This is the million dollar question. 

Is the real estate a bad investment that you should dump? Or do you honor your word and pay it back?

What if in 2004 you paid 1.2mil for a property? You put 20% down, and the lender allowed it even though your back ratio was @ 52%.  That property is now valued at $700k - you still owe well over $800k and the idea that this property will ever be worth what you paid seems laughable.

Do you wait it out?  Really?  You are half a million in the hole and sinking. What is a good investment?

Trump walked away and rebuilt.  What is the right answer?  Business sense tells you to run, not walk away.  Morality tells you to stay.

Is there really a right answer?

There are no moral or ethical implications to a mortgage contract.  As Chris points out, it is merely a legal document that outlines the terms of performance, and the terms of non-performance.  If the homeowner decides to no longer make their mortgage payments, the note holder has a variety of remedies, including foreclosure.  Homeowner's should evaluate their situation as a business decision, weigh the consequences of their actions, and make the most appropriate decision for their situation. 

What I find immoral is the efforts of some to inject morality and ethics into the equation, as though someone is a "bad" person for making a business decision that banks and businesses routinely make.  Recently, Morgan Stanley decided to walk away from their investment in Crescent Real Estate Equities rather than continue to service the debt on $2.5 billion owed on the property.  I'm sure no one would suggest that Morgan Stanley can't make their payments; they simply decided that it was in their best interest to give the property back to the debt holder rather than continue paying in the hope that the value will some day return to the property.  There's no difference between this and some one deciding to stop paying on the $400K mortgage secured by a $250K house. 

Great post Mike!!   Thanks so much....we need to not only get Back To Basics, but Back To Ethics as well.

This is what is wrong with America right now everyone is a victim. I mean where did our sense of right and wrong take such a left turn? When did we become so weak and dependent on everyone else to solve our problems. Weren't we a country that has always pulled itself from its own bootstraps and carved the path we wanted to take. When did we become so dependent on the government to protect us from everything and make us so weak minded?

Banks are not responsible for the housing mess. Did they hold a gun to peoples heads to buy homes they couldn't afford? Is a gun shop responsible for every person killed by a gun from there store? NO! Lets just face it people were and are greedy. People will sell there own mother these days if it helps them financially. It's unbelievable what I see everyday with clients and how the act. When did intergrity, honesty, and values leave us?

If housing continue to move higher would we have these conversations or did we have these conversations 5 yrs ago when everyone on paper was getting rich...NO? OH but now everyone wants help and is a victim.

People want the banks to change there note, give me a lower payment, don't let me hold up my end of the bargain but you take the loss. If it was your money would you do it? NO you wouldn't you'd press them hard to get your money and hold up to their agreement. Its time we start all taking responsibilty for our actions and this whole idea of strategic default is infuriating. Let's pass the loss on to some one else just as long as its not me. Is that what you want to teach your children? Is this the values we want to go forward with? I certainly hope not. Everyone thinks the bank is the one holding the note. NOT true they have secured that note to an investor maybe even you if you own bond funds with the express intent of giving X amount of interest. So we're talking trillions of dollars secured across the globe and people want to just up and change the terms. That has a huge domino effect as it effects the bank and the investor as well. Keep in mind 45% of all our debt is held outside the US. So if buyers of our debt can't trust the agreements what do you think happens next time we offer more debt to sell? They pass as we're no longer good to our word and guess what we now have no access to money. It's not that easy to just change a payment you have to see the big picture.

Banks are tired of this too and coming back to people for the money. If you read your note carefully you are personally responsible for the debt. So Realtors advising clients walk away better understand short sales and foreclosures do not absolve you of the debt. I'm seeing more and more cases where banks are going to attorneys and filing judgments for those defaulting on loans for the remainder of the forgiven debt. Just because the bank releases the title does not mean the debt is forgiven forever. This needs to be communicated to clients. Will the banks get everyone know but then again they might get you so be prepared. If you can pay your mortgage do it or the consequences could be worse than you think?

I know it sounds like I'm defending the banks but I'm not I'm defending our integrity and the bank could be a person as well. I'm abhorred how the government is giving banks billions in free loans, accounting changes to write off all the toxic assets, and tax breaks. We the taxpayers are paying for this and its not helping. This gets me fired up but that's another topic.

I just hope everyone takes a step back here and thinks about this as its time we get back to our true American values!

this is purely a financial decesion a family needs to make for themselves. if you're underwater... WALK AWAY! I have meet with to many homeowners spending down there last pennies trying to save a house that just is not worth it!

The Lenders had everything to do with overheating the housing market, now they want the taxpayers to pay to clean up thier mess, on both ends, sorry I don't agree. I couldn't agree more that there are no moral or ethical implications to a mortgage, it is a legal contract, nothing more. Homeowner's should evaluate their situation as a business decision, weigh the consequences of their actions, and make the most appropriate decision for their situation, because that is exactly what the banks do.

I, like most others (I believe), have empathy for those folks who bought homes and that are now upside down because the values fell.  However, I do not believe it is ethically correct for those that have the capacity to pay, but elect not to, to default on their financial obligation.  To blame the situation on the bank or other lending institution just, to me, does not make sense.  Did the bank hold a gun to the borrower's head and require him/her to purchase the home?

All too often we want to justify our actions on the premise that it is okay because others are doing the same thing.

Corporations have no moral conscience and it seems as if a lot of individuals are following that path.

