Walk Away From Debt -- Your Right, Your Responsibility

By
Real Estate Agent with GreenRoads Realty (formerly Go Realty)

The Wall Street Journal article (Fri. Feb. 26, 2010) by Brett Arends makes a strong and logical case for homeowners who have lost equity in their homes to guiltlessly walk away. The numbers are staggering -- a quarter of all American families with mortgages! (See article below or at http://bit.ly/dnRnZj)

Offering tax breaks to those who have little or no income does not stimulate the economy. The fact that more than $42,000 per man, woman and child in the U.S. was given to the banks in bailout, without any mandate for them to loan it back, was one of the greatest financial mistakes of all time and has (and will continue to) bring down our economy.

Can you imagine what the financial landscape might look like now just two different choices been made at key junctures? 1. If the US response to the tragedy of the World Trade Centers had been humanitarian aid and not military invasion and occupation; which would have avoided the financial crisis we are in (see how much the US taxpayer has spent: http://www.costofwar.com/). 2. If, say, $100,000 per mortgage was paid down (much less than all the nonsense of bailout and ineffective programs) and recalibrated at 4% for the balance of time on the loan, making the banks solvent, keeping people in their homes, and truly stimulating the economy. Imagine the pride and confidence Americans would have in themselves and the benevolence and reason of our government. But that didn't happen.

The blind optimism of some of my colleagues is staggering. It reminds me of the many citizens and tourists in Sri Lanka who watched in awe as the ocean quickly receeded from the shoreline. They did not make the connection that if it goes out in force like that, it will come back in force, subsuming everything in its path. The difference between that analogy and the financial crisis is that a tsunami is caused by natural forces, the shifting of tectonic plates, with no ill intent. While the banking industry, controlled by a group of mega-wealthy individuals called The Federal Reserve, has been manipulated by human policies, driven by greed.

Such overthrow of fundamental economic principles can easily be traced to the early 1980s and, with deregulation and the free-for-all "free market" (which even its guru, Fed boss Alan Greenspan, has admitted wasn't such a good idea), and we saw the crisis reach a peak and collapse in Oct. 2008, like an over-inflated balloon exploding.

To think this the world as we knew it is coming back is simply wishful, magical thinking that ignores the policies that are in place now, making it more profitable and less risky for banks to foreclose because they will be reimbused by taxpayer money for any shortfall. There is no motivation on their part to work with people and keep them in their homes.

The only sane, rational and self-preserving response for those whose property is worth less than what they are paying, or whose hardship (medical bills, job loss, etc.) is making it impossible to meet financial obligations, is to preserve whatever capital they have and walk away. It is the only non-violent means of revolution, and I cannot help but think that Thomas Jefferson would approve:

From the Declaration of Independence: We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.

 

By BRETT ARENDS

Millions of Americans are now deeply underwater on their mortgage. If you're among them, you need to stop living in a dream world and give serious thought to walking away from the debt.

No, you shouldn't feel bad about it, and you shouldn't feel guilty. The lenders would do the same to you—in a heartbeat. You need to put yourself and your family's finances first.

How widespread is this? More than 11 million families are in "negative equity"—that is, they owe more on their home than it is worth—according to a report out this week by FirstAmerican Core Logic, a real-estate data firm. That's a quarter of all families with mortgages. And for more than five million of those borrowers, the crisis is extreme: They are more than 25% underwater—the equivalent of having a $100,000 loan on a property now worth just $75,000 or less. That's true for a fifth of mortgage holders in California, nearly a third in Florida and an incredible 50% in Nevada.

Are you in this situation? Are you still battling to pay the bills each month, even when it may make little financial sense to do so?

It's time for some tough talk.

Stop trying to chase your lost equity. That money is gone. Don't think like the gambler who blows more and more cash trying to win back his losses. That's how a lot of people turn a small loss into a big one.

And do the math. Even if you hope the real estate market is near the bottom—it's possible, but by no means certain—it may still take years to see any meaningful recovery. If you are 25% underwater, your home will have to rise by 33% just to get you back to even.

Is that likely? And over what time period? Even if home prices rose by 5% a year from here, that would still take six years. And during that time you could instead be building fresh savings elsewhere.

If you are reluctant to give up on "your" home, realize that it isn't "yours." If you are in negative equity, it's the bank's home. You're just renting it. And right now you may be paying way above market rates. You need to be ruthless about your cash flow.

Are you worried about the legal consequences of walking away? Certainly, you should check with a lawyer before doing anything, but the consequences will probably be more limited than you think.

In "non-recourse" states, the mortgage lender may have no right to come after you for any shortfall. They may have no option but to take the home, sell it and eat the loss. According to a survey last year by the Federal Reserve Bank of Richmond, such states include negative-equity hot spots California and Arizona. Even in "recourse" states, lenders may have limited ability to come after you. Often they'd have to jump a lot of legal hurdles, and it's just not worth it for them. They're swamped with cases anyway.

"In my experience, right now they're not really going after anyone," says Richard Nemeth, a bankruptcy attorney in Cleveland. "They just don't have the resources."

If you've taken smart steps to protect your money, you may be safer still. For example, money held in a 401(k), Individual Retirement Account or pension plan is sheltered from creditors.

Sure, a strategic foreclosure may hurt your credit score. But if you're in financial difficulties, it's probably already suffered. And your credit score is not the only thing in life that matters.

Still, when it comes to the idea of walking away from debts, many people are held back by a sense of morality. They feel it's wrong to abandon their obligations. They don't want to be a deadbeat.

Your instincts, while honorable, are leading you astray.

The economy is fundamentally amoral.

Sometimes I think middle-class Americans are the only people who haven't worked this out yet. They're operating with a gallant but completely out-of-date plan of attack—like an old-fashioned cavalry with plumed hats and shining swords charging against machine guns.

Do you think your lenders would be shy about squeezing you for an extra nickel if they thought they could get away with it?

They knew what they were doing when they wrote your loan. Many were guilty of malpractice, but they pocketed good money and they've gotten away with it. And if they thought your loan was "risk free," how come they were charging you so much more than the interest on Treasury bonds?

If you're only a small amount underwater on your mortgage, it's probably the case that you're going to be better off staying put. But if you are deeply underwater, it's a different matter.

Whether we like it or not, walking away from debts is as American as apple pie. Companies file for bankruptcy all the time, and their lenders eat the losses. Executives and investors pocketed millions from the likes of Washington Mutual, Lehman Brothers and Bear Stearns when the going was good. They didn't have to give back one cent of that money when the companies went into bankruptcy.

Limited liability, after all, is one of the main reasons every business from your local dry-cleaner to a major multinational gets incorporated in the first place. They're not shy about protecting themselves if things go wrong. You shouldn't be either.

Write to Brett Arends at brett.arends@wsj.com

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