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Whether to walk away: Housing’s moral minefield
Sunday, March 22, 2009 | 2 a.m.
Chris Morris
Sun Topics
Sun Archives
- LV reclaims top foreclosure ranking in U.S. (3-20-2009)
- Foreclosure sales have home market feeling down (3-16-2009)
- Builder: It is 'rational' for homeowners to walk away (3-13-2009)
- Homes at half price from 2006 peak (3-10-2009)
It’s the scruples question of the day. Maybe of the year.
Should I stay in the home I love, or stick it to the bank?
Financially, you are able to make your mortgage payments. But if your mortgage is greater than the value of the house, why pay it? You’re throwing good money after bad. Paying the mortgage may be the right and legal thing to do, but not necessarily the smart play.
This raises a moral question for tens of thousands of valley homeowners: Is your greater responsibility to your family’s financial well being, or keeping your word to the bank?
It may be an excruciating decision for good, decent people: Do I make my payments and refuse to join the next wave of foreclosures that will further blight my neighborhood? Or do I violate personal ethics and walk away from a contract that I signed with my eyes wide open?
One financial adviser says homeowners, in increasing numbers, are taking an unsentimental view toward their houses — once viewed as the pinnacle of the American dream — and making cold, rational decisions to walk away from legally binding commitments.
“That’s the problem with our society: You have an obligation and yet people walk away. If that happens across the country, we’ll go kaput,” says Frank Farley, a professor of psychology at Temple University and a former president of the American Psychological Association. But such people, he says, aren’t lacking justification: They are the victims of real estate greed and incompetence in the banking and subprime lending industries, and they see corporate America making similar decisions.
The number of homeowners bringing foreclosure on themselves could be staggering: More than 234,000 homes in Nevada — 55 percent of the state’s total — are “upside down,” or valued at less than what is owed on them, according to a December report by First American CoreLogic, a data analysis firm. That percentage is the highest of any state.
Put a different way: Most properties bought here between 2004 and 2007 are upside down or “underwater,” according to Steve Bottfeld, executive vice president of Marketing Solutions, a Las Vegas housing consultant.
Depending on whom you talk to, not paying the mortgage even when you can is sound business practice. Or the acceleration of our fraying social fabric. Or pragmatic and rational. Or a bad example for children.
Those who dispense spiritual advice suggest homeowners should stick to their promises and pay their mortgages. Those persuaded by fiscal arguments say there’s something to be said for self-foreclosure, even if they don’t recommend the practice.
Ultimately, personal values shape decisions, says Kristen Monroe, a professor of political psychology at the University of California, Irvine, and an expert in altruism. “You act out of a sense of who you are. Even in desperate times. It’s an identity question.”
Voluntarily foreclosing “is the easy way out,” says a disapproving Dwight Watson, pastor of the Oikos Church, an evangelical Christian congregation in Las Vegas. “Such behavior is rewarded in corporate America. These companies are so big and our economy depends on them, but it doesn’t make their decisions right. It doesn’t make them moral. It’s a blight on our society. It shows we as a society really walked away from personal ethics and integrity.”
Various mortgage specialists interviewed for this story say they do not advise homeowners to abandon their properties. They’ll mention foreclosure as an option, but tell their clients that if they consider it, they had better line up a lawyer to deal with the fallout.
Steve Schauer, a mortgage specialist with Flagship Financial Group, says that of all the upside-down homeowners he meets, about two-thirds say they’re abandoning their homes. The homeowners who opt to stay for moral reasons are the exception, he says.
Rabbi Felipe Goodman of Temple Beth Sholom in Las Vegas is more optimistic: “People feel they can’t abandon their homes. They say, ‘Maybe 10 years from now, the market will rebound.’ ”
Goodman says if asked by congregants, he would advise they stick with their mortgages if they can afford them.
Financial adviser Jeff Ballek says his clients who are confronting the personal quandary have stellar credit ratings, posted 20 percent down payments on their homes, built 401(k) retirement accounts and paid their bills on time. “They’ve done everything right,” Ballek says.
These homeowners are the least likely to be bailed out — and now, perhaps, the most likely to foreclose.
Unless their loan-to-value ratios are under 105 percent — with a $210,000 loan on a home valued at or more than $200,000, for instance — these homeowners are unlikely to get any government help. Nevada has an average loan-to-value ratio of 97 percent, according to First American CoreLogic.
