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106 Comments on Strategic Mortgage Defaults - Beyond A Contractual Decision
So many people are quick to walk away with every intention of buying another home in a "few years" I can't help but wonder if the people that are doing these "STRATEGIC DEFAULTS" were informed "due to your lack of committment, you will never be able to get another home loan" Perhaps they would reconsider and wait this market out?....
Sara, we are in a similar situation in a rental property but we are continuing to make the payments. At some point we may not be able to do this, but for now we are. I totally understand where you are coming from. BTW, where is Carla's comment that Katerina referred to?
Sarah, I know where you are coming from, and I would do the same if I were you.. What I don't understand is sellers who decide not to pay their mortgage and then use that money for personal gain, ie nice cars, spas, designer clothing, Its these people that I have a big problem with.
I applaud you sticking to your principles, even though you are throwing your money down a hole. You would actually be better helping society by giving that money to a charity.
You have to do what you feel is right. If that means putting hard earned money into this situation, then by all means do. Its your money, and you have the right to spend it the way you see fit. You're one of the few who feel that the contract is worth more than the financial gain. Just be aware your hard work, and moral ethics is probably being taken advantage of by someone out there.
Don't be angry when you find US Bank handing out big fat bonuses to their executives.
There is a HUGE difference between choosing to "walk away" and having limited options due to hardship...we had a couple...he lost his job, got cancer and she lost her job...their home became a successful short sale...it isn't what they wanted...it is not where their moral compass pointed...it was the only thing they could do.
Sara, My default move when I'm stressed is to run the numbers and I'm invariably less stressed. I'm hoping there are at least less tears based on this.
This isn't great stuff, but it's not "retirement ruining" type of bad. It's not "our kids can't go to college" type bad. It's a speed bump (like our new 3 feet tall ones in the East Village), but it's not a head on crash with a semi.
If the 2005 price was $200k. At a 50% drop, that's $100k now. Loan started @ an 80LTV or $160k. A 30 year would have paid off $10-12k in principal. Net appears to be $50k "gained" by default.
(I was under the impression that Florida is a deficiency state, but that type of stuff is above my pay grade. If it is a deficiency state, then this "value" goes to $0 pretty fast.)
The monthly figure requires a CPA. You save some cash, lose some tax benefits. That's also above my pay grade.
Normal people who "strategically default" simply get higher borrowing costs & insurance costs plus the added goodie of not getting that job in a 10%+ unemployment market because the other candidate's public records are clean.
You are not normal. Your job gives you more data than 99% of real estate professionals, let alone consumers. You live in Chicago which is also not normal. I don't know if a Roscoe Village 2-flat on the Brown line for a song fits your financial goals, but it's only an option because you didn't default.
With each passing day and each strategic default, those with unblemished credit have increasingly better options in general. With your job, wow, you probably have greater access to opportunities than almost everyone. Plus that whole deficiency detail may make this a moot point.
It's a speed bump, not head on crash.
Just my unsolicited $0.02,
Sara - I get what you're saying and I really respect you for it. You have the means to pay so you are meeting your obligation. If you didn't have the means you'd figure something else out. But people "just walking away" because their home didn't turn out to be the investment they envisioned are no better than the banks, CEO's, wall street, etc.
I'm rooting for Iowa.
There are those who have no choice and have to leave, but we are not talking about them here. To me this is no different than the exotic mortgage products that these banks came up with and then told people they can just refinance it in 2 years, or worse yet, the unlicensed mortgage brokers who chose to lie on their clients behalf just to get some of these NINJA loans through. That was just as unethical as the people who are walking away because values have fallen. I do understand the concept of a business decision, but I think that is why we are in this place now. If we were all to throw in the towel and walk away, we would have nothing left. A better solution is to avoid doing business with people like this, go to a local bank where they still have to look in the faces of their clients. Don't reward them for their bad behavior, take your business elsewhere!
Appreciate your honesty. These are times in which our actions say more about who we are than our words. It takes courage and conviction to do what you're doing.
These are great comments. Thanks for posting!
I agree.....for myself. I have a few properties I'm upside down in equity, but I make my payments, it's not a hardship to do it, so I do. Does it make more sense financially TODAY to walk away, maybe....long run? probably not. But I don't like the judging of others....it's none of our business, they will suffer as a result.
I agree with Joseph Mazzei in #82.
Moral obligation or not, if banks worked with the owners/investors instead of making idiotic demands of "prove the income", "pay a hefty downpayment for settlement", "catch up in 6 months", etc., a huge number of those owners/investors would continue to make the mortgage payments.
The way $700 billion (and more) were dished out to the banks, they have more incentive to force foreclosure and/or short sale compared to keeping the same mortgagor.
It is the morality of hard working Americans that is being exploited by the financial industry. Glass–Steagall Act needs to be reinstated.
