's one thing. On the other hand, manipulating the situation for one's own financial gain is indeed morally wrong imho.

Great post Bryant. My take on it is that is the avenue is made available by our lending institutions and government, why wouldn't you at least consider it. If the banks are held accountable for putting us in this mess and are offered a bail out, why shouldn't the lay consumer. This IS the bail out for many American's. And while I agree that you should be responsible for the money you borrow, if this is the game government wants to play, then Batter Up! :)

Indeed, this is an interesting post. This is not a moral issue whatsoever. In keeping the mindset of business is business and personal is personal...this is strictly a business decision to better the future of either a person's family or business. It shouldn't even be considered if the outlook demands a strategic move on either part. Just as credit card companies have increased their rates beyond belief as preparation for the losses they will incur once the new rules are set in place, consumers have a right to protect their future as well.

The biggest fear is the banks not only have received the bailout funds, restricted lending, receive incredible tax relief in claiming their losses, they are also acquiring additional assets in properties and all the while the hard working people are homeless, shamed and left with nothing. What happens to them? What happens to their children's future? The children that will one day take care of all of us? The morals lie elsewhere not whether or not you should pay your mortgage.

Oops! Posted above, but I didn't log in. Here it is again ...

The loan is contractual, and choosing to break this type of contract when you have the means to repay it is immoral. Plain and simple.

I believe one of the problems is much of society has forgotten about hard work, and maybe having to take on a 2nd or 3rd job if you are in financial stress. It is called working it off.

Banks are not allowed to foreclose on your property unless they can prove default on your side, so the argument about if the shoe was on the other foot has no merit. They are not permitted to take your equity gains.

Ummm....yeah...What Lenn said ;)

... and for the record (based on what Janet just posted), I believe that what the banks have been doing (i.e., receiveing the bailout funds, restricting lending, ... and all the while <leaving> the hard working people homeless, shamed and left with nothing) is morally wrong, too.

I think the moral issue lies with the "trusted" banks. We trusted our lenders to accuratley review our financial records and trusted them to put us in a loan that worked for each individuals income level. After all it is their money they loaned out, they would not put someone in a loan they could not pay back would they? They abused that trust, made money off of it and now look at the foreclosee as though they are in the wrong. I say everyone should do what is best for them and their families, isn't that what the banks did.

If a home owner walks away from his home because he is mad the value has decreased, but still can afford payments, then yes, it is a moral issue. It's called taking the bad with the good, and fulfilling your commitments. Just because your value has decreased is no excuse to walk away. Come on people, stop blaming everyone for your problems and taking the easy way out. What a pathetic excuse...be thankful that you have a roof over you head.

See, the problem with society today is that we find it so easy to walk away. The phrase "I promise to..." no longer has any meaning. The phrase "In good times and in bad"...no longer has any meaning. We no longer hold people to their word and the documents they sign. If you sign a mortgage/note, you are signing a commitment. Walking away because the value is down, while at the same time pocketing your income so you can "make it on the other side" is FRAUD, dishonest, deceitful, etc. I am so tired of hearing the excuse that it is all the banks fault. Take personal responsibility...no matter what, YOU made the descion to buy. No one had a gun to your head while you were signing at the closing table.

Now if you talk about someone who lost a job or for some reason can no longer afford payment (readjusting ARM), then it becomes a financial issue. But even then, I see people making bad decisions. I had a client once who we were doing a short sale because she couldn't afford payments, but the family sure could afford a huge flat screen tv, video games, and every time I visited, she had redecorated the house with new stuff for showings. What she should have been doing was putting that money into the house. To me, even that is a moral issue.

To me the age of personal resposibility is gone, instead it is the age of "let the government take care of us".

My first reaction was that it is a moral issue. This is an issue that I have grappled with on my office which may only be worth half what I owe the bank. I have decided to buckle down, work harder to keep the money flowing to pay for the office.

Our country's leaders and their friends are continuing to line their pockets at the expense of the American taxpayer, so I can not pass judgment on whether it is right or wrong for the individual. Interesting subject.

I still don't see how someone else's behavior affects your word.

What I am hearing is this.

A friend is desperate for an operation, and begs you to help, So you loan the friend $10,000 for life saving surgery. The friend promises to pay you back as soon as he can.

A year later, that same friend buys a $30,000 car and brags that he paid cash for it.

You are incredulous. You ask about the $10,000 that the friend still owed you.

The friend responds: I made a business decision not to pay you back because it was not in my family's best interest.

According to most of what I'm reading here, this is the right thing to do because the only thing that matters is the money.

it's very simple.

We follow thru or renogotiate. that is integrity.

If we are going to take or use something that is not ours we are stealing.

How moral others are has no impact on truth. Seriously - "all the other kids are doing it" is not valid.

Ya know, I don't blame the Appraisers OR the Lenders; they offered a product AND THE MARKET BOUGHT IT! Of course, NOT MANY people point a single finger at the Government Entities that mandated BANKS MAKE THEIR PRODUCT MORE AFFORDABLE and LOANS EASIER TO GET for those with bad credit! I was offered Equity loans several times on my house AND NEVER PICKED IT UP because I didn't want that burden! Folks bought it and now they are looking at the Government bailing out these banks and DO wonder where theirs is?

If the freakin Government would get their sticky fingers OUT OF THE BUSINESS maybe this thing would straiten itself out faster instead of postponing the inevitable! But now we have a WITCH HUNT going on for those BAD OLD APPRAISERS AND LENDERS that were offering a product and THE MARKET BOUGHT IT! Duh!

How stupid are we?

We have not seen anything yet. Many people were hoping to sell this spring and summer and if not then they would stop making payments. I see a whole wave of foreclosures coming. I think to take care of famly is FIRST....

I now raise another issue with the volume of REO's why has the banks stopping and slowed at taking foreclosures? For every Foreclosure the bank takes in they have to increase their capital reserves. Banks are being taken over by the FDIC weekly due to lack of reserves. I think this is a slow boiling pot where the banks are NOT going to be able to take over the amount of homes that are going to go into foreclosure over the next 6 months......................THINK ABOUT this one and everyone might be able to live in their home for over a year or two since the banks CAN and MIGHT NO LONGER BE ABLE to FORECLOSE due to this issue................the banking industry dominos has hit a wall...........

BB, great post and comments! And I guess my feeling is that it's just so complicated, with individual circumstances in each case that make it impossible to generalize. And while I don't see consumers as neccessarily being innocent victims in every foreclosure or short sale situation, I have absolutely no sympathy for the banks. Banks made business decisions to make the loans and they understood the risks more than the people who borrowed money from them. And it's hard for me to put any of this into a morality context.

What a great, thought provoking blog. Has anyone read House of Cards about the Bears Sterns meltdown, or seen the insightful CNBC program of the same name? Does anyone feel the activities of Wall Street and the "To Big To Fail" banks were morally wrong?

I've seen the devastation left behind by the excessive greed that was enabled and continues to be enabled by the US Government. What this is doing to the fabric of society, especially in our state of Florida will be felt for generations to come.

I congratulate those who are putting family first, and walking away from a debacle not of their making. I wish them well.

BB! WOW! You are certainly in a different market. We just don't have that problem, and if we did, I'm not sure how I would feel about my situation, and that of my neighbor.

From a purely technical perspective, it is my honest belief (as someone who's watched credit markets for several decades), that people who have negative credit during 2006 - 2009 will be scored "differently" in the next 24 to 36 months. Meaning, I think that by 2011 and 2012, those folks who "endured" (strategically, or not), will not have to wait as long to purchase again. Also read here that I think you need to have your decision made, and be on the road to recovery by the end of this year. I mean if you have been in trouble during 2006, 2007, 2008 and 2009... after 3 or 4 years, you need to figure out how to get your finances in order, in light of your CURRENT job, savings and housing situation.

I believe its a moral issue, it is incorrect to default on a loan by choice - but it is only done for practical reasons. I think the question that has to be answered first is why would a house worth $200,000, now be only worth $60,000. Was it over-valued and by whom, or what enabled its perceived value to be held up. Could this be predicted.

And also, as with all investments did the buyer, seller agents really tell the new owners about the true risk. I think owners are making a sound decision not to support a bad investment, that is the American way, isn't it. The final question has to be, 'do those who profited along the way, really care? Or is it just money they seek"

Look at the big picture! Wall Street created this big housing bubble by selling all these crazy loans & MBS. Most consumers have no idea they would be 40% to 60% under the water in less than 4 years. The govt encourage a ownership society. Don't blame the players, blame the game.

This is a very thought provoking blog.

My opinion: it depends.

I personally couldn't, I just wasn't raised that way.

However, if irresponsible lenders through prolific, unrestrained, unqualified lending are the source of the implosion in your area, then ya' gotta ask yourself: Why catch the javelins for other's misdeeds and ruin your own family in the process.

The spin-off from the strategic walk away is: When will some savvy homeowner wrangle up an ambulance chasing lawyer and trying to generate a class-action suit for lost valuations due to fraudulent lending? It's 18-24 months away, max...

Actually it could be both morally wrong and it could be a good strategic move particulary if it is a purchase money mortgage. I personally would not make it a stratetgic decison to do so on any purchase that I was a part of.

However, if it is a refinance you have to be able and willng to live with the consequences, which may be significant, for alot of years and they can last far longer than a recovery in property values. That can include getting a 1099 for the amount of the deficiency and having to pay the IRS on the 1099 amount. Personally I would rather work with the lender than the IRS any day. As in most things you need to do LOTS of research, and much of it legal, before making that decision.

my Dad shared with me a long time ago .. these words and they stick as I read these posts...

"If it is wrong for an indivual, it is wrong for the group" so if only one person did this what would you feel? How does the theory "everyone's doing it come into play here?" if you can NOT pay it is one thing but to forgo a promise made with your signature you used the money "someone" rather a bank (other people's money just like you) or another person gave it to you in good faith for you to repay....... and now you do not because you want to use it to do what? buy something else? .........Choose wisely the things you do today they will follow you for ever .............. moral or inmoral is not the question it is true integrity here at stack........

I agree w/ Richard (#12), the homeowner signed the promissory note, agreeing to pay the amount due. My personal opininon is that it IS a moral issue. I think that too many problems have come about because people decided that it's okay to bend the rules as long as it benefits them. Just because something is a legal/criminal/civil issue doesn't mean that it can't also be a moral issue.

Let me ask you this- if a mom & dad are both unemployed & have no income, is it okay for them to steal groceries to feed their family? I'm hoping that they would still be prosecuted under the law, and yes, I think that stealing is morally wrong, not just legally wrong. I feel like some of you are making that type of statement regarding walking away from their mortgage obligations.

Hi BB - Great post and terrific comments. Here's my 2 cents. What if...the banks thought is wasn't financially sound AND that it was morally wrong to sell a property for less than what was owed? Haven't they defaulted on their promise to their investors? Dumping foreclosures, and short sales- willy nilly continues to bring the market down.

