Awesome Slate magazine article.



Go Ahead, Walk Away.

If you borrowed the money from your mother or uncle, I suppose it would be immoral. But a business transaction with a bank is just business, with the lender factoring in the risks in deciding whether to issue a loan and how to price it. The lender won't hesitate to default on ITS obligations when the situation demands, why should you? Further, if the lender doesn't want this to happen, perhaps the lender should have demanded a 30% down-payment.

I don't know if it's a particularly smart move to wreck your credit rating when you can in fact make your payments, just because you home is underwater -- but a lot of people do that, so I suspect it's a perfectly rational choice a lot of the time.

People get offended when a bank CLDs them... its just a business decision. If you're going to make the business decision to give up your house, you should feel no worse about it than the bank felt about CLDing you... which is, not at all.

Just don't go bitching and moaning about the consequences of said action...not to mention the fact that the next house WILL be requiring a sizeable chunk down to account for the increased risk.

However, once again, we will see that the actions of a few prompt the adverse consequences for the masses (which is part of why we are seeing the current adverse credit climate). There are more at risk by walking away than just the bank...you also screw the neighbors over as well.

I agree with your sentiment centex, however, I think you are being too optimistic. I earnestly believe that there won't be any "next house" for more people than you can imagine...well, at any time int the near future anyway, but that is another subject that relates to your "actions of a few" comment. The key word here is "strategic." If you owe more than your house is worth, you are but an income reduction away from losing the strategic advantage. I have probably heard all of the ethical arguments against this, but in the end too many people hold out for as long as they can, burning through savings, investments, assets, a standard of living and good credit scores just to hold onto their homes. How does this help them?

Mark my words, 2010 is going to be hell in this country. 2010 is when the second shock wave from the fallout will hit. There are A LOT of people out there simply maintaining a holding pattern right now. When their tanks are empty, they too will come crashing to the ground. In fact, if you pay very close attention, you can even hear many of those "under the radar" with 750+ credit scores showing 'current' on all of their expenses losing altitude and sputtering. 2010 will be their year.

The only bitching that I have been hearing is in regards to the job market. People lose their jobs or otherwise suffer income reduction and if they are able to land another, it is almost always for a reduction in pay...often a BIG reduction. And a lot of these people aren't of the liberal arts persuasion, they are in science and tech.

EVERYONE has a mouse in this maze, even if there are some who haven't figured it out yet. I gave up blaming others when it became my turn. It has been very humbling and motivating. I am becoming very involved at the community level. There is some MAJOR house cleaning in order.

Vicious circle, no? How many folks are unable to sell and walking away because of the FC's that have already happened on their block?
Many have already been "screwed" by the neighbors. Now they just want out of the neighborhood.

What I find myself wondering is this:

If "walking away" becomes more commonplace, do you think it's likely that more states that are now "no recourse" (for foreclosures) will end up changing that policy? It wouldn't surprise me if we started seeing lenders/servicers pressing for such a change.

interesting point,

What is the interest of the state in this?

A recourse state could see less RE price appreciation in regular years since buyers would be presumably more cautious - just a guess, I don't know if that's what happened in recourse states in the past.

Walking away is becoming common place for many. What will happen in 2, 3 or 4 years to these people? They will be able to buy again because mortgage companies need to loan money to make money to stay in business. Credit Scores will adjust with new levels. If not there won't be a need for the products because too many people will be left out of the market.

Consumers are becoming educated in the laws - thanks creditboards - and they too will learn the business game. I think 2011 is the year to watch for the last melt down and then we should be back to an upswing for the next 20 years.

As for house cleaning - we need a major clean up with elected officials. More pro consumer and less corporate attitudes is a must for my vote!

Paying your bills is not about morals or standards. It is about making good personal business decisions. Wonder what the banks and credit card companies think now that consumers are learning to treat them as "just business"!

People have been walking away since the first coin was ever lent. We don't need to regulate the consumer as much as we do the lender or since in this case it deals with valuations, the appraisers.