I believe if you signed a contract you should honor it as long as you can afford to do so.  My own home is in this situation.  As long as we can afford it, we will pay it. We used to have $20K in equity and we did NOT borrow up to or over our home value.  Yet, we lost all that equity due to the foreclosures that have come onto the market.  However, our home is just that, our home!  So, we will pay for it as long as we are able. 

I say shame on the banks who will NOT work with their clients who are trying to stay in their home.  By doing so, the banks are futher reducing the value on their existing defaulting assets and their paying assets, along with reducing the value of existing homeowners who are staying in their homes!

Both parties need to work together to start trending the home values upward.  Otherwise, there will continue to be a downward spiral on home values. Both the bank and the homeowners will lose in the end if they fail to work together. 

Agents in this type of market should be helping both the banks and the homeowners to honor their commitments, instead of advising a homeowner to walk just because they can.

Dear Mike,

I must say that I, as a real estate professional, have never influenced any buyer to purchase based on the commission to be earned. I must say I resent the implication of your comments.

Furthermore, I do think the greed of the banks to soften lending rules to buyers, who really had no business purchasing due to either bad credit or insufficient income, has created this problem. Adjustable loans and balloon payment loans were a nightmare for the borrower from day one. I do think the banks need to solve the issues of refinancing of these types of loans in a more timely manner to begin to alleviate this situation.

There will be a necessary process to recover from all of this. But, all parties must work together. Thank you.

Dear Mike,

I must say that I, as a real estate professional, have never influenced any buyer to purchase based on the commission to be earned. I must say I resent the implication of your comments.

Furthermore, I do think the greed of the banks to soften lending rules to buyers, who really had no business purchasing due to either bad credit or insufficient income, has created this problem. Adjustable loans and balloon payment loans were a nightmare for the borrower from day one. I do think the banks need to solve the issues of refinancing of these types of loans in a more timely manner to begin to alleviate this situation.

There will be a necessary process to recover from all of this. But, all parties must work together. Thank you.

People, there is no "financial obligation" that stands apart from the mortgage and note.  These are legal documents that quite clearly spell out the terms for each party.  The borrower is free to decide to not pay any longer, and the lender is then free to foreclose on the property, and in many states, sue for any deficiency.  An individual is well within their rights to make the decision that the costs of giving back the home and perhaps filing bankruptcy are more acceptable than continuing to pay the debt on an asset that will never return to it's former value.  Businesses routinely do this, and it's an imperative part of how our economy works.  This is not borrowing money from grandma, and most here defending the banks position on this don't even understand how money actually works.  I would strongly suggest to those people that they view the video "Money as Debt".  In it you will learn that when you are approved for a mortgage and close on it, you are not borrowing someone else's money, the money is actually created out of thin air!  Crazy, right?  Watch the video.

Next, there are many commenter's here who clearly do not understand Wall Street's complicity in driving home prices to the insane levels they reached.  It's true that nobody ever put a gun to anyone's head to sign a mortgage loan; however, banks willfully created the conditions that caused the housing bubble by providing loans to anyone with a pulse when even a cursory review of the loans would reveal that it was impossible for them to be repaid.  This created an enormous influx of newly "qualified" buyers, so with simple supply and demand economics you can see how prices were poised to sky-rocket.  Why did the banks do this?  Because the system allowed them to loan the money into existence, then package the new loan with a bunch of other loans just like it into a bond issue.  Then they sell that bond issue to some unsuspecting pension fund under the guise that it was AAA rated.  The smoking gun is that the banks new these were junk because their own trading desks (you know, the ones gambling with their own money) were placing bets aganst the very same bonds they sold your city or states retirment fund.  To easily summarize, this was nothing more than a Ponzi scheme - a very elaborate one, but no less insidious.  Those that bought homes or refinanced homes because they thought they had this treasure trove of wealth stored in their house are just victims of this Ponzi scheme, and those people that want to demonize them for making a sane financial decision now that the scheme has collapsed are truly the immoral ones in my view.

Mike - no

Roger - Yes

There is a lot of shared blame..,many homeowner's jumped into th e market when they knew (or should have known) that they could not afford the home or that they could not afford it when the loan adjusted; the banks are certainly to blame too as they made loans that they should not have.  the Community Reinvestment Act of 1977 is attributed to much of the current downturn.  In 1995, Bill Clinton expanded it with a goal of allowing inner city people to be able to buy a home and leverage was put on banks to make subprime loans (I have seen people claim that the action was taken by George Bush - it was Bill Clinton).  So, the government shares the blame as well....and yes, many real estate agents allowed greed to get the better of their judgment and did not offer the best advice sometimes. Everyone shares th eblame in this one...

This is not solely a moral dilemma, in reality its a financial problem. There is absolutely no reason to stay in a property that has no equity, especially one that has lost over 60% of value like many of us down in south Florida. When one gets a loan from a respective lender, ( that a few years back had ridiculous and false verification and lending practices) neither party ever thought that the prices would plummet off a cliff! If they did no one would have bought any real estate in 2006, 2007, 2008

Banks are not making it any easier for struggling homeowners, yet they do not think twice about reducing and accepting low ball offer on already forecloses homes.  Its a catch 22. I have customers that live in luxury buildings that are now worth about half what they paid for. Hundreds of thousands of dollars less, ( or are still paying for). It makes more financial sense to strategic default and purchase the unit upstairs for half off !!

