When To Walk Away From A Bad Mortgage
Published on - January 25th, 2011 (Modified on - March 8th, 2012) (by Sierra Black) This post is from staff writer Sierra Black. Sierra writes about frugality, sustainable living, and getting her kids to eat kale at Childwild.com.
Since the housing bubble burst, many Americans have found their finances underwater. They’re paying on homes that are worth much less than the mortgages against them. More than a few have chosen to walk away from these debts.
Called a “walkaway” or a “strategic default”, deliberately defaulting on your mortgage is becoming more common as the real-estate market continues to struggle. Some experts believe that as many as 20% of homes currently in foreclosure are the result of walkaways: people who had the means to pay their mortgage but chose not to when their life circumstances changed and they found their homes unsellable.
Businesses walk away from bad investments and debts like this all the time, but for an individual to do it takes guts. There’s a huge stigma associated with walking out on your mortgage. Americans feel that there’s something morally wrong with not paying your debts, even when those debts are astronomical or unfair.
As Matt Taibbi puts it in his new book Griftopia:
When you meet people who are losing their homes in this foreclosure crisis, they almost all have the same look of deep shame and anguish. Nowhere else on the planet is it such a crime to be down on your luck, even if you were put there by some of the world’s richest banks, which continue to rake in record profits purely because they got a big fat handout from the government.
That’s why one banker CEO after another keeps going on TV to explain that despite their own deceptive loans and fraudulent paperwork, the real problem is these deadbeat homeowners who won’t pay their…bills. And that’s why most people in this country are so ready to buy that explanation. Because in America, it’s far more shameful to owe money than it is to steal it.
Whether or not you agree with Taibbi’s take on the mortgage crisis, you’ve surely seen that look of shame on the face of anyone you know who’s lost a home to foreclosure. Despite of the social pressure to keep making payments, though, thousands of borrowers are defaulting. The rate of walkaways went from virtually nothing in 2007 to nearly a fifth of foreclosures today. That’s a huge increase.
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What Happens When You Walk Away From a Mortgage?
Given how many homes are underwater these days, it’s probably not surprising that I have a friend who is considering walking out on his mortgage. I get asked for financial help or advice a lot since I started this gig at GRS, but I was clueless on this one. Some quick math revealed that continuing to pay his mortgage makes no financial sense for my friend: The house is worth much less than he owes. He can’t sell it. He no longer lives there; it’s just an albatross around his financial neck.
Still, I thought my friend must have other options, so I called up mortgage expert Keith Gumbinger at HSH.com. Gumbinger had some great suggestions for what to do when you’re facing overwhelming mortgage debt.
Gumbinger agreed that bailing out of a mortgage sometimes makes good financial sense — but the consequences for doing so are steep. “You can certainly walk away and let it go to involuntary foreclosure,” Gumbinger said. “That’s your ultimate hammer. But there are consequences in the rest of your life.” Walking away from a mortgage should be the absolute last resort.
Walkaways face some serious issues:
- Your credit will plummet, making it tougher to get anything from a rental apartment to car insurance.
- You’ll be stonewalled by the mortgage industry for seven years.
- The mortgage company can come after you for the money they lose on your property when they’re forced to sell it below market value as a foreclosure. That’s the bad debt you were trying to walk away from, coming back to haunt you.
Before walking out on a mortgage, Gumbinger says you should call your mortgage company. Lenders don’t want you to default on your loan — and stick them with an unwanted house — any more than you want to destroy your credit. They’ll talk to you.
“You should be able to get a reasonable response,” Gumbinger said. This far into the mortgage crisis, most lenders have experienced staff people who do nothing but negotiate loan modifications, short sales, and planned foreclosures with their borrowers. They have clear processes to handle this type of situation. It won’t be fun, but if you stay engaged, you stand to get out of your mortgage with your credit in better shape than a foreclosure would leave it.
Gumbinger warns to carefully document the entire process. Keep notes of who you talked to, and get agreements in writing.
Loan Modifications and Short Sales
Before you call your lender, decide what outcome you’re after. If you’re looking to keep the property but can’t keep up with the payments, call and talk to your bank about a loan modification. There are federal and private programs to help troubled borrowers get their mortgages adjusted. You may qualify to have your mortgage interest rate reduced as low as 2%, or to have some measure of your debt forgiven so that your monthly payments don’t exceed 31% of your income.