Too late to go back now...but the people who live next door to the $60,000 property and who continue to pay on their $200,000 loan are most likely feeling that they are just being foolish.

I don't even want to read the comments. If you are able to pay your bills and feed your family and you walk away from your commitment, you are wrong. This is defintely a moral issue.

It's not illegal to default on a mortgage. If you start a business selling beans and 2 years later, no one wants to buy beans, you shut the doors and close up shop. It's no longer financially smart to sell beans. If you buy a house and it decreases in value to a point where it is no longer financially smart to keep it, shut the doors and move on. It's a business decision, not an emotional one.

Tina in Virginia

"People who live in glass houses shouldn't throw stones". I have no sympathy for the banks! For all of you that have compassion for what others are going through, I commend you. Banks are being enabled to buy other banks & their assets for pennies on the dollar & are recieving bail out money & billion dollar tax credits. But yet even though their collateral is worth 40-60% of what they show on their books. They are buying banks & their accounts for pennies on the dollar yet they demand to collect $1 on the $1 from troubled home owners.

Living & working in the southwest Florida market I see many disturbing things transpiring. There is a large percentage of homeowners that would like to be able to stay in their homes. If the banks would instead(Home & economic recovery act of 2008) discount the principle balance to current market value in order to help those who want to & also give homeowners an incentive to stay in their homes. But instead in one clean sweep they will foreclose on the property and the owners end up on the street. The home is then tied up for 3-12 months before it is marketable all the while the banks are paying a per diem not to mention the cost of the foreclosure process & legal fees. The home is then put on the market & sold to a complete stranger for 40-50% of what was owed on it. Most of the buyers in my market that are buying homes right now are paying cash or financing through a different lender than the one selling the home. So the bank that is foreclosing does not make any interest on the purchase. The end result is the banks foreclosing end up with pennies on the dollar when they could have worked out a principle balance reduction & given people an incentive to stay in their home. In the meantime we all wonder why the economy is the way it is. We now have millions of uprooted Americans and vacant foreclosed homes predominant in neighborhoods.

Many people would like to stay in their homes but cannot afford to since their income is in many cases down 30-60%. Reduce the principle balance to current market value, rewrite the loan at a realsitic interest which would put people in payment they can realistically afford. Banks would then avoid foreclosure costs & legal fees, no lost time while they are paying a per diem waiting to be able to sell the home & no cost of sale. They will net more and have a performing asset that will yield much more over the next 30 years. To be fair they could even require home owners to sign an addendum that states that if owner was to sell the home in the next 5 years at a profit, they would receive a % of the profit.

Many of these foreclosures could be avoided and the number of homes on the market would be reduced resulting in a quicker recovery time. Not to mention compassion for fellow americans.

Everyone wants to blame the lenders, banks and appraisers. There is more blame to go around than just to that group of professionals. Did anyone out there refuse or offer to lower their commission because they thought that home prices were over inflated? Normally it was always "how soon can we close"? Or, I sure hope it appraises? If you were worried about the appraisal, you apparently knew that the home was overpriced, but chose to sell it to your client anyway.

Just remember, when you're pointing your finger at the "other person" there are 3 pointing back at you.

Well said Bryant. Florida seems to have the biggest problem but all over the country the banks have made the problem worse in numerous ways.

I am blessed to live in Austin with a relatively strong economy but we have not been immune to problems. W-2 employees wishing to buy cookie cutter properties have to have higher credit scores and provide more documentation but they are able to get loans. The charm of Austin is the fact that it is full of unique properties and has large numbers of 1099 employees and small business owners but they do not fit current lender requirements. Unfortunately anything other than a plain vanilla loan is either impossible or very difficult to get.

When an asset loses its liquidity, its price drops because there are fewer buyers able to buy the property even though there are willing buyers. So far the rental market has been able to take up most of the slack of those families who needed to move out of necessity but if the banks persist in their one size fits all policies, they will eventually damage even this market.

As a society we tend to blame those who become homeless and are unable to care for themselves. Most of the people who are walking away are just trying to take care of themselves and their families before their financial hole becomes so deep that they don't have a chance. We cannot walk in somebody else's shoes. The people who walk away will be paying the consequences for years

I am torn over this one also. If everyone walked away from their underwater mortgage here in the valley, it would be insane. People stay for reasons (my husband and I are underwater but the mortgage is cheaper than renting a comparable property.)

I do believe it is morally wrong for someone who extracted equity from their homes to buy toys to "let it go" ESPECIALLY when they are still enjoying their toys. I believe that the money should be accounted for and given back. So I have no sympathy for the cash out borrower.

Purchase money, I could somewhat see their line of thinking.

HOWEVER, we are seeing notes modified because of ERRORS. We received a loan modification without asking for it, our rate went down 2 full percentage points and we are saving a couple hundred dollars a month. When I had a lawyer look at it (I thought it was a scam when I received it since I didn't ask) they said that the original note had errors and we could quite possibly go for principle reduction with the loan mod BUT would have to re-qualify which would be hard since I am self-employed. We just took the interest rate deduction.

I did find it a pity that so many wanted to refi and enjoy those VERY low rates (low to mid 4s) this spring. But they couldn't because of the underwater variable.

To answer your question, it is both. You agreed to pay and you have the ability to pay. At what point in your life should financial gain outweigh fiscal responsibility?

It never has been a level playing field and those on Wall Street and behind the big mortgage companies and banks were allowed to get totally out of control. Morality cannot exist from the bottom up unless it is being enforced from the top down.

In many cases, the bailouts were put in place in recognition that a high percentage of mortgages would result in default due to the collapse in home values. While homeowners, hindsight may have made a foolish decision to take a risky mortgage, with the expectation that they would be able to refinance in the future, the homeowner generally is not an expert and very likely did not have the skills that the banking industry should have had to forecast market downturns. Several economic studies were available years ago that suggested value problems ahead. Yet the banks kept pushing creative solutions to increasing home ownership. Why? Because they made money doing so.

While the decision to walk may have some "moral" charateristics, I believe the "upside down" homeowner who faces job loss and the ability to feed their family needs to make the right financial decision. Further, it would not surprise me if in the future, the "feds" didn't find a way to push FNMA, Freddie and FHA into looking past a credit score that was trashed with a foreclosure or short sale to make it easier for home ownership - not unlike what happened to homeoweners who lost homes during localized value problems in Texas and California in the past.

To my clients - family first!

To investors - now that's a different story!

Have a great day!

For the real estate investor. There is no law that guarantees you positive return on your speculative investments. A great misdeed was done to the public when speculating in real estate was sold as investing in real estate. Investing sounds more stable and less risky. Unlike they show you on those 30 minute infomercials it is risky and it is speculative and it is not easy.

Now for home owner. There is no law that guarantees you equity in your home. I have to tell you. I'm tired of hearing about people who say that their homes are not worth what they once were and that the banks should lower their mortgage balance. These people should stop driving their cars as well. What they owe is more than what the car is worth.

If the opposite were true.. if they purchased the house for 60K and it was now worth 200K could the bank come back to the borrower and say "you borrowed 80% on the house so now we think the mortgage should equal 160K" ??? How would that look?

A mortgage payment on a 160K loan tied to a house that was worth 250K is EXACTLY the same as a the same mortgage tied to a house that is worth $120K. Adjustable rate mortgages are tied to indexes that are still incredibly low, I'm tired of listening to talking heads on TV talk about ARM resets. It' scare mongering, that is all it is.

We have a government that has totally disregarded contract law in this country. It is no wonder the citizens want to follow suit. If you can't afford your house, fine, move on. But to STRATEGICALLY default on your obligations because it is a "financially sound" thing to do should open you to plenty of lawsuits from those who have had to carry the water in this county for too long.

Some homeowners can't resolve the issue of whether a strategic mortgage walkaway is moral until its too late. Last week alone I spoke with two desperate homeowners, both older single women, who continued to make their mortgage payments until they literally ran out of money. One woman, in Southern California, had $1000 left in bank account and was still wondering whether she pay it to her lender. The other woman, in the S.F. bay area had $20 left. Her voice was shaking when she told me she couldn't find a job and didn't have money for food. She made her last payment to the bank a month before and wanted to know when she could expect to the foreclosed and evicted.

The decision to stop make mortgage payments when your house is upside down and you have money in the bank may be strategic today--but strategy is nothing more than determining the ends we seek and the best methods to achieve that end. If your goal is survival, how can making payments to a bank be a better strategic decision when the end can possibly be financial ruin? If morality is a choice between right or wrong, which is the greater right and more "moral"?

It's both!

Yes, it's financially sound, but it's also a moral issue...you committed to paying a mortgage (not just if the property values remain at their present level), now you're deciding to re-nig on that commitment.

Right or Wrong?

That is to be decided by the specific situation and the conscious of the borrower who makes those choices.

Personally I believe if I make a promise I should do everything in my power to keep it, including a promise to pay a mortgage, regardless of what is happening around me or to the value of my property. We are conditioned to expect our home's value to always increase, so when that does not happen some people think they should "let it go" or "walk away" which is upsetting.

The main issue is that the more people who "walk away" or "let it go", regardless of the morality or the reason, the further down we go!

Values will continue to fall, and inventory will continue to rise, until people stop walking away for their obligations.

Every foreclosure or short sale, reduces the value of the neighborhoods homes, and makes it more difficult for the next buyer to qualify for a mortgage.

To encourage anyone to not make payments, when they can afford them, drives yet another nail in the real estate value coffin. Anyone who makes this type of recommendation is part of the problem.

If someone has financial hardship, that's one thing, but not paying your mortgage because your home lost value, that's only going to make things worse for everyone!

Final thought - If you have ever financed a car, why did you keep paying the payments? Did your car lose value? And you kept making the payments? hm...

The key to me is the word STRATEGIC. This suggests you have another option. Like one of the previous posts said, How important is it to yourself? You can BS anybody you want, but you can't BS the image in the mirror.

What if this is a reality check of your life? When you die and get to answer for all your decisions.

Will it be a Moral Decision then?

This is easy - a strategic foreclosure is morally wrong. That said, we do get put into positions that in the defense of our families, welfare and future; we may be forced to make a choice and all choices are wrong. Hundreds of hot moral topics apply.

I do not see an argument to change my mind on this. Since I am not in that position, I can not and will not judge those going through that situation.

I will say, I disagree that the prices will "never" return to the absurd prices they were at, but really that is not at issue. If I continue to pay the mortgage (rent my own home), I will eventually get above water. Remember you are not just sticking the bank when you walk away, your are screwing your neighbor with 70% equity as well.

Folks:

Here's what is implicitly being said: Why am I held accountable and others aren't? It's a fair question.

