Mortgage too much? Join the crowd, walk away

[Grandpa Shooter]

I thought this was a good, simple explanation of the mortgage debacle and why it is fueling a crisis.

A growing trend among homeowners with upside-down mortgages is simply walking away from their homes without even trying to get a loan modification, according to local mortgage brokers.

Loan modification programs not cutting it

“People have gone from buying a house to raise their family in to buying a house as an investment,” said Eric Bowlby, president of Amerifirst Financial in Mesa. “We see customers all the time who come in and they’re letting their home go on purpose to the bank, and they act like the bank screwed them because it’s now upside down in value. But they pulled a line of credit out. They bought themselves an RV, a new truck, a new boat, and they think that it’s the bank’s fault that their house is upside down.”

People are being told simply walking away is the smart thing to do, even if they can afford to pay their monthly mortgage, he said.

“‘Experts’ tell people ‘well, if you’re upside down in your house $100,000 and you make $40,000 a year, you should walk away from your house,’” Bowlby said. “When you feel like it’s OK to walk away from something you committed to, the banks, because of the losses, have to start walking away from things that they committed to ... and the company that you work for may lose the ability to fund their own business, which means you’re now out of a job.”

Dan Huss, president-elect of the Arizona Association of Mortgage Brokers, said homeowners believe banks should reduce their loan balances because home prices have dropped so far below when they purchased their homes.

Those who do choose to walk away can expect their credit score to take a hit, rendering them unable to buy another home or obtain financing for what can be an extended period of time, according to financial experts. Still, that’s not keeping many from choosing to leave their home and rent another for far cheaper until their credit improves.

“The consumer sits back and says ‘OK, let’s look at it this way: I owe $400,000 on a $300,000 home. If my credit (score) was perfect, they’re not loaning me any more money, so what difference does that perfect credit mean,’” said Kevin Hardin, director of the Mortgage Mediation Group at Valley-based law firm Thomson Conant.

[Gewehr98]

Wait.  These people honestly think the bank won't hire attorneys and pursue to recover the difference in the mortgage loan vs. what the devalued house will sell for afterwards?

It's already happening around here, and even on short sales of homes.  It was in the newspapers not too long ago:

http://buyingsellingahome.suite101.com/article.cfm/banks-go-after-short-sellers-after-the-sale

[Jocassee]

It seems the credit scoring system is the incentive the financial system uses to keep people paying. If it becomes no longer to the consumer's benfit to pay any attention to that credit score...what happens? Tougher system? More punishment?

ETA What he ^^ said, you could just sic a lawyer on 'em.

Not strictly relevant, but I know that many of my peers (the barely out of college crowd) are NOT buying houses, even the ones with stable, well-paying jobs. Even with those positives the risk is still gauged to be too high.

[MillCreek]

And yet, banks and finance companies routinely walk away from underwater financing on commercial property.   It is a rational decision for their financial self-interest.  Should individual residential mortgages do differently?

[RevDisk]

And yet, banks and finance companies routinely walk away from underwater financing on commercial property.   It is a rational decision for their financial self-interest.  Should individual residential mortgages do differently?

The difference is, banks and financial companies can hire plenty of lawyers.  

Unfortunately, in this world, might does make right.

Not strictly relevant, but I know that many of my peers (the barely out of college crowd) are NOT buying houses, even the ones with stable, well-paying jobs. Even with those positives the risk is still gauged to be too high.

Heck, I'm in that boat.  I make decent loot.  I'm not buying a house in the near future.  Dumping my surplus cash into savings, 401k, etc.  Only debt I have is my car loan and what I accumulate in credit card debt since the last paycheck.

[Sergeant Bob]

If I walked away from my mortgage I'd moving to easy street (if you could really consider renting easy) but, I could not do that and still look in a mirror. Also couldn't handle moving into a cliff dwelling or not being to do whatever I wanted to the place. If I want to go hunting or shooting, I have only to step out the back door.

[Phantom Warrior]

Someone correct me if I'm wrong but the amount they borrowed from the bank hasn't fluctuated, right?  They borrowed $400,000 from the bank to pay the seller for the house.  Even if the house is worth $10 the bank still lent them $400,000 to pay for it.  So even though the imaginary value of the house has diminished greatly the amount of money the bank gave them hasn't changed a bit.  So even if the bank gets the house they take the hit on the loss in value.  And the owner gets to play the risky real estate business risk free.  Exactly what we are all criticizing Wall Street for doing.

Right? 

[Grandpa Shooter]

Someone correct me if I'm wrong but the amount they borrowed from the bank hasn't fluctuated, right?  They borrowed $400,000 from the bank to pay the seller for the house.  Even if the house is worth $10 the bank still lent them $400,000 to pay for it.  So even though the imaginary value of the house has diminished greatly the amount of money the bank gave them hasn't changed a bit.  So even if the bank gets the house they take the hit on the loss in value.  And the owner gets to play the risky real estate business risk free.  Exactly what we are all criticizing Wall Street for doing.