I do not see an immediate solution, I do see interest rates sky rocketing on credit cards, equity lines of credit etc. And I would never advise anyone to stop paying their note, but I would neither blame them for getting out before it's too late. Who truly wants to stay with a sinking ship?

There are really so many scenarios to consider in walking away.  If an owner decides to strategically walk away he must still consider the consequences of how it will affect is credit in the near future.  Will he be able to buy another house, how about a car, and the ding on his credit cards as they raise his interest rates and cut his available credit. 

There is so much more to consider than the house itself.

morality has nothing to do with it. It's all about what makes financial sense...money is all that matters.  Lenders, Corporations and Politicians have no morals, do not care about anyone or anything but the bottom line.  This is the world that our politicians and "special interest" groups have created and we allowed them to do so.   This is how the game is played, we didn't make the rules, we just follow them.   Lenders are all about protecting themselves and their bottom line, why shouldn't homeowners do the same?  I am not a lender I am a real estate agent.  I have no say in who does or does not get approved for a loan.  I also did not sell any home to someone who did not qualify financially but since then some have lost their income or just want to move but can not because they are underwater due to no fault of their own.    For some it may make financial sense to do so, for others not so much.  Morals in this situation are for the naive!!

I agree with #3, #14, #18.....well said guys!!!

I got his message from a friend today and it pretty much sums it all up:

"It all gets better when you learn how to exploit it and profit from it. Sad, but true. Cmon Obama! More spending. Pass healthcare! Pass Cap and Trade! Do another stimulus (oh yeah, now we call it the "jobs bill") but make it 3 trillion this time! Bail out more banks and insurance companies! China must LOVE this guy. I know my Chinese investors do

It's not Obama's fault, It would be no different if MCcain had one, special interests rule the world, they make the rules.........Wake up America!!!

Our current government policy is bringing this on our country. Even more than strategic default's many people stop paying their mortgage and shoot for a modification even if they can afford it because they see the sweet deal that their neighbor got. Right now, thanks to our leaders and a lack of leadership from our industry to push for good policy, there is a carrot but no stick. What did we expect would happen? It will only get worse in California as long as we have bad policy.

The real answer lies in the fact that real estate is a long term investment not a get rich quick scheme. What has happened to the market recently is that outside forces have politically and financially changed that investment by tinkering with the system that was in place since the Great Depression. Real Estate was always a long term investment until the mid 1990's when the Government mantra was to increase homeownership. They increased it by allowing more liberal underwriting and by allowing Mortgage Backed Securities to be sold in large bundles through the Stock Market. Unfortunately, there was no real scrutiny of the quality of those mortgages when sold. Just that they are Mortgages on American homes that are a "safe" investment. Many of the liberally underwritten, low or NO money down, stated income loans were packaged with 20% down conventional loans as if they were the same. That created a free flow of money and Underwriting guidelines became even more liberal.  The requirement of a decent initial investment and scrutiny by the mortgage company as to whether someone REALLY qualified went out the window because of Greed. It wasn't the Bank's money, it was someone else's. They sold it to them and made lots of money in the process and now because of their Greed we are being taxed to keep them afloat.

Given all of that, real estate is STILL a long term investment NOT a quick turnaround. Because our area, Northern Virginia outside of DC, is one of the "hot beds" of foreclosures we have Banks, with Governmental help, manipulating the market again by limiting the amount of foreclosures in the market place and waing tax credits to anyone who buys. In the past 6 months we've gone from having a lot of inventory to a minimal amount on the market and prices are going up. The foreclosure townhome that sold (dumped!) for $100000 6 to 8 months ago sells for $165,000 with 20+ contracts now! All because the Banks are manipulating the market by withholding inventory. Why I bring this up is that ties into the stategic default issue. Market values dropped rapidly and are now rising rapidly. Why? Because of the affordability! Most of the real estate damage was in 15 major metropolitan cities and surrounding area's in the US. Most of it is due to panic and if people took a collective deep breath and held their investment they'd be better off than dumping it "strategically". It's not unlike having a Stock that goes down after you've purchased it but rises over time. Hang in there please! Look at the median income compared to the rates and affordability of the monthly payment in your market and compare that to the percentages in the past and you will find that a real estate purchase now is an incredably affordable purchase. Once the buying public recognizes that affordability, prices will climb back to a number more reflective to the incomes we have UNLESS our Government screws with it again.

Jon

I think we are over simplifying things on the investment level. Behind these mortgages are investors who invested in good faith. When we say 'the bank' as though the institution were at the losing end of the stick we are not acknowledging the individuals behind the loans and the complicated mess that really exists. Govt. backed loans are one thing but remove that element and you have a mix of investors that were sold short. Still further you have mortgage insurance companies that now must pay out for these failing investments. (One reason why AIG was not allowed to fail.) So beyond what is moral there is the question of what is reasonable. The Federal Govt. might be able to direct the responses and assistance of loans backed by FannieMae and FreddieMac but that only remedies 50% of the picture. There are many more homeowners who have loans not under such 'jurisdiction'. Do we start mandating that free market investors suck it up. Has anyone built a case for these circumstances? Then again, taking a loss is an element of investing. Walking away may be the only alternative for homeowners in these cases due to fractured ownership of the loans and the very complicated process (and long shot odds) of gaining permission to modify the original terms. It's also clear that loan modification has a high rate of failure with time. Clearly there is no single answer. We have to make the right decision for our circumstances and be able to live with ourselves in its wake.   