I have been looking for houses but everywhere I look to buy there's so many other houses around it that have something crazy going on, I'm not sure if the house is really worth the asking price. I saw one for $255K that's in my price range, but it's been on MLS over 120 days, and one right by that house went for $263K, so I don't know what to make of that. And jobs these days are so untenable. Why would I want to buy a house in an area where selling it if I needed to might be a problem? People lose jobs a lot quicker than before so at any point in my mortgage, I might be hard pressed to sell.

As a matter of fact, professional lending was invented thousands of years before money was invented. Perhaps people used to walk away from their borrowed bushel of beans...

I'd have to disagree with the title here. It might make good business sense. It might be the right thing to do. The bank might screw you over in a heartbeat. There might be a dozen other legitimate reasons for considering it. There may be very few consequences. But breaking your word is pretty much the most fundamental example of being "immoral" that I can think of.

I do not consider it breaking my word. I promised that the bank could have my house if I did not pay. I am living up to my end of the bargain if I walk away. The bank gets to keep my house and all equity in it just like I promised.

Agreed. The rationalization in this thread is simply amazing. Why do people continue to believe that they live in a bubble? It's exactly the myopic "me-first-it's-only-business-screw-them" mentality that got us into this mess, and judging by the prevailing attitudes here... will perpetuate it.

A sound economy only works when people do what they say they're going to so, not if people default willy-nilly all over the place on a whim just because the numbers don't add up this year or even next. If paying one's bills is no longer necessary, and not paying them is no longer frowned upon, then why even have contracts? Seems to me that that attitude would discourage future lending more than any new law would.

The proper way to deal with this long-term is to teach people to THINK before they spend and not put themselves into a bad situation where the lender has such power of them to begin with, and to tweak the laws so that there are real consequences for lenders and to "encourage" them to think before they lend also. Why is there no outrage for the guy who was stupid enough to being duped into paying $560K for a $200K house? Oh yeah, he's one of us, he's a 'good guy'.

Bottom line: Free market is a fine system, but literally "anything goes" is not a good business strategy. Like it or not, to work, even the so-called free market needs rules and limits to function effectively. Whether those rules come from societal standards and stigmas (i.e.: "morals"), or from legislative attempts, the framework of rules still needs to be there.

At face value, I tend to agree with the sentiment that you and cljohnr hold as well, but then I get back to the 'mechanics' (avoiding the word 'politics') of the whole situation and my perspective takes a 180. In a nutshell, trust works both ways.Sure, you may avoid feeling dirty by taking the high road, but what happens when you begin getting a strong impression that both roads are leading to the same place and that taking the high road is just going to lead to your kicking yourself in the arse in retrospect? Again, this is the strategy part of it. Why burn all of your fuel maintaining altitude in hopes of not running out and crashing when you can still manage your descent, preserving what you have until you are safely on the ground? Sure, you aren't going to be anywhere near your destination, but at least you aren't having to worry about the (in many cases, inevitable) crash. It has really gotten this bad for many people. That is why I reserve my indignation these days.

If you end up broke and homeless, do you really think that whoever took the risk on your note is going to care one way or the other? They only care about that dividend. They took risks too. You lost. They lost. Given any real choice in the matter, most people would gladly continue making enough to REALLY pay for all of their obligations. Unfortunately, that often isn't within their power, even if they are still "able to make the payments."

increased filing fees at the courthouse related to the recourse will help to offset property taxes that are not being collected on the deadbeat house...

Not to mention...a State that is more prone to allow action against a homeowner who defaults encourages lenders to remain active in that jurisdiction (which benefits the masses).

That's the rub, I totally get what you're saying and I don't necessarily disagree with you, I just can't bring myself to abandon everything and go there without reservation. If we do, I just see more of the same negative.