Absent government help, can the homeowners negotiate a reduction in the mortgage principal with their lenders? The answer seems to be no.
Some homeowners think they can persuade lenders to write off some of the principal if they first withhold their payments for three months and feign financial stress. That tactic can “hit or miss,” one mortgage specialist says. More typically, lenders will suggest owners pursue a “short sale.”
And financially healthy homeowners who beg for relief while continuing to pay on a timely basis will probably not get any sympathy from their lenders because they have offered no evidence of stress.
“Is it fair that your neighbor did everything wrong — he bought a house without a job — and the bank will help him, but the bank won’t talk to you until you’re three months behind?” Ballek says. “That’s just not fair.”
Ballek, who says he does not advise clients to default, finds it ironic that homeowners with the most conventional and conservative of all loans — 30-year fixed-rate mortgages — and were most committed to homeownership are now the ones who are considering foreclosure as an escape from their undervalued homes.
“At this point, they’d rather destroy their credit for seven years and start over again,” Ballek says.
“I don’t think the average person has a lot of remorse anymore. They just feel like a part of the crowd now.”
The beleaguered homeowners, Farley says, are empowered by what they see happening in corporate America, where failing companies unabashedly are lobbying for federal bailouts, pursuing bankruptcy protection or otherwise reneging on loans — anything to survive, morality and ethics notwithstanding.
This troubles Watson, the pastor, who worries that homeowners may be co-opting such corporate logic.
Three decades ago, foreclosure — and surely personal bankruptcy — would warrant social stigma, a scarlet letter. Not anymore.
“You used to shake hands and that was the deal. The handshake was golden,” Farley says. “That’s gone. Honor doesn’t quite play out like it used to.”
Discussion: 30 comments so far…
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Another option instead of walking away. Take advantage of the aid out there now, from Citigroup, Fannie Mae, The federal gov't FHA, many states, JPMorgan Chase, Wachovia, and Bank of America/Countrywide have committed to helping over 4 million homeowners between them keep their homes. More info on the programs here.
http://www.needhelppayingbills.com/html/...
You have the option to be honorable when you have a steady flow of income. I don't mind the stigma coming from the religious or home mortgage financing crowd when I struggle with the basic needs of my family. Let's see: food on the table (assuming I can keep my table) or FICO score? Not a tough decision...
People need to remember that in Nevada the bank has the right to come after you later for the difference on what you owe and what they are able to sell the house for. This article should have advised people of the law. These banks have taken a big financial hit and will be coming after people later. They are not just going to help you out by erasing the difference. Banks have never been in business to help people, banks are in business to help themselves. Why would you trust the people that created this mess to be so forgiving later when they have a legal claim to the difference in price. I know that a lot of the posters on here have said that the banks are not going to chase everybody. Well if you can predict the future then why didnt you see all this happening ahead of time and make money shorting the market? These banks will create departments for foreclosure reclamation. They have every right under law to do so.
Which part of "buying a house may be the biggest financial decision in your life" did people not understand? Every investment has risk and there's no excuse for not doing your due diligence. Just because everyone was buying a house 3 years ago and you did too doesn't mean that you should foreclose because everyone now is doing that too. If it means choosing between paying the mortgage or food on the table, then I can only hope people will learn or be forced to move and live within their means.
If the government wants to address the economic downturn that is at least in part caused, and perpetuated, by the speculator-caused housing crisis, and if the government wants to spend billions of taxpayer money to "bailout" portions of the economy, then the government should consider these steps:
1) appraise every single owner-occupied residence in the US
2) provide a new FHA mortgage at that amount to the owner-occupant
3) pay off the difference to the mortgage holder
Housing crisis, done. Is it morally appropriate to bailout homeowners who used their homes as ATMs? No more or less than bailing out banks who made it possible by providing low-doc and no-doc loans - loans from liars to liars.
Moral outrage is everywhere because behavior on all sides has been morally questionable through this whole mess. The point is, we're already spending money in morally questionable bailouts, so why not spend some where it will do some good? Otherwise, even the morally upstanding will consider the immoral, and then what?
It would be best for most everybody to get the "deadbeats" out of homes as fast as possible, please, walk-away, the faster you do the faster we get to a bottom.