Right? 

Exactly.  That is why I posted this.  It appears people are thinking that walking away is no big deal.  That attitude of "me first" is among the things at the core of the problems this country has.  Of course that is only my opinion.

[Balog]

Phantom Warrior nails it. You borrow money, you have a moral obligation to repay it as best you can.

[crt360]

And yet, banks and finance companies routinely walk away from underwater financing on commercial property.   It is a rational decision for their financial self-interest.  Should individual residential mortgages do differently?

So true.  When banks do it, they consider a sound business practice.  When you do it, it appears to be a breach of some high moral obligation.

Someone correct me if I'm wrong but the amount they borrowed from the bank hasn't fluctuated, right?  They borrowed $400,000 from the bank to pay the seller for the house.  Even if the house is worth $10 the bank still lent them $400,000 to pay for it.  So even though the imaginary value of the house has diminished greatly the amount of money the bank gave them hasn't changed a bit.  So even if the bank gets the house they take the hit on the loss in value.  And the owner gets to play the risky real estate business risk free.  Exactly what we are all criticizing Wall Street for doing.

Right?  

The owner doesn't get to play for free.  There are consequences and they are real.  That several hundred thousand dollar judgment and potential bankruptcy prevent a lot of people from getting to play again.  A few that manage to come into money or sweet talk more creditworthy investors often find a way back in.

[De Selby]

There are also sometimes nasty tax consequences to these things.

But yeah, I'm with MillCreek and crt360 on this one - how can an institution that has with certainty done this many times in the past, wave its arms with rage when consumers do it?

There wouldn't be mortgages if the system were designed around individuals paying off debts no matter what.  The reason we have that device in the first place is that sometimes people don't or can't.  It's up to the lender to price the asset it wishes to take as security under a mortgage. 

It looks to me like banks will be asking us to bail them out because they failed to take adequate security for their loans. 

[Laurent du Var]

 It's up to the lender to price the asset it wishes to take as security under a mortgage.  

I agree with that statement. Besides institutions who make money out of money without any added value
what so ever deserve to get screwed over time and time again. No bailouts. Added value and not a [deleted] weasel mentality
"I'm so clever and always be on the winning side because the gubbermint backs me up"  
In my book if you get a loan for a house which the bank keeps the title for security of you should be able to
walk away from it and let them have the house. Fair enough.


Language, folks...

[MillCreek]

Wait.  These people honestly think the bank won't hire attorneys and pursue to recover the difference in the mortgage loan vs. what the devalued house will sell for afterwards?

It's already happening around here, and even on short sales of homes.  It was in the newspapers not too long ago:

http://buyingsellingahome.suite101.com/article.cfm/banks-go-after-short-sellers-after-the-sale

As with other rational financial decisions made at the corporate level, such litigation is generally only filed if the defendant has sufficient unencumbered assets to make it feasible to sue them.  If they don't have money, they don't get sued.  You can't get blood from a stone.

[MechAg94]

I don't like the idea of people walking away from loans, but on the other hand, the mortgage companies were stupid for making the loans or allowing the homeowners to roll additional debt into the loans.  To some extent, they are just as responsible for the housing bubble as the people buying the extra houses. 

[Monkeyleg]

I don't like the idea of people walking away from loans, but on the other hand, the mortgage companies were stupid for making the loans or allowing the homeowners to roll additional debt into the loans.  To some extent, they are just as responsible for the housing bubble as the people buying the extra houses.

True, but why are we the taxpayers bailing out both? Why aren't Barney Frank and Chris Dodd in prison?

[Ned Hamford]

To some extent, they are just as responsible for the housing bubble as the people buying the extra houses. 

I'd say even more so from just the micro v macro scale.  The banks and government are in a far better position to understand valuation and should be somewhat neutral parties.  It makes me think of the old saying, if you owe someone a hundred dollars, you are in trouble.  If you owe someone a million, they are.  When you hear stories about banks giving 500k and then later when they are stuck with the property, letting it go for 5k... yah, they really dropped the ball on determining value.  If you are I took such actions we would be institutionalized, in prison or a psyc ward.  But... since a lot of folks are doing it and they are wearing suits, they automatically pass the sanity check.   

I say pass the common sense standard further up the line. 

But I have little faith that will happen of course.  Its not rational not to take absurd risks when its someone else's money.
 

[Gewehr98]

Walk away from a mortgage, and go to debtor's prison.

Oh, that's right - there's no such thing anymore.   

[Ned Hamford]

The folks that would have been in them are now running our financial system.

[Silver Bullet]

the mortgage companies were stupid for making the loans or allowing the homeowners to roll additional debt into the loans

how can an institution that has with certainty done this many times in the past, wave its arms with rage when consumers do it?

These points may be true, but in my opinion they are immaterial.  The borrower made a deal with the bank to borrow a certain sum to be paid back with a certain interest.  The bank held up its end, the borrower should too.  What happened to the housing market afterwards is of no relevance to the deal that was made.  The fact that the bank does it don't excuse your debt, unless maybe the lending bank did it to you personally. 

The borrower should own up to his own accountability.

I'm reminded of ten years ago when Merrill Lynch sold an investor exactly the investments he asked for.  The investments tanked, and the investor sued Merrill Lynch, claiming it should have known better.     Sadly, the investor won his suit.     As in all cases of this sort, I blame the jurors.   

[Headless Thompson Gunner]

Someone correct me if I'm wrong but the amount they borrowed from the bank hasn't fluctuated, right?  They borrowed $400,000 from the bank to pay the seller for the house.  Even if the house is worth $10 the bank still lent them $400,000 to pay for it.  So even though the imaginary value of the house has diminished greatly the amount of money the bank gave them hasn't changed a bit.  So even if the bank gets the house they take the hit on the loss in value.  And the owner gets to play the risky real estate business risk free.  Exactly what we are all criticizing Wall Street for doing.

Right?  

Right.

I agree with that statement. Besides institutions who make money out of money without any added value
what so ever deserve to get screwed over time and time again. No bailouts. Added value and not a [deleted] weasel mentality
"I'm so clever and always be on the winning side because the gubbermint backs me up"  
In my book if you get a loan for a house which the bank keeps the title for security of you should be able to
walk away from it and let them have the house. Fair enough.

Now that's just silly.  Banks and lenders add no value?  Then why do people pay to use them?  (Obvious answer: because banks and lenders do provide value.  You may not recognize the value, but their paying customers surely do.)

The point of using the house as security is to attempt to make the lender whole again if you injure him by not honoring your contract and repaying the loan.  It's their way to try to pick up the pieces after a defaulting borrower makes a mess for everyone else.

Realize that mortgage agreements are structured in the form "you will repay XYZ", not "you will either repay XYZ or give us your house, you choice, whichever you happen to feel like at the time, it's all the same to us".

And yet, banks and finance companies routinely walk away from underwater financing on commercial property.   It is a rational decision for their financial self-interest.  Should individual residential mortgages do differently?

Banks and developers and investors that try to pull that crap in the commercial real estate world often get hosed in court.  And they get hosed in the biz community, too, losing their reputation and lessening their odds of making any profitable deals in the future.  They get away with it sometimes, but not nearly as often as you'd think.

[Brad Johnson]

You borrow money, you pay it back. 

The value of the house vs the loan balance is irrelevant.  You borrowed money with an agreement to pay it back.  You choose to break the terms of that agreement?  Fine.  You also choose to live with all the legal and financial ramifications pertaining thereto.  If you were too damn dumb to get a mortgage you could afford (vs buying based on the max available loan) then I have no sympathy. 

I see a stream of idiots who, in the literal sense, have absolutely NO FRIGGIN' GRASP of what being financially responsible actually means.  They will gripe and moan about three dollar gas while standing in line for five dollar coffee.  They will go into fits of apoplexy about how their turd of an employer because their raise is so small they will have to wait until next year to trade in the boat for a bigger one.  They will collapse into a steaming pool of goo over how much groceries cost while waiting in the supermarket checkout line with a basket full of high-dollar 'organic', luxury brand, or prepared food items.

Tough cookies folks.  You get yourself into the mess, you get yourself out.  Don't throw that burden on someone else's shoulders and expect folks like me to pat you on the back for doing the right thing. 

Brad

[MillCreek]

^^^ Brad, your argument can also be made about the commercial lenders and large financial houses.  They got themselves into this mess, and now we the people are having to bail them out.  Why the outrage over the poor financial management of individuals and not over corporations? 

[Tallpine]

The folks that would have been in them are now running our financial system.

True 

[Brad Johnson]

^^^ Brad, your argument can also be made about the commercial lenders and large financial houses.  They got themselves into this mess, and now we the people are having to bail them out.  Why the outrage over the poor financial management of individuals and not over corporations? 

Because I deal with it every day.  Don't take a lack of expression for lack of outrage in other areas.  There is plenty of stupid to go around.

One thing that tempers my ire at larger entities is that many of the problems there can be traced to management's forced compliance with govt rules and regs, not from an endimic lack of business savvy or some kind of inherent flaw in their ethic.  With individuals it's a straight-up call between Smart Decision and Blatantly Stupid but Did It Anyway.

Brad

[Balog]

I hold banks responsible for their actions too. Aside from HTG you won't find many people on here who are pro-bailout.