The point of the original article, as I interpreted it, was that one is an idiot if they pay their obligations whether they can or not. There are certainly times when people DO need to look out for themselves first, absolutely. I'm trying to make a distinction from 'cannot pay' and 'can pay but don't want to', though. With the former, ya gotta do what ya gotta do, and there are legitimate legal and long-standing remedies available. It's the latter that will assist in continuing any overall recession, and for that reason it's the latter that I believe should be discouraged.

Our markets need a correction in attitude, no doubt, but I believe we would be better served by correcting back into what some are dismissing as "morals", rather than throwing out any kind of expectations and framework and sliding further into economic chaos.

Just because one is upside down now does not mean the house will forever be upside down on valuation. As an example, the last Austin house I leased was one purchased a few years before the real estate bubble bust of the mid-1980's. At the time, the owner owed a few thousand more than the ~125K that they had paid for the house. They kept it, leased it out and now, 25 years later, has escalated in value to the point where it is being sold for just shy of $600K. And yes, house in that area of Austin still sell very quickly after being placed on the market...

Houses were never intended to be a short-term investment vehicle.

True. But the situation that you reference is not in any way typical in the current market under the current conditions. THAT is the big kicker. Sure, there are a few areas that shine MUCH brighter than others- Austin (Lake Travis, etc.) would be one of them. The Woodlands just north of Houston would be another, but it is very difficult finding a historical reference point for many reasons, not the least of which would be the huge growth in federal debt and devaluation of the US Dollar since then.

We are just entering the 'perfect storm' (sorry for the cliche) period. And in MANY places, it is difficult to find eligible renters, assuming that a person wishing to avoid foreclosure even has what it takes to be a landlord in the first place. Add to that that it is even more difficult to find renters who can pay whatever it is you have in a mortgage payment each month, presumably leaving you with enough money to lease another more affordable place. It isn't so much the $125K homes at issue anyway, it is the more middle class segment with mortgage payments of around $2000 or more. Notice how the traditional conventional wisdom regarding the "recession" hurting the lower class isn't being thrown around so much these days, despite an administration in power that has always favored such rhetoric. This "recession" is hitting the middle class VERY hard...and I am referring to the center and upper middle class, not those at the bottom. The jobs getting wiped out aren't the ones paying $500/wk. They are increasingly the ones that were paying $1000 and higher. These are the people who stand most to strategically tell the system to go F itself. These are the people who have had the time to figure out that the larger picture is hostile towards them.

I think centex makes some extremely valid points here.

As long as someone can afford the house and does not plan to move/refinance in the short or medium-term, the loss in value is really just on paper at that point. I realize that this scenario does not apply to many people, but I have actually had conversations with people who were in a solid position yet still were considering "walking away."

OTOH, if someone is "circling the drain" financially speaking, I'd say that I could understand "walking away" in such a case.

Centex has a point, but that is hardly a moral issue. The question Centex addresses is whether it is an economically prudent decision, and I agree that it is very possible that paying off an underwater house is prudent financially. However, walking away from it, while questionable from an economic standpoint is in no way a moral failing.

I think it is a mistake to compare the current situation with those residential RE bubbles of the past... the escalation from 2001-2006 dwarfed anything that had happened before and was without any fundamental support.

Here is a little example of my point... In my little enclave of the NW Burbs of Chicago, the avg 4 BR home in a newer upper middle income subdivision sold for $160-175K and was usually justified by two incomes. By mid 2006, that same home was selling for $475K to $550K... During those years the average household income in Illinois went DOWN 6%. There was no justification for the price increases fundamentally.

The low interest rates and the loans made with terms that were not sound or based on any kind of debt to income principal allowed the feeding frenzy. I have always felt that after the stock market bubble, the housing bubble replaced it as the next road to riches, get wealth fast fad. In my dealing as a real estate development professional, I saw people being approved for condominiums with $225K price tags with 25K incomes and families with two wage earners making 100K purchasing homes priced in the 600K range. It was pure insanity and why I insisted that the partners I worked for stop all residential development in 2005.

