Comments on: Walk Away from Mortgage if Underwater: Professor Paper

By: douglaslsakiestewa

douglaslsakiestewa — Thu, 18 Mar 2010 05:18:51 +0000

The article is very thoughtful. At the time of buying a house I should have spent weeks reading and interpreting all the deed clauses before signing which was rushed always as I have purchased many houses and sold before moving on. All the motgage clauses protect the lender. Then one day I thought all comes from the credit rating I once was given, allowed, granted, obtained, or created by some credit rating group. Further I wanted to know if the credit rating systems are unconstitutional anyway. I never got to respond to my first credit rating, nor was it ever negotiated. So I feel I never had due process allowed by the U.S. Constitition. I still feel the credit rating systems are unconstitutional has it results in so much denial of health, welfare, safety and overall inability to have the “American Dream.”

By: Move Now

Move Now — Tue, 09 Mar 2010 09:23:05 +0000

It is never nice to talk about cutting losses, but the topic has arisen and the arguments are valid. Why are the small guys getting screwed, while the fat cats that engineered this catastrophy is getting bonuses paid with economic bail out money?

By: Rainer

Rainer — Tue, 22 Dec 2009 22:39:13 +0000

The bailout money was not a donation except in one or two cases. They were loans. Almost all are going to be repaid in full.

There is also significant evidence that banks were forced to take the bailouts by Bush's Secretary of the Treasury, Paulson. It was also a balance sheet issue. They didn't need the money to fund loans. They needed it for reserves required under Sarbanes-Oxley as a result of the Enron scandal (required to balance out asset losses related to declining real estate values). So, technically, the banks didn't need the cash, and didn't need the bailout. Note how quickly banks are paying back the money: many if not most have already returned the money.

As a business leader, I do feel a moral compulsion to repay my business debts, as do most of us. Please stop lumping business leaders into this evil capitalist paradigm. It is rarely the case. Usually the bad ones go to jail.

By: John Grever

John Grever — Tue, 22 Dec 2009 20:46:42 +0000

It's interesting that banks and businesses don't feel any of these moral compulsions when making their financial decisions, yet few don't feel that their clients should. You sure didn't see many banks having any moral conflict over taking taxpayer money during the bailout.

By: 10thdegreemarketing

10thdegreemarketing — Tue, 22 Dec 2009 18:47:50 +0000

If you can afford the mortgage payments, and you don't need to move, then why default? There is also the social issue, where you could make things worse for your neighbors by walking away from a mortgage, because a foreclosure may cause home prices to drop.

By: jfsellsius

jfsellsius — Wed, 02 Dec 2009 17:34:21 +0000

Since there are consequences to the defaulting party, the choice to walk
away seems just between bank and borrower. Every mortgage has a risk of
default, hence the interest rate and the right to take back the asset, even
at risk the asset may have decreased in value, including from factors other
than the economy. And if we peel back the onion layers, we might cry that
those ultimately in control of lending practices and loan products, Fannie &
Freddie, and those that traded the paper, built the house of cards which
fell. Can we say with certainty the loss should ethically fall completely,
if at all, on the borrower? Even though they wanted easy money to buy homes
with historically high P/R ratios, the lender could have said no.

If a client is so far underwater & can't afford to pay w/ARMs or whatever,
keeping his word adversely affects his family and may STILL result in his
defaulting, after bleeding his finances to zero. Then the ripple effect
causes other creditors not to be paid and less money to be put into the
economy. If the strategic default is walk from the home, give it back to
the bank so you can save money, pay your other creditors and spend in the
economy, that may be fair/ethical. It's a toughie, Rainer.

By: Rainer

Rainer — Wed, 02 Dec 2009 15:59:52 +0000

I wouldn't lump all 100% no doc mortgages into a non-affordable category. Sure, many or even most of them are tough on the buyers. But, when the buyer accepted the no-doc to get a better rate, or to even get a house period, the buyer accepted the risk as much as the lender did. There is responsibility on both sides of the table. Many media reports seem only concerned with the "plight of the little guy" against mortgage companies, so the general feeling has shifted to feel sorry for the person getting foreclosed on when lenders and neighbors are the ones really suffering through the downturn.