Now, if one really wants to have fun and games with the banks, play it this way. Don't pay your mortgage, taxes, insurance, HOA, LID/SID, only utilities. Wait until the lender's foreclosure sale (not Notice of Default) is going to happen, you must be notified within 30 days of the sale by law, then the day or two prior to the sale file Ch. 7 bankruptcy. All processes are "stayed", the lender has to basically have a hearing to even begin the foreclosure process again, meanwhile, one is still not paying on the mortgage, HOA, taxes, SID/LID. The Ch. 7 will eliminate the mortgage, and will in addition, give one an extra 7-10 months of free living in the home on the banks dime. The best part is that one can still maintain their credit card and auto payments if the home mortgage is the only debt that one would like to have dismissed. Consult state and fed. bankruptcy laws for complete details on income levels, and protected assets.
If done properly, one can live for free in their home for nearly 18 months. Make sure the lenders and banks know how much they are appreciated.
Moral minefield? Actually, it's quite straightforward.
When the resale value of the houses was on the rocket going UP, everybody was willing to accept the profit. Now that the resale value is down, you accept the loss.
Because you signed a contract.
Risks. Benefits. Profits. Losses.
A little morality-challenged? There's a lot of that going around.
Five years ago after a needed but non-insured surgery, which destroyed my credit scores, a nice young real estate agent offered me a 3-bed, brand new home for $191K with minimum down payment (I think about $5K)that she would also get financed. I refused. The monthly mortage, assoc fees, etc maybe $1100. I could've paid that but believed to would've put me in further debt, over my head. HOW DUMB of me!! As that property soared to $330K in value. Why I could have taken a second mortagage, bought fancy cars, trips to Spain, etc. BUT NO - I did the morally correct thing. I could NOT AFFORD it. Personal responsibility, anyone? Had I taken the house, got a refinance, I could be walking away today, head up high with my AIG brothers and sisters. Why did my parents teach me not to lie, cheat and steal? Because they must have been stupid.
LasVegas 2009 has his head up his proverbial A** again. It's estimated that it costs a bank 30-50K to try and get a judgment on the homeowner for the difference between the mortgage balance and the value of the house. No way they will chase someone down. What if he lives in Maine? They gonna drag him back here? No tax liability either-banned by Congress a few years ago. Look, if it even were to go to court, so many of the loans were Ninja and Alt A's that were borderline dishonest that a judge would ask the bank "What were you thinking?" I had a house in Houston once that lost 50% of its value. I wasn't working. Then I was offered a job 180 miles away. So LV2009, I should have simply kept paying on a useless unsellable house while paying for another rental out of town? Or simply pony up the difference in the homes value, and mail it to the bank? Man, people can be so smart-until they're put in a bad situation-falling values-then they learn the whole truth-the hard way... Hope you're next...
bdover: You are way off base! I suggest you read the laws or talk to an attorney. This is not Texas and this is not the 80's. We are talking about people with means to pay the monthly payments. These people if they walk away will be sued for the difference in what they owe and what the banks sells the house for. We are talking about people walking away because of negative equity [refer to the article]. They are not walking away because they can't pay or dont have money but because they are upside down. Your lack of knowledge is no excuse to come here and spew nonsense. If people are gonna walk away they need to understand that in NEVADA the bank has every right to come after them for the difference. They dont have to drag them back anywhere (another dumb ass comment) its called wage garnishment. Maybe you are able in your profession to work under the radar but most people work jobs where there income is reported. Please anyone thinking of walking away talk with an attorney. Not some former deat-beat (dbover) spewing stupidity....He just wants the rest of the country to come down to his level.
jk1313 has the right idea. Stick it to the banks by declaring bankruptcy just after receiving notice of sale. Save the mortgage payment to start over.
LasVegas 2009 is trying to scare people. Isn't Nevada law such that the bank has to do a special, personal foreclosure in order to obtain a personal judgment and that they can't do it after non-personal foreclosure has taken place? I suspect that banks don't try to get a personal judgment since the debtor can always declare bankruptcy.
saltydawg: Again we are not talking about people who are bankrupt, the article is talking about people who are walking away simply because of negative equity. You cannot just hand over the keys and not expect the banks to come after you. If I wanted to scare people I would tell them the stock market is going to lose half its value. We never assumed this would happen a year ago but it did. And assuming the banks are not going to go after MONEY is just closing your eyes. People need to be warned. The SUN should do and article on just what the banks are planning to do. At the very least the article should have covered the consequences of walking away.
"When the resale value of the houses was on the rocket going UP, everybody was willing to accept the profit. Now that the resale value is down, you accept the loss."
Well, that is true under a normal, morally-equal circumstance. This is neither.
