Has anyone ever gone through a "strategic default" on their home?

[justamouse]

If any bank execs are reading this, I'm sure they are sighing in relief.

 

These loans aren't simple partnerships between individuals and their local bank. The big banks deliberately manipulated the mortgage market to generate massive amounts of new loans that could be repackaged and sold as investment vehicles. If they could have done it with auto loans, they would have. They took the reputation of mortgages and used that to sell high-risk loans as stable, low-risk securities.

 

When the high-risk borrowers began defaulting, the banks developed derivatives that allowed them to turn more profit on the very same shady investments that were collapsing. They shorted themselves and made more profit on their own bad judgement. Never mind what they were doing to the people they purport to be their "customers," you and me. We are not their primary concern, no matter what the marketing materials say. We are numbers on a spreadsheet that they used to create securities for their real customers.

 

The banks engineered this mess and figured out how to profit all the way down. And a big part of how they were able to do that was because they knew their "customers" were still in an old-fashioned mindset of Their Bank being there to partner with them and help them get their American Dream.

 

Welcome to reality. If you want that type of relationship, stick to your local credit union.

:iagree:

 

I went to open up an account at a large bank branch the other day and I got so sick with myself that in the middle of it, I told the manager (or whoever was taking my application) how I felt about it all and walked out. I just couldn't bring myself to do it.

 

The JAWM tagger, so, so funny. So, you basically want everyone to agree with YOU, and passive aggressively tagged the thread?

 

Funny how that shoe looks on the other foot.

[AngelBee]

DH and I have been discussing this as well. We are in the same position. We are having a hard time deciding tho when we do have the ability to pay each month.

 

So I am all :bigear:

 

Hmmm...I wish banks had the same scruples when it comes to their borrowers. For a bank, it is allowed to be purely a business decision. For individuals, conscience must be part of the equation. One reason I avoid doing business with banks when I can!!

 

This is what confuses me about business.

 

I always expect the best from myself in my business dealings. I always end up with the short end of the stick. :(

[DawnM]

I don't know what JAWM means.

[DawnM]

AH!!!!!

 

Thanks.

 

Just agree with me :)

[KS_]

And is your step-brother happy with his decision, or does he wish he'd just stuck it out? Has he had a hard time since then?

 

I think he's just fine with his decision (he lives in another state and we don't talk - I hear stuff from my mom). He was working part-time in the mortgage business before this, so knew a lot about it and what the impact would be. He's very fortunate that he has a very good friend who invested in another house in the area for him, and once he's able to (credit-wise), he'll take over the mortgage from his friend. For him (I believe - all this is second-hand), it was only a business/financial decision - there wasn't really an issue of if it was a moral decision. The housing market tanked, he was way upside down in his mortgage and lost his roommate, so wasn't able to make ends meet. He would probably never have been able to get his money back out of the house had he stayed, and with the bank unwilling to adjust anything, he got out.

[SueinNC]

One more thing...sorry!

What is your back-up plan if you a) cannot get a rental at all right after a foreclosure (beat out by other applicants, or whatever, b) have to settle for a much smaller rental than your home/what you would like, c) have to consider rentals outside of your DD's school district - would you be willing to move her?

I think it's absolutely necessary to find a soft place to land should you happen to fall flat.

 

 

And I would also add, if you or your spouse are suddenly thrust back in the job market, would you want your foreclosure to affect whether or not you get the job? Companies now do credit checks before hiring.

 

Would your monthly rental payments be more or less than what your monthly mortgage payment is now?

[AlmiraGulch]

:iagree:

 

I went to open up an account at a large bank branch the other day and I got so sick with myself that in the middle of it, I told the manager (or whoever was taking my application) how I felt about it all and walked out. I just couldn't bring myself to do it.

 

The JAWM tagger, so, so funny. So, you basically want everyone to agree with YOU, and passive aggressively tagged the thread?

 

Funny how that shoe looks on the other foot.

 

What's JAWM?

ETA: Never mind. Should have read the rest of the thread.

 

If that was meant for me....well....way off base. There's nothing to agree with. I have not made a decision, so there's nothing to agree with, which I've stated several times. Odd.

[CalicoKat]

Just wanted to point out that the same people who crashed the housing market got bailed out with taxpayer funds and continue receiving performance bonuses.

 

:D Thank you for saying this.

[Murphy101]

I'd agree with you, but the OP has essentially said that this is why she is considering the option of walking away.

 

No she hasn't. She has said that due to the overall bad economy she is worried that if she sticks with this loan, she could be screwed for years to come. It is not just an upside down mortgage. It's the devalueing of the dollar in general. She wants to make sure she gets the most use out of her money for her kids and her own future.

 

This is what confuses me about business.