I haven't seen anyone just walking away but I think I am getting close.  I sold a house at the top of the housing market August 2008 just before the bust.  It closed at $384,000, the buyer's job took him back north.  They have had the house on the market since February 2009 with several reductions.  We are currently at $364,900 and we have had very few showings and can't even rent it for less than their monthly expenses.  They are having a hard time paying rent and a mortgage.  I don't know what the answer is and I can see both sides of the situation.  I guess it is true that everyone has their price.  The price of being moral can be high but you would hope the banks would want to work with the people that are their "bread and butter" for the future.  God help us if a solution to this dilema is not found soon.

As with most things in life, there is no "right or wrong" answer -- each case should be reviewed individually. For example, those peopel that have owned the home for a time prior to 2003, but maxed out equity to buys cars or other non-improvement items, that portion of the borrowed money could/should be converted into an unsecured line of credit to be paid off in installments. Those that bought at the top in 2005 may have made a bad investment, but the banks are not allowing the owner of a primary residence time for recovery. Unlike with an individual invesment in the stock market, the home/nvestment is forced to be sold in an abbreviated time period with little recourse for the investor. A home is much different in utility than a stock. Having a roof over one's head is a choice made to fulfill a basic human need of the owner and family. As such, it must be replaced once lost unless the owner and family are meant to endure homelessness.

New laws state that a modification must be offered, and if not feasible, a short sale must be allowed. This certainly gives the banks the opportunity to allow the homeowner/investor more time to recover from the downswing in the real estate market that now walks hand in hand with high unemployment and underemployment. If the bank forces a short sale, then certainly, the banks can be judged for what they have chosen to do to their customer, the homeowner, during a difficult economic period. In such, I feel the banks tend to choose in favor of the short term loss, rather than the long-term invesment in their customers...

Im not sure one of you have experienced what I have found are many people situation but this hasnt been a moral decision or a walk away because the house isnt worth as much. I am in a position that is horrible because I havent been able to refi or get out of my loan even when the economy was showing signs of pain. It is not my fault the banks tighten their requirements. They actually told me sorry you dont qualify to pay less!!! I cant sell the house, cant rent it, cant refi, cant modify all because the bank said so. So...... after a while Im going to have a say..... Knock yourselves out!!!! See Im in this investor pool just so happens and I cant get out of it! No one told me this might happen and no where in my docs does it say youll never be able to step out of your loan no matter if your credit score is in the 700s and you have equity. Where the blank is the morality in that!!!!

Just so you know where my morality is.... I have been working with NACA under a forbearance agreement with my servicer and investor and still paying on my second. Also so you know, the broker changed the 5yr arm interest rate 2 days before closing to 8.675% and I took it because I put the equity back into the home to improve it. Now its worth more but cant sell it for lack of JUMBOs!

So stop all the general chat about the American people having no morals and think about the people who are stuck because of the morals of the banks making up rules. Logic has way gone by the way side and thats whats killing our economy.

Mike,

Excellent analysis. You state both sides of the ethical dilemma well and pose the question for the reader to resolve. Of course by definition, a dilemma is a situation in which there are either two equally right answers or no right answer. My answer woulld be, It depends!

It depends on the terms of the initial loan, whether the loan is a recourse loan, or dependent entirely on the value of the underlying asset.

It depends on the financial circumstances of the borrower, whether the ability to pay is there. If not, it would not fit this category anyway.

It depends on whether the borrower has expanded the debt since the initial mortgage was entered. If HELOCs are involved the appearance of milking all possible value from the asset undermines any moral validity for the decision to walk away.

This dilemma also highlights a major gap in the responses to the current mortgage crisis. Is there not a middle ground to be explored? Does one have to be insolvent in order to have loan mitigation/modification considered? There are plenty of situations in our political economy where it is possible for a 3rd party to claim that a borrower has the financial ability to pay but usually this assumes that other debts or financial obligations are minimal. For example, the FAFSA process for determining eligibility for student financial aid including Pell Grants, subsidized and unsubsidized student loans, and parent plus loans has a ridiculously low threshhold for determining familly contribution. The formula doesn't even ask about other debts, mortgage payments, etc.

I mention FAFSA only to say that provisions for forbearance are built into the repayment system that partially offset the faulty formula used to determine grant versus loan status.

Unless the feds and the private sector develop a method of handling the voluntary walk away by otherwise solvent borrowers, this situation is going to be an enormous problem for the housing industry.

   John

John E Cleek, Ph.D., REALTOR®
ABR, e-PRO, GRI, SFR, CSP
The Buyer's Agent
Education and Marketing Consultant
Licensed in Kansas and Missouri
Crown Realty of Kansas
johncleek@JohnCleekRealtor.com   

Author of the comprehensive new consumer guide to home buying
Buying A Home in the Twenty-First Century
www.home-buying-made-easy.com

In 61% of all sub-prime home loans that were made between 2005-2007, the borrower could have qualified for a conventional loan, but because the loan officer had been incentized by banks with higher fees to make subprime loans over conventional -- these people are now paying huge amounts...

Who is at fault? We all know how it works. The buyer goes to apply for a loan. At right before the close of escrow, the mortgqge guy says "Ah. I could only get you this kind of loan. Do you want the house or not?"