If you’re ready to walk away from the mortgage entirely and don’t want to keep the house, talk to your lender about a short sale. In a short sale, you agree to retain possession of the property, keep it in good shape, and sell it on the bank’s behalf. With the bank, you agree on a sale price that reflects the current fair market value of the property, even if that’s much less than what you owe on it.
Usually, a short sale agreement will have a two- to three-month time limit. After that, you and the bank can negotiate a “planned foreclosure” or “deed in lieu”. Instead of simply walking away and forcing the bank to take costly legal steps to repossess your home, you can give it to them. In exchange for saving them the hassle of taking it, they’ll go easy on you with the legal and financial consequences. Again, use an attorney to negotiate this on your behalf.
Any of these options should bring you a happier ending than simply mailing the bank your keys without a word.
“Because you’ve tried to do the right thing, it does preserve to a greater degree your opportunity to participate in the housing market in the near future,” Gumbinger said. Your credit will still take a hit, but if you do a short sale or planned foreclosure, you may be able to buy another house in two to four years. If you even want to. After being burned by the housing market, many people are happy to become permanent renters.
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I would definitely suggest the short sale. It’s always better to work with the bank than run away from them.
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It’s definitely a bad idea to walk away from your home mortgage.
When you said, “Americans feel that there’s something morally wrong with not paying your debts, even when those debts are astronomical or unfair.” I just had to shake my head. OF COURSE IT’S WRONG TO NOT PAY YOUR DEBTS! As a borrower, one has agreed to the amount owed and the interests rates. Once those papers are signed, it’s the responsibility of the borrower to pay it back according to the terms. That what was agreed upon.
I know a person that walked away from their home, and I could not believe their lack of moral integrity. They could continue making the payments, but decided to walk away because they owed more money than the house was worth. I don’t think I can look at my friend the same again.
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I’m still a bit in shock that an article like this would even be posted at GRS.
Getting Rich Slowly is (or I always thought it was) about taking stock of your financial situation, facing your past poor spending decisions with responsibility and patience, and setting a new and more financial steady path for yourself. That *responsibility* part is a HUGE part of the process.
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To all of those who already have and will continue to comment on the perceived (and it is a perception, folks) lack of morality where “walking away” is concerned: it’s a BUSINESS decision, not a moral one.
Let’s say that your family can barely function financially due to circumstances beyond your control. (I mean, did your family REALLY invent credit default swaps? Seriously??) You now find yourself in a situation where your home is underwater. Putting your family’s financial future at risk for a crummy mortgage is not only irresponsible, it could be argued that doing so itself is immoral.
I wish the “morality police” surrounding those who default on crummy mortgages – which were funded by banks with questionable (to say the least) ethics – would get off of the high horses. Circumstances change, folks. If someone has to walk away from a worthless house due to a bad mortgage – that someone is trying to find a solid future. Those who advocate the shackling of someone to a bad mortgage for the sake of “morality” probably wish to see the return of debtor’s prisons.
Hey – let’s force those who “walk away” to wear a big red “M” on their chest, in homage to the “Scarlet Letter”. Give it a rest, those of you in judgement.
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Like Kate, I was a little surprised to see this title on GRS too. After reading the entire post, I will agree that walking away from a mortgage should indeed be the last resort…I wouldn’t even think about doing it unless I couldn’t afford groceries. I’m with Kate and Derek above, responsibility is king whether you owe more than its worth or not.
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Agree with above two posters–and, could not disagree more with the suggestion that owing money is more shameful than stealing. I get the point the writer was trying to make, but quite frankly, part of the reason we are in this mess to begin with is that people had no problem whatsoever borrowing astronomical amounts of money without thinking about the risk they were taking.
Strategic defaults ARE morally wrong. It’s a far cry from those who are down on their luck and cannot afford their mortgages to those who walk away simply because the house isn’t worth what it was before. A house is shelter, and if people would stop looking at it as an investment, they’d be less inclined to walk away from an obligation they willingly entered into. Strategic defaults prolong the housing crisis for no reason other than these individuals’ looking at the bottom line instead of the long term (and societal) ramifications of their choices.
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Is this article serious?
JD, why haven’t you ever done an article on declaring bankruptcy to get out of credit card debt? It’s the same basic principle. I thought the mantra around here was to fix cash flows and pay down debts; not just take the easy way out and leave someone else holding the bag.
Hmmm… will tomorrow’s article be on how declare Chapter 11 bankruptcy as a means to get rich slowly?
