I wanted a little bit more reasoning and example on this "THE WAY WE LIVE NOW" piece from this upcoming New York Times mag, which says that people should abandon their underwater mortgages (true!). He writes: "Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment – surrender of the property. The borrower isn't escaping the consequences; he is suffering them." Sure! There is of course often the complication that then, you know, people have to find somewhere else to live.
Thursday, January 7, 2010
55
Felix Salmon Explain It All.
I wonder if the reason I have been seeing articles like this showing up lately is the concurrent increase in murder suicide stories appearing in the news.
Well they could use the money they were paying on their mortgage to rent a cheaper place, no?
If a landlord will take on someone with destroyed credit, sure! Remember when you couldn't get an apartment if you missed (and quickly caught up with) a utility bill six years ago?
Maybe you get your signature on the lease on your new place before walking away from the old one? I mean, they can't kick you out when your credit becomes bad, can they?
I remember no such thing! I mean, well, mighta happened once or twice, but only because, um, my wallet got stolen, yes, that's it.
There's a glut of empty apartments and homes out there, Landlords will rent to anyone and everyone with a job.
@jfruh, no they can't. @kneetoe, where'd you lose your wallet, at the bar? @Morbo, this is true, and it's mind-boggling. It's like the future I'd never thought I'd see. What would you have believed more likely 5 years ago... rent declines and look-the-other-way credit checks in Manhattan, or flying cars?
Make friends with pyros.
Get to know your accelerants.
or, to speed things up, enemies.
My technique is to get a bunch of mice and train them to chew through the electrical wiring.
What a dismal science.
Sounds like Bjorkland's about ready to do jingle mail en masse.
Where will the elves go?
While lenders are certainly hesitant to offer loan modification solutions to individual homeowners, modification is picking up steam in the commercial real estate realm. Problem is, the currently-preferred modus alterandi ultimately amounts to little more than a simple pushback of maturity/adjustment of amortization, which means that in about 2014-2016 we're gonna be in a HEAP of shit again.
I haven't read the article (update: I just skimmed it), but as someone who is very closely related to someone who may/may not have an underwater mortgage (ahem), I would like to meet someone who actually walked away and was like: 'damn that was great decision!'
No cut and dry answer. I moved 4 times last year. I have been where I am for 5 months (an old friend.) The months leading up to the day of the foreclosure became increasingly stressful to the point where, when the day finally came I felt it was a great decision operative word-felt. At that point, I was beyond thinking-just feeling. I was completely exhausted from thinking how to solve the puzzle of how to save my home. I finally realized there was no solution.
I'm assuming walking away negatively affects ones credit score?
Just for seven years. If the math is correct, and it will take 60 years to extract equity, its a pretty easy decision.
1. Default on your (underwater) mortgage.
2. ???
3. Profit!
Well, since we've already quietly granted personhood to corporations, it's perfectly reasonable to expect people to start acting like corporations. And corporations have no "shame," unless "shame" = "concern about loss of revenue." So, on the whole, this is a pretty good article about The Way We Live Now.
On the other hand, this one, which addresses some of the same themes, is patently ridiculous.
Can anyone explain from personal or near-personal experience what the immediate real-life consequences are to doing this? Like, is your credit instantly destroyed, and if so how does that affect you day to day (do your credit card companies cancel your cards or lower your limits?). Even if you send your mortgagor some kind of formal note saying "I have no plans to ever pay this mortgage so you might as well just try to sell my house," do they and/or the collections agencies they hire still hound you for payments for some undetermined amount of time?
An ex-girlfriend of mine filed for bankruptcy years before I met her because she had (curable, but still pricy) cancer and shitty insurance. She said the process (the bankruptcy, not the cancer) was remarkably painless: since she was a renter and owned virtually nothing of real value, there was nothing the bankruptcy court could take away from her other than seven years worth of good credit. They even let her keep her most valuable aset, her car, on the logic that she needed it to get to work, even though she lived in San Francisco and didn't, really.
First my story is not a neat and tidy story. Yes, I made bad decisions, based on a feeling of panic (my husband was getting increasingly ill.) Part of the messiness was that I took out a second mortgage under my name. The most frustrating issue that I am now facing is this. Between the date that I filed for bankruptcy and the date it was recorded (I guess that is the word,) my second mortgage was sold. I had the HARDEST time reaching a human being, never mind one who could answer a question. Subsequently, it was sold two more times!! So although the house went into foreclosure, and I filed for chapter 13 bankruptcy (10 years to recover,) I am still getting mortgage bills from Bank of America.
Can't talk about walking away but when your score inevitably drops, the credit card companies will lower your limits, which will change your debt to income ratios and available credit ratios, which will drop your score even more. You'll most likely have some new maxed out credit cards even if you had $10k free on them the day before. It's all a downward spiral from there.
It'll be like this for a while but your scores will actually go up to reasonable levels within a year or so of whatever triggered it.
Totally disagree! Legally speaking, yes, well within their rights etc. etc. But morally speaking, I can't help but think that shit people encourage individuals to do they'd excoriate corporations for doing. And don't try and tell me that the fact that there's a penalty, which is paid, means it is morally right. Otherwise there'd be no moral cost to committing a crime and paying for it. E.g. Xe nee Blackwater's payouts for killing dudes.
"But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth."
What? So only one party can be at fault? They both fucked up! Don't take a loan for more than your house is worth! Don't give one! Etc.!
They did both fuck up. Totally agree! That's why the fair thing to do is let the house go into foreclosure. Homeowner loses the house. Bank loses the amount of the loan minus present value of the house (IF ANY) and whatever payments have already been made. They both made a shitty investment and both should lose.
Well, sure, but it should be pointed out that if foreclosures keep going up it's going to get harder and harder to get a mortgage in the first place. We'll be back to 20% down payments in no time. I don't have a problem with people who can't afford the payments going all foreclosey, but being underwater is not the same as being unable to afford it - it just means you will lose money on the house. This is sort of how investing works! And I think it's maybe kinda unethical to fuck over future home buyers because you made a bad investment.
20% is still standard in a lot of places? (i.e., my coop)
It's the places demanding 50% that we should be worried about. (Is "worried" the right word?)
Agree! The point is, people walking away from mortgages they can (but don't want to) afford is going to make it exponentially harder for new home buyers in the future, and acting like there's no moral cost there (because there's a punishment!) is bullshit.
p.s. I (sorry, we) bought in 2003. Because I (I!) am a genius!
Yes, but giving the mortgage is an investment on the part of the bank -- they are also taking a risk in the hopes of making money. If a long string of "walk-aways" is what it takes to make banks think long and hard about who gets a mortgage, I think that'll go a long way toward avoiding another inflationary experience like we've just gone through. (I also don't think 20 percent down is too much to ask, but that's the norm in my area anyway).
It is already very difficult to get a mortgage. Also, if the house isn't in pretty much perfect condition (new wiring, no metal plumbing, etc.) it will never pass the new extensive inspections. Same with trying to get reasonably priced insurance on a recently purchased house.
It's not like corporations were handing out loans for well over the price of the house ... by and large, they were doing just what they always do, which is handing out loans for a bit less than the selling price. However, both parties did fuck up -- because they were operating on the assumption that the price of the house was roughly tied to what it was worth. As it turns out, it wasn't even close.
On the other hand, are they solely to blame? When you're dealing with goods in a speculative economy, price gets untied from actual "value" fairly quickly, and even non-speculators are forced to play the game (if you don't take a loan out for roughly the going price of the house, you're not going to be able to buy it). Now, when houses actually became subject to speculation is a matter of debate, but they sure as hell are now.
Basically, I'm only taking issue with "Don't take a loan for more than your house is worth!" because that's nearly impossible to do in a speculative economy, even for an honest investor.
Granted! But it is equally difficult for the lender to do. My point is they both made the same kind of mistake, and in the same way. I'll grant that there's sort of a systemic inequality in any individual vs. bank scenario, but I took issue with saying the individual was absolved of sins because the bank was the one who made the loan. I think we agree, is my point!
And, yes, it is absurd how speculative the housing market is. I'd take issue with your separation of worth and price - something is worth what someone will pay for it - but just to say, nobody expected home prices to change so rapidly, with such little cause. Because when you're riding the bubble up, nothing will ever be worth less than you paid for it! Magic!
Ha, yes. Everyone was elated, and assumed it would keep going up and up. There was a lot of "oh, man look at all this money I made just by owning a home!" going on, and a lot of people don't like to look back and admit that they thought that way (however, the home equity loan they took out to pay for a new Jet Ski tends to remind them).
