Broker Bryant wrote a blog, commenting on another blog, by Richanrd Zaretzky, both regarding intentional defaults on mortgages. Bryant argues that when your home is worth less than 50% of the price paid, or mortgage balance, that in fact it might be financially sound to default.
I would like to point to some of the raminfications of this, and to discuss the moral and fiancial issues involved, however briefly.
First, let's consider that the buyer, at the time of purchase, made a good faith committment to paying for the house they purchased. A contract was signed, and a mortgage lender funded the purchase, in good faith, while the buyer agreed to pay. Later, when the market collapsed, these homes lost value.
Today, lenders have been bailed out, and are still writing down bad mortgages. Shareholders in these lenders, or in companies that invested in mortgage backed securities, took and continue to take a beating on their investments, investments without which, these buyers would not have gained funding. Stock values plumeted, just as housing prices did. This caused the market for mortgage backed securities to evaporate, which in turn led to tight lending, or nonexistent lending, for certain key market demopgraphics.
From a financial persepctive, further defaults on mortgage committments will further tighten home lending, and will further deteriorate housing prices. Intentionally defaulting then results in a further decline in the housing market, and tighter lending which then further pressures the housing market, leading to further defaults, etc. An endless loop that has no upside.
Of course, from the perspective of the buyer/owner, it may make sense to default, as Bryant says, since the values will not likely come back for many years. But in terms of financial issues, this exacerbates the problems already extant in the housing markets.
Morally speaking, would you say that Bernie Madoff made a sound financial decision when he decided to defraud his investors? For Bernie, it may have appeared so, at least until his scheme unravelled. But what he did was to steal from others to increase his own wealth and financial well being. Same as these intentional mortgage defaulters?
How about the fact that this is stealing from investors who originally put up money so that these folks could buy their homes, and doing so to benefit themselves... Sound like a Bernie Madoff routine? Where is Bernie now?
Morally, and ethically, it is a bankrupt affair. Nothing less than theft.
I see no way to rationalize this so as to get to a point where I can discount the moral issues in favor of the personal financial well being of the borrower, who as I said, entered into the mortgage with the understanding that the house was worth what they were paying, and that they would then have an obligation to pay that cost. The lenders made available loans that were at best shaky, to borrowers who perhaps lied about their ability to pay. But it is not all the lenders fault, as no one forced the buyers to buy homes. They agreed to the terms of the loan and purchased the house. Now to decide it was a bad idea, and to decide that they will simply default, intentionally, and live in the house for free as long as poosible, i sa bad financial discision over the long haul, and in the big piture, and is morally bankrupt, period. We cannot discount the moral and ethical issues in favor of our small minded financial considerations.
If you can pay, pay. If not, default, declare bankruptcy, pay the piper, and make a better decision next time. But let's not remove moral issues from the question, as these would be paramount in most other decisions we make.
We are adults who buy houses, and we have learned to take responsibility for our actions, and we teach our children to do the same. How then do we see fit to evade responsibilty here?
Paul Silver, Owner
Focus Professionals, Inc.
Rhode Island Real Estate Services
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Paul your posts (I've read hundreds on RT) are always so intelligent. :)
Thank you!