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The Ethical Dilemma of Strategic Walk-Aways

By
Real Estate Broker/Owner with Mike Bell, REO Broker - Realty World MBA

Owners that can actually make their loan payments, but choose to walk away, accounted for 1 in 4, or 25% of all foreclosures as of June 2009.   That was over six months ago, and the numbers have probably gone up since the initial studies (these data can be easily verified via a quick Google search).  Strategic default is an ethical dilemma, and the discussion is burning up cyberspace.

On one hand, there is a moral obligation to honor your contract.  If you owe more than your house is worth, one way or other you gambled on your equity and came up short.  Maybe you bought at the top of the market, or took out an equity line of credit and bought some stuff; a car or TV, or maybe even another house.  Regardless, it’s not your lender’s fault that your property value went down.  After all, if your property went up in value you wouldn’t turn around and give the bank extra, right?  If you buy gold, and it loses value, you don’t get your money back, you wait it out. If you loan money to a friend, and he loses it all, you would still expect him to pay you back, especially if he can afford it.  The value of a promise doesn’t flex due to circumstances, or whether you are the giver or the receiver.  If you can make your house payments, it’s the right thing to do. 

On the other hand, are the banks responsible for some of this mess?  Should they share the burden?  Didn’t they sort of tease us into all these high-risk loans and credit cards?  In the first few years of the Y2K decade, the FED, major lenders, and real estate professionals convinced us that everybody in America could buy a home. They made you feel foolish if you didn’t.  It was like manifest destiny, your birthright, your duty.  You could get a home loan if you had a pulse.  You could qualify just because you said so, no matter if you could actually afford one.  Lenders didn’t seem to care if you were truthful in your loan application.  Certainly they knew they were making questionable loans, gambling on equity just like us.  Aren’t the financial institutions culpable, too?  Didn’t they practically beg us into this?

The survival of our economy depends on everybody doing the right thing.  Imagine the consequences if all borrowers that owe more than their house is worth but can afford the payments choose to walk away, or if all the lenders call in all the notes on properties that won’t appraise for the full amount.  

 

Half million dollar house in Salinas, Californ...

Image via Wikipedia

So, who gets the free morality pass?  Who gets to choose what’s fair?  Is personal credibility negotiable?   Is the golden rule irrelevant?  Do we just step off when times get tough?  Is this the new American paradigm?

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.

 

 

Comments(164)

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Dana Devine
Charles Rutenberg Realty - Apollo Beach, FL

good post...my thoughts:

  • the blame is  on everyone.... but 90%  if it is the FNMA/FHLMC and banks, if they said no one gets a loan unless you got a 700 credit score and 20% down, well then that is the rule..period
  • HOWEVER...you tell someone that with stated income they can get the pool and granite and 3 car garage and they do not have to prove anything( no income/ no asset)...they are going to take it
  • title, RE agents, loan officers, inspector, appraisiers ...WE  are the other 10%
  • do you think one of the 10% would turn down a deal if the bank (backed by FNMA/FHLMC) said it is just fine give the uninformed consumer a house..we all did the deal
Feb 10, 2010 07:38 AM
Diana Cessna
Effective Technical Group, LLC - Tampa, FL

No, we all didn't do the deal.  Some of us actually advised our clients with concern for their future because we built our business on repeat clients and wanted them to refer other business to us.  I would very specifically advise clients of ALL the pros and cons or their options.  The clients that I chose to work wanted to make wise financial decisions.  It would defeat my business growth plan if I let my client purchase a home with a mortgage that I new they could not afford.  To me, it wasn't worth my time to work with a client only once.  The problem is that there were too many licensed Realtors (and Mortgage Brokers) that were in it for quick and easy money.  They just tried to make as much as they could on each client and moved on to the next one.  There was no concern for future business growth among their client base and certainly no concern for the community in which they worked.  In the past, the Realtor and Mortgage Broker were known community leaders that maintained stellar reputations.  When large banks that had no ties to a community started hiring mortgage originators in telemarketing type shops, they didn't have any concern for the reprucusions of their business practices. 

