My aunt walks away
My aunt lives down in the Portland area, and about two years ago (I think) she bought new construction in a small development (<2 dozen units). She was one of the first to buy in the development, and at the time I commented to my wife that despite my aunt's assurances that the builder gave her a "great deal," it seemed likely that the remaining houses in the neighborhood would sell for consecutively less as time went on.
Well, I was talking to my mom last night, and sure enough, that's exactly what happened. It wouldn't be a big deal of course if she had gotten a 30-year fixed, but guess what, she didn't (who did in 2006?).
Problem #1: Apparently she did some sort of financing directly through the builder that required her to refinance this year.
Problem #2: She put practically nothing down.
Problem #3: Since all the houses that have sold since hers have sold for less (including larger ones), her house won't assess for what it needs to for her to get a normal, sane mortgage through a bank.
Solution: Walk away. She's handing the keys back to the builder and bidding them farewell.
Now I actually know someone first hand that has walked away. Note that the fact that she is losing "her" house does not mean she's going to end up on the street. It's basically just as if she's been paying rent the last few years, and will move on with her life just like anyone else.
Well, I was talking to my mom last night, and sure enough, that's exactly what happened. It wouldn't be a big deal of course if she had gotten a 30-year fixed, but guess what, she didn't (who did in 2006?).
Problem #1: Apparently she did some sort of financing directly through the builder that required her to refinance this year.
Problem #2: She put practically nothing down.
Problem #3: Since all the houses that have sold since hers have sold for less (including larger ones), her house won't assess for what it needs to for her to get a normal, sane mortgage through a bank.
Solution: Walk away. She's handing the keys back to the builder and bidding them farewell.
Now I actually know someone first hand that has walked away. Note that the fact that she is losing "her" house does not mean she's going to end up on the street. It's basically just as if she's been paying rent the last few years, and will move on with her life just like anyone else.
Comments
That belief lives on from an era when a huge hit like this was a big deal. Now, you can easily get credit even with a bankruptcy on your record. She'll be able to rebuild her credit over time.
Also, the value and importance of credit scores are drastically overstated. With the exception of your home, if you are using credit at all you have already made a mistake. His aunt will be fine, and the small premium she may pay will be easily offset by not being $100k underwater on her home.
If I owned a bank, I would be pissing myself hearing stories like this one. It's one thing to accept the reality that some people will walk away. But you absolutely do not want water-cooler discussions where people exclaim the virtues and tell how happy they are. I think this might be a grassroots campaign they won't be able to stomp out.
Right or wrong, more landlords are doing that as the economy worsens. It would not surpise me if other bubble states are doing that too. Hope your aunt finds one of the good old school landlords.
Just sayin'
A foreclosure and bankruptcy are not the same thing.
I wonder if Foreclosures will become like bankruptcies in Walk-Away cases in the same way. Do they not appear on credit reports?
I wish I could remember the source, but I read something not long ago that some people in CA were being refused rentals because of a foreclosures. Maybe it's because many people are spiraling down financially, and a foreclosure also triggers a bankruptcy?
That may not be the cause with Tim's aunt, but it is for others.
We also bought a car with crudy credit from non payment on the house, we actually got a better interest rate on the car then our previous car with good credit(before walking away high 700's)
I'd elaborate on this further that there is absolutely no ethical case against it. By walking away, you are making an educated guess as to which cost will be higher; the cost to pay back the loan or the cost to your trustworthiness as a borrower if you return the house in lieu of the loan. It's clear what the financial cost of paying the loan is, it's less clear what the total cost of walking away is. This is no different than when an airline cancels an airplane order or when you pay a service termination fee to cancel a cell phone.
There is nothing "honorable" about making huge payments on a home that is a pit financially. Smart business people face this same type of decision every day. You cut your losses and move on.
In California (a year ahead of Seattle) it is becoming a strategy for people to find their new home at the lower values (20% to 30% discount to their underwater mortgage) with the same quality house.