 

I always expect the best from myself in my business dealings. I always end up with the short end of the stick. :(

 

Here is my take on this. I always try to be as educated about whatever business I'm doing as possible. In many cases, ignorant or too trusting people relied almost or entirely upon the guidance of others in these loans. The banker, the real estate company and so forth. All of which were either more ignorant than they or their clients knew or who knew full well they were playing a high stakes winner takes all gamble with the client. I knew many people who I strongly, dang near begged, to not take some of those popular deals. They ignored me because I was and am not a financial expert and they were confident it was a legal contract. (Not that anyone had to be a financial expert! This was basic math folks! And it was completely legal.). They were upset with me because they felt I should be happy for them. So I shut my mouth and tried my best to smile despite the fact that I could clearly see they were about to get hit by a train.

 

Now I have a home that is not upside down and I am still debt free. (ETA: debt free except for mortgage I mean.) And they are not. I'm not at all happy about that. I'm very very sad for them. Because to a certain extent they were right. They should have been able to trust the supposed expert professionals they were encouraged to do business with.

Edited May 23, 2012 by Martha
Auto mess up.

[CalicoKat]

I haven't read through all the other replies, but my step-brother did this a couple years ago - after going to the bank and trying to work with them to reevaluate what the home was worth. They didn't want to work with him and would rather go into foreclosure and then resell the house for less that what they could have renegotiated for with my brother.

 

The bank probably wouldn't even talk to him about re-negotiating UNTIL he missed three payments.

[Murphy101]

The bank probably wouldn't even talk to him about re-negotiating UNTIL he missed three payments.

 

Yep. When my dh was laid off, we tried to do the joke that is the home modification program. (yk, that program that it seems no one has ever been approved for?:glare:)

 

We were in very good standing and they would not do anything. Nada. Until me missed at least 3 payments. Then they wouldn't do anything because he had been laid off. Then they wouldn't do anything because he found a job. Then they wouldn't do anything because.....:glare:

 

Bailing them out was the most buttbackwards stupid thing ever done. If they don't need to renegotiate to stay in business, then they won't. In fact, they managed to figure out how to make more money in foreclosure than in renegoting loans.

 

ETA: We have never missed a payment. We were too scared to rely on anything the mortgage company said when we did some research and found out how horrid their reputation is in these dealings and how people who documented they were doing as the company directed still lost their homes. We only wanted to modify our loan because owing less per month would have made it easier to accept a job paying less if necessary. Also, it would have eased our burden if he had had to take a job out of state and sell the house.

Edited May 23, 2012 by Martha

[photomo]

One of my very good friends had to let her house go back to the bank and had to file bankruptcy 3 years ago because her husband just up and left her and the kids and it took forever before he was forced to pay child support.

 

3 years later she has worked hard on her credit and got her credit score back up to 645 which is pretty good after forclosure and bankruptcy. She just bought a house. It's a small house but works good for her and was actually able to get a loan at 4%.

 

She said she got a credit card with a small balance and would pay a bill with it and then pay it off the next month and kept doing that. The credit card company would at time increase her credit limit. She only used it to pay bills with and then paid it off. She said that is what helped her credit score go back up. She raised her credit score well over 100 points in 3 years and was able to buy a house. Obviously the bankrupcy and so forth was on her credit report but it most not have mattered.

[justamouse]

No she hasn't. She has said that due to the overall bed economy she is worried that if she sticks with this loan, she could be screwed for years to come. It is not just an upside down mortgage. It's the devalueing of the dollar in general. She wants to make sure she gets the most use out of her money for her kids and her own future.

 

 

 

Here is my take on this. I always try to be as educated about whatever business I'm doing as possible. In many cases, ignorant or too trusting people relied almost or entirely upon the guidance of others in these loans. The banker, the real estate company and so forth. All of which were either more ignorant than they or their clients knew or who knew full well they were playing a high stakes winner takes all gamble with the client. I knew many people who I strongly, dang near begged, to not take some of those popular deals. They ignored me because I was and am not a financial expert and they were confident it was a legal contract. (Not that anyone had to be a financial expert! This was basic math folks! And it was completely legal.). They were upset with me because they felt I should be happy for them. So I shut my mouth and tried my best to smile despite the fact that I could clearly see they were about to get hit by a train.

 

Now I have a home that is not upside down and I am still debt free. (ETA: debt free except for mortgage I mean.) And they are not. I'm not at all happy about that. I'm very very sad for them. Because to a certain extent they were right. They should have been able to trust the supposed expert professionals they were%2

 

 

It's almost painful, isn't it? I know. Dh and I told people till we were blue in the face not to take these deals. We begged and pleaded. But those experts were slick and many people are not as business savvy as my Dh. They trusted those bankers, those appraisers and those mortgage brokers. We never did.