Be careful of taking the moral high road when you're off course. 

I guess it's pointless to post on here as it doesn't seem as though anyone actually reads anything other than their own posts.  Once again, we have more people using terms like "moral obligation", or "financial obligation" when describing someone's circumstances should they have the ability to pay on a mortgage but instead decide to walk away.  I challenge anyone on this thread to provide evidence of language within a mortgage contract that asserts such an "obligation".  I will save you the time looking, there is none.  The borrower borrows money under agreed upon terms (money I might add once again that did not exist until the promisssory note was entered in to), and with certain remedies ascribed to the lender.  The borrower has two options that are agree upon in writing -  the first is to pay the note, the second is to default on the note.  There is no clause that attempts to describe the circumstances under which a borrower may decide to default.  There is only language that describes the lenders remedy should default occur, which includes charging late fees, attorney fees, etc., leading up to foreclosure.  Why do you people insist that there is anything else to the agreement other than what's in the contract?  To be sure, there are ramifications for those that default; it's no free ride, and I'm certain that it's painful enough to know that you made a terrible decision buying where and when you did without having the false "ethics" junk hoisted upon them as well.  Why should these people be subject to you holier-than-thou's that want to judge them by a different set of standards than what they agreed to in the first place?  Again, entering into a mortgage contract is a two way street, with the lender and the borrower accepting risk.  Why is it that when the risk goes bad for the lender, the federal government is right there to bail them out, but when it goes bad for the homeowner, we have people who want to somehow force them to continue pouring good money after bad?  Please, do some research and learn and understand how banking really works before you start disparaging people on forums like this.

Now banks are going back after those people and filing judgments for the loss.  Walking away is not as easy as it seems.  The judgments are attaching for 20 years.

Where is the banks' moral obligation?  These are the people who foreclose, "try" to re-sell it at a foreclusure sale for the loan+missing payment+costs value, where 90% aren't sold, then re-offer it at a value the original owner could probably finance.  For those who try hard to meet their obligation the bank waves the foreclosure sword over their head so they can't pay for kids clothes, food, health care.

The gov't has tried to PAY them to resolve these issues, but they seem to make more money by causing pain to foreclosed owners, and to those who haven't been foreclosed, by driving down their home prices.

There is missing Realtor moral obligation; our silence on a state and national levels on the bad behavior of banks.

I personally am waiting for the dust to settle before I invest cold hard cash into any property in the US or anywhere.

I'm a realtor myself and thank God I have other jobs/talent/careers to sustain me. This all comes down to greed and officials in Government who are entrusted with public trust to make sure everything is regulated...I say wipe the slate clean. Remove the career polititians from office and put new ones there and lots of blue collars into office to keep things real...like the FREC ... We need to take America back and restructure all the laws and legistlatures. Or we are going to be another ROME...Self distruct.

For those interested in a solution, it's actually quite simple.  STOP GIVING MONEY TO WALL STREET.  If the federal government would stop their insistence on propping up the real estate market with artificially low interest rates, buyer incentives, and Wall Street bailouts and simply let the system work as it's intended, the system will reset properly.  Get all the bad debts out into the open and either renogitiate the debt, or deal with the consequences of a default.  If default results in banks going out of business, then so be it.  There are, believe it or not, plenty of banks that didn't participate in the Ponzi scheme that would be more than willing to lend responsibly.  There is a lot of money out there that is waiting to be invested, but not into a rigged market.  The market will actually correct itself if the government and special interests (yes, I'm talking to you NAR) will only allow it.  Let housing fall to their natural levels, penalize those that took on too much risk, and reward those that did not.  There is no solution on the horizon that will not cause a lot of pain, but if we keep kicking this can down the road in the hopes that somehow, someday, somebody else will fix it, we're only making the inevitable crash harder and deeper.

Great post comment ...don carter..you are right on..

 The same examples of how we see our "leaders of industry"  get ahead are now being viewed as possible solutions for the avg consumer..(bankruptcy, abandonment of obligations..) This is an indicator of who we are a society as well.

 Now we bring in morals? The loan is a contract, this is business.. if the borrower utilizes their rights to default then they assume the impact for these actions.. in instances of fraud by the lender then there should be other courses of action..but the fraud on the part of the lenders is a tough sell.  Fraud on the part of borrower's is a mixed bag at best..good intentions with optimistic outlooks for the future.. few people told them the home value could go down and that the industry would deny them the refinance options of plentiful no-doc or limited doc loans overnight. Remember lots of folks said hey you can always refi in a year or two..( i was not one of them)

I lost plenty of business (gladly) for not offering to limited income families the option of a no-doc or option arm when they clearly could not afford the proposed payment. The borrower simply went to the Realtor identified alternative source for lending..to someone who 'could get the job done"  I seldom had a discussion with the Realtor about what is the best and most affordable finance option for their buyers. I did not get the feeling that if the loan had a  higher fee from the alternative source or a higher interest rate ,this was a primary concern for the realtor... Everyone wanted to work fast and just get the sale done.  Not  that this is a bad thing just the way it is. Do realtors play an active part in who the buyer goes to for financing and do they inquire on costs and rates for the client? The lenders that "got the job done fast" got more referals.