Get a mortgage on the new home while your credit is good, then move to the new home (with the much lower payment) and mail the keys to the bank for the underwater equity home.
It is happening. I recall reading about it a few weeks ago.
For those with the income and who can afford to make their payments, even though they are underwater, this makes financial sense to do. The credit score impact of a foreclosure is not the end of the world. At the end of the process, it is a $0 balance and debt collectors are not hounding you.
You could likely even dispute it off of your credit reports within two years.
Then there is Plan 9, but that is from outer space and a topic for another thread.
No, no, no, no, no. Defaulting is the contractual obligation of each party if the borrower chooses, for any reason, to stop paying. If you want to discuss Christian ethics, then the bank sins by loaning with usury. As Shakespeare writes, "neither a borrower nor a lender be".
Defaulting is neither moral nor immoral; it is amoral. There may, however, be a social stigma for people who default, which if you pay attention has been exhibited in this thread.
Regarding stigma. It is not an issue to me. I don't let other people determine what I should "feel guilty about".
'Course the whole thing is moot for me on a personal level since when I finally did decide to buy I looked at the market and said "only a 'greater fool' would buy a house in this market". If I had knownd the gov would bail out all those fools though...
Is there anything that says what happens when you violate that promise? If so, it is actually saying "you promise to either pay the amount or give your approval (in writing) for plan B to happen."
'Course, if it is a "non-secured" loan, that's a whole 'nuther ball game...
That is soooooo 20th century. :-)
If you feel that your personal ethics dictate that you stay with a bad investment no matter what the circumstances, then so be it.
Many people feel an ethical obligation to make appropriate financial decisions to better take care of their familes and their financial future. If that means letting go of a home which has a negative financial outlook, then there is nothing wrong with that.
Contracts are broken in business all of the time. The contracts typically have provisions to handle those scenarios where one party or the other does not perform. This scenario of owning a home is exactly the same. If one party (the home owner) does not perform on the contract (pay the mortgage) then the other party (bank) can foreclose and take back possession of the property.
There is no ethical issue here. This is a simple contract. We make the best choices available to us based on the circumstances and how they may change over time.
Trying to create a false sense of ethical morality about a home mortgage is silly.
That sounds like situational ethics. I would agree that there are some circumstances when it is reasonable to back out of a promise, but simply breaking a promise for one's own advantage defeats the whole idea of what the word promise means.
While a person walking away from a mortgage might think that are helping their family, there are in fact pushing off the loss onto someone else's family, or if enough people do it, to taxpayers as a whole. They are also breaking the agreement to occupy the house, and thus put at risk their neighbors if the house is vandalized.
If you paid someone with the expectation that you would get something in return, and the other party doesn't hold up their end of the bargain, you would call them unethical at the very least.
The Mariners signed Richie Sexson to a $15.5m/yr contract to play first base and hit the baseball at a level comparable to or better than his 2005 season. He did not hold up his end of that deal and the Mariners cut him. Is he unethical?
A mortgage is a contract, nothing more and nothing less. The bank lends you an asset (the house) and you pay them monthly to use that asset; if you pay them long enough the bank hands over the deed to the asset. If you can not (or don't want to) pay them for that asset anymore, you stop paying and the bank takes it back. You're out a place to live, but they still have their asset and some of what you agreed to pay.
The preferred situation, of course, is that you transfer the asset to another party (a different bank) and repay your original contract in full.
Now, if you trash the house or gut the interior before reneging, that is definitely unethical behavior (and probably illegal, too).
...And is Richie Sexson unethical? What if he knew how incompetent he would be when he signed the contract? Did he deceive anyone?
All I know is that he managed to get cut by two teams in the same season.
Our society depends on people doing what they agree to do. If signing every page of a 10 page document that begins "I promise" means it is nothing but an agreement of conditions, then the rules will change accordingly. Interest rates will rise if lenders know that borrowers will walk at the first opportunity. People won't have the option of getting a mortgage for less than 20% down, because it is only good faith that makes a low down payment mortgage make sense.