Feb 11, 2010 06:12 AM
Beverly of Bev & Bob Meaux
Keller Williams Suburban Realty - West Orange, NJ
Where Buying & Selling Works

Unfortunately, everyone doing the right thing only happens in the movies --- and it rarely happens then. This is a legal issue first that's becoming a morale one. The banks have a lot of control on the options that can provide and they are deciding not to provide them.

Feb 11, 2010 10:06 AM
Matt Robinson
Professional Investors Guild - Pensacola, FL
www.professionalinvestorsguild.com

Whatever happened to PERSONAL RESPONSIBILITY?  Give me a break with all of this, "the devil (bank) made me do it" mumbo jumbo.  Did they hold a gun to your head?  The people who are blaming banks for their home being overleveraged would also blame the alcohol for the drunk driving accident and the gun for the shooting.  The last time I checked, it's a human being that decides to take the drink, pull the trigger, and mortgage their house to the hilt.  That's not anyone's fault but their own.  The banks do a lot of shady things, but they've never forced anyone to borrow their money. 

Feb 12, 2010 06:42 AM
Anonymous
Michael H. Sasano (Kama'aina Realty, LLC)

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? 

Feb 12, 2010 08:50 AM
#149
Diana Cessna
Effective Technical Group, LLC - Tampa, FL

Alright, quit it with the moral argument already.  Michael (#150) you are absolutely right, a person's primary responsibility is to take care of their family's basic needs.  Too many families are struggling to keep their children fed and to keep their healthcare costs paid.  The deadbeats with no ethics left this market a long time ago.  Those investor speculators that started dumping their depreciating asset at the first sign of the market downturn are long gone.  Unfortunately, because of them, property values began their downward spiral.  Moreover, because the banks did not take responisibility for their actions and did not act quickly to get the distressed properties turned over to responsible owners through quick foreclosures or quick short sale approvals, neighborhoods and communities deteriorated quickly.  Those homeowners that continueto pay for their mortgages despite the depreciation of the property are stretched thinner and thinner.  Because of the distressed properties and the banks' slow response to the crisis.  The homeowners that are paying have to pay more.  The costs for maintenance, association fees, community district development grants and property taxes continue to escalate because their are less people paying these shared expenses.  This all in an environment of deteriorating services and neighborhoods in disrepair.  Not only are many people living on lower incomes due to the bad economy, their costs are increasing and their property values continue to plummet.  This is pushing many to the breaking point and adding to the defaults.  Those of you still on the moral responsibility bandwagon will be affected by the same market forces eventually as their is no stop to the spiral. 

Feb 12, 2010 11:02 AM
Dan Quinn
The Eric Steart Group of Long & Foster Real Estate - Silver Spring, MD
Dan Quinn

Good and timely subject for discussion.  There is a lot of blame to go around and certainly a lot of finger pointing, while at the same time the pain for many is unbearable.  The answers do not seem immediately clear as to how to correct this problem so as to prevent it from ever happening again. 

We would do well for all of us to remember that houses are not necessarily commodities to be traded, but rather a place to establish a home for a family and to establish a neighborhood that enhances our lives as well as the lives of others.

The desire for quick riches in real estate and the excessive greed that I saw during this past rise in home values was like nothing I have ever seen - and hope to never see again.

Feb 15, 2010 06:52 AM
Anonymous
Richard
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.
Feb 24, 2010 04:52 AM
#152
Anonymous
Richard

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.

Feb 24, 2010 04:52 AM
#153
Bo Bromhal
BHHS York Simpson Underwood - Raleigh, NC
Triangle Native, 2 decades of experience

I don't have to read a single comment - and to those who gave lenghty or impassioned answers I apologize. if you bought a home and have not suffered an unforseen economic calamity - then you owe the balance of your loan.