J.D.’s note: I didn’t read Sierra’s post as advocating strategic default. Her friend is considering it, and Sierra’s exploring the options. I think this is a Good Thing. I felt like her recommendations made sense. If the article was all, “Heh heh, here’s how to screw the banks”, I wouldn’t have published it. Instead, it seems like Seirra’s saying “Before you take such a drastic measure, consider these alternatives.” I don’t think it’s wrong to talk about his stuff!
Sierra’s note: Hey all! I’m just chiming in now; my computer’s been down all day. It’s true that I like a good controversy, but I didn’t intend this article to be all that controversial. I don’t think anyone should simply abandon ship on a mortgage, but a lot of people have so when someone asked me about it I looked into it just like I do when people ask me about investing or getting out of debt.
What I like about Matt Taibbi’s book is that he uncovers a lot of the outright criminal activity that went on in big financial institutions during the housing bubble. A lot of people made bad financial decisions, but focusing exclusively on individuals and letting banks off the hook obscures the picture.
That said, I could have worded my opening better. Re-reading it, I see how it could be read to mean that walking out on a bad mortgage might be a good thing, and that was not my intention at all. Rather, I wanted to show people what other options they have if they find themselves unable to keep paying a mortgage, or trapped like my friend in a bad investment.
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Agreed. Why is it so acceptable to walk away from mortgage debt? In that line of reasoning, I can walk away from student loans or credit card debt because whatever I bought turned out to be worth less than what I thought.
All parties in the transaction – individuals borrowing more than reasonable, banks too eager to sell to subprime, and government for encouraging universal homeownership – should all be held partly responsible for the crisis.
Individuals have suffered from lower house prices and layoffs. Banks have suffered massive losses on foreclosed properties. Politicians have been kicked out of office. It’s even pain for all.
What’s unfortunate is that the responsible have been dragged down along with everyone else. Layoffs have affected everyone. Some responsible banks are being trashed along with the big 4. Upstanding politicians have been voted out along with everyone else (or shot).
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As Sierra points out, there are serious consequences to walking away from your mortgage. I think what she is suggesting is to weigh these consequences against the benefit of not having an upside down loan on your hands. It’s a cost-benefit analysis.
Morality probably should be part of our financial system, but as we’ve seen over and over again, it’s not. You can hate the system, but if you don’t play by its rules, you’ll likely get burned. Thank-you, Sierra, for talking about how to reduce the burn.
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For example, I work for a construction company. We submit bids for 99% of our work. When you submit a bid to a local government agency, you are saying that you agree to do the work for the price you submitted. There are times that contractors will be the low bidder but will withdraw their bid. There are consequences, they may lose a bond and have a bad mark on their credit rating, but the decision is made because the consequences of performing the work in the bid are greater. Is this morally wrong or a sound business decision?
I am not saying that one should sign any agreement without thinking about the consequences because you can always back out. Going into a deal on bad faith is wrong. But the stigma that you are a reprehensible citizen if you have to default on your mortgage is no better. Whether we like it or not, we have turned our houses into an investment of sorts and therefore, we must look at a home both ways: as shelter and as an investment.
With that said, I believe the article gives good advice on what to do if you find yourself in a situation where a default is an option. It shows more options other than just walking away without a word.
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Add me to the chorus of people that take issue with this article. I understand that there are a ton of people out there that are in foreclosure because they cannot pay mortgages for any number of reasons (unemployment, medical emergencies, other major life upsets). However, I do not get walking away from a mortgage they could otherwise pay. And blaming the banks because they were deceptive or dishonest is not a good reason. If you made a bad financial decision (bought a house that turned out to be overpriced…getting caught up in the overheated housing market…etc. etc.) then you deal with the consequences. It was still your decision and now your obligation. I know it is difficult and limits your options but…well…that is kind of the way life is.
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The advice presented in this article is good. Walking away should be an absolute last resort, you should always talk to your bank about a loan modification or short sale first, which I imagine many people don’t.
And if the bank is unable to work with you and you’re forced into foreclosure, then so be it. They have (or should have) considered the risk of lending to you in the first place, and are prepared to deal with the potential losses associated with that. But your credit will be destroyed, and rightfully so. Hopefully it’s enough to put you on the right path again, the path of only buying things that you have the money to pay for.
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I think it is extremely odd that this article is talking about a “strategic default” and then the quote used talks about someone “being down on their luck”.