I was raised - I think sometimes lately to my disadvantage - that being good for the sake of being good is a virtuous thing. However, I see that continually disadvantaging myself.

Let's run down a few situations for fun:

Bernie Madoff - Lived large for 70(?) years, and will forfeit the rest of his life in prison (potentially in SuperMax, but unlikely)
Joe Nacchio - Ruined people's lives through pumping Qwest stock as its CEO, now in his twilight years facing white-collar prison
Allen Stanford - Now facing Ponzi scheme charges, after years of luxury
Angelo Mozilo - Facing a litany of litigation and criminal charges, after living a life of luxury...
Tom Daschle, Tim Geitner, Wesley Snipes (though his was more deliberate) etc who don't pay their six-figure tax bills until they have a "revelation" sometime down the road when in the public spotlight. (Those are just the most current examples off the top of my head.)
Taxpaying individuals being refused their OWN MONEY in California and Georgia and getting IOUs? Seriously? It's nothing short of theft!

Get the hint?

People just want equitable treatment and, frankly, they feel it's not only absent, but the rules to achieve it are in increasingly absent and/or unenforced and/or bent on a whim.

The larger concern: People are now at the point of seeking their own justice.

That is a point wherein civil breakdowns occur. I am NOT talking about canned goods, shotguns and cabins in the woods!!! BUT, I am talking about a ratcheting down of interpersonal responsibility which has already suffered in the past 20 years or so.

Without that interpersonal responsibility, we will see a coarsening of society and potentially a flood of self-interested people acting in their own current interest as opposed to being bound by their obligations.

My biggest concern in this whole TARP/Bailout: good people turning bad (like strategic defaults) when they see virtue as a burden.

For the first time in my life, I am starting to hear really good people say, "Screw it. Why should I do the right thing? I'll do what I want."

Taking the issue of lending its micro context to a macro context: Will this strategic foreclosure escalate into something more prolific? Or is it a symptom of an accelerating societial phenomenon?

I would argue, it's the latter.

It's morally wrong. They're essentially leaving others to pay for their mistakes. Everytime a house gets foreclosed upon, we all take a hit in some miniscule way through additional hidden costs.

A few years ago I would have seen it as a moral issue. No more. Yes promises were made, but promises were made on both sides, politicians and large business have now broken faith with the American People. I am a conservative Republican and believe in free enterprise and have no problem with large business, but enough is enough. The banks took the bite of the apple, they scream like victims, but use every rule in the book to stick it to customers. Our government is dismantling our economy bit by bit. At the end of the day people have to do what is best for their family.

I do think a lot of people abused the mortgage system and used the house as an ATM, but a lot of these people did everything they were supposed to do and are still out in the cold.

We do not have debtors prisons in this country for a reason. A life time of debt is the same as slavery. Debt is a way to enslave people. If we work our way out of this perhaps the government and the banks will use a more cautious policy in the future that will not enslaves people. Many years ago a mortgage was 5 years, then 7, then 10, etc. and now up to 40 years. The ready availability of credit drives housing prices.

We need to move away from a credit culture. Some credit is important, but it has gotten way out of hand and it is by design.

This is nice discussion.

I still think most comments are missing the big picture and the root cause of the current financial crisis. If this was a regional or local crisis I can understand many of the comments.

However, considering the global aspects. I have to agree with comment #8 (Lenn). Most are forced into a bad situation created by forces out of their control and that should have never existed in the first place.

On the other hand those taking undo advantage of the crisis are making thing worse. We need to be focusing on making them better.

Bryant,

Sound financial desicion!... You MUST do what you NEED to do for your family! It's probably not a decision you would have ever made if our economy were still "normal", but one you must make to survive!

Kathy Opatka

great blog. thanks for sharing. The bottom line is most people do not have the money to go out and buy a home with cash; so therefore we must utilize credit. Credit is a double edged sword. We may use it to our benefit or detriment. I guess that many people who are about to default have to ask themselves this question: Shoud I pay the house payment or buy food for my children? I know most people, confronting this situation, would do the latter. I would feed my children, if there were only 2 choices. I realize morally, default is bad, but we do not always see the entire picture. There are real people behind all these numbers, and statistics. Did not read entire blog, but what i read was very good! thx again!

ALthough I am not one who has a religious background... I know the saying "The LORD helps those who help themselves."

Banks treat borrowers like NOTHING BUT A NUMBER. SOme Banks like SAXON, WAHINGTON MUTUAL, and BANK OF AMERICA...take 6-24 months (yes, 24 months... want addresses to prove it???) to pull off short sales even IF they allow them! How much does THIS hurt property values? How much $$ do they cheat their own investors out of because their too incompetant to even answer the phone....oh, sorry ..one of those banks will have the phone answered in a 3rd world country. DId THE INVESTOR do THIER Due Dilligence? Where was THEIR morality when setting a borrower who truly didn't understand what a "Pay Option" (negative equity) loan was? Did they question how you work fast food by day, but are "self emplyed" making $100k at night? I think we should look at GM..keep what works and pitch the rest.. let the bankers join the mortgage agents and part time Realtors in the struggle to survive in the post-Boom.

Jeff Burnham- Rosen & Co. Las Vegas, NV

People will and should do what they have to do to survive. That being said, a few hundred thousand dollars of negative equity can tempt even the best person and make them consider walking away and try to start fresh. Especially when all their neighbors are doing the same.

Also, if banks want to forgive the remianing loan balance that is a business decision they are free to make. As long as they don't need my taxes to subsidize that or to bail them out - I don't really care...

For the people that can afford the mortgage but choose to walk away, it is up to the bank and the rules in the state whether to convert the remaining loan balance to a judgment against the person and their other possessions.

For people that were mislead, defrauded or is in a bad situation due to unforeseen circumstances, we should show compassion by allowing all or part of the remaining debt to be forgiven or deferred after a foreclosure and personal bankruptcy.

Believe that is the way it works these days anyways.

What a fantastic dialog going on here. All I can add/say is that nobody can judge anybody when it comes to how they handle their finances. You just don't know what the catalyst is. I'd be willing to bet that there would be as many different reasons as to why they made that strategic decision as to the number of defaults that there are...

As a matter of choice, it's morally wrong, as a matter of hardship, I agree feed your family before you pay your mortgage as many posters have stated above. However, I have seen many banks refuse short sales, then foreclose and put the house on the market for less than the shortsale offer. Many people would not be in the situation in the first place if the banks would accept the short sales. These kind of decisions that banks are making are bad all around. They're bad (obviously) for the seller who then loses their home in a foreclosure. They're bad for the bank who gets less money from the foreclosure sale than they did from the short sale. They're bad for the real estate market in general, when homes are listed for less bringing down home values in the surrounding neighborhoods. This is not a Win-win situation. Everybody Loses.

Moral - justify this and you can justify anything as long as it benefits you=stealing, murder, selling illegally obtained assets. If life is all about survival and taking care of yourself at the sacrifice and detriment of others - then I would question your morality. Strategic defaults are quite simply planned out for defaulting on a promise made regardless of how it affects others.

That is what you asked about!

I used to take a hard line on this topic believing that a contract is a contract. I have seen so many different situations with clients in the last six months that I have come to the conclusion that I cannot cast a wide net of opinion.

I did have a client whose home was listed for sale for a year. I was unaware of an impending foreclosure (in retrospect I blame the title company and myself for not demanding a date down on the title work...they one I choose to work with now provides me with updated title reports and trustee notices hot off the press). I marketed the home, sat open houses, showed it, toured it....the whole shebang. The client was slow to return my calls and was always on holiday: deep sea fishing, Mexico, skiing in the mountains...every weekend. Eventually they stopped returning my calls and the next call I got was from the guy at the house taking the doorknob with my lockbox off the door.

I still have the doorknob with the lockbox attached sitting on my desk as a reminder. I felt duped, and in this case I did judge these sellers. They made a decision to not pay their mortgage and spend the money recreating...that's not fair....to me, to their neighbor whose house was on the market, to anyone. I would love to recreate too.....save my mortgage payments and take off to the Caribbean for a couple of weeks. My sense of financial responsibility precludes this.....at what point of negative equity could I imagine disregarding my fear of negative credit reporting? I can't imagine that point....so ingrained is my belief that these sorts of responsibilities simply come first. I can imagine several low paying jobs to make the ends meet (hello McDonald's....if I had to). But I cannot assign my morality to the masses....

Alternately, we have all seen the client who has lost a job, gotten sick, divorced, whatever...and that glitch in their situation has made it impossible to pay back a promise made two years ago. Different scenario, yes. It is, as this thread discusses, a moral decision, not a legal one, as we sit today. But will there ever be a way to prove inability to pay?

Great discussion....I am sure we all have battle scars.

A moral issue? You better belive it!

However it's foolish to discuss morals with the PC crowd you have to have a common language to use. The entitlement mentality is amoral on it's face so why waste the words, why waste the passion?

Let's just take a practical look at the results from defaulting when you cah afford the payments.

It's stupid that people will default because of negative equity when they can afford the payments! While this may be PC, it makes little sense. The alliterative is normally a lesser rental at a higher price!

If home owners would continue making their affordable payments they would eventually pay off the property at the time they originally planed! Renting on the other hand will mean ever increasing cost, loss of tax benefits, and loss of security! A tenant can be evicted in some states in as little as 5 days.

The PC's tell us to stick the bank, we were cheated, Obama paid the bank, all based on hate an ignorance! The PC's have no concern for the consumer. If you can't afford the payment and can't sell "strategic default" may be a good idea it may be inevitable, but defaulting on an affordable payment is simply stupid!

We need a "Rosetta Stone" to slap them up the side of the head with! We need to get their attention. Sticking the bank because it's PC, because you're upside down doesn't make sense if it raises your cost of living!

Bill

There is no moral issue. It is a business contract that is made to be broken but not without legal and financial ramifications. A homeowner makes his decision based upon the ramifications. Walking from a mortgage or promissory note is a huge decision...credit is destroyed for at least 7 years...but it is better, in many cases, to do that than to allow your family to starve. If the banks are doing their job, they have this eventuality covered within the framework of their loan. If not, it is their problem. Great, thought provoking post!

Obviously, this is a hot topic and I appreciated reading everyone's thoughts on it. But...

To pull back to a larger picture, what about the debt our government has committed us and future generations to?? At this moment, we may be able to look at individual circumstances and make a "good person/bad person" judgment, which is not our business. But what is our business is the fact that trillions of US taxpayer dollars (our dollars!) were committed to bail out corporations -- including banks, which were given money with no mandate to loan it -- and create the "stimulus package", which is not effectively stimulating anything!