 

We bought in the first low, and we sold in this low and bought in this low. It SUCKED being poor (saving) while everyone was spending $ left and right, buying houses, and man, it all looked good on paper.

 

We're debt free,have a new, big house, and are *now* splurging. It's a bittersweet success because my old town is about 70% foreclosures.

Edited May 23, 2012 by justamouse

[TranquilMind]

Heather in NC:

Once upon a time a newly divorced woman bought a house with her divorce settlement money during the height of the housing market for $250,000 because, according to the appraisers who were HIRED BY THE BANK, the house was WORTH that amount.

 

First of all, the buyer was not staking his purchase on the opinion of the appraiser. Appraiser's job, back in the day, was merely to rubber stamp purchases. You have to do your own value calculation, not trust an obviously biased party.

 

People who were experts in the field of real estate and banking told her that this house was worth that amount (and yes, houses ARE touted as an investment). So the consumer gets the mortgage for this house.

 

No, they are not "experts". They are hired hands. They were making NO representations of value; it is printed RIGHT ON the appraisal.

 

The customer did what he wanted. He bought a house and assumed the risk of the value going up, down, or staying the same. This was an assumed risk, not one foisted upon him without his knowledge.

 

If the house wasn't worth that amount then banks should not have loaned that amount. But they did.

 

The bank loaned the money IT could justify at the time, with NO promises of any future appreciation. Buyers gambled; buyers lost.

 

 

Five years later, that same house now might sell for $75,000 if she is lucky. This person now owes $175,000 more than what the house is worth.

 

That's what happens with gambling, which we ALL do when we purchase a product, an investment, or anything else. We gamble that it will be worth the money we think it is worth. Some win. Some lose.

 

 

But here's the thing no one is mentioning: THE BANK HAS THE HOUSE. And it is a nice house. And the bank can sell it or write it off as a loss on their taxes, etc. The bank has choices.

 

Sure, the bank has the house, which it took as collateral for a large loan. You can't get a large loan on your good name anymore. The bank has choices and so did the individual who chose to walk away.

 

What choice does this woman have? Who in their right minds would pay $250,000 for something that is only worth $75,000? So they can keep their reputation? With whom?

 

Well, she has to live somewhere, first of all. A house is NOT an investment; it is a product that serves a purpose - shelter. Walking away has disastrous effects on creditworthiness, insurance rates, job selection...so many areas. No one should do this because they aren't happy with their bargain.

 

So what happened to this woman? She pulled $50,000 out of her 401k and paid cash for a smaller house that had been foreclosed on (a house that used to sell for about $150,000 a few years back) one week before she retired. She now lives debt-free and worry-free. And she was able to get credit cards without any hassle within one year of the foreclosure.

 

I call that a smart decision.

 

That is one way to look at it.

[TranquilMind]

jdahlquist: The issue isn't that she is paying $250,000 for something worth $75,000. She DID buy something and paid $250,000. That is in the past. That $250,000 went to the previous owners of the house. She didn't have $250,000, so borrowed it from the bank. Her decision now is not whether she should pay $250,000 for something worth $75,000; her decision is whether to honor the agreement she made with the bank.

 

Exactly. This "others do wrong so it's ok for me to do what they do" argument just isn't working for me. It doesn't work when my kids try it either.

 

Would it be "strategic" if she saw a pair of shoes she loved for $100 in Macy's, but didn't have the cash to pay for them. So she charged them on her bank credit card. After she wore the shoes for a while, she saw they were on sale for $25. She was upset because she owed the bank $100 for something that was only worth $25! So she decided not to pay her credit card bill.

 

Yeah. Same logic.

[TranquilMind]

Heather in NC;: Ah but see, the previous owners did not owe $250,000 on the house. That is just how much they were told by an industry professional that they could get. So they put it on the market for that amount. Then another industry professional says, "Yes! We agree that it is worth it...so much so that we are going to loan you the money for it!" They took a risk that the house actually was worth it.

 

No, no, no. Maybe "industry professionals" make all of YOUR decisions, but most adults make their own decisions as to the value and worth of something. Is this a wise purchase? Can we afford it? Can we afford it if the market tanks? Do we have a plan to get out if we need to? Can we live up to the agreement we are signing?

 

 

Or did they? Because it seems to me that there was a lot of news about faulty lending practices by the banks ... Giving consumers mortgages based on inflated appraisals just so they could sell bigger mortgages.

 

Ok, but whose fault is it for accepting those bigger mortgages. Nobody held a gun to the buyer's head.

 

It was a gamble and everybody lost. But the government bails out the banks for their bad gamble. Who bails out the little guy?

 

Nobody. Gambling has always been a bad idea and will come back to bite you.

 

If the industry professionals either lie to make more money or gamble it away at least they get the house back and can make some of their money back and can write the rest of it off. But what happened to this woman's divorce settlement she used for a down payment?