Housing prices were unnaturally ratcheted up via speculation fueled by one thing and one thing only: Low-doc and no-doc loans provided by mortgage backed securities. Without those loans, "everyone" would not have turned into real estate speculators, and the values would not have been pushed unnaturally high. The risk was magnified out of control by SPECULATORS on all sides of the equation.
Now, a select few of those same speculators (banks) are being bailed out by the taxpayer, so why shouldn't the taxpayer see a little benefit from the bailout as well? If the banks who fueled the speculation can be bailed out because they got burned, then so can the taxpayer who is funding the bailout.
Again, I suggest the government reappraises and rewrites every single owner-occupied mortgage at 5% FHA, and, using bailout funds, pays off the difference caused by speculation. Otherwise, as homeowners continue to see their financial position weaken as banks' financial position strengthens, they will, with more frequency, choose to decide to walk away.
Otherwise, if we want to keep this on a morally-equal playing ground, NOBODY gets bailed out, and let the chips fall where they may.
I am searching for the moral high ground.
I accept that this difficult decision will be made by many to keep their family functioning rather than being bled by the institutions and greed of the rich. Others will walk away with a relatively light step.
Keep in mind that many contributed to this mess - greed by the rich and the rich in property - the encouragement by Andrew Cuomo when he was the HUD Secretary for unqualified people to buy homes and the promotion of the idea that homeowning was an ultimate value - the laziness of the successors in HUD who left in place many bums and perhaps the reluctance and difficulty in the present to really change, and many others contributed to the mess.
When Harry Truman had a Haberdashery that went broke he repaid everyone to whom he owed money as he was able.
I know of a few individuals who went bankrupt and similarly repaid their debts and satisfied all who had legitimate claims.
Ok, in the present I hope we find some similar stories both by big and small business as well as by individuals. May we forgive the others as in forgive us our debts as we forgive our debtors.
May the end come soon to this mess!
Purchased my home the "old-fashioned way" prior to the boom days: credit/employment/financial verifications...the whole 9 yards. Today my owner/occupied home is under-valued in a neighborhood of foreclosed homes. While there is enough blame to trash around, there seems to be no practical assistance for people like myself. I'm ready to damn' morality,the right thing and latch on to a "ME FIRST" mentality!
God, LV2009, you are worthless. First of all, there are over 20,000 foreclosures in the Valley. WAMU is gone, Countrywide is gone. So the banks that assumed the loans are going to sue? Garnishing wages for child support is one thing, no BK. But for a mortgage? No way. You must be a dumb lawyer. Did you know they can't touch an IRA? Or a 401K? An annuity? I tell you what-the next time you find someone who has had his wages garnished for non-payment of a mortgage, I'll send you 1,000 bucks. Cash. Just send me the credit report that states such a stupid, stupid idea. Won't happen, Bro. Go back to your evangelical life, LV-you are lost....
Comment removed by staff.
SHORT SALE
A short sale is where you negotiate with the bank to sell your property and give the proceeds to the bank. If you sold the property for less than your note to the bank, the bank will forgive the remaining debt. For example, you sell a property for $50,000 that you are indebted to the bank for $100,000. In a true short sale the bank forgives the remaining $50,000 that you owe the bank on the property.
FORECLOSURE SALE
A foreclosure is the sale of the property on the courthouse steps. When you default on your note to the bank, the bank can either sue you on the note or take back the property in which it is has a security interest. In a foreclosure sale, the bank sells your property on the courthouse steps but can sue you for the difference between what you owed on the note and the sale price on the courthouse steps. For example, you sell a property for $50,000 that you are indebted to the bank for $100,000. In a foreclosure sale the bank has 30 days to report the foreclosure sale and request a hearing with the court to get a deficiency judgment against you for the remaining $50,000 that you owe the bank on the property.
http://www.associatedcontent.com/article...
bdover:You can read it yourself. Or have someone read it to you.
And by the way there are 1000's of fillings by banks this year alone!!
http://homebuying.about.com/od/foreclosu...
bdover: You have done a major injustice to people by advising them to walk a way. You are responsible for the things you have lied about and need to confess your ignorance. In the future you need to never ever give foreclosure advise again. I just hope no one listened to you! You are a cancer!
LV-So sad, so slow, so foolish. From Foreclosure Guide:
"Banks rarely, if ever, sue former clients for deficiency judgments, though, because they know foreclosure victims do not have a lot of extra cash to pay down another judgment after losing their homes. It would take the bank too much time and money to sue again, when they didn't collect very much on their original foreclosure lawsuit."