That said, there are reasonable times to default whether it is a no-doc or not. I can understand a default with someone who has an ARM going into the stratosphere when that person doesn't have the income to support it (the buyer still maintains some responsibility due to accepting the loan this way). In general, I'd say the ethical thing to do for an owner is to try to pay as much as they can, make attempts at loan mods, look at refi's, moving to a short sale if possible before they reach foreclosure. Since they made a promise to pay on the mortgage, it is simply the right thing to do. This would apply to any loan, even good prime loans where the owner has fallen on hard times. Many owners are reportedly not helping the mortgage company process their loan mods, and many more are simply sticking their heads in the sand and ignoring the situation. These thoughts are a bit of a generalization, but I think the professor's case is an example of unethical behavior.

Using foreclosures for values seems to be exactly what the professor did, but that's an assumption on my part. To answer your question, no I don't think the foreclosures should be used for valuations. However, every house in the neighborhood is impacted because the high number of foreclosures forces a seller to compete against the foreclosures. Many buyers go to the foreclosures first, then look at the "nice" homes; sellers are having to discount their properties to compete and generate interest. There is probably a point where you do have to use foreclosures for neighborhoods that have a higher than normal concentration of foreclosed homes on the market...those homes have become a part of that market and must be considered....but that is a rare case. In my market, I can't think of a neighborhood where that would apply.

I don't think the bank should be concerned with the neighbors. I don't know how bank's have to report their properties on their balance sheets, but I think they could better serve themselves and their investors by holding on to property longer, and demanding higher prices. If all banks were doing this, then prices wouldn't have declined as much, and the financial crisis would have been slowed if not averted. They could even get a property inspection done, and fix issues themselves, or contract with a local flipper that can do repairs and bring up to a livable standard. It would help everyone. If they had done this from the beginning, would we have even had a recession?

By: jfsellsius

jfsellsius — Wed, 02 Dec 2009 14:08:11 +0000

Thanks Rainer for your thoughtful comment. I see your point in the case of affordability. I'm interested in your opinion on the non-affordable loans on underwater property– those folks who got a 100% no-doc mortgage — in those cases, the bank took the risk the buyer was NOT really qualified for this loan. In either case, if the default is unethical, there is a punishment beyond money damages– the loss of credit score.
The effect on neighbors is a concern, esp. if they are trying to sell and must compete against foreclosures. But is it fair to use foreclosure sales to lower property values? — if so, the folks (or AVMs) who do the valuation are screwing the neighbors. Perhaps the loan modification in non affordable cases is the better way for a bank to go, assuming they are concerned with the neighbors.

By: Rainer

Rainer — Wed, 02 Dec 2009 01:34:03 +0000

How is it not immoral to walk away from a loan you CAN pay? Sometimes math may make the situation look good, but do the ends justify the means?

The purchaser made a contract...a promise to pay on the mortgage. They accepted the risk of falling values.

Furthermore, if the person intended to stay in the house, then prices will come back up.

They might save some money in the short term, but will pay more when they get an FHA loan 3 years from now for the same type of house as prices come back up....they'll have closing costs in addition to yet another 30 year mortgage they have yet to pay a dime of interest on. Throw in increases in any other type of adjustable rate loan the moment a foreclosure hits their credit, and their costs skyrocket.

Most homes haven't dropped 66.6% in value as in the example. I also find it very strange the property value was exactly two thirds of the amount owed.

"Strategically defaulting" also hurts everyone else in the neighborhood. So, doing it for the good of the one family causes more price declines and further hurts the market, forcing more people underwater...boosting further declines in the market.

I think this professor should stop looking at only numbers he wants to use and take an ethics course.

By: Portland Condo Auctions

Portland Condo Auctions — Tue, 01 Dec 2009 16:43:54 +0000

Interesting. I had not seen it put so bluntly before.

-Tyler