I would NOT classify someone that did these things as down on their luck:
– Chose to purchase a house that was more than they can afford
– Chose to sign mortgage papers, most likely for an exotic loan that would become more expensive over time
– Probably did not read any of the loan documents they signed
– When things get tough, they walk away
I would classify them is irresponsible.
There was no guarantee when they bought the house that prices would continue to skyrocket, and they would gain astronomical amounts of “equity”.
I also think it is quite crazy how we continue to blame the banks. I have not heard one story of a mortgage banker holding a gun to someone’s head forcing them to sign loan documents. PEOPLE WERE FALLING ALL OVER THEMSELVES TO TAKE OUT LOANS THEY COULD NOT AFFORD. It is not the bank’s responsibility to decide what you can afford, any more than it is the grocery store’s responsibility to decide what groceries you can afford. TAKE RESPONSIBILITY FOR YOURSELF.
I think, in general, people in America are starting to lack morals. Most people just do whatever they want to do, and then make up stories after the fact to justify their actions – “It is the bank’s fault”.
We are also becoming very politically correct – PC. 25 years ago this type of action would have drawn outrage. Now, it draws outrage when someone like me tries to argue for doing the right thing.
The US has lost its way – big time. We’re a country full of greedy people. End of story.
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I once bought a brand-new car and financed it.
A year later, I discovered it had plummetted in value. In fact, at the time, I owed more than the car was worth.
So I walked away from it. Mailed in the keys and ruined my credit.
Sounds stupid when you put it this way, doesn’t it? Well, to some of us, it sounds stupid when it’s about a house, too.
Pay your bills, deadbeats.
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For me, the scariest thought is that of the mortgage company selling your house (generally well below market value) and then coming after you with a lien on your present house/whatever other collection tools they have for the rest of the debt anyway. If you can make the payments and depending upon your situation/location, it may make more sense to try and rent it and hold until the market (hopefully comes back). I believe since the whole mortgage crises that banks have gotten 1) a lot more effective; and 2) a lot more aggressive in going after people who walk away.
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Wow – I can’t quite wrap my head around why so many of you folks are so quick to jump down the author’s throat about this article. Unless I’m missing something, I don’t see the part where she outright CONDONES a strategic default as a method of getting rich slowly. In fact, she very clearly states that it should be nothing other than an absolute last resort.
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Wow, let the judgements begin!
I’d really like to see how most of the previous commenters would behave if they were underwater on a house they couldn’t afford or needed to move for a job.
When you take out a mortgage on a house – the deal is between you and the mortgage company. You keep making the payments and you get to stay in the house and eventually own it. If you don’t make the payments, the mortgage company can take the house and sell it.
Both sides take a risk on that type of deal and if things don’t work out, one or both sides will lose.
Most of the time (historically at least), both sides win – this is why there is a big mortgage industry and lots of happy home owners. Sometimes things don’t work out, mistakes get made and there are losses.
I don’t see anything “moral” about the situation.
I would also question the advice in the article about using a default as a “last resort”. If you are in a situation where you are fairly sure you’ll eventually be mailing in the keys, you owe it to yourself and your family to bail as quickly as possible. Fighting a losing cause will just deplete your family finances and make things that much harder once you default on the house.
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Holy Cow. The bulk of this article is fine, trying to give advice on how to work your way out of an underwater mortgage without just mailing in your keys and walking away. And doing the right thing.
But the first few paragraphs are just awful (IMHO) and have no business being in GRS.
“Businesses walk away from bad investments and debts like this all the time, but for an individual to do it takes guts. There’s a huge stigma associated with walking out on your mortgage. Americans feel that there’s something morally wrong with not paying your debts, even when those debts are astronomical or unfair.”
I know contract law, and the contract is void if you enter into it under duress or with undue influence, or if you were not of sound mind or incapacitated. If we rule out those things, the contracts that brought someone into debt IS FAIR and if it is “astronomical” it is the person’s fault 100% that they got into it in the first place!
Of course it’s unethical and immoral to not pay it if you are able to pay it. Why even suggest otherwise???
And for the record, businesses do not “walk away” from their debts (or investments) used to purchase assets that depreciate all the time. Where does that even come from?
The body of the article is fine but the first paragraphs are just awful.
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@Money Smarts Blog:
“Both sides take a risk on that type of deal and if things don’t work out, one or both sides will lose.
I don’t see anything ‘moral’ about the situation.”