I recall reading that the same amount committed to TARP funds were roughly equivalent to the sum of all US mortgages. Had the government elected to "forgive" all mortgages, every homeowner in America would have owned their house free and clear. Imagine what that would have done to stimulate and stabilize the economy! Yes, most of the banks would go under, but the 75 million families would be secure in their homes, thus avoiding the problem of foreclosure, vacant and vandalized houses, displaced and desperate families, etc. But, clearly, we live in a corporatocracy and such an idea would be laughed off the table. How silly to give power and benefit directly to the citizenry!

So, we're in a big pickle -- globally. For those who are still receiving and generating income, about 80% of the working populace, the dire scenarios of foreclosure have not hit home. But they will, eventually, trickle down to all of us, unlike the stimulus funds. Americans are incredibly optmistic and are sure "things will turn around". In the meantime, without any top-down mandates to change the course of this unraveling situation, it becomes "every man (and woman) for himself."

As individual Realtors, we have no power to effect the major changes needed in the banking/mortgage industries. Maybe our collective voices at the NAR level can help Congress enact laws that mandate our money is loaned back to us with more-reasonable guidelines and low interest. Why should the banks still be making huge profits on money the American people have indebted themselves to keep them afloat?

Lots of questions, no answers. I hope there are those smarter and wiser than I who will figure this out and set us on a brighter course.

How can a strategic foreclosure not be a moral issue? Money is a part of someone's life. When you don't pay it back it in essense is stealing part of another's life. They worked and produced something to earn money and then lent it to you. Now you are saying that it just doesn't work into your financial game plan to give me back the part of my life that I lent to you?

Business runs on trust. If you can't trust people on their word, then business has to prepare for higher risks. Higer risks means higher costs.

Don't be surprised when mortgage rates go up to 20% and you have to put 50% down. That will be the ultimate cost when most people think that a strategic foreclosure is OK.

If you still think that it's OK, try putting a face on the money that was lent instead of just thinking about the evil banks. If I scrimped and saved and sacrificed for years in order to save $200,000 and then lent it to you so you could buy a home, are you going to be able to look me in the eye and say "screw you for trusting me. Sorry you wasted much of your life on me but I just don't think it makes sense for me to pay you back." When that happens over and over no one is going to lend any money at a reasonable rate and terms.

I have to say that in the beginning of all this financial/foreclosure mess I firmly believed that it was immoral for homeowners to simply walk away from their homes just because the value was less than the mortgage balance. Now, I have changed my mind due to the gross misconduct by the current administration (i.e. continuing bailouts/handouts to Democratic campaign contributors (think Obama's, Dodd's, Franks' friends at Fannie Mae, AIG, etc.), Chrysler/GM stock equity to labor unions, reduced payments for some homeowners, but no help for others, etc.). I think homeowners that bought homes they could afford (i.e. responsible people) are now being sucked down a financial black hole and the only way out is to walk away and take the credit hit now. This is what happens when the government meddles in the private sector - it shifts decision making processes and produces unforseen and unwanted results. Thanks Obama! His campaign slogan should be altered - No hope, just chump change.

Well this exactly what I said would happen - they opened the flood gates. Now even "good" people have joined in. I think it is wrong and just shows this country has gone to h-e double L in a hand basket. No morals!! A throw away society thinking Nothing of what will happen to the neighborhood they leave behind. Caring only about me me me and not caring that they made a committment to pay back the money.

But the real problem - it is just to Easy to walk away. Change the rules IF you file bankruptcy and forclose you have to wait 10 years to borrow anything again - no car, not credit cards no nothing. People may think twice.

I have to agree with the ones that first say it is not our place to Judge others. Is defaulting wrong? Absolutley. If you sign a contract you are obligated, legally and morally!!! If a lender and / or appraisers committed fraud then take it to the courts. Those that bought the homes knew what they were buying, they also knew whether they should have been buying with no money down and rolling all the cost into the purchase. They signed the papers so most have no one to blame but themselves.

I think it is a terribly bad thing personally. The owner made a financial decision to purchase a home, and has the warewithal to make the payments. Just because the value has gone down, that does not alleviate the owner of the obligation to make the payments. Who bears the burden of those families that make the strategic decision to stop paying their mortgages? Well, the banks get bailed out...with tax dollars. It hurts all of us. I understand why families are making this decision but the brunt of this will be borne on the shoulders of my sons which makes me very upset.

Heck yes, they should consider walking away. What would be better is if the banks would consider doing a "short refi" which is basically having the bank take less of a payoff than what they owe and do it as a refinance. Why not let the homeowner stay in the home and keep the balance in line with market values? That is essentially better than taking a short sale as a short sale buyer wants to get a discount off of current market values thus hurting values and prices in the area. What is more troubling is the fact that if the banks accepted a short refi then it would stop the downward spriraling of home prices as each foreclosure or short sale inherently brings on more short sales and foreclosure because folks who do want to sell there homes at a fair market price are left with a hard decision to make, hold on to the house, short sell it or let it foreclose. This will prolong the real estate slump and hurt the homeowner.

VERY interesting post. My two cents...

Our local market has been hammered by foreclosures. The banks take back a property and dump it on the market for half the mortgage that was owed. Honest homeowners who are trying to sell their home because they've been hit with a job loss or other financial problem cannot compete against the banks. And in our area, there aren't many jobs now so this has affected almost everyone. What is their alternative? They can't afford the home and they can't sell it. If the bank allows a short sale, it compounds the problem by forcing everyone else's home values down.

This is a vicious cycle and I don't see it changing any time soon unless the banks are forced to stop dumping properties. I don't think it's a moral issue - you can't expect morality on one side (the homeowner) when the banks are creating such an unequal playing field in the market.

Folks:

Here is what I wrote when this bailout non-sense started...let me know your thoughts in the context of today's situation and this specific topic.

Michael

----------------------------

In the interest of full-disclosure, I am a Realtor®. I think this bailout is insane and incredibly short-sighted!

Taking my Realtor® hat off and putting my MBA hat on, let me offer the following:

I understand that liquidity is the problem, but injecting money does NOT guarantee that liquidity will improve nor will resolve the housing inventory glut.
Looking at the St. Louis Fed's credit numbers, credit is at literally an all-time high.

This is like putting water in a blocked toilet and flushing again and again...it doesn't break the blockage!

Now, I have not necessarily heard how this package directly addresses dealing with:

Oversupply of inventory, created by
Rampant foreclosures

which seems to be at the core of the crisis (foreclosures - really oversupply).

I think the most conceptually simple approach (the devil is always in the details) is:

Provide a 40, 50, 60 year amortization for loans in trouble (at market rates), not a 30-year rework...which essentially gets you to a minimally different payment.
- This keeps homes off-market, creating price support due to the current level of demand competing for a reduced supply (inventory) of homes.
- This has the ancillary benefit of keeping property values up (not artificially, but by ACTUAL, desired home ownership) which benefits state and local economies (who rely on property taxes) based on valuation
Trade off a portion of the equity on the back end of the sale for the privilege of doing this rework, say 10%, for the opportunity to do this.
- This would have the effect of neighborhood stabilization (lest remaining homeowners just get fed up and leave the keys on the counter and leave at some point, if they see their homes go underwater to the tune of $50k, $100k or $200k as their neighborhoods implode). This encourages value preservation.
- This 10% trade off would also discourage homeowners from "working the system" - and hold the homeowners accountable for getting in over their heads - if they had to provide an additional lien for $20k on a $200k home (present value); while permitting a MEANINGFUL adjustment to payments of homes that are in trouble. Also, this additional lien discourages churn of those homes when values start to improve and brings them into the market only when appreciation is substantially over the encumbrances (including the 10% trade-off noted in #b). The homes would HAVE to be owner-occupied.
- Now, I would waive the 10% if they paid their homes off earlier than the 60 years (say on the original 30 year schedule) - to encourage equity accrual.
- Require homeowners to purchase some sort of life insurance policy that pays off the mortgage, should they pass away prior to the 60 year mortgage being paid off. Guess what? This creates a wealth transfer to the heirs of the troubled homeowners, too! (Great reason to abolish the death tax!)
How do you fund the gap between the cash flow of the 30 year loan vs the 60 year amortization?
- Create a private investment fund for raising funds for this endeavor, perhaps with tax free benefits paying, say, 7%, after all, at 10% return on the back end, you would make 3% differential (mind you, I haven't done an NPV analysis or time-value of money analysis on this).
Moreover, this would ESTABLISH VALUE of these mortgage assets due to increased (or, really, commencing) cashflows from the DISTRESSED loans.
- Moving from a 30 year to 60 year loan would reduce payments by 15% (from $600 per $100k @6% to $514 per $100k @6%). (That doesn't take into account the differential from reducing the rates based on percentages.)
- That benefits banks as 85% of something is better than 100% of nothing. This should increase cashflows in the credit market and permit the ability/encourage willingness to loan in the market. The differentials (the remaining balance of the loans in distress) would be funded through the private investment fund noted above.
- If there were a gap remaining there, THEN fund THAT. I mean, we are putting 1/14th of the GDP into Wall Street in one bill. That's insane.

The net-net is: You keep supply of available homes down. Due to the implicit requirement of having any given home needing to overcome its encumbrances, these homes should not churn until value (and equity) is acquired. That is equity that can be used to move up somewhere down the road, or provide a legacy to these homeowners' family and children.

Interesting and thought provoking. I can't remember the moral test from my psychology class in college. It has to do with is stealing food wrong then is stealing wrong to feed your family?

An interesting dilema. Let me ask or throw some of the other moral blame or guilt around. I'm betting 90% of the agents and brokers on this site were selling those high priced homes or funky loans that got these homeowners into trouble. I say this because if you were in the business in 2006 weren't all the markets like this? Were you warning your clients or taking the larger commissions? Did you truly warn them or not for fear they would go with the happy agent or broker who told them how smart they were?

(I can be morally pure and snobbish on this issue because I was a loan officer in 2003-04 and got out of the business when I saw where the loan business was heading. I decided on an honorable profession and became a professional poker player)

One of the most thought provoking posts I have read here on AR. I thought the best comments were from David Cheung, "Don't hate the player, hate the game." As long as the rules are what they are everyone will act in their best interest. Underwater borrowers, banks, agents, etc. It can be argued that the banks are not asking in their best interests, that's another story.

Richard Weisser, awesome comments as always. Kudos for presenting the alternative viewpoint. I think it's not a moral issue but a legal one. The homeowner did agree to pay the mortgage and if they didn't the bank would take back the house. This is the agreement that the bank and homeowner agreed to. The bank lent the money with this understanding and the homeowner agreed to it. I understand your viewpoint, understand mine. I believe an issue like this is why they still have philosophy departments at universities.

Your other arguement is about the lending somebody 10K and they buy a car for 30K cash a year later and refuse to pay you. I would argue this is a violation of the social contract we agree to as a society. If you violate this social contract then I can as well ... by kicking your ass. (On a side not the last time I was involved in violence was 33 years ago when I was 7.)

Good answer, Bob Davies! My thoughts exactly!