We all like to point fingers and the favorite culprit has been the Mortgage broker and the banks did pretty much get a pass..I mean what has changed for the banks? We now have 3-4 major banks controlling 90% of all financing in the nation.. The world of lending has changed plenty for the Brokers and not in a good way...the number of mortgage brokers is dwindling and the options for buyers is extremely limited..I do not see how we can expect improvements in this current environment of lending monopoly and less competition in the industry. Too many loans are government subsidized FHA , R-D and VA 100%..this pushes affordability and more future default risks. Home pricing is still under pressure as a result. We did not get here in a year and we shall not recover fast either. in my humble opinion..

Wow, what a debate!  It is amazing to see the passion this topic brings out in so many in the industry!  I hope you all have just as much passion for the political process and will get involved for what you believe and make a difference! 

I'm not sure is someone already brought this thought forward or not as I have not been able to review every post if so, I apologize.

I have been in the lending industry for over 15 years and have seen just about every game played from an illegal alien purchasing a home with false documents and identity to realtors and lenders shopping clients over and over again until all the holes exposed from previous underwriters have been plugged and the loan is approved. In addition, banks and underwriters turning guidelines into suggestions because as others have already pointed out "it's a right for everyone to own a home no matter what the situation". So I believe many have contributed to the state of the environment we presently see.

A mortgage is a contract between two parties that enter into an agreement that by virtue of its existence is based on the good faith of both the issuer and the recipient that the terms will be adhered to and every expectation will be to fulfill the contract. With that said I believe the banks have by recent actions started a war with the public that breathes life into the belief that a moral obligation can be replaced by a business decision.

I can't tell you how many clients both current and previous have shared this same scenario. Its starts with the client stating that I have never been late on any of my accounts but, for some reason bank (X) reduced my credit card limit and increased my interest rate up to three times higher than it was. When they contact the bank in order to find out what had happened, they are told that the bank had decided to exercise their rights under the agreement and they have made a "business decision" to change the terms of the account. After they hear that response their mindset begins to change. So when they find out the neighbors house just sold either by short-sale or foreclosure for 50% of what they currently owe on their own home the wheels begin to turn...

At this point they break out the calculator and do the math. Once they determine that the home's value probably won't return to the current mortgage level for a decade or more they begin to search out people that can help educate them about possible options. Short-Sale, Foreclosure, Bankruptcy etc. Once they determine that it would be in THEIR best financial interest to exercise one of those options any potential hesitation or remorse that they are not fulfilling a MORAL obligation floats away with the sound of "it's a business decision" ringing in their ears.

I think personal responsibility has gone out the door.  Borrowers signed a legal agreement to pay, and should honor their end of the bargain.

I think personal responsibility has gone out the door.  Borrowers signed a legal agreement to pay, and should honor their end of the bargain.

I think personal responsibility has gone out the door.  Borrowers signed a legal agreement to pay, and should honor their end of the bargain.

I was cheering your post on until I got to this statement:

"...Not surprisingly, real estate professionals are leading the charge in advising people to walk away.   Not ironically, real estate professionals were leading the charge 4-6 years ago advising people take on these same loans.  Whatever it takes to earn a fee.  Maybe it's time for an industry gut check..."

I take exception to this comment.  I don't personally know a single REALTOR® who has or would advise a person to walk away, nor do I know any REALTORS® who advised clients to do whatever it took to get into a home, including taking on a loan they knew they could just walk away from at their whim.  My colleagues and I work with reputable, ethical lenders.  In our small community, we can't afford to burn people just for the sake of earning a fee.  Additionally, our Broker wouldn't tolerate us doing business like that.  I refuse to believe our community is an anomaly.  And frankly, no fee is worth sacrificing my morals or ethics for.

You can sign all the legal contracts you want-- without morals and ethics, it means nothing.

People...

Remember way back in the day when buying a home was considered "an investment"?  The best kind...an investment you could live in and use every single day....and even get tax credits for purchasing?

Anyone who owns a stock or mututal fund already knows that sometimes investments increase in value and sometimes they drop in value.  But never, EVER when a stock drops 20% do you get to call your stock broker and whine about how it isn't your fault and that the stockbroker should simply give you your money back or "make you whole"....or help you out at all.  When the margin call comes you'd better pay up....

A foreclosure due to circumstances unforseen relating to your ABILITY to pay is understandable. But walking away from a bad investment because you don't want to pay should not only be discouraged by people in our profession...it should be prosecuted whenever and wherever possible. 

The big bad banks and Wall Street sharks made loans to people that both wanted them and promised to repay them. 

The fall in value should not be a factor used in the decision to pay the mortgage.  A new car falls in value a good chunk the day you drive it off the lot, yet you continue to pay the car payment until your obligation is fulfilled.  Why is the house payment given different consideration? 

The sense of entitlement is disheartening...."Everyone needs to help me becuse I made a bad investment, and if nobody will help me I'll just give the house back to the bank".  Because the bank is where you got the house from in the first place...right?

If you can't pay...I get it.  That's why the terms of the mortgage note you signed provide remedy to th lender should you not be able to fulfill your fiscal obligation.

If you just don't want to....shame on you.  I hope the future consequences are severe enough so that rather than you telling the story of how you "screwed the bank" and walked away for years to come....those of us that honor our obligations will be rewarded for not contributing to this financial crisis.