Feb 24, 2010 02:10 PM
Bo Bromhal
BHHS York Simpson Underwood - Raleigh, NC
Triangle Native, 2 decades of experience

I don't have to read a single comment - and to those who gave lenghty or impassioned answers I apologize. if you bought a home and have not suffered an unforseen economic calamity - then you owe the balance of your loan.

Feb 24, 2010 02:10 PM
Anonymous
David in Arizona

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.

Jun 16, 2010 07:34 AM
#156
Mike Bell
Mike Bell, REO Broker - Realty World MBA - Santa Clara, CA

Thanks, David.  Wow, you actually read this whole thread?  Impressive. This was 4 months ago.  There are a wealth of blog posts on this subject, enough to keep you busy for weeks.  Seems there's another twist: walkaways getting sued in civil court for breach of contract.  You might be interested in tracking that discussion, too.

Jun 16, 2010 08:15 AM
Tony and Suzanne Marriott, Associate Brokers
Serving the Greater Phoenix and Scottsdale Metropolitan Area - Scottsdale, AZ
Coldwell Banker Realty

Strategic Default is an acronym for cowardice.  If one is an ostrich - then stick your head in the sand.  If you are a responsible individual - do a Short Sale - unless your legal and tax advisors tell you to do otherwise.

Jul 09, 2010 07:01 AM
Anonymous
Heather Davis

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.

Oct 20, 2010 08:17 PM
#159
Mike Bell
Mike Bell, REO Broker - Realty World MBA - Santa Clara, CA

Heather, what a compelling story!  There's no way I can pretend to imagine what it must be like to be in your situation.  I'm sure you've exhausted the channels with your lender, but if there was ever a hardship story for consideration of modification or principal reduction, it's yours.  Purchasing the second home was briliant, and perhaps your only recourse.  The only thing I can suggest is to be relentless in pursuing your lender, be transparent and explain that you may be forced to walk away.  I've heard of cases where a relentless borrower has done just that, and was offered a no-strings principal reduction (read my blog post "The Principal Solution To Strategic Walk-Aways").  Maybe some of the thousands of professionals who particpate in Active Rain can offer some better advice than I.

At any rate, I admire you for attempting the high road under extraodinary circumstances.  Sometimes we are made to endure things we can't understand, but being a man of faith, I believe we are blessed through stregnth of character, and you will one day be blessed indeed.

 

Oct 20, 2010 11:17 PM
Anonymous
Diana Cessna

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. 

Oct 21, 2010 08:05 AM
#161
Anonymous
Diana Cessna

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

Oct 21, 2010 08:29 AM
#162
Jim McCormack
Nashville Short Sale Specialist - Jim McCormack - Edge Advantage Realty, LLC - 615-796-6898 - Murfreesboro, TN
Nashville Short Sale REALTOR - Stop Foreclosure

My view is that owning a home and borrowing money to do so is a business decision.  When the deal goes bad you try to make it work again.  If the bank will not work with a borrower the bank has recourse per the mortgage note.  Nothing more, nothing less.  For the banks it is all about the bottom line $.  Until financially distressed homeowners start looking at the transaction the same way they will continue to be bullied by the banks.

Jan 05, 2011 06:11 AM
Anonymous
Ray
I know people in Florida that haven't paid their mortgage for 5 years because they said thvalue decreased below what they owed. They took out an equity loan to buy a rental beach house that as foreclosed on but they still live rent fre in wir very nice home in Destin fla. they went through ago ugh time but are working again and doing ok. The wife doesn't work because she doesn't have to nd they still haven't paid a mortgage in years. Thispisses me off. They should have been kicked it after 1 year max for zero payment. Will anything ever happen to them? Will e bank every say get out? I knowpeoe in Ga this happened to they were out the door. What's the deal in Florida?
Sep 05, 2013 01:43 AM
#164