Bryant - A very thought provoking post indeed! I happen to agree with your position - I do think it is a sound financial decision. The consumer had no control over the market place. That the banks were so heavily leveraged is not the consumers fault. The fact that the market crashed is not the consumers fault. At some point the consumer needs to look at their own situation and make a decision that is best for them. I cannot judge anyone's decision as moral or immoral, it is not my place.

the bank charges interest to compensate for the risk. here it comes.

they abandoned underwriting, COMPLETELY, to make loans to folks that couldn't buy lunch without a co-signer, paid brokers extra points to place their clients into three year prepays, permitted the same brokers to take yield spreads that were unconscionable in any other age, allowed appraisers to FABRICATE appraisals to make the deals happen and in general engaged in business practices that can only be described as retarded.

in the absence of a bailout, we'd all stand back and watch as the guilty went down in flames...unfortunately we are knee deep in this with the deadbeats and will be paying their bills for decades to come.

morally wrong? yes, philosophically. a good business move...probably. depending on the facts in a given senario it might be the wisest move and i have been warning against the coming tide of foreclosures that will arise from this. we are looking at folks who make a simple mental spreadsheet and decide it is not in their best interest to continue paying good money after bad. the Alt-A borrowers will be a huge component of this contingent...this is the coming big story.

in related matters, the banks saw this coming last fall and moved to stop folks from purchasing a new cheaper home with 30 year fixed financing in preparation of abandoning the overpriced one three blocks away.

Strategic defaults are BOTH morally wrong and sound financially sound.

In making the "Strategic” decision not to pay their loan, they do get to save the money AND if their mortgage loan is with a bank/investment firm that accepted "TARP" funds, that bank/investment firm can foreclose but CAN NOT evict anyone from the home.

So, they don't have to pay a mortgage, just the utilities and can stay there until the loan is sold to a third party. They do not even have to pay taxes on the property while they are staying there....

Banks can not issue a short refi (which is a good idea) until the fed wants to issue guarantees to such loans. If we had started in 2006 allowing the banks to issue a second mortgage that was underwater (and could be sold with a government guaranty) then we would not have gone this deep.

Remember it was Nancy Pelosi that announced the Federal Backing for 100% financing with great glee many years ago. The banks did not create all this in a vacuum.

The moral issue, to me, is irrelevant. The lenders and investors who supposedly are/were some of the smartest people in the country made billions before the crash and then had their balance sheets bailed out by the federal government. Heck, maybe they are the smartest, they got their money on the way up and the way down. I've read about a few local mortgage brokers who got busted for mortgage fraud and might do some jail time. The big homebuilders and banks who worked the system- not a one has gone to jail. Their personal credit and ability to buy a home are the same as they were before the crash, except maybe they can't afford as big a McMansion.

Now look at your individual borrower who paid $200,000 for a home that is now worth $60,000. Did they cause the crash? Will the government pay off $140,000 of their mortgage so they are out of the hole. Hell no! We are bailing out the multi-billion dollar bad decisions of the big boys, but all this borrower might get is an adjustment of interest rate or a small portion of their principle foregiven. They are deciding to knock their credit score down 250 to 300 points and forego buying a home for 5 to 7 years when they choose to stop paying. I don't judge them morally for a second, they are doing what they have been forced to do by the greed of huge corporations and banks and the stupidity of Fannie and Freddie and the federal govenment. My heart hurts for their loss of their home and any money they put into it. I just hope they can get back on their feet and one day become home owners again in a more sane environment.

It all has to do with risk. You buy a house you take a risk. You make a loan you take a risk. Sometimes risks do not reward you as you thought they would. Why is it fair that the homeower/investor buyer/borrower should be the only one left holding the bag when the housing market tanks? Realtors, Title companies, appraisers, loan officers, lenders, wholesalers, securities houses, underwriters, insurers such as PMI and AIG, and hedge funds all made money on the wary up. So if you are going to be really fair, let's find a away to bring them all in to the unwinding table.

Moral responsibility has many faces. Responsible to who? The lending mechanisms on the one hand or your family and/or your own best interest on the other. I fee that borrowers can only be held to account for those things that they can control. They could not control the direction of the housing market.

You kind of have to agree with most of these folks for walking away, they have nothing to loose as many never put any money down, refianced the heck out of the house and now they can walk away as if they had been renting, so very true and realistic in many States it is the same way.

Well i tend to think that if you took out a loan and can pay it you should, in some circumstances it may make sense to walk away but it should really be the last resort.

Wow! No wonder real estate agents have a bad reputation. Yes, there are a lot of lying rats in government and at the banks who have taken advantage or would take advantage. We shouldn't lower ourselves to their level or try to justify it. And you folks who say there's no black and white and who are we to judge! There's no morality when you're only honest when it benefits you. I hope none of you have spouses who believe that contracts are only good in health (not sickness) in richness (not poor) and not as long as you both shall live.

True life story #1:   Husband, wife, and 2 young children occupied a home on this Macomb County street for 11 years.   First, hubby lost his job and didn't find a replacement. Next, wife lost hers and didn't find another job in the area. She finally found a job on the western side of Michigan, but living there during the week and commuting back to their home on the weekends wouldn't work financially, and it certain wouldn't be in the childrens best interest. They called their mortgage lender, told them the situation and have in essence given the house back to them although they did not do a deed in lieu of foreclosure.

True life story #2:   On this street a young man who purchased a home 5 years ago walked away while he was still employed. His house was worth approximately 25% less than when he purchased it, and he had also become a new husband and father. The house was suddenly too small (in their eyes) so he locked it up one day and moved into a home that his father purchased for him. His reasoning? Why wait until the housing values go back up, he'd rather take the credit hit now and deal with it. He then filed bankruptcy to protect himself from any repercussions from his mortgage lender.

Both of these streets are within walking distance of my home and well within appraisal distance.   Both of these homes are similar to mine and are just 2 more homes in which this has happened over the last 3 years. These "sold" prices are now my new comparable sales should my husband and I wish to put our own home ont the market.

My own home? It's worth 55% less than what paid for it in 1997.. We're not walking away as long as my husband still has a job and we can still make the payments. We know we will eventually have to sell before the values come back up fully, but we're prepared to stick it out.

Why? We made a promise to pay when we signed the mortgage note. No where on that note did it say "..unless the value of the home drops".

Yes, we're probably financially stupid for sticking it out, but I'd rather do this than to stick it to my neighbors. I sleep better at night knowing my husband and I are doing all we can for our little community that has been our home for 12 years.

For people #1 I feel sorry for them and know they had no choice. I cried when they left and still keep in touch with them.

People #2? I want to kick some butt. They were selfish and didn't give a darn about anyone but themselves.

Jason Quintero I say anybody who continues to pay on a $200,000 loan while their home is worth $60,000 is either insane, stupid or fearful of the great moral boogyman. Ever since we elected Barrak Obama and kept in office a beavy of immoral Senators and House members the American morality question is no longer an issue. It may be for some people but we need to look at what our corrupt government is doing to us. Bailouts of AIG, Bank Of America, GM, etc. where is the moral leadership? Few of us want to hold on to our moral standing but as long as Barrak Obama and the Democrats screw the people our morals will slowly slip away in favor of smart business decisions.

To anybody on the fence about a strategic mortgage default, I say go for it. If you have to make a choice between your financial security or your lenders profits I say bail in them. Keep your finances and family close. Tell the mortgage lender and government to KMA.

I personally believe the Moral Issue is out the window in this market. Especially, since the one's who created this mess are the one's getting bailed out. It now comes down to making a prudent and wise FINANCIAL decision for you and your family no matter what the circumstances may be.

To Jason Quintero: "I say anybody who continutinues to pay on a $200,000 loan while their home is worth $60,000 is either insane, stupid or fearful of the great moral boogyman. "

OR...we made a promise to pay AND want to make sure our neighbors don't suffer because of our decisions.

Go ahead and call us stupid and insane though if it makes you feel better.

Scanning through the responses I'm not seeing anyone considering the tax consequences of walking away from a mortgage. The IRS considers forgiven debt a "gift" and can be taxable income. In addition to being a REALTOR I work for H&R Block during the peak tax season, and I hate it when an investor comes in with several 1099-As. Paying taxes on $140,000 of forgiven debt can be quite a shock.

Moral issue asside I think its a FINANCIAL decision and it is tough NOT to do it. I think its morally wrong but I am not big into judgement so thats not my business.

To Kris: Buyers made a promise to pay and the collerateral is the house. If the buyer does not pay the lender gets the house, that's the deal, business is business.

If you feel paying a corrupt goverment run industry is a better idea then taking care of ones family and financial security then you have bought the big lie.

Wake up America, Wake UP!

I CAN'T BELIEVE YOU WROTE THAT POST! BB, I'm disappointed in you. If you made that post public, then the post in itself is almost an inducement to break a contract. As realtors, we've all been asked what do when a homeowner is hard on their luck and their home value is plumetting, but we can't advise them to stop paying on their promise to pay.

A moral dilemna, yes. Maybe this will help someone out there decide. You own a house. You lost your job. Your wife left you with two little children to house and feed. You have $2,000.00 left to your name and your house payment is due. I think it would be immoral to not feed the kids, what do you think? Also, once the bank decides to foreclose, where is the bank morally? The banker collateralized the house, not your remaining earnings over the remainder of your working life. Didn't he make an agreement also? One last point. Will the poor banker who is sadly taking your house back hesitate one minute to foreclose on your home even if your two children are motherless, soon-to-be homeless and had NOTHING TO DO WITH THIS LOUSY SITUATION? NO! MORALITY? This is business, get real.

Thank you Dennis Erickson, thank you.

Jason, you obviously didn't read my entire comment. (Bryant, if you want to delete this banter between us go ahead, won't hurt my feelings :-)

People need to take care of their families first. (See my real life scenario #1). I do not fault them whatsoever for the decision they made. I ached for them. They were heartbroken at walking away.

Those that walk away simply because there property lost value I do fault. They are driving home prices in their neighborhoods further down.

If you can pay you should. If you have to make a choice between feeding your family then of course you do what is best for your family.

I've been awake for many years. My eyes are wide open. I've seen the misery first hand and have felt it myself.

Some people have no choice. My daughter bought a home with a friend. She had a full and part-time job and the other person had a good job. Well, her part-time was eliminated because she did tags for new cars, and who is buying new cars? No one. Then the other person was in construction and since there are few jobs in that industry, they too are out of work, and have been for 7 months!

They put the home on the market 2 years ago before they had problems because it was hard to make the payments even with all the jobs since the interest was escalating. They have had 2 buyers and both walked away because the bank had someone do a BPO which is completely inaccurate! The bank wants more for a townhome than you can buy a single family home and have not accepted any offers, including a CASH deal.