But banks treat it as a numbers game where the most profitable or least costly situation is the one that's carried out. Why shouldn't individuals be afforded the same? Why should a stigma be attached to individuals doing the same thing that corporations do everyday?
Exactly, the people taking out mortgages weren't planning to default; they had jobs and believed that the price they were paying was what the house was worth.
It's not malice, just ignorance. An acquaintance only learned recently that his townhouse purchased at the height of the boom here - summer 2008 - may be worth at least 10-20% less than what he paid for it.
Maybe if I phrase it this way it will make more sense:
It can be better for an individual to cross a strike line and keep working, but it is worse for the collective group of workers (and for that individual in the long run!) to do so. Likewise with strategic foreclosure.
Everyone elated? Bah. I remember how relieved I felt when my parents sold their crappy little house in Bethesda for $600,000, because it seemed pretty obvious that Uncle Alan was full of shit and that the whole housing thing was going to blow up at any moment. Anyway, that was in 2001, so maybe I was a little off. But (real question) did the collapse really surprise anyone or are a lot of people just pretending that they didn't know what was happening?
I think the issue is that while both parties certainly fucked up, the lenders, as the ones with all the money and finance degrees, are expected to know better.
To push this to a logical extreme, imagine you went to a surgeon and she suggested you get a "very common procedure with great potential benefits" done. While she stands to profit, you invest some trust in her as the "expert" in the transaction. And as the expert, she is hugely liable if she advises you incorrectly!
Now, certainly highly-educated or particularly curious patients may know or learn enough to accurately second-guess their doctors. But the value of a specialized society is that supposedly you shouldn't have to second-guess your doctors.
Doctors:Mortgage brokers::Lawyers:Used car salesmen
Discuss
As I said, it's a logical extreme. The point is that people with greater expertise are held to a higher standard of accountability in their fields. The more opaque and risky your discipline, the more responsibility you take on as an expert. Finance may not be as obscure as medicine, but it's not exactly grocery shopping either.
I guess I'm not comfortable of absolving someone of moral agency just because they were advised by someone else. Especially when the consequences will impact many people who were wholly uninvolved (future homeowners).
Amen, Mr. Morals. Simply put, walking away from your debt obligations creates a cascade of events that inevitably result in crimes against Humanity. I know from personal experience because after I stopped paying my Humanity Corp. ("The friendly lender") Visa card they sued me for the remaining balance, which negatively impacted my FICO score. Naturally, I was furious. In retaliation, I burned down the Humanity CEO's summer home in Vermont and hacked into the company's database deleting the card balances for all customers whose name begins with S. (If only your name began with an S instead of a D, Deepomega, your Humanity Visa card would be balance free!) Well, long story short, I'll be paying restitution for these crimes against Humanity fora long, long time. On the bright side, I was able to get a Discover card!
You're a treasure, SN.
Is it too late for me to change my name to Mr. Morals? Am I too established?
My other choice for name was "Mr. Mostly Mittens"
Anyone who watched House Hunters knows that people are greedy + stupid + convinced they need five bedrooms when they only have one kid.
Everything I need to know I learned from reality television.
Not true, I also read a lot of books by Glenn Beck.
I think our legal system generally abhors inefficient allocation of resources and penalizes, perhaps, but does not punish nor call down the gods upon those who make wise economic decisions. Good money after bad and all that.
And here's me on my soapbox: the housing market was consciously used by Greenspan as a replacement for income growth; the wealth that was created was used to keep the consumption-fueled economy going while still allowing corporations to not increase their employees' wages. But in the end the consumers/employees got burned anyway. Moral of the story: guess.
This has happened before - in Texas, in the early 90s. So many people had their houses foreclosed, it just became an odd badge of honor, and within a few years, once the economy picked up, lenders ignored that as an aberration. 7 years after foreclosure, I had a new house in California, which is still a goldmine, even after everything. Dirt to Diamonds or whatever. Anyway, there is a moral component to walking your mortgage? I can't even believe I read that. I can attest from the other side that your credit score does not suffer because of your morals, it suffers because you don't pay your bills. Do your 7 years (10 years if you have to file BK), keep all your credit clear in that time thereafter, and start over. BFD. Why is this crap so new to people who should know better?