Lee
America was once the home of revolutionary's. It now seems to be the home of lambs. It's been proven in study after study that corporations have been paying little or nothing in the way of income taxes for the last 40 years or so. Yet still partaking in the massive infrastructure we all pay for so they can make a profit at all costs. FYI: This is not the behavior of patriots! We are no longer "All in this together." They have made it so that it's US against THEM. Mean while, nearly every government program of any kind has shifted to being funded solely by main street tax payers. People are falsely assuming that congress will remedy this situation. But that will never happen with the way our election system is currently funded and operated. What people are failing to realize is that we don't need government to solve this problem. If everyone in America united and stopped paying their mortgages, credit cards, and any other debt they have, we could bring the entire banking system down or at least bend it to the will of the people in a matter of days. No government involvement necessary. They can't arrest 150 million people. But everyone in this country is so scared that they MIGHT be one of the few that are arrested, we will all do nothing instead, and continue arguing with each other over nonsense as individuals while the country continues to spiral down the drain. Politicians all preach that this division is "The American way." That the political process in America is "ugly" and that's the way we like it. That kind of rhetoric is divisive and promotes the status quo as the solution to our issues. We're all being lead like lambs to the slaughter when we choose "not to act" by continuing to promote "individualism" as the American way. Until we unite as a nation and say "no more," I'm afraid all this arm wringing over what's moral and what isn't will be our downfall. You can't slay a wolf if you behave like a lamb.
We've traded our revolutionary heritage for a 3 bedroom, two bath, home in the suburbs, a college education for ourselves and our children, and a couple of matching BMW's in the driveway. The trouble is, "You can't eat that." We're trading our freedom for a "risk-less" lifestyle. Unless that attitude changes soon, I suggest that we brace ourselves for the worst or find a different country to reside in and play it safe.
IMHO
Carl S
Lets assume for the moment that it's true that companies don't pay taxes. There is one thing they do pay. Salaries to the people that work for them. They don't take everything in and not pay anything out.
Sara
The fact that you are able to make the payments mean you would not qualify for a short sale. So "biting the bullet now" makes absolutely no sense. Capital Losses however do. Talk to you tax preparer, and setermine what benefits long term Capital Losses may have in your current financial situation. It may be better news that you think. Even with bringing money to the table.
Great post. Lots of great comments supporting a variety of positions.
Sorry to hear about your personal scenario but I'm glad you've made a decision that you can live with. Good for you.
I've got to add though, that personally, I believe that there is an absolute double standard vis-a-vis "Main Street" and "Wall Street". For example, there is no mention of "moral hazard" (i.e., the moral delema), or lack of integrity, etc., when big business aren't doing well, and instead of making profits are taking ever increasing losses. If the banks think there's no way to turn the situation around, they simply make the "business decision" to cut their losses, declare bankruptcy within their business entities (thereby saving their personal credit), and then simply walk away. This scenario happens every day on "Wall Street" and is not only accepted but expected. This give business the opportunity to limit their "down-side". So, they can profit without limits on the "up side", and can greatly manage their risks by limiting the "down-side". This isn't considered a lapse of morals, ethics, integrity, etc. - just business
But, this doesn't hold true for us "regular folks" or "main street". We are expected to totally absorb any losses or "down-side" without any limits. And our morality, ethics, and integrity are played upon especially by the same "Wall Street" business who are prone to just make "business decisions" should or would they be in the same position. Or they rely on, and ask for, bailouts funded by us "regular folks" on "Main Street". Ironic - isn't it?.
So, for my real estate business, I shall support whatever decisions my clients and future clients come to in terms of their personal morality, ethics, integrity; in those cases where they make a "business decision" and decide to act like "Main Street" and cut their losses and limit their "down-side" - I'll be there to support them and help them execute a short sale.
Hi Sara - You need to be true to yourself. And thank God you and your husband are in a financial position that you can keep taking the beating. We bit the bullet and kept paying on our vacant home in Pittsburgh PA for 18 months, forcing us to move 3 times in Gainesville FL until we got the place sold. I have to say the experience left us completely disgusted with the banks, who were NO help at all in terms of helping us modify our loan from a 20 year to a 30 year mortgage, because we no longer lived in the state where the property was. So what happened? We sold the home for $100K less than we bought it for 3 years previously, had to pay $2500 for a gas main fix (due to neighbor construction), and had to bring $10K to the table. Now, if our loan had been modified to a 30 year mortgage we would have had a little more financial breathing room and wouldn't have to totally kill neighborhood home values by taking first lowball offer that came along.
If only lenders had to operate with a moral compass as well, I wonder how much better things would be for everyone right now.
The banks are probably laughing all the way to the...hey wait a minute!
The bank is loving the fact that people are focusing on "Strategic" defaulting and the morality of it and "liar loans", etc. rather than the debilitating economy many of us are trying to survive. In fact there are many more people who are suffering in this economy and have lost one or both incomes or become one of the walking wounded, the underemployed. Our nation is at nearly 10% unemployment. It's not about morality for most people and acting self-righteous about how people got their loans or how they have to get our their loans doesn't serve the greater good.
Sara, you have the luxury of having a decision to make. Many people who are upside down do not. The banks are foreclosing and not modifying loans because the servicers can recoup all their fees in a foreclosure, even before the investors get their money. With a modification they do not recoup their fees and it costs them more money upfront. With a short sale they may get some of their fees. The banks are acting in their own best interests in the short term. Let's see what happens when they end up with more and more inventory.
Katerina and partner I respect your opinions and find your posts insightful. Richard, I'm sorry you lost your home because the banks are making such ridiculous decisions. I am hearing of so many similar experiences with the banks.
Great discussion. Thank you Sara.
The blog was about people who can afford the payments but chose to just walk away. If you can't afford the payments you can file for bankruptcy, which is different from walking away.
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