So that takes us to now and into the future.... In order for the $525K house that is now worth $185K (which is roughly 2001 prices, plus 1-2% appreciation per year... the historical avg) to make it back to its selling price the average household income would have to nearly triple... And that back of the envelope calculation does not include an allowance for interest rates rising (which they will) to a what more closely resembles an historical average.

Further, I do not expect that regulations or strict formulas to "affordability" will vanish or be ignored again anytime soon. My prediction is that many of those now seriously underwater will not live to see a positive equity situation in their lifetimes. I don't think that this notion is accepted yet and I know that any "realtor" would argue against it. If this idea did become common knowledge or came to be believed by many struggling now, there would be an absolute flood of "middle and upper class" residences onto the foreclosure rolls... Denial will keep many in their homes to the end and ease the flood but renting is not feasible because the avg rent could only pay for perhaps 40% of the mortgage and RE Taxes.

On the flip side, we did not purchase due to seeing this coming but will be buying a home (not an investment) at 2001 prices. We are looking at a 4,000 sq ft home on 2 acres currently... The price tag: $165K... the house last sold in April of 2006 for $575K. Yes, they walked.

As far as the question at hand... If it were me.. I would struggle to do the right thing... But if I knew that I could end up with my wife and kids living under a bridge... I would bail in a heartbeat.

I tend to agree. In some areas housing prices were severely detached from reality, due to circumstances not likely to happen again anytime soon.

Not that "equity" is the primary reason for owning a home, you pay your money and in return you get somewhere to live. Renters never have equity. Homeowners will eventually have equity.. and eventually have no housing payment at all... it just may take a while. It really doesn't matter, other than if you need to sell.

That is a good point... We have lived without "equity" for some time now... but could have easily been way underwater if we had purchased before... Yes, a house should be a home.

Well, I will reiterate what I have been posting for years. It isn't just those who were irresponsible that will be (well, now actually are) taken down. We bought our house in 2003 for roughly $190K on a $90-100K income. Since then, and after having paid 6 years without a hitch, now the income has finally dropped to the point that we can no longer afford it, and the market value of the house has dropped to below what we owe. We thought the house was over-priced back then, but that was the rule. We could not find a house in a decent enough neighborhood for what we were looking to pay.

I believe that there is a whole army of people out there in our exact position. We still have our 800 credit scores with plenty of credit available on aged and spotless credit reports, yet if you look closely enough, the savings accounts are dwindling, the second cars have been sold...

There is no foundation for a change in this environment. The globe at large has a capital issue. This thing is just beginning. It is the price we pay for fractional reserve lending and central banks.

Oh. And there will be a new currency coming. Plan on it.

In 6 months time maybe we can add caffeinekid to this list.

Awesome.

All things considered, I wouldn't mind being proved an idiot. I just don't see it happening. And my approach isn't so much based on what the DOW does, but rather on the spending capacity of the American consumer, who largely happens to be either insolvent or close to insolvent. I am more concerned with governmental policy and the devaluation of our currency. And don't get me started on hypothesizing on what the "big event" will be within the next couple of years.

Yeah. I would much rather be an idiot than correct again. Its only a matter of timing after all.

I would say that I wouldnt walk away from my house if I still had means to pay the mortgage and still had money left over to live a good life. My parents are in the exact opposite situation.

Thier house value has gone down so they are not that much upside down but thier property taxes keep going up. They have more than quadruppled in the 12 years my parents have owned the place and even when the hourse value went down, thier taxes went up.


Look at it any way you want but Democrates are to blame for this mess. They pushed non regulation of banks, they failed to listen to thier own members about freddie mac and fannie may, and they let the bankers pass on those ARM mortgagues that royal screwed people.

I am all for banning commercial banks. F them. CU are sooooo much better because they dont have bottom line.


Oh yes, screw countrywide.

You do realize that you're probably going to get this thread locked, right?

That said, I think it is far too simple to blame any one group or say that the mortgage crisis has a single cause. There was plenty of greed to go around, and the same goes for the blame.