So that’s it then? In the world of finance, there is no such thing as “morality?” Only “risk” and “reward?”
So I suppose then that there’s nothing immoral about shoplifting? After all, you’re taking a risk (that you’ll get caught). If your gamble pays off (and you don’t get caught), then you get to acquire an asset for free. The stores already expect to lose a certain threshold of product to breakage and theft, so it’s built into their pricing model already.
The stores clearly post the terms of the “contract,” namely that “Shoplifters will be prosecuted.” So as long as you consent to your side of the contract (that is, you accept that if your risk doesn’t pan out, the consequences will be prosecution), then there’s nothing wrong with attempting to shoplift, right? It’s just two parties entering into an agreement, balancing risk and reward.
This is insane, people. Is this really what society is coming to? This unbridled greed and rampant rationalization of amoral and immoral behaviour is going to be our downfall, mark my words.
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I know several people who had to sell homes at a loss and ended up owing more than they got for the house because of work transfers. Every one of them paid off their debt (over time, of course). I don’t know a soul who’s just walked away from a home/mortgage.
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1) simply owing more than the house is worth and wanting to get out because the asset you thought would appreciate, didn’t. You can still afford the payments and have no outside reason to move.
2) Your ARM has readjusted such that you can no longer afford the payments (this happened to a lot of people). Some people would argue that you shouldn’t have entered into a mortgage that you couldn’t afford when the rates adjusted. That’s probably true on some level but I do believe that there were some predatory lending policies during the housing boom and even, probably, some actual fraud on the part of the banks.
3) Your house is worth less than you owe and you can still afford the payments, however, life circumstances have changed significantly (job, family, etc) such that you need to move a substantial distance.
I don’t think it’s fair to say that everyone who walks away from a mortgage is morally reprehensible, nor is it fair to say that everyone who walks away from a mortgage is morally justified. Like most things in life it is rarely as simple as black or white, but a multitude of shades of grey.
For people who think that it is always the fault of the person who signed the mortgage papers without reading them, I would encourage you to listen to
“The Giant Pool of Money” produced by This American Life at NPR http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money
I think this is a helpful article for people who find themselves in a bad situation. Thanks for putting together the information.
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I think renting the home would be the best option but my wife is strongly against this.
I’ve looked into Walking Away, I don’t really have the appetite for this either….
I don’t want to be a victim of the market place, I want to find a way to take advantage of this situation. If you’re not looking at this from a cost benefit standpoint then your have your eyes wide shut to the reality that there are real pressures on the individual to provide for themselves while the corporations are bailed out with liquidity, I can’t get a refi becaese the loan to value precludes it. If our government had done the same for these large banks, I wonder where we’d be today?
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“Lenders don’t want you to default on your loan — and stick them with an unwanted house — any more than you want to destroy your credit. They’ll talk to you.”
Really? Have you ever heard of toxic assets? If they really wanted to talk to you, we wouldn’t be hearing so many stories about people who call countless times to discuss the mortgage to no avail. Until we make it impossible for banks to write off their losses from foreclosure, we will continue to see banks who ignore those who want to modify their mortgages.
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@Kevin – There is a difference between a failed business deal and committing fraud.
Shoplifting is illegal, walking away from your mortgage is not.
If you default on your mortgage, you don’t get to keep the house.
Think of it this way:
John takes out a $50,000 business loan to start a business. This loan is not secured by any personal income or assets (I know this isn’t realistic).
After two years, the business is out of money, so John closes the business and defaults on the remainder of the loan.
In this case, John could easily keep up the payments (his wife has a good job) and eventually pay off the loan if he chose.
But the loan was against the business – not John’s house or income or any family assets.
Is John morally wrong for not paying the business loan?
If this business was a house, would it be any different?
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The day I returned to work after our move, I was informed the paper I’d been working for was cutting all its editorial staff. I was able to do quite a bit of freelance, but my income was cut by half (making us VERY glad we’d bought less house than we could afford). Values started softening the next year. Then, enter the triple whammy of: financial crisis, auto industry nearly going under (I live in Detroit so this affected us badly), and a huge government corruption scandal which meant no one would invest in the city (for good reason). None of these things are my fault, and yet I’m stuck with a house I can’t get rid of.
We’re struggling with what to do…we need to get out of here, but it would require a $100,000 pile of cash at least to make up the shortfall. I keep hearing nightmares about short sales. We’ll keep making the payments, and I certainly think a walkaway is wrong on many levