Sunday, January 31, 2010

Walking Away Too

Three weeks ago we talked about strategic defaults on home loans, citing a piece in The New York Times that it might be advantageous to get out from under a crushing loan.

Discussions ensued, and I went so far as talking to a trusty lawyer, who said "It's doable. You can also use the threat of defaulting to negotiate different terms with the bank." (this is called leverage.)

And now I've found a sharp-edged article by the Foole named Motley who reiterates the New York Times' position:

Why Are Homeowners Idiots?

... For many of the underwater homeowners in today's market, paying down their mortgage isn't really in their best financial interest. Particularly in states like Arizona -- where mortgages are nonrecourse, meaning the lender can't go after any of the homeowner's assets other than the property itself -- it makes little sense to continue paying a large mortgage on a devalued house when comparable rental rates are far below the monthly mortgage payment.

The situation had University of Arizona law professor Brent White scratching his head, and as a result he wrote a very interesting paper on the subject, which University of Chicago luminary Richard Thaler brought to an even broader audience over the weekend.

Among the conclusions White reached is that borrowers are suffering from "norm asymmetry." That's a jargony term for sure, but it basically means that homeowners are being convinced that the "right thing to do" is to keep paying their mortgage -- even if it's not in their best interest ...

And who's doing this convincing? For a large part it's the financial companies themselves, folks like Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo.

But they're not alone. They've had plenty of help from government officials like Hank Paulson. Back in 2008, Paulson launched a sharp jab against those who would consider walking away from their homes, saying:

"And let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator -- and one who is not honoring his obligations."

Which makes perfect sense, since I imagine Paulson never speculated on anything when he was at the helm of trading king Goldman Sachs ...

One of the reasons I harp on this is, I hear blatant lies from big business all the freaking time. Some of my favorites are:

"Don't share your salary information with other employees." (Even though you have a legal right to do so.)

"Your job is safe. We're not going to have anymore layoffs. (Half of you will be gone next week.)

"You want a pay raise? But we're a family here ..." (And we'll be getting rid of you at the earliest possible convenience.)

So pardon me if I puke when the former head of Goldman Sachs, one of the most voracious, ruthless, blood-sucking corporations on the face of the planet, tells me how it's dishonorable to walk away from a shitty loan.


Anonymous said...

But once again this article doesn't deal with the credit and 'finding a a place to live' ramifications of doing this. The argument that you can find a place (a cheap apt?) to live before you stop paying and your credit hits the wall counts on the fact that you have good enough credit prior to this and not too much debt already and a good source of income(not all three likely) that would warrant someone to let you buy or rent while still showing your 'current' status on the mortgage you want to walk away from - not to mention split second timing and enough money to afford a move and likely storage space for the downsizing.

Sure, I agree - SCREW the banks - and 'THEY do it all the time', but the problem is they forgive each other for 'walking away' from their debts and they likely won't forgive someone who isn't a bank for doing the same thing. They're in cahoots.
If you have no choice go for it, but if you have the means to keep paying your mortgage (underwater or not) I would suggest to keep doing so and hope eventually it turns right side up again (which will hopefully happen again if you can wait it out).

I, myself, have had some experience in this. Several years ago I had so much debt and a sudden reduction of income I went to one of those credit services to help negotiate with the creditors. They were all willing but it was on my credit report as a BIG black mark and after 2 years I was able to finally able to get new loans with really bad rates and seven years later finally had good credit again. BUT keep in mind I didn't walk away from anything. I just renegotiated rates and payments with some of my creditors - not even all of them. Some creditors i didn't change a thing with, but the minute they got a whiff of what I did they cancelled my credit with them and asked for payment in full.

If you want to reinforce your argument, Steve, find an article about what will happen to someone that actually does this - that isn't written by a lawyer that makes money on helping you do this, of course.
Lots of your advice I agree with (like the things you also mention like letting others know your salary), but this seems utterly foolish and unless you've done this (or those writing those articles) and have lived to tell about it I'm going to ignore this advice until I've red from someone who has done this.

Anonymous said...

Originally, the concept of 'strategic default' emphasized the "stragetic" part. In other words, this wasn't something that people who are loaded with debt, and in dire financial straits did--it was what the savvy afluent homeowner (saddled with an underwater mortgage) did.

It was for people who could afford to keep making their payments (easily, even), but chose not to because it was not in their financial self-interest. These people would have no trouble arranging an apartment ahead of time, or anything else they imagined they would need for the next 3 years (new car, etc). This is why it is called 'strategic'. It is simply a level-headed financial decision, not a desperate one.

As the poster above mentioned, it becomes quite a bit harder when it is done out of financial desperation. Lining up alternative housing, and whatever needs you will have for the next 3 years is more difficult when you don't have much money. So the dynamics are different, and is not so much 'strategic' as it is 'an emergency.'

Nonetheless, regardless of how easy or hard it is, if it is the difference between total bankruptcy vs. salvaging what is left, people should choose to walk away. A bad credit report for several years is much better than total ruin.

Anonymous said...

I see good points from both perspectives. Ultimately each and every one of us is responsible for gathering as much information as possible for making our financial decisions. Yea, just stated the obvious didn’t I.

One website I have found useful on the housing market is Again, its another perspective, but interesting none the less. I hope for the best to all those who are having a hard time with their mortgages, people in and out of the animation industry alike.

Anonymous said...

Threatening a lender that you will walk away won't do anything to lower your payments.

I've tried this. I even had someone in the "home retention department" tell me that it would be in my best interest to walk away.

They don't care. At least not these guys.

Anyone that is trying to get on the Obama "making homes affordable" plan knows what a bunch of bull crap it is. The lenders don't want to help you out. The government has really screwed up the rules and they aren't helping out the situation either. Between the lender/government it is such B.S. People are spending more than a year trying to make it happen. It takes so long that a lot of them have no choice but to walk away.

Anonymous said...

It is very difficult to get by without credit in this country and that in itself is a crime. I think the bigger question that needs to be addressed and hasn't so far is why this is and how it needs to change. The banks, the Federal Reserve system, and the corporations that rely upon it to dominate the economy need you to borrow in order for the economy to function, and that won't change unless there is fundamental change. They have an overriding interest in sustaining spending on all fronts, no matter what the cost to individuals personally. The system incentivizes spending and punishes savings. That is not a free market with prices determined by supply and demand. It is that inflationary banking that always develops out of fiat money, currency based on nothing. The people actually were able to see for once how the entire thing works when the market melted as a result, but it is sad that subsequently they have really done nothing to change it. Fiat money creates a never-ending boom-bust cycle and inevitably ends in collapse. We have boom-busts more often than you realize but they get papered over with more fiat each time. I'm not saying abandoning a loan isn't painful, I'm sure it is. It is the collective pain of confronting that reality that prevents us from doing so and perpetuates our slow downward slide. But we should force change from the system that created it. The move your money campaign is a good start, but there needs to be a movement against credit. You think those Free Credit commercials are funny? The jokes on us.

Anonymous said...

you walk away first and let us know how it went...then we'll follow if you survive.

Anonymous said...

People buying houses they can't afford is bad.

Deregulation of the banks that allowed them to offer loans to people they know can't afford them is much, MUCH worse. Especially since they bundled up and sold these loans at great profit and created the bubble that finally crashed.

This was brought up countless times the last 8 years. Of course we had a do-nothing idiot president and a bunch of spineless members of the Democratic Party.

Anonymous said...

Time to re-regulate banking, with strict limits on their business affiliations.

Anonymous said...

But once again this article doesn't deal with the credit and 'finding a a place to live' ramifications of doing this. The argument that you can find a place (a cheap apt?) to live before you stop paying and your credit hits the wall counts on the fact that you have good enough credit prior to this

The rental market is large and plenty of rentees are willing to rent to people without optimum credit ratings. Right now, landlords trying to rent out apartments and houses aren't in a position to be super choosy (Different rental markets have different dynamics.)

Last time I rented, the landlord didn't ask for a long credit report, just if I could put up the cleaning deposit and first and last months rent. The check cleared, and I was in.

With so many units available right now, hard to believe that anybody with cash to pay is going to get turned away.

Anonymous said...

I don’t think many people understand the severity and size of the problem. Yes, (good) regulation is something, and no, people can’t just walk away from obligations, but only if the credit market has the power to determine your economic success. In a real sustainable economy, credit doesn’t determine your earning potential. With a fiat currency, it absolutely does. We haven’t had a real economy for many years, so there is no real production or growth. When they talk about creating jobs, what they mean is making it easier for international flows of capital to make a claim on what you will produce but will not own. That simply hasn’t changed with any administration. In the long term, there is less and less that the US can produce that can compete on the global market. So the only way banking and government interests can sustain the appearance of the standard of living upon which we have grown accustomed is the way they historically do in times of crisis, quantitative easing - they inflate. Wages stagnate, prices rise, and so where do consumers go but right back into the arms of credit. The cycle continues. The danger currently is that we might experience a cycle of hyperinflation in response to the sheer size of the central bank’s current balance sheet. That will change everything. Then, of course, you may happily walk away from your mortgage, as there will be many more prescient financial concerns in your future, namely how to afford a ten dollar apple.

Anonymous said...

Good post, but a friendly reminder that paragraph breaks are your friend.

Anonymous said...

Walk away from your mortgage at your own risk. Here is an article from about lenders going after homeowners after foreclosure!

Anonymous said...

Why are banks even LENDING money to people who can't afford a loan? Don't they do their homework? There need to be much tighter regulations to prevent banks from doing this, then selling the loans for profit.

Anonymous said...

Goofus buys a house he cant afford with a no-money-down, variable rate "exotic" mortgage for one reason- he has no money.

Gallant saves for decades and buys his house with 20 percent down, a fixed rate and a 30 year conventional mortgage for one reason- because he has been told that that's "the right thing to do".

The housing bubble bursts and the market tanks.

Goofus finds out from lawyers that he can short sale his house and buy another bigger one really soon because one of Obama's new policies wipes out bad credit after only TWO MONTHS. So he does.

Goofus then can buy nice cars and clothing because he is living in a big house he bought for a great price with little credit (The short sale 2 months ago didn't seem to affect him at all).

Goofus has a party to celebrate his new, bigger house, and invites Gallant, but of course Gallant can't make it because he is working two jobs to pay his mortgage, because its the right thing to do. Plus, because of his down payment, Gallant now has no money.

By the way, this is a true story. Steve is actually right on this one. And yes, it is possible to short sale your toxic mortgage and buy again almost immediately without getting bad credit. I have seen it happen, right here in LA.

Party on, Goofus!

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