Now, there are 2 offers for a similiar amount, I wonder if the bank is still going to hold out? We have requested an appraisal and hope the bank does a newa one because the home is not worth any more than people are offering.

When she was making money, she asked for them to rework her mortgage and they would not allow her to!

If you cannot pay, and the bank will not be realistic, then what do you do?

My Goodness...

What an eye opening experience this topic has been. So many different views that my head hurts now :)

Kris...

Banter away my dear. That's how we all learn :)

TLW...ROAR!

Holy mackeral!! I go to work for a few hours and come back to all of this. OK I just spent the last 90 minutes reading each and every comment. Very interesting I must say.

I truly don't think I have any thing else to add to this discussion. There is no easy answer.

TLW and me sold 3 pof our properties in 2008. We knew it was going to get worse so we decided to unload some debt. We had to take large chunks of cash to closing on all of them. It was not an easy thing to do but we did it.

Moral or not? It's not my job to make that judgement.

Your market may be different than mine but in my market this is the reality:

"These borrowers are so far underwater they will NEVER be back on top again. So…. whether they make payments or not, at some point they will have to sell, due to life circumstances i.e. job relocation, divorce, marriage, death.....it makes sense to take the hit now and start rebuilding."

This is the true issue these folks are faced with. They can make payments for the next five years and when the time comes that they have to move THEY WILL STILL BE UNDERWATER.

The definition of insanity is: Doing the same thing over and over again and expecting different results.

All I have to say is WOW! What a great provocative post! So many people talking about this issue today- I personally feel it depends on each person and each person's particular situation.

I love the post and really have loved reading the discussion. We have so, so many of these down here in the West Cost part of Florida.

So many people owe more than 100% more that what there home is worth in NorthWest Fl....it is just really sad to all involved any way you slice it. It is a hard dilemma for most.

I look forward to reading more comments soon.

Thanks, Alisa

Alisa Stone Herring, CRS, GRI
Broker/Owner
Stone Real Estate Group LLC
850-596-2456 Cell
www.thebeachpeach.com

"The Georgia Peach that Sells the Beach"

Decisions to default on mortgage and home loans are mostly taken very seriously by the property owners. I wouldn't call these strategic defaults so much as mandatory life changing decisions for many people.

It's true that the money was owne on the note secured by the deed of trust or property. On the other hand, most note holders agreed to look to property value as the ultimate guarantee of payment. So when values dropped so much, the security for the loan was lost, leaving the bank and note holder with recourse only to ask for payment from the obligor, who in turn loses motivation to make payments on the note when life situations are so drastic.

This is a rough subject, whether strategic or life mandating default, and will be studied and considered by others, perhaps those in philosophy and social behavior classes on college campuses for years.

It's very hard to be a responsible citizen and meet your obligations, when so many of those highly paid executives have walked away from their mistakes with a bonus in their hand. It would be a different question if everyone had to play by the same rules instead of just "What's best for me? and the hell with everyone else!"

I guess i misread the OP, because alot of people are saying it depends on each persons situation. I thought the situation was laid out in the OP as 'Strategic Defaults' . IMHO that eliminates hardship, and all other reasons/excuses. They are doing it based solely on the numbers. Not because they have to. and to be honest, The libertarian in me wants everyone to take personal responsibility, but here in florida prices have literally collapsed. In the subdivision I farm, I sold the Highest priced home at $133k. The highest sale in the last 12 months or so was $42k, with 4 being bank owned and 1 estate sale. In normal market conditions how long will it take them to triple their value just to get back to where they bought at? Decades?

No, I do not think it is morally right. I cannot judge another, but in general -- I do not think that the practice of strategic foreclosures is a good thing. Moral issues are deemed ethical or unethical not only by how they affect the person involved, but how it affects others -- or all humanity -- as well.

So, if the situation is, they can no longer afford thier home -- I do believe ONE "morally right" thing to do is to SHORT SALE the home BEFORE it goes into foreclosure. That way, the bank has the opportunity to settle the books sooner and with less loss. Also, the home has a new owner, and the neighborhood is sparred from yet another foreclosure. In general, many people will tell you that short sales cost the banks less money... and as we as tax payers are bailing out the banks, doesn't that translate to the notion that short sales help the tax payer?

So now we are getting into how strategic foreclosures can affect neighborhoods and tax payers alike -- not in a good way! ~ That's my 2 cents on the issue. Who am I to judge another?... but I'll not give strategic foreclosures my stamp of approval when it affects so many of my fellow business associates, and tax paying citizens in negative ways! Julianna in Seattle

Hi BB - I am now arguing with myself over this one. I agree with you, but I also agree with Sally and some of the others who disagree. It is not an easy question you pose, dang you! And the issue is compounded when the homeowner who doesn't want to walk away but needs help is told that he cannot get it until he is in default.

A very tough question with no easy answers. I can see both sides of the argument and feel for anyone caught in this situation for sure.

I am absolutely amazed at how easily many people here are just tossing out the morality issue. Why not just go into the bank and just rob it, you need to feed your family don't you?

I will up my offer to $1000 to anyone that can show me anyone that was FORCED to buy a home.

For many people it was a bad decision and I've always had to pay the consequences for my bad decisions. Oh wait, but that was an America of many years ago.

Oh well, it is what it is and the topic is getting old.

Great post!!!

The majority of the borrowing public did not create this global melt-down. The greed and intentional obtuseness of the few (unethical lenders) has led to the total undoing of the majority (honest borrowers), through no fault of their own.

Almost all of the bail-out monies have gone to bolster and reimburse the perpetrators of this global crime and almost nothing to assist the actual victims, the borrowers.

All efforts to mitigate losses by the honest, bill-paying majority have been met with stone-walling and runaround (short sales).

The "government" is clueless and is only exacerbating the issue.

There is no homeowner in this country who will ever hear a negative word from me on choosing to walk away from their debt. It is not dishonest. It is a sound business decision. That is all it is. Just business.

They signed a security instrument that stated they would turn the property over to the debt holder in exchange for the debt owed. Plain and simple, black and white. It is their prerogative, legal right and allowed in their contractual agreement.

They are only excersizing their legal and contractual right in exchanging the asset for the debt. It's neither their fault nor their problem if the lien holder created an envorinment that caused the asset to depreciate exponentially below it's initial value.

There are no morals clauses in a mortgage document or note. It is a business transaction. A mortgagor has as much right to default on their mortgage and note as a lender has to foreclose.

The mortgagor is willing to pay the price of blemishing their credit for the requisite amount of time. The lender has to suck up the financial loss they created and facilitated. It's what the contract says.

The secured lien holders of bonds for the automotive industry and other companies held security instruments that stated they would be paid first from restructuring/liquidation proceedings in a bankruptcy. Our government has taken over and told them to "take a hike, tough luck." Their "secured" interests have been nullified by our federal government and they are left without recourse.

Well, that's where I view the residential mortgage holders who have received the bulk of the bail out funds right now, not to mention the multi-billions they received prior to the market crash.

Tough luck, suck it up. Just like the rest of us.

Ok- I have to add my Two cents! Can anyone tell me the difference between a person who is paying a mortgage on a home that is worth less or renting. What I mean is that renting is money out the window! So even if your home is worth less than you bought it for are you not better off paying the mortgage. For one thing you never know when the prices may go back up. And also, if you live there long enough you may make some money.

But, if you rent for the same price (as a mortgage) for 20 years you end up with nothing. So in this scenario this would be a better decision for the home owner. They win because they still have good credit or course this would only work if the mortgage was the same amount as renting.

Because as the previous poster said, IT's an investment. They don't all work out. But, when you pay your mortgage you can paint it any color you want, improve it, park 9 cars in the driveway and if they have a conventional loan fixed rate it won't go up. Just some thoughts about the entire mess we are in. Personally I don't pass judgment on any one because each situation is different. PH

Let it go and be done with it. One of the earlier responses (Amiri Property and Financial Services Corp.) said they were obligated to pay if they had the means even though it dropped so much. BS. Who wants to waste their LIFE paying for something that is worth nothing? No me and I would bail in a minute and never let it bother me. If property values dropped that much where I was doing business i would leave and start up somewhere else too. I'm not wasting my life.

Hey Bryant,

WOW...what a post!!

I came pretty late to the dance because I needed some time to get a handle on my emotions about this issue. At the end of the day, I have to admit that I come down on the side that this is probably more of a civil matter. Every fiber in my being SCREAMS when I think about walking away from personal responsibility. My dad...a WW2 decorated hero...taught me this lesson hard and clear. Still...today's heros face different opponents. I can't imagine what it's like to look in the eyes of your wife or child...and the countless sleepless nights...when making a decision like this. In the end, the person who walks away is accepting personal responsibility. They have made the decision that dealing with the ramifications of the default,...as per the mortgage contarct...is more acceptable than keeping on with the status quo.

The problem here is that the financial industry did not anticipate the flood of foreclosures that we see today, and the impact that it would have on the world economy. Lots of other "innocent" people got hurt as a result. (And how "innocent" were these other people who invested in mortgage backed securities without truly understanding the risks?!) Blame the bankers? Blame the politicians? Blame the borrowers? Hell...there's more than enough blame to go around. I fully anticipate that the foreclosure rules will change in the near future as a result.

At no time since the Civil War has the fortunes of so many Americans come at the expense of so many other Americans. A sobering thought on the July 4th weekend...

Good point, PH.

However, there is little difference between rental value versus property value.

The are both interlinked and relative to each other.

Case in point - I am currently renting. I have been renting the house I am living in for 2 years now.

In the 2 years I have been here property values and rental values have both decreased by about 30 to 35%.

When I rented the house, my monthly rent paid was already $150 in the hole for my landlord's mortgage payment.

After 2 years, I cannot in reality or sound business practices continue to pay 30 to 35% more for rent than my property is worth, no matter how much I like it.

Consequently, I am in the process of moving.

The house is about 1360 sq. ft. I am paying $1,500 a month. I can rent 1800 to 2000 sq. ft. in a similar neighborhood for the same amount of money as I am paying now.

The property is currently for sale for $229,000 or rent for $1,650 a month.

If my landlord is unable to sell or rent the property for these numbers in the next few months, she will lose it to foreclosure.

The sale value is about $130,000 to $150,00. She owes $220,000. Since it is a non-owner-occupied investment property, short sale is not an option.

In the 30 days it has been on the market, there have been 2 showings - one for sale, one for rent. The one renter made an offer of the same rent I am paying now - $1,500. The landlord turned it down and countered him to the full $1,650. He did not respond.

The economy has made my income too sporadic and unreliable to continue to pay rent so hugely over market value. The concept is no different from making mortgage payments on a property that is not and will not be worth current expenditure for many years, if not decades.

Again, it is a business and financial decision. My landlord is a real estate agent. She understands and holds no ill will toward me.

She has no intention of pouring $300 to $500 a month into a property just to prevent foreclosure. If she can rent it or sell it to cover her payment or debt, fine. If not, she will let it go. She has no choice. She does not have the income to pay the deficit indefinitely. It is a financial decision and reality, not a moral obilgation.

When my landlord got married and moved out of this house, the rental value was $1,800 a month. She had no way of knowing that this financial catastrophe would happen. It was not a matter of irresponsibility.

Very few people saw this coming. In a way, I did. I just never dreamed in a million years it would be this catostrophic.

I realize I have no info in my site profile. I am in Grosse Pointe Farms, one of the wealthiest suburbs of Detroit, Michigan. Our state is wiped out. Our potential for recovery will be years behind the rest of the nation, if it ever happens at all.

Consequently, I probably have more of a hard line view of the national economy than people in other states. Our financial outlook for the future here is much more devastating than most of the rest of the country.

We are up the creek without a paddle. For many, many years to come.

Please don't blame the average Michiganian. Most of us are hard working responsible citizens. We just have too many auto union oriented people with the entitlement mentality than the state's economic structure could support.

And those people have a very kind ear in our current political administration.

Kathie- thanks for the comments. I do see your point and am so sorry for what is happening in Michigan. I can not imagine it being that bad. Where I am in Pennsylvania, in the suburbs of philadlephia, it is not that bad. We have numerous Pharmacutiacal companies here that help our economy. Houses are still selling and if we can keep the forclosures to a minumin we might make it out of the fog. And oh, don't get me started on Unions. Perky

JUL

I know "strategic" defaults are happening, but I don't personally know of any. The people I am dealing with in my neck of the woods are doing the best they can, do not want to default, but sometimes do when there is no other choice. The State of California is in an awful mess, cutting state employee wages by 10% and probably more if they ever settle the budget. That's big to homeowners who used "creative" financing (sub prime loans) to purchase and are now caught in the fray.

There are no easy answers to what is going on in the housing market, especially in the hardest hit areas of California, Florida and Nevada. I agree with you that prices will not reach the high of 2005 anytime soon, if ever again. Homeowners need to plan accordingly.

Sorry I am late to this soiree. Was out showing distressed properties in Poinciana.

MEDICAL BILLS are also a major reason will walk away from a home. Borrowing from Peter to pay Paul. I know of many, many cases where an illness is a precurser to a walk away because the bank will not modify, adjust or work with a sick ownerowner until the mortgage becomes so toxic they have no other option. Strategic walk aways are not morally wrong in my humble opinion. They are inevitable. It is onlt a matter of time before the defaulting boroower will face eviction.

On the other hand...there is the Investor

They become morally objectionable when the "Investment Landlord" is willing to let the rental property they bought fall into foreclosure and the Tennants who HAVE paid their rents...are evicted.

Depending ont he circumstance- ill homeowner..no Investor who actions cause harm to another..yes. At least tell the tenant so they have time to make other arrangements.

At the local court house just a few weeks ago. Guy in the elevator just handed the deed over. He said before court he was done with that house. The area and house was in such poor condition; now wondering who made the best deal.

Understand all being discussed, however, I had a client who moved from PA to FL, built a brand new (est. $300,000+ home then tried to sell their home in PA and hasn't been able to get enough money to cover first and second mortgages owed. So, if you want to "upsize" and take the first step to buy and qualify to have two mortgages, but then walk away because you suddenly can't afford both mortgages, how does that work? You've got your new dream home and now walk away with a dented credit report which today seems like no big deal. For those who are "working the system" this way, shame on you. I do believe morals and ethics should have some part of this problem. Is it the American way to bit off more than we can chew, then expect everyone to understand and help? Again, each situation is unique, but for those who are working the above system, not a wise choice.

Wow is right. I feel there are very few circumstances that make this decision OK. Too many people are just walking away and continuing their lavish lifestyle with no regard for the rest of us who are suffering because of their attitude and actions.

One homeowner I know, decided that they wanted to move closer to family and start a family so they are "stratically" planning their foreclosure. Found a mortgage person to write them a new loan (this can't be on the up and up, so here we go again) So they are ready to leave the old home and purchase the new one. Quite frankly, it makes me sick. I know way too many people who played this game and they are winning. Not the right thing to do!!!!

The morality question really goes to the bankers and the wall street fat cats. They knew what they were doing while your average homeowner does not understand half of what they are signing at the closing table.

Barry Trammell

All Florida GMAC Real Estate

Let me ask this question: was it a financially sound decision to defraud thaousands of Americans of their hard earned money, or was it a moral decision, on the part of Bernie Madoff? For him, while it lasted, it was financially sound. He made millions, if not billions, on the deal... for him, it was financially sound.

For stock holders of State Street Bank, of which I am one, the which holds many mortgage backed securities on behalf of investors, or for shareholders of other banking institutions, is it morally good, and is it a sound financial decision, to defraud these share holders of their hard earned money, invested so that many folks could get mortgages?

As it turns out Bryant, things can be both financially sound, and morally bankrupt. Strategic Default on mortgages is both, from the perspective of the borower, but financially unsound for the housing market in general, and regardless of perspective, always morally bankrupt.

The fact of the matter is that you and I, and everyone else reading this, are paying for the losses incurred through these "strategic" defaults. In fact, all of the taxpayers in this country are paying for it. If you feel that stealing from Peter and Paul, and from Broker Bryant, is sound judgement, then go for it... to me it is plain old theft, morally bankrupt, and in the end, given its impact on lending and finacial markets, it is not finacially sound either.

I would group these folks in with the Madoff's of the world, stealing from lenders to pay vendors, and in the end, hurting the entire economy. Financially sound, not at all... and lets not forget to point to the moral issues, so at least if we know people that are doing this, they should know that it is in point of fact morally wrong, ethically wrong, and in the big picture, financially absurd.

As a Lender I am inclined to see things in the form of a balance sheet. Purchasing a home has and will always be a financial decision. Everyone must keep their perspective and make the BEST financial decision for themselves, their company and/or their family.

Another thought about the moral dilemna we're discussing. We've all seen the asinine way lenders are dealing with short sales, loan modification (what a joke) etc. Lenders have the ability, if not the will, to create workouts with borrowers so that some of the foreclosures need never happen, yet they're not doing it! Why aren't they? Help me out here. If a person loses their job and can't pay their house payment, why not employ a little creativity and either forgive payments for a year (oh my goodness, I can hear the screams on Wall Street now) delay payments, reduce payments to a manageable level for a period of time, etc. etc. etc. Isn't it better than taking back a property, enduring the expense, kicking a homeowner out of the home, driving property values down on other properties which the lender also has a financial position in and on and on. Lenders could go a long way to fix these problems but they aren't. They did, after all, create at least half of the problem. And by the way, so much is said about the billions, maybe trillions of dollars at risk in the mortgage market but NO ONE SAYS A DANG THING ABOUT THE TRILLIONS OF DOLLARS IN PROFIT THESE LENDERS MADE AND WALKED OFF WITH IN THE MIDDLE OF THE NIGHT. They were to supposed to sock a little away. So, sorry lenders, no pity here. You're smart, calculating business people who work for soulless corporations that exist only to make money. My advice to myself and everyone else who earns money is to save, invest, don't buy with credit, use cash and take these sniveling whining greedy financial middlemen out of the mix until they can readjust their ethos.

Bryant this is a very long thread of comments and I must confess I haven't taken the time to do more than scan the comments. I do have a question, and I apologize if it has been answered already, but what I want to know is that if the "value" of the "investment" can go up and down according to market forces why can't the amount of the mortgage payment go up or down relative to the fluctuation in value?

Oops, sorry about the double post. My bad.

Wow did this generate some comments! You know Byrant I've talked with people who are so upside down that it makes sense for them to default. I can't say I blame them at all. It's an individual decision,one which I won't cast judgment on. People need to do what makes sense for them and their family.

I had a seller call me two weeks ago that was having problems making payments and was worried about losing their home to foreclosure, but want to sell, but didn't want to do a short sale because of the hit on their credit. They also didn't want to leave the neighborhood, they loved the neighborhood and the schools right where they were!

I said, the rent in that area right now is $1400 a month, you could sell your property on a short sale, move in to the house next door to yours for $1400 a months, save $600 a month for a down payment and in two years buy in the same neighborhood and more than likely with the price trend in that neighborhood in two years your mortgage won't be more than $1,800 and your mortgage balance will be under $200,000 or you can continue to pay close to $2,500 a month and in two years still own $240,000 on your property that will only be worth $200,000 in two years?

We are listing it on the 16th of this month and they are moving in to the house next door.

Todd Clark - www.LivingBeaverton.com

I totally think it's a moral issue. If the 25% of people who were doing this strategically would stop being so greedy, maybe the market wouldn't tank SO bad. It's typically narcasistic behavior though of Americans to only think about themselves. They borrowered the money. They signed a contract. They didn't complain about the terms at that point. We all buy other depreciating assets- i.e.- cars, and we keep paying them to keep the car to get to work, and we don't say, well, here are the keys, my car is worth less now, I'm done. But people think they can just be irresponsible with their homes b/c the value has gone down on paper. It's an investment. It bears risk, just like investing in the stock market. There's no guarantee. And when people bail, the homes and people around it suffer. It's also a place to live. And we teach our kids that when someone lends us money, if we are able to repay, we do so.

My aunt and uncle had a business 60 years ago. It failed. They filed a Chapter 11 BK. They paid it off for years. That's what their generation did. They made a promise to pay, and their word meant something.

If we as a society would think long term a little rather than just about ourselves perhaps the market would be better off across the entire country. This bailing problem is just selfish. It's one thing if people can't make the payments. We have a rental in MI we can't stand. We lost 11K in the first year. We don't make money on it like the Realtors promised, but we took the risk. We owe 93K. It's probably worth 75K in this market if we're lucky. But we got smarter about being landlords, and if we bailed, we'd reduce the value of that neighborhood even further. Not to mention our credit would suffer and we think long term.I would encourage more people to do so.

Right now at this low point in the market, I think if you want to be walking away and taking the hit on your credit and finances that this is the time to do it. In a few years the banks and finance companies are going to have to bend some rules or else they won't be able to loan money to half the people in America. So take the hit now at the bottom then down the road when things improve.

I remember watching a morning show a few months ago where a buyer bought a house for $150,000. Then they refinanced it and owed over $300,000. Then they stopped making their payments, trashed the house, and moved on. The anchors on the show where shaking their heads and talking about the "sad situation" that so many people are in.

These people made over $150,000 in pulled out equity, then lived rent free. I work REOs and so many people do like these people did. They make money off, what I'll grant you were bad loans, and then after they have lived free for as long as they can they trash the place out of spite.

It makes it hard to have sympathy for people in foreclosure. I truly believe that the people that are being foreclosed on because they have fallen on hard times is such a small minority. I think the banks would work with these people if they could identify them from all the frauds.

Interesting question. However, these "strategic mortgage defaults" are a symptom of a complex, systemic disease. It is most certainly, in my opinion, a moral issue simply because you can ask the question of whether it's right or wrong. The answer, of course, to the question depends on an individual's ethical philosophy.

Who are we to judge?

As Robert Swetz's post suggests, industry professionals were (are) complicit:

http://activerain.com/blogsview/1143934/some-very-unhappy-past-customers-how-can-i-explain-to-them-

Hi Bryant - sorry to miss this free for all. I have read most of the comments and notice a trend.

I do not see your readers commenting that your actor did not buy his or her house from the bank. The bank is a third party who put up real dollars so that you could buy your house from the builder. If the house cost $200,000, then the bank paid out $200,000 real dollars (in our example) on your behalf to let you buy the house. The current value of the house is irrelevant to the discussion of the bank's $200,000.

So to answer your question on its basic terms as to the morality of a strategic decision to walk away from a mortgage obligation, of course it is immoral to intentionally default on the personal obligation. This lack of personal responsibility on a pandemic level has nearly brought down the house and may yet succeed in doing that very thing.

Now, I understand that the world is a complicated place and there are many complex forces at work here. There has been fraud in the inducement, mortgage fraud, greed, failures of government and instances of distressed persons acting on necessity. The discussion of who bears responsibility for this mess is a very different question and there is plenty of blame to go around - including realtors. But the question you asked was limited in scope and can be more easily answered than solved, in my view.

JUL

Bryant--I am amazed at the varied comments here--like you, I spent alot of time reading and trying to absorb the comments as I am incredibly torn about this issue. I don't think you realize but, this topic, for me anyway, has been brought up to everyone that I've talked to in the last 24 hours! The different takes on it are just as you have generated here...no one seems to know 'why' they would do not do this and others clearly feel that it is the best financial decision--as you say, in 5 years, they'll STILL be underwater, so why not begin the rebuilding process. Conversely, others can't put their finger on it being a moral issue--just one of 'responsibility,' as in contractural responsibility.

When all is said and done, no one seems to be able to tell me what they would do in this situation should it arise in THEIR lives! It seems that everyone is torn about it unless you've actually LIVED it! And, we all pray that we never HAVE to 'live' it!

Great, thought-provoking post, BB! The head just keeps spinning on this one!

Thought provoking....to say the least. I myself am facing this dilema. I bought my FL home in 2000 for 92K. I refinanced and had an interest rate of 5%. Needing to update the home a bit i refinanced again and pulled out some equity in 2006. Home appraised at that time for 245K so didn't feel a 150K mortage on it was to bad. Because i was in the midst of a business start up my good friend (haha) at Countrywide reccomended a 9% arm that is now at 9.75%. I was to refinance that arm in two years time but now can't with the mortgage industry/real estate situation. On top of that with the hurricanes of 2004 my homeowners insurance went from 900/yr to 5000/yr now at 4000/yr. Property taxes have remained stable. So what i have is a mortgage payment that went from $850/mo piti to $1880/mo piti. A comp in my neighborhood sold recently for 110K smaller sf but has a pool. In order to sell my house, in a good market, i would still need to put another 15k into it. (new ac and roof) My AC just went out, this will be the second unit i've persoanlly installed since purchasing the home and is going to cost me 8K.

So do i continue to drop good money after bad? I did not buy my home as an investment but rather as my home! But i feel that the forclosure is just biting at my heels. The economy is not going to get better any time soon. I am over 50 and have nothing saved for retirement. Is it really morally wrong?

When banks make "morally wrong" decisions such as stringing a short sale along, pretending to review offers when all the while the investor knows he'd be insured if it forecloses; when their Home Retention department keeps you on the phone for hours and tells you they won't be able to help you modify your loan, give you a forbearance until you can find a job, or offer any other meaningful help; when they constantly throw up roadblocks and frustrate customers;

then what is the right way to combat a morally corrupt system? Perhaps when the "Golden Rule" goes out the window, an "Eye for an Eye" flies in.

This is a great discussion, but I believe it boils down to this....What's YOUR word worth?

Granted, there are times when you have to break promises to meet the needs of your family, but I don't believe breaking a legal, moral contract for convience is ever proper.

Great post BB, and I think that each person has to make their own call. I can see how you growing up with certain morals instilled in you could cause guilt over the whole thing/issue. I say do what you have to do to make your family whole and get on with it. Either now or 5 years from now, the house & situation is not going to change. This is a tough call.

Wow! This is the most comments I have ever read on AR and I didn't even read all 199 of them! I believe that if you make a promise and then break it, that is morally wrong.

Walking away may be a good financial decision - doesn't make it moral.

What should you do? Whatever you can and must. Who can say what they would do in any given situation?

Should the banks be more compassionate or fair? Should they make morally responsible business decisions? I don't think that what I would like them to do has any affect on their decisions.

JUL

I wonder how many of those who are strategically walking away lied about their income and assets when they bought the home? There are situations where it is definitely the right decision and only decision to sell/walk away. There isn't one blanket answer but there are people who are doing it for all the wrong reasons, just like the people who bought for all the wrong reasons.

Sharon

Wish I had time to read all the comments. Great post. I think It is a financial decision at this point. Feed your family or keep the house. Easy decision for families in that situation.

Great post Bryant! I agree.

I simply call it a financial maneuver. Such a move made to hopefully better an individual's financial position at the present or the future (we all know it's not sometimes the case). Fortunately in this country, laws are available to protect such financial maneuvering by individuals and corporations. It's a jungle out there - survival is keen.

JUL

This problem was not created just by the Banks. Remember our government wanted homeownership for everyone! The banks just came up with creative ways to get people into mortgage loans who really couldn't afford them. Law of supply and demand, and then we had more people who could buy than homes available to buy, which drove home prices up. Setting that aside, are strategic mortgage defaults moral? Is it any less moral than giving an individual an owner-occupied option 4 mortgage who can afford to pay only the neg am payment? When it comes to strategic mortgage defaults, the moral question comes into play because a promise was made to pay back the loan. Morality is to do the right thing, which is to keep the promise and pay back the loan. Good business is to do what is right for financial gain. The mortgage meltdown has shown us that good business and doing the right thing are not in alignment.

Pamela I would just add that while your make a good point it should also be pointed out that they have been out of alignment for quite a while

JUL

From a moral standpoint it is sad that homeowners with negative home equity who can still afford to pay their mortgages would choose to voluntarily default. However their decision is no less morally reprehensible that the decision of some CEO’s of major mortgage lenders to lend their stockholders’ money to mortgage borrowers without first documenting borrowers income or assets, or applying sound underwriting principles to other mortgage applications. Those CEO’s put their greed for bonuses ahead of their fiduciary duty to their stockholders. Those who would condemn these homeowners for their moral failings are hypocrites if they do not also condemn the aforementioned CEO’s for theirs.

From a practical standpoint homeowners who walk away from a mortgage with high negative equity are similar to a small business owner who decides not to put anymore of his or her personal savings into their small failing corporation. The small business owners recognize that that the will need those savings for their retirement, children’s education, etc., and any ding on their credit from declaring bankruptcy will be erased long before the business can be restored to profitability. At that point bankruptcy is a logical choice. Bankruptcy is in the lenders interest as well in many cases. If the bankruptcy judge determines that the lender would be better off, he may reduce the company’s loan balance and/or interest rate to a level that would enable the small business to remain viable rather than ordering the liquidation of the company’s assets.

Personal bankruptcy laws currently do not apply to homeowners’ mortgage debts. Many of the homeowners described in this article are no doubt rapidly drawing down personal savings to keep up with their mortgages, and mortgage lenders would be smart to support the reform current bankruptcy laws to apply them to personal mortgages. Many of those homeowners who are currently walking away from their mortgages would be less likely to do so if the balance mortgage was reduced, and in many cases the mortgage lender would net more from a performing mortgage at a lower balance than if they had to sell the home in the current market.

Bruce Hahn

President

American Homeowners Grassroots Alliance and

the American Homeowners Foundation

JUL

Pamela,

It took over 200 posts for someone to say that it was government initiatives that forced the banks hands to "get creative", thank you. One thing though, approval on Option ARMs was not based on the neg am option or lowest payment, it was based on the full payment. Of course if the borrower "stated" his or her income to qualify, then what do we have. A situation where we expect people to be morally bound to a contract they lied to get into? The horse has left the barn.

One thing we also need to realize "good business" is when all parties benefit. Not when one party gets taken advantage of in order to maximize the profits of another. If you sell something retail that you purchase wholesale you make a profit. People buying your product realize that but are only concerned with value of goods purchased vs. the cost of the goods. If you were a monopoly you could set a extremely high price and people would have to pay it, not getting fair value. (bad business) In an open market of many suppliers and options the market would decide what a fair price and good value was. You would still be able to make a profit but not as much as if you were a monopoly (good business) So you see that maximized profits is not good business.

Another thing people need to realize is that banks lend depositors money. So a write down of principal needs to come from somewhere. Banks (portfolio lenders) will have severe problems with their required ratios on their balance sheets. More banks will fail. The FDIC will be required to pay out more to insured depositors. The FDIC is really the taxpayers. So when we talk about banks holding on to inventory instead of flooding the market (dropping values more) they are protecting their businesses as well as protecting us.

Banks earn money each month through interest payments paid by the 'majority of Americans who actually do pay their mortgages', and through other means. This figure tells them how much they can afford to write off each month, after their overhead. They just can't write it all down at once, they can't operate at deficits the way the Federal Govt can. (read the other day that 92% of mortgage holders pay on time. I was shocked, from the news you would expect to read that 92% of American's don't. I guess it depends on where you're living. The problem is segregated into pockets, and not widespread.)

This was a great post. Hit a nerve with the number of responses. Although it went from strategic defaults to being able to feed your family, which at that point it is no longer strategic.

JUL

I am not sure if it is a moral issue or not. However, many people saw this coming and did nothing but profit from sky high prices that were unrealistic...that is morally wrong.

I don't find it to be a moral issue, especially when Sunstone Hotel Investors can walk away from the W San Diego hotel because the "once high-priced property is so devalued it's no longer worth the $65 million that is owed" and "has become a financial drag on its owner's portfolio of 43 hotel properties." If it's good enough for the big boys, surely it's good enough for individuals, too.

I need to start reading my comments. Comment #212 is actually by me. Russel left to go to a home inspection and left his computer logged in to ActiveRain. We always try to save electricity by not using both computers if it's not necessary.

JUL

Awesome comment thread!! Thank you so much!!

Jim that's funny!!! That would NEVER happen with TLW and I. If I even get close to her computer she will shoot me!!!

Lenn said Poppycock.

JUL

Wow,

My head is spinning after reading all the comments. I have to go digest all this.

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