One way to look at the contract for mortgage is to actually read your note! And read your mortgage or Deed of trust. Mine says that to pay down the note I should write to the "holder of the note" to inform the holder of my decision to pay down the note. It does not say, for instance that I should contact my servicing company............... it said........... write to the holder. How can I write to the holder when the information as to the identity of the holder is refused to me by the servicer? May I say "breach of contract"?

Again, since the note is no longer worth the face value due to the reduction of the value of the property it secures, should I not be able to offer the holder a reduced sum for its' repurchase? How can I accomplish that when the holder's identity is occult-ed from the issuer?

 Ann-Marie has it exactly right.

Here in Florida, in one of the top 3 disaster markets, we had over 80 communities selling between 3,000 and 4,500 homes a year.  Our policy during the 30% per year price run up in the state, was to NOT offer sub-prime, a buyer couldn't purchase more than 1 house from us (had to be either a primary residence or a second home - not a rental), and they had to qualify by the traditional homeowner model (housing not more than 30% of income).

But because of the meltdown across every industry and with real unemployment in Florida over 20%, people lost their jobs and can't afford, right now, to make their mortgage payments.  That includes homeowners that bought prior to 2002.  And I have found consistently that the banks are not willing to work with them to keep them in their homes. The banks are just gaming the system and jerking homeowners around.

These homeowners were not playing the market with their house, the banks were.  And so was the U.S. Federal Government.

This proves there are no "ethics" at the banks and on Wall Street.  Their investments were just a business decision and they still are.  It's the usual "Greed is good."  So I don't fault people for walking away if it makes sense for them financially.  Their credit is usually ruined anyway.  And the banks, including their shareholders, deserve every loss they take.  The shareholders ought to toss out the management.

Unless the banks get right with their customer relationships and a traditional business model, they will not recover.  I'm fortunate that I didn't buy into the hype and don't have a mortgage issue to deal with so what I'm writing isn't personal sour grapes. 

I still remember the lessons my parents taught me about the depression.  And so do the others from that time.  So will the people that have had to deal with the greed is good banks now.

Mike
www.BrownLtd.com

Let's not forget that at the height of the housing market who's idea was it to come up with a loan program where a borrower could state their income and not have to provide any proof of their assets?  Does "Stated Income, Stated Assets" bring back the lending memory? 

Lenders made it VERY EASY for someone to qualify for a mortgage loan.  I understand a past comment that mentioned how the lender "never held a gun to your head to purchase a home" however when the lender advertises and promotes how easy it is to get a loan and not have to provide any proof of income or assets, who wouldn't want to take advantage of something so fantastic as that?  In fact, many of these lenders used that very loan program to entice people who were renting and encouraged them to consider buying a home. 

Prior to these type of aggressive loan programs many homebuyers were trying hard to save up the customary 20% down payment in preparation to buy their first home.  Some of these buyers were literally "talked out" of doing that and directed to consider going the 100% financing programs and to save their cash to enhance their homes or to save it for a rainy day. 

I recall a transaction I did back in 2005 and my buyers got preapproved for a loan from a local lender who basically wanted to put down 30% but after consulting with the loan officer it was decided that they would finance thier mortgage 100% using the Stated Income/Stated Assets loan progam.  I was totally blown away by this direction and after talking about this with the lender, I uncovered something that was very disturbing. 

This LO was paid a commission based on the loan amount they are funding.  Some lending firms pay commissions based on a tiered scale.  So, the higher the loan amount the more commission the LO makes.  Which is why this particular LO convinced my buyer to go 100% financing.  Because if my client had put down 30%, they would only finance 70% of the purchase price and the LO would make a commission on just 70% rather than the full 100%.  Again, all based on whatever tiered commission pay scale the loan amount fell into.  Forget the fact that the lesser the LTV the better the interest rate.  This LO pulled out all the stops in telling my client that when they were ready they could refinance their loan with him and get a better rate at that time so they need not worry and if they are able to, pull out some cash once their home gained a bit of equity. 

Now, whether or not this activity was the norm around the lending tables across the country, I am unable to determine.  But hearing this made be feel very disappointed in how my client was being serviced.  A total lack of ethical behavior at its finest.

So, in asking the question, is the lender to be held 100% accountable for the demise of the housing crisis or perhaps the Realtors are to be?  I say it is for the lenders who used the 100% loan financing as a means to prey on prospective buyers who had every intention to do the right thing but were talked out of doing so. 

Hi Mike.  Please check this link out.  The banks are doing just fine and always will...

Personal Responsibility went out the window when the homeowner lost their job or received a reduction in pay due to the state of the economy.  If things went on their merry way as it had well over 5+ years ago and the homeowner defaulted on their mortgage payments just for the heck of it then sure...there is an issue to consider there.  However many homeowners had fallen victim to the economy because they never once expected to be laid off from their jobs of 20+ years.  They did everything right up until that pink slip showed up. 

As I blogged earlier, the bank(s) never held a gun to anyone's heads.  But, at the height of the mortgage lending deals there were programs put into place to entice people to consider purchasing a home with ZERO MONEY down and NO INCOME/NO ASSETS VERIFICATION.  Even when a buyer had 20% to put down, some lenders encouraged them to consider the 100% financing path and to save their down payment for new furniture or upgrading their kitchen.  So, the bank perhaps never made you do it, but they sure did paint a pretty picture as to why you should. 