"Lenders, of course, do nothing to dissuade homeowners from having the fear of wage garnishment. In fact, being sued after foreclosure, and the threat of losing their job, income, or other assets is often used by customer service representatives of mortgage companies to compel homeowners to keep making payments, even if they can not afford to do so. But foreclosure victims do not have to fear that the bank will come after their income during the foreclosure, and will not have to worry about the possibility even after losing the home."
LV, you are a prostitute for the mortgage industry. Sharp as an eraser, too. Hope you've lost your shorts....
dbover: just google "deficiency judgment". I dont have time to teach you the Law. You cant admit it when your wrong. Thats as sad as being a dead beat. Your a lost cause.
I think everyone who defaults on their loans should be jailed. Debtor's prison, like the old days.
This also goes for the banking criminals.
Why should I bail anybody out with my tax money?
I bought less house than I could afford, huge down payment, in a great area of the country (not Vegas) where there is a fundamental balanced supply/demand for houses.
Anyone who bought in Vegas from 2003-2007 is an idiot. Buying up a steep price appreciation curve only means one thing will happen: a crash.
TAKE RESPONSIBILITY FOR YOUR ACTIONS.
"... walk away from legally binding commitments."
Actually, not true. Fraud voids all agreements, and what many banks are doing is fraud on the largest scale imaginable.
The banks cheated everyone and are still cheating all of us. Although they've been bailed out many are now gouging their credit card customers. Check that out at http://www.usatoday.com/money/perfi/cred...
And that's not mentioning all national banks' credit card contracts are illegal to the point of being no contract at all.
Another article in today's Sun reported Obama now pleading for private investors to bail out the banks.
It's about organized greed, not playing that tired old "don't be a deadbeat, honor your obligations" play on good people's morality.
If you think you can handle the truth check out moneyasdebt.net
I used to deplore the huge cd and dvd counterfeiting industry in China, but now I have no problem with it. lol. It's an industry that doesn't destroy lives like the heroin industry, the subprime loan industry, or the student loan industry. It provides a service for consumers and it creates millions of jobs. Counterfeiting in China hasn't destroyed the world economy like AIG and it hasn't driven people to flee the country like Sallie Mae. Maybe cd copying is "wrong" but if you have the choice between paying $15 for a cd or copying a library copy for the 15 cent cost of a blank CD-R, what should you do? And incidentally Oprah Winfrey has hurt as many people as Bernie Madoff by telling teenagers to go to college and not warning them about the horrors of student loan debt. She must be getting kickbacks from Sallie Mae or Wells Fargo or some other student lenders. But then there's no right or wrong. It's simply "government of the money, for the money, and by the money" (that's from the DVD to "Captains and the Kings")
I think that we could solve the housing fiasco very easily if the government were to..
Offer a two and one half or three percent mortgage rate to any PRESENT or FUTURE homeowner/buyer who wants proceed this way..
Treat these home loans as a stock market type of investment
If the homeowner wants to take out a home equity loan or sells his home that money would be treated as short or long term capitol gains and taxed as such in the year that the money is taken..
Only exceptions would be for medical issues or student loans..
Low interest loans would be for primary residence only..
This would cut down on the use of your home as a checking account with the interest on the home equity loans getting written off on your income taxes.
The biggest problem with this solution is that it reduces the opportunity for people to "live the American dream"..
That being cheating on their taxes and getting 30 year loans on their BMWs.
Nothin' personal. It's just bidness!
Ok,
I'm gonna take the "High Road"...
While Trump Casinos,Station Casinos,Herbst Gaming,And,Probably MGM,And,Harrahs....File for Bankruptsy?
I'm Old-School,20 yrs ago I woulda been ASHAMED to file for Bankruptsy,But,Now I'm living in a Condo that has turned into a Budget Suites,That,I would be stuck in for the rest of my life due too the devaluation,And,The lawsuits for building violations.
I know its "Buyer Beware"...But,I never imagined this would happen.
Should I sacrifice the rest of my life for this?
I would like to ask Mr.Eckhouse, the author of this article one guestion. He says that honor doesn't quite play out like it used to. How is honor playing out with our illustrious financial institutions lately?
We're not seeing the moralist who continue to tax homeowners at previously inflated home value rates handing back rebate checks either.