RE link to doomsayer article, yes, some have been predicting the fall of USD for five years now, USD still around and kicking

solution don't just buy US stocks/index, diversify enough to have some Chinese stocks, some European stocks, to balance things out
if USD falls too much, exports may revive, so it will have a silver lining (maybe US will be less of an import driven economy)

RE people saying let's ban all banks. huh??? what about the fact that up until recently we were the center of financial innovation? what about all the jobs Wall Street creates? this is where we as a country had and will probably still keep comparative advantage
we provide financial products to the rest of the world, kinda hard to compete along that dimension if banks or for-profit financial institutions are not there anymore, just thinking out loud, doesn't sound like this banning of banks is going to help anyone

Correct on both points. No politics allowed, and singling out one bucket of water during a hurricane..well..

I'm not certain a majority is insolvent, in fact our "savings rate" has skyrocketed from -0.5% to about + 6% in the last 18 months. For a lot of folks it's not that they don't have money to spend, it's that they are too uncertain of the future to spend it right now. A 10%+ unemployment rate will do that.
If we come out of this mess with less personal debt and more savings, we'll be on a relatively good footing for growth.
Moderate devaluation of the dollar is not necessarily all bad either, unless you are China. A complete crash would be a disaster, but there is no legitimate reason to believe that will happen. More likely we'll see a moderate devaluation, followed by a re balancing of trade, an increase in export manufacturing jobs, increased foreign tourism, and increased difficulty selling our debt to overseas lenders.. Which wouldn't necessarily be a bad thing long-term either.

I agree. And I don't know that a majority is insolvent either, in fact I agree that they probably aren't, but it doesn't take a majority to bring the game down anyway. I think a better context would be not whether or not a majority is insolvent, but rather how many are essentially insolvent so far as debt to assets/income ratios go, which is at the heart of this problem. When you look at it from that angle, the whole picture changes and we are very likely talking the majority.

I also believe that for many people, this isn't about saving instead of spending, or fear of spending either. It is about not having anything beyond what it takes to make ends meet. It doesn't matter if you still have your job if you don't have a dollar to spend beyond the essentials. How many people are now in this position, whereas a couple of years ago they were out spending borrowed money and keeping the economy moving? How many were relying on this money being spent as a matter of their own well being? What becomes of those HUGE numbers of businesses (most of them middle class proprietors) that rely on discretionary spending? I already know because my business relies on those businesses. I see where this is going. It is resulting in ledger losses to banks with no short term end in sight and an upper middle class foreclosure trend that is just getting it's legs. I believe the crash already happened and that the banks, instead of taking the loss like they should have (but couldn't because the money never really existed), essentially bought some noggin thumping time by having their Fed write up IOUs to keep the illusion going a little longer. Notice that $1.4 TRILLION dollar debt now. That in itself is insolvency. If the Fed couldn't inflate, they would be bankrupt.

This brings to point, and avoiding politics for the same reason that has already been mentioned, that this perceived well being of our economy relies entirely too much on the flow of fractionally funded credit, and not nearly enough on actual money, let alone domestic production. This isn't "new" news either. The Fed owes more than it can ever pay, and the Marines are of finite number. They can only do so much to keep that Dollar "at the top" so to speak. At some point, it isn't going to work anymore. I say that we are practically there and that our Fed is the fiscal equivalent of a crack whore on life support. One has to wonder how many backroom commitments she has made do our national detriment. This bank bailout is just the latest in an 80 year history of suicidal maneuvers on her part so far as our status as a free nation goes. That is why it is relevant to every one of us. That is at the heart of why I agree with the article posted. And that is why I like Minyanville in particular. They seem to have at least a few writers who know the score and don't mind posting it. Addressing the individual~ if the system is untrustworthy, then it is not immoral to play by their rules.

See, that's where I disagree. Bank profits are looking up across the board and even a dog like Citi managed to churn out decent numbers. Foreclosures are inevitable given the excesses of the past, but the numbers are reducing and not just that, home sales are increasing. We just have to keep future deficits under control.