Consider this.  I represented a client who was trying to refinance AND loan modify their mortgage.  But, my client recently lost his job and is having a hard time finding a new one and since he's umemployed, the bank will not help him.  Because of this he's been unable to pay his mortgage payments for the past 6-months and what little savings he does have, he's using to take care of his family while he's out there looking for work.  Now, I agree he did have a personal responsibility to ensure his obligations are met based on his agreement to the bank that he would pay his mortgage.  However, he's a single father of 3 children.  So, his PERSONAL RESPONSIBILITY right now is to ensure they're well cared for and have food to eat, continues to be educated in school and pay for whatever medical premiums he's able to afford for them. 

Many homeowners are in dire straits right now and are left with either to pay for their mortgage or letting the family go hungry.  Many banks are not as willing to help out a distressed homeowner.  Which is why the US Government is looking to force lenders to step up their efforts to help as many people as possible.  Because last year those lenders did not do nearly as much as they should have. 

And as I've read recently from one blogger who commented that it's not the banks fault, he also stated "the banks do a lot of shady things, but they never forced anyone to borrow their money".  Which would lead me to think if that statement is true, then why are the banks doing shady things to begin with? 

I'd really like to see someone who knows the law, comment about the long-term liability of just walking away. Nobody seems to have mentioned that walking away does not absolve you from the debt. Banks often sell your information to debt collectors, even years after the default, and these agencies will come after you with gusto. Unless you've consulted an expert, you could end up having future wages garnished and property seized to pay off the debt. I don't know the laws in other states, but I strongly advise you to find out before you just walk away.

I read all of these posts today and some are very interesting and informative. However, some need to be put in the round file. I personally am a big supporter of startegic walk aways and people who push the morality argument seems meaningless to me. The people on this site who try and shove the morality issue down my throat will not be invited over for BBQ and a beer. If your are one of these folks, you should pull your head out of the sand and open your eyes. I am not a real estate agent or involved with the banking industry. The best post of them all was #92.  Jason said it best and a nice job to you. So lets get on with it.

I have read every single one of these posts as well.  I am divided on this issue because I am one of those people who are in this predicament.  My husband died a little over two years ago leaving me with a mortgage on a house that I love.  We bought the house nine years ago and refinanced to add on for our ever growing family.  We did not pocket the money, buy expensive cars, or go on elaborate vacations.  We put the money back into the home thinking we would live in it until we both passed away and then hand it down to our children.

For the past two years I have been paying the mortgage payment out of the proceeds from my late husband's estate.   I can't afford to pay it in any other way.  I have paid a little over $73,000.00 in payments hoping to keep my home.  But, I can't do it any longer.  It just is not prudent for the sake of my family.  I feel I have an obligation to the bank and so I am trying to find a buyer that will work with the bank.  The loan I owe is probably between $50,000 to $80,000 more than what the house is worth.  Pretty much the only way this is going to work is through a short sale. 

in the meantime, I guess I am a strategic walker (or maybe I fall into another category) because I have purchased another home with cash from the life insurance money that is left.  I am debt free on that home.  I guess I could have, maybe even should have, continued to pay on the other home but in the end it gives me no savings and still leaves me in the precarious position of possibly losing the home anyway. 

I wish someone could just ease my mind about the moral obligation I feel in paying off this loan.  And, yet on the other hand I can see it as a contract that both the bank and I agreed upon and the house is the collateral that they get if I step away from this loan.  Let me tell you, walking away from your dream home after saying good-bye to your husband of twenty years is not the ideal situation for anyone to be in.  The only comfort I find in owning another house outright is that there is security in not having to deal with a bank at all. 

So, for those of you who think that this is just an easy decision for us, the borrowers, to make I hope this comment will leave you with some food for thought.

Heather,  First of all, I'm sorry for you loss.  The death of a family member is one on the most devasting changes that affect a family.  Nevertheless, it is one of many changes that affect families and necessitate the sale and purchase of real estate.  Normal life events, like death, or job change, or births or retirement or others continue despite the struggling economy and real estate market.  These types of normal life events would be the triggers for the movement of real estate.  Whether a homeowner would find good fortune or distress, they would be able to sell their home and accomodate their new family needs. 

Because of circumstances entirely out of your control, you could not sell do the responsible thing and sell you home to move on to what was more affordable.  The banks have destroyed our housing values and communities by their criminal activity over several years.  That had nothing at all to do with you or your family.  You are in this position because of what they did. 

I know that you know where your priorities need to be focused.  You are a Momma Bear and your main responsibility is to protect and nurture your children and family.  I think you made a good decision to finally stop spending the money that you need for yoru family on paying a bank. 

I know it sounds like I'm saying it's all the banks's fault but it really is absurd to point fingers and blame.  It's like arguing in the stairwell of a burning building about whether the fire was started by the faulty wiring or the person who fliped the light switch.  It really doesn't matter, the building is burning, get out! 

The state of the entire banking system and housing market is in turmoil and getting worse.  All of us Momma Bears out there need to focus on preserving our families. 

Heather, please contact me so I can share my resources and or advice with you about how to strategically exit a property while safeguarding your future.  There are some very important legal issues that my expert Attorneys can help you with or offer to coordinate with any Attorney that may already be working for you.  It is of the utmost importance that you work with a skilled Attorney.  I can help you with that at little or no cost to you.  Regardless, my advice to help you is always at no obligation and no cost.  My cell is 813-957-4237 email is dianacessna@gmail.com