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Your Take: Default on Underwater Mortgages?

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Foreclosure!There’s an interesting article on the Consumerist two days ago discussing a paper written by law professor Brent T. White of the University of Arizona. The paper, “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis,” argues that more people should be strategically defaulting on their mortgages but don’t because they feel guilty and because the consequences of foreclosure are overblown.

If a business finds itself in a bad loan, it can go bankrupt and restructure (Trump has done it about a billion times!), but people can’t because people have feelings and a conscience. Obviously bankers hate this paper because they would prefer it anyone, individual or business, continues to pay on a loan regardless of the financial implications.

What do you think? Do you think it’s OK to default if it’s the financially correct choice?

Personally, I’m a little mixed. I think businesses should be held to the same standards as individuals, not the other way around, but that’s simply not possible. So that leads us to our current scenario, which is whether it’s OK for someone to strategically default and I think that’s OK. If we think it’s OK for the Trump empire to restructure its debts, why not let individuals?

I’m really curious to hear what you guys think about strategic defaults.

(Photo: respres)

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60 Responses to “Your Take: Default on Underwater Mortgages?”

  1. codename47 says:

    I don’t understand all the moralizing. The banks don’t seem to have any problem forclosing on people. Why should people feel bad about walking away?

    • saladdin says:

      That’s right. Let’s throw out all morals and ethics because someone else is doing the wrong thing.

      Can we also just do away with the myth that this country has any religious foundation?

      And admit that we give lip service to doing the right thing when what we really mean is “I’ll do what’s best for me at all times. Screw everyone else”

      saladdin

      • codename47 says:

        “That’s right. Let’s throw out all morals and ethics because someone else is doing the wrong thing.”

        I can live with that. I’m not going to be the only honest guy in the room.

        Why would you continue to play in a rigged game where the ref’s are paid off and the table is tilted?

        It is good enough for wall st (take your pick from madoff to Enron to mutual fund market timing, predatory lending, etc..) and the gvt (corporate bailouts, no bid contracts, payoffs for votes, etc..), then it is good enough for me.

        “Can we also just do away with the myth that this country has any religious foundation?”

        No argument here. religion has been used to justify slavary, native american genocide and fondling the choir boys.

        “And admit that we give lip service to doing the right thing when what we really mean is “I’ll do what’s best for me at all times. Screw everyone else”

        In a time of universal deceit, telling the truth is a revolutionary act. Everyone else is acting in their best interest, why shouldn’t I?

  2. My son & I, who co-own a house we bought when we imagined the real estate bust had hit bottom, are now about $45,000 underwater. The house will not rent for what we pay on the mortgage, and I have lost my job.

    We have considered walking.

    Problems with that scheme:

    * Neither of us wants to lose the amount of principal we’ve put into the house, around $40,000, or the amount we put into repairs and upgrades.

    * He is presently living in the house, paying half the mortgage, and underwriting repairs and upgrades with payments from a roommate. He can afford that much, but he can’t carry the entire mortgage payment. I have enough in savings to cover my half of the payments through 2010, but after that…??????

    * He likes the house and wants to continue living there. If we walk from the house with our credit ruined, we have no idea where he will live but you can be sure it will be a dangerous dump.

    * We both have top-level credit ratings. Because I am old, my house is paid for, and I’m now “retired” because of a layoff, I will never buy another house and my next (probably last) car will be paid for in cash. So it doesn’t really matter if my credit rating is ruined. However, he is young and can’t afford to have his credit trashed.

    It’s occurred to me that he could simply sell his interest in the house to me and then I would default. That would protect his credit, but it would leave him with no place to live.

    There are no moral issues, BTW, when it comes to dealing with the predatory lending practices we have seen in recent years. In this environment, it’s every person for him- or herself.

  3. Chris says:

    Can anyone give some advice. If I can qualify for a larger home at a price that is lower than what I payed for my existing home pre-bubble and bust. What is to keep me from buying the new home and then walking away from the other if I don’t plan on financing anything for a few years other than my personal morals? I don’t know about you, but I know a lot of people without the same morals. What would the true implications be?

    • Jim says:

      The probability you get a loan for the new home is going to be very low for a variety of reasons. The chances of a bank giving someone two home loans is going to be slim, unless they have the income to support it.

      • Chris says:

        But if I already pre-qualify for the second home what would the implications be of me walking away from the first house. I would benefit twice, but I don’t know of any other imlications.

        • Chris, you won’t be able to walk on the first property until after you purchase the second. If you do, the lender won’t make a loan for the second house.

          If you default on the first property after buying the second, I wouldn’t be too sure that one or both lenders wouldn’t come after you on some sort of fraud charges.

      • saladdin says:

        Rates on a 2nd house will be higher also.

        saladdin

  4. John says:

    I emphasize with ones caught in the underwater webb because it is a sad condition to be caught in. Yes, many financial institutions have failed in their responsibilities but they were pushed and threatened by our very own congress if they did not give many of these loans that people could not pay for.

    Follow these 4 principles and you will do well:
    1. Think long-germ with goals and investing.
    2. Spend less than you earn (don’t follow the Jones’).
    3. Maintain liquidity (or emergency savings).
    4. Minimize the use of debt. When one uses debt to the excess, you are volunteering to take a pay cut. If your boss came to you and asked you to take a pay cut, you would think that outrageous. Unwarranted debt does the same thing…reduces income.

    For some folks who are underwater on their loans, it means that they have not counted the cost (gambled)and have ignored their ability to add and subtract, including some college grads who have also done the same thing. Their college did not teach them to THINK…just indoctrinated them. Our congress is BIG TIME at fault for the mess but they know most people will not catch on. Congress blames others and many people fail to understand this fact because they do not read from a variety of sources. Throw the bums out. Bums that live off the tax payers by giving themselves extensive, rich retirement incomes and who will not live under the same rules that they hand down. Rather than do the research, many people use a “I like to think….blah blah blah…” mentality, without counting the costs. People’s faulty ideas have been bringing this on for many, many years and making themselves vulnerable to what has happened. Will we learn from this experience? Some will learn, but most will forget it within 30 years.

    So many are seeking peace but they will not find it in riches. It just does not exist on that foundation. Just observe and you will see this fact. Meanwhile, whenever you can, help your neighbor. When you see that someone has a need, meet the need if it is in your power to do so.

  5. John says:

    You are right. Too many held out their hands and said give me free money. Pay day does not come every day, but it does mean “pay day some day” and that day has unfortunately arrived for many.

  6. jenny says:

    When you bought the home you made an investment, and, more importantly, you made a promise to pay regardless of how well your investment appreciated. Your integrity is at the foundation of the decision to “strategically” walk away. Keep paying your mortgage!


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