If you took your car in to have it worked on, you couldn't just trust that they would fix your car. Even you get a statement that says "I promise to fix your car," you would have to read all the fine print to see what is really going to happen in the event the car isn't fixed because the mechanic wants to "help his family" by fixing someone else's car instead.
That analogy is not at all relevant to a voluntary foreclosure. You are essentially trying to say that someone who bails on a bad investment (underwater property) is a thief? I don't see it and neither does the law. Now if the home owner were to loot the house of all copper scrap metal to sell, prior to moving and mailing the keys, then that would be an issue. But merely allowing a money pit to foreclose is not even remotely comparable to theft.
That is the capitalist system.
If there are many lenders competing to make loans, then terms will be loose with low down payments and low interest rates.
If there are few lenders competing, then terms will be strict with high down payments and high rates.
But that does not make this an ethical issue for anyone. This is still a just a simply contract with provisions that handle the scenario of either party failing to perform under the contract.
Huh? You are really stretching to find an analogy that supports your POV. I will try to play along. If the mechanic fails to perform, then you can reverse the charges on your credit card, file a complaint with the Better Business Bureau, or tell all of your friends to avoid a lousy mechanic. This is not an ethical issue. This is just business. Good business, bad business, whatever.
Ethical issues are deeper than that. That is between right and wrong. Someone making a rational financial decision on a bad investment (underwater house) is doing something that makes sense based on the economic circumstances. It is not "ethical" to stay in a money pit home. It is pure stupidity.
Do we agree that when you freely sign something that says "I promise to pay X plus interest" that means you are agreeing to do something even though it may later turn out to be disadvantageous to you?
The consequences of the breakdown of ethics in our society is an increased dependence on the legal system. Not that this was ever a perfect society, but in the days before computerized credits reports, people relied on each others' reputation. Now we have credit reporting agencies whose job it is to warn others "don't trust this guy, he doesn't keep promises"
With the increase in the number of people for whom a written promise is ignored, we can expect to see few lenders or much higher interest rates until the laws are strengthened to provide strong disincentives to replace the missing ethics. While some people would welcome the falling price in existing houses, the net effect is bad for society when people can't trust each others' word.
Jon -
I admire your viewpoint, but I propose that you accept the fact that the legal system defines the "ethics" in a business transaction in todays society.
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Jon let me ask you, who broke which promise?
The Realtor when he said "Housing is foolproof AND it is a leveraged investment, you just can't lose on this"
The appraiser when he said "Oh this dump in the woods has gotta be at least 400K in todays market"
The lender when he said "Oh absolutely you qualify for this no-money down negative amortization loan while I look the other way since you have no documentation to support your 5 figure salary for this 500K house"
The wall street analyst who took a look at the portfolio of subprime and Alt A loans and rated them AAA so the pension fund would buy them.
The rating agencys who looked the other way while everyone rated their bonds AAA++++ certified?
The newly happy and proud "homeowner" who only had greed in his mind and knew the angel on his shoulder was constantly poking him and reminding him can you really afford this house? or was it the poor homeowner who sunk his entire life savings for a 20% down payment so he could really afford the house of his dreams?
Its very easy to say that "promises have been broken". Its not so easy to say who is to blame is it?
However, the home loans have an escape clause. You can walk away and give the house back at any time. The assumption on the part of both parties was that you would probably not be incented to because "real estate always goes up" so the lender would get his money back, and you could also sell it to pay off the loan. When things go upside down, that "escape clause" comes in mighty handy for the borrower. He gives back the security on which he got the loan.
I look at it like this: it is the equivalent of letting the pawn shop keep your watch...
However, the home loans have an escape clause. You can walk away and give the house back at any time. The assumption on the part of both parties was that you would probably not be incented to because "real estate always goes up" so the lender would get his money back, and you could also sell it to pay off the loan. When things go upside down, that "escape clause" comes in mighty handy for the borrower. He gives back the security on which he got the loan.