 

She made a decision that didn't work out. She could have made a different decision. Or this one could have worked out beautifully....assume it is 2004 in San Diego? She could have walked away with millions upon resale. Some did, in those days. Those who gambled in recent years will not.

 

I'm one of the latter, but I don't try to foist my responsibility on others. It isn't like it is brain surgery and I could not assess the risk of this technique of removal of a tumor vs. that technique. It was financial. There are risks. Anyone who pretends otherwise is disingenuous.

 

 

So back to your shoe analogy. It is really more like she bought a pair of designer shoes for $100 because they were supposedly worth it only to find out later that they were knock offs and not the real thing and so not worth what she paid. But somehow the store owner gets to take the shoes back, sell them to someone else for a lesser amount and the woman gets no money back and has no shoes.

 

So, the house wasn't the real thing? Yeah...it was the same house she happened to buy in a time just prior to a market crash.

 

Your analogy doesn't work. It wasn't as if she signed the mortgage and deed for a single family house and then received a cardboard box or shed to live in.

Edited May 23, 2012 by TranquilMind

[TranquilMind]

This thread has been extremely interesting to me. I find that, in general, people expect a certain level of behavior from people but often excuse corporations from behaving morally since their purpose is profit. .

 

Who is "excusing" it? No one excuses abominable behavior, and let me tell ya, "Vengeance is mine, sayeth the Lord; I shall repay". Yep, cheating people is right up there on the list of abominations. It will come crashing down.

 

But what most people are having difficulty with is the "Well the bank is unethical so I can be unethical too, without qualms." Um, no.

[Barb_]

We've been toying with the idea for the past couple of years. We moved here in 2005, and prices were too high so we rented for a year, squeezing 6 kids into an 1800sqft 3/2 with a tiny rock yard because rents were artificially high (no one could afford to buy). We bought in late 06 when the market tumbled figuring the house might depreciate slightly before it bounced back, but we never imagined we'd still be here watching our property value slide. We paid $479K (Arizona was almost as expensive as CA back then) for a 2900sqft house. This was after the builder had knocked $180K off the price (original buyer never showed up for the walkthrough). We thought we were getting a deal. Now this house is worth about $215K. Blech :::shudder:::

 

Dh lost his job here in town back in April of 2010. He moved to San Francisco and then to Chicago without us...so my 3yo doesn't even remember her daddy living in the same house. We can't afford to rent it out because rents are still $1000 a month cheaper than our mortgage payment. We haven't walked away because our entire life savings is in this house...over $100K. We thought we were doing everything right, but we're in over our heads because we needed a place to live.

 

Did you know that there was a mortgage settlement signed back in February that was supposed to help people like us who are under water? I would LOVE to have a 3% mortgage rate so I could put the extra toward principle and pay it down faster or else afford to rent it out and move back in with my husband. But guess what? Many of the states are taking using that settlement money to temporarily plug their budget gaps.

 

Morals can only take you so far when you are in essence, under attack. Allowing bullies to repeatedly punch you in the nose doesn't make you morally superior...it makes you a chump.

[AlmiraGulch]

Who is "excusing" it? No one excuses abominable behavior, and let me tell ya, "Vengeance is mine, sayeth the Lord; I shall repay". Yep, cheating people is right up there on the list of abominations. It will come crashing down.

 

But what most people are having difficulty with is the "Well the bank is unethical so I can be unethical too, without qualms." Um, no.

The banks were huge contributors to the reason SO many homes lost such an extreme amount of value. The circumstances are extenuating. The loans were not made in good faith; rather, the loans were made using unscrupulous practices. The general public had no idea what they were getting into. Now, we do. It was unprecedented.

 

And actually, it's pretty simple. The two parties have entered into a contract. If the person who took the loan fails to pay it back per the terms of the contract, then the lender takes back the property. Those terms are clearly stated in these types of contract. There are rules, and there are consequences for breaking them. No where in the contract I signed for my home did it say "if you don't pay this loan you're a horrible, immoral person who will be shunned by your community and go directly to hell." I cannot even wrap my head around that line of thinking.

[Barb_]

And actually, it's pretty simple. The two parties have entered into a contract. If the person who took the loan fails to pay it back per the terms of the contract, then the lender takes back the property. Those terms are clearly stated in these types of contract. There are rules, and there are consequences for breaking them.

 

Exactly. If something happened (job loss, medical bills, small business bankruptcy) in a boom time, the bank would wind up with a house that cost thousands more than they lent. The bank was hoping the property would appreciate, but they were taking the chance the price would go down just as the buyer was. The bank is either paid the mortgage, or receives the property. It's cut an dry. Giving up the property *is* fulfilling the terms of the contract. There is nothing morally suspect about fulfilling the terms of a contract.

[Murphy101]

But what most people are having difficulty with is the "Well the bank is unethical so I can be unethical too, without qualms." Um, no.

 

 

I would agree that would be wrong.

 

I do not agree it applies to this situation.

 

Mortgage company creates false inflated pricing, which makes it hard to impossible to find a home not jacked up. Then mortgage company creates legal but shady loans. All of this is presented to buyers as legit reasonably safe options. This is called predatory lending for a reason. Mortgage company puts in those shady loans a penalty clause for defaulting.

 

Buyers realize they were screwed but still have to make the best of this crappy loan they are left holding. Buyer decides the contract is such poo, the penalties are worth more than the contract. If the loan is an example of predatory lending, using this penalty is an example of prey getting away only with a scarring bite instead of sticking around to let the predator finish them off. I simply do not find that immoral at all.

 

As for buying a home being a gamble. It buying a home is as risky as poker where buyers have to hope the mortgage industry isn't bluffing - count me out. I don't gamble. And most responsible Americans wouldn't ever sign up for that deal either.

[AlmiraGulch]

 

Buyers realize they were screwed but still have to make the best of this crappy loan they are left holding. Buyer decides the contract is such poo, the penalties are worth more than the contract. If the loan is an example of predatory lending, using this penalty is an example of prey getting away only with a scarring bite instead of sticking around to let the predator finish them off. I simply do not find that immoral at all.

 

As for buying a home being a gamble. It buying a home is as risky as poker where buyers have to hope the mortgage industry isn't bluffing - count me out. I don't gamble. And most responsible Americans wouldn't ever sign up for that deal either.

 

You said "poo". It made me giggle. :D (But yes, I agree with this assessment entirely. Now I'm just trying to determine if the risk is worth it).

[Barb_]

 

Morals can only take you so far when you are in essence, under attack. Allowing bullies to repeatedly punch you in the nose doesn't make you morally superior...it makes you a chump.

 

Giving up the property *is* fulfilling the terms of the contract. There is nothing morally suspect about fulfilling the terms of a contract.

 

I know it sounds like I'm arguing with myself here, LOL The first quote referred to the above discussion about whether a person's usual moral code should come before defending her family's financial future, and the second is closer to my actual belief regarding the actual mortgage situation.

[Murphy101]

I know it sounds like I'm arguing with myself here, LOL The first quote referred to the above discussion about whether a person's usual moral code should come before defending her family's financial future, and the second is closer to my actual belief regarding the actual mortgage situation.

 

That's okay. I argue with myself every day.:)

[Barb_]

You said "poo". It made me giggle. :D (But yes, I agree with this assessment entirely. Now I'm just trying to determine if the risk is worth it).

 

How old are you? My age is really giving me pause. We're in our mid-40's and I'm having a hard time walking away from our life savings. Even if we could get a mortgage (my parents have offered to help with the down payment), do we really want to face paying it off in our 70's? There isn't any way we can afford to do a 15 year in the Chicago suburbs.

[Barb_]

That's okay. I argue with myself every day.:)

 

I figured I'd better call myself on it before someone else did. :D

[KS_]

And actually, it's pretty simple. The two parties have entered into a contract. If the person who took the loan fails to pay it back per the terms of the contract, then the lender takes back the property. Those terms are clearly stated in these types of contract. There are rules, and there are consequences for breaking them. No where in the contract I signed for my home did it say "if you don't pay this loan you're a horrible, immoral person who will be shunned by your community and go directly to hell." I cannot even wrap my head around that line of thinking.

 

I agree.

[Jane in NC]

 

But what most people are having difficulty with is the "Well the bank is unethical so I can be unethical too, without qualms." Um, no.

 

What is being debated is whether breaking a contract is indeed unethical.

 

Consider the state of Michigan which is having some financial problems. The legislature is rewriting its agreement with retired teachers. In more prosperous times, the state agreed to pay x amount of a retiree's insurance premium. Teachers planned their retirements on this promise. Now the state wants retirees to pay more.

 

Who has the ethical higher ground here? Retirees who were promised something or the legislature that has to pay the bills?

 

Pension plans that have been underfunded have reneged on their promise to pay a certain amount to members of the plan. Is mismanagement of a fund unethical or just a bad business decision?

 

What I was trying to suggest in my previous post is that corporations, institutions and governments rewrite the script often. Yet there is a suggestion here that a consumer--a person--cannot. I am not judging. I am just making notes on the conversation.

[eloquacious]

My husband recommends these articles:

 

http://www.law.arizona.edu/faculty/getprofile.cfm?facultyid=278

 

Read the ones entitled

1) Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis

 

2)The Morality of Strategic Default

[AlmiraGulch]

How old are you? My age is really giving me pause. We're in our mid-40's and I'm having a hard time walking away from our life savings. Even if we could get a mortgage (my parents have offered to help with the down payment), do we really want to face paying it off in our 70's? There isn't any way we can afford to do a 15 year in the Chicago suburbs.

DH and I are both 40, and this is one of the things I"m also considering. The thing is....a. 15-year in the Atlanta suburbs isn't so out of the question. I've done a 15 year previously and it was completely do-able. I'm thinking unless the market rebounds at the same rate it declined (which, of course, it won't) that if I were to buy again in a few years (even at a rate higher than where I am now, because of my would-be damaged credit) I could re-fi a few years after that to a 15. Honestly, I hadn't thought that all the way through until right this very minute, but....it could be an option if I go this route.

 

Also, I just spoke to a Realtor friend of mine who does many, many short sales and foreclosures in my area. She had me first speak with a broker friend of hers who does a lot of work with the mortgage "programs" that have popped up that no one seems to qualify for. Well.....as I suspected, I don't qualify, either. So, there's that.

 

Her recommendation was for me to stop paying now, and put the house on the market right away. Then, after three months the bank would likely start working with me on a short-sale option, which of course would be much less detrimental to my credit. I suppose I could do that, but I wasn't planning to move that soon! Now I have to decide if I want to go through the hassle of getting my house ready to show. It's a lot of work, but worth a thought. Plus, there's not guarantee she could even find me a buyer, so it could take longer and end up in foreclosure anyway. Food for thought....

[Jen500]

I don't have any advice. It sounds very stressful. Good luck with whatever you decide to do.

[Murphy101]

How old are you? My age is really giving me pause. We're in our mid-40's and I'm having a hard time walking away from our life savings. Even if we could get a mortgage (my parents have offered to help with the down payment), do we really want to face paying it off in our 70's? There isn't any way we can afford to do a 15 year in the Chicago suburbs.

 

This is us. Back when we only had 4 or 5 kids and were younger, home ownership and debt wasn't as scary. Now we know it would be near impossible to find a rental, much less afford it for our family of 12. Plus, 20 years from now we might not be healthy enough to work, that really wasn't something we thought about when we were closer to 30 than 40. And then there is the desire to help our older children launch into adulthood with as much chance of success as we can give them. So for now, walking away from our home would not be consideration. Ideally we hope to one day sell for enough profit to buy our forever retirement home. Mostly because this is a 2 story and I can't picture my already bum hip getting me up and down the stairs if I live to 80.

[Barb_]

DH and I are both 40, and this is one of the things I"m also considering. The thing is....a. 15-year in the Atlanta suburbs isn't so out of the question. I've done a 15 year previously and it was completely do-able. I'm thinking unless the market rebounds at the same rate it declined (which, of course, it won't) that if I were to buy again in a few years (even at a rate higher than where I am now, because of my would-be damaged credit) I could re-fi a few years after that to a 15. Honestly, I hadn't thought that all the way through until right this very minute, but....it could be an option if I go this route.

 

If I were in your position, I'd do it. Our circumstances are such that I'm not quite there yet.

[Jane in NC]

My husband recommends these articles:

 

http://www.law.arizona.edu/faculty/getprofile.cfm?facultyid=278

 

Read the ones entitled

1) Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis

 

2)The Morality of Strategic Default

 

From the latter:

Think of it this way: When you got your cell phone, you likely signed a contract with your carrier in which you promised to pay a set monthly payment for two years. Let’s say, though, that two months after you sign your contract, the price of cell phone service drops by half—meaning that the same cell phone service for which you pay $100 a month could be had for $50 with another carrier. You decide that you would be financially better off paying the early termination fee of $300 rather than $100 a month for twenty-two more months of the same service that you can now get for $50.

 

Would it be immoral for you to break your contractual promise to pay $100 for two years and elect instead to pay the early termination fee? Of course not. The option to breach your promise to pay is part of the contract, as is the con*sequence of breach—a $300 early termination fee. There is absolutely noth*ing immoral about exercising your option to breach, and you’d be financially wise to do so.

 

Though a mortgage contract is more substantial than a cell phone cont*ract, it’s no different in principle. Like a cell phone contract, a mortgage contract explicitly sets out the consequences of breach.

 

In short, it’s simplistic to suggest that it’s always immoral to break a promise. A more accurate description of the social norm is that one should keep one’s promises unless one has a compelling enough reason not to do so.[21] For example, needing to move in order to take care of a seriously ill family member would be a good reason, at least in most people’s estimation, for a renter to break a lease agreement. The renter would still have to face the risk that the landlord might pursue the remainder of the lease payments, but few would think the renter immoral for taking that risk. Indeed, not only is breaking a promise frequently acceptable, sometimes it’s the most moral thing to do.

 

This is no less true for a mortgage contract.

 

Thank you for the link. Is this issue as black and white as some paint it?

[Barb_]

This is us. Back when we only had 4 or 5 kids and were younger, home ownership and debt wasn't as scary. Now we know it would be near impossible to find a rental, much less afford it for our family of 12. Plus, 20 years from now we might not be healthy enough to work, that really wasn't something we thought about when we were closer to 30 than 40.

 

Yeah, pretty much any other choice would leave us financially a lot worse off than we are right now $250K underwater. It s*cks being separated, but hey...we're getting out of the desert for the summer and headed to Chicago. It's not all bad!

[AlmiraGulch]

My husband recommends these articles:

 

http://www.law.arizona.edu/faculty/getprofile.cfm?facultyid=278

 

Read the ones entitled

1) Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis

 

2)The Morality of Strategic Default

 

Thank you, and your husband! Very interesting reads.

[Amber in SJ]

I call shenanigans on the cell phone example (this is what we do at our house when someone is trying to use BS to make a point.)

 

When you signed a two year contract on a cell phone you agreed to pay $100/ month for cell service. You did not, however, borrow $2400 from a pool of other peoples' money and agree to pay it back at $100/ month which is what you did with your mortgage.

 

I don't understand the crying foul when the value of a house decreases. I don't remember getting the guarantee when I signed my mortgage papers that my home would increase in value. I know plenty of people who retired on the equity in their home when they sold at the height of the bubble (Bay Area, here, people....the bubble was ridiculous) I know people who were able to send their kids to college on the equity in their home. Will I be able to do that? No way. Did the banks do me wrong? Nope. I made the decision to buy the house.

 

The whole idea of not paying when you are able to, just because you no longer like the terms, and the willingness to squat in your house while not paying does say something to a person's character.

 

Amber in SJ

[AlmiraGulch]

The whole idea of not paying when you are able to, just because you no longer like the terms, and the willingness to squat in your house while not paying does say something to a person's character.

 

Amber in SJ

 

According to you.

[Bluegoat]

Who is "excusing" it? No one excuses abominable behavior, and let me tell ya, "Vengeance is mine, sayeth the Lord; I shall repay". Yep, cheating people is right up there on the list of abominations. It will come crashing down.

 

But what most people are having difficulty with is the "Well the bank is unethical so I can be unethical too, without qualms." Um, no.

 

Some are, actually. They say that it is different when businesses or banks engage in that kind of behavior because the purpose or moral imperative of business is to pursue profit for the shareholders. That perspective has been voiced on this thread.

 

Even people who don't embrace that view often tend to give different weight to the actions of businesses to try to maximize profit. It is viewed as distastful but not viewed in the same way we would view an individual who did similar things. Legally the consequences aren't always comparable either. I think of a mining disaster here a number of years ago where it was shown that the mine owners were absolutely responsible for ongoing unsafe conditions in the mine. But because they can't be considered criminally responsible, they are living nicely on the profits in another province now.

[ilovemy4kids]

That being said, when you signed the loan you promised to pay it back. I couldn't walk away from something that I said I would pay for if I had any way of continuing to pay for it.

:iagree:

[TranquilMind]

And actually, it's pretty simple. The two parties have entered into a contract. If the person who took the loan fails to pay it back per the terms of the contract, then the lender takes back the property. Those terms are clearly stated in these types of contract.

 

No, they aren't terms, but are a mitigating factor for the lender of default. Yes, lender loses loan because owner bails, but lender can take asset and resell for what he can get, and then usually, go right back after borrower for the defaulted amount.

 

The agreement that a borrower made in the promissory note with the mortgage issuer was to repay money borrowed, period, not only if the property retains or gains value. No where in the mortgage contract does it state that the borrower isn’t obligated to repay the loan if the housing market fails to continue to rise.

 

Morally, what it teaches your children is that honoring obligations and taking full responsibility for the decisions you make is optional, and completely relative to your comfort factor.

 

Not a message I personally want to send (and again, this does not apply in catastrophic situations)

Edited May 24, 2012 by TranquilMind

[TranquilMind]

Amber in SJ;I call shenanigans on the cell phone example (this is what we do at our house when someone is trying to use BS to make a point.)

 

When you signed a two year contract on a cell phone you agreed to pay $100/ month for cell service. You did not, however, borrow $2400 from a pool of other peoples' money and agree to pay it back at $100/ month which is what you did with your mortgage.

 

I don't understand the crying foul when the value of a house decreases. I don't remember getting the guarantee when I signed my mortgage papers that my home would increase in value. I know plenty of people who retired on the equity in their home when they sold at the height of the bubble (Bay Area, here, people....the bubble was ridiculous) I know people who were able to send their kids to college on the equity in their home. Will I be able to do that? No way. Did the banks do me wrong? Nope. I made the decision to buy the house.

 

EXACTLY. Cell phone issue is TOTALLY irrelevant here as there was no borrowing and promise to repay.

 

The whole idea of not paying when you are able to, just because you no longer like the terms, and the willingness to squat in your house while not paying does say something to a person's character.

 

Yes, ma'am. It sure does. And the kids are watching.

[Free]

I tend to agree. It's one thing to take one of many bad choices when there are no good ones available, but it would be quite different, to me, to default on a promise because I no longer liked the ROI I was getting.

 

I disagree. This is a business transaction. You did not make a "promise" to the bank, you agreed to a contract. It is perfectly OK to consider options to break a contract when it is no longer working for you.

[Free]

I would only if I felt the long term results were worth it.

 

It's a standard business decision that companies have to make every day. Is X investment paying off or not? If it isn't, how can it best be either made profitable or loss reduced?

 

Have you considered asking them to forgive the deflated difference and refinances with you? Can't hurt to ask?

 

At the least, I would try to refinance if it is worth the cost.

 

I would even consider bankruptcy.

 

Otherwise, keeping a bad investment is just bad financial planning. That's money better used for your children's education or your retirement fund.

 

There is no moral imperative to keep a bad investment.

 

Talk to your lawyer about all your options and what the long term affect is likely to be for you.

 

:iagree: 100%. This is purely financial decision. Question of morality does not come into this at all.

[Jane in NC]

I call shenanigans on the cell phone example (this is what we do at our house when someone is trying to use BS to make a point.)

 

 

EXACTLY. Cell phone issue is TOTALLY irrelevant here as there was no borrowing and promise to repay.

 

 

OK--so neither of you like the phone argument which came from the previously posted article, The Morality of Strategic Default. What did you think of other points in this article which I believe raises a valid question, namely,

Why take homeowners, and not lenders, to task for putting their own financial interest ahead of the common good?

 

The Tishman Speyer and Morgan Stanley examples in the article resonate with me because I live in an area of zombie developments. The developers in question are still around, often peddling properties in developments without infrastructure, even buying new properties despite having not paid millions in back taxes to the county. It's a business decision, you know?

 

So toss out the cell phone example and tell me why residential mortgage contracts are a sacred trust but not commercial contracts. In an earlier post, I commented on a state which promised retiring teachers that they would pay x amount of their insurance premiums but are now increasing it to y. Why is this not considered unethical but practical?

 

I have not been in the shoes of those who were stung by the housing crisis but I am trying to understand their point of view. Finance is easy for me. It is the ethical question that becomes compelling.

[Free]

This thread has been extremely interesting to me. I find that, in general, people expect a certain level of behavior from people but often excuse corporations from behaving morally since their purpose is profit. Rather fascinating...

 

I know right? It is indeed fascinating...

[Free]

Morally, what it teaches your children is that honoring obligations and taking full responsibility for the decisions you make is optional, and completely relative to your comfort factor.

 

Not a message I personally want to send (and again, this does not apply in catastrophic situations)

 

Actually, I would want to model making sound financial decisions to my children.

[Heather in Neverland]

Actually, I would want to model making sound financial decisions to my children.

 

:iagree:

[justamouse]

Actually, I would want to model making sound financial decisions to my children.

 

:iagree:

 

With amortization on a mortgage, the bank is out nothing. If anything, they make MORE money, because now they have the ability to sell the property to another person who is paying gobs of interest on the front end.

 

That's why this Abe paid his debts off story doesn't even relate to this.

[AlmiraGulch]

No, they aren't terms, but are a mitigating factor for the lender of default. Yes, lender loses loan because owner bails, but lender can take asset and resell for what he can get, and then usually, go right back after borrower for the defaulted amount.

 

The agreement that a borrower made in the promissory note with the mortgage issuer was to repay money borrowed, period, not only if the property retains or gains value. No where in the mortgage contract does it state that the borrower isn’t obligated to repay the loan if the housing market fails to continue to rise.

 

Morally, what it teaches your children is that honoring obligations and taking full responsibility for the decisions you make is optional, and completely relative to your comfort factor.

 

Not a message I personally want to send (and again, this does not apply in catastrophic situations)

 

You are correct in that the lender can sue the borrower for the defaulted amount in a recourse state (mine is one). However, that is still part of the deal. Those are the terms. It is still a consequence of failing to repay, and one that I may or may not choose to accept.

 

Your telling me what it teaches my children based on your moral compass is completely irrelevant. And really, incorrect. If I (or my children) choose to make a specific decision, and there are consequences because of that decision, I am still taking full responsibility for that decision. If I choose to walk away from my mortgage, I will be fully and wholly responsible for any repercussions, including any tax or financial implications that go along with that decision. I may, in the end, decide that it is a better decision financially for my family to assume that risk. There is nothing immoral about that, or even illegal.

Edited May 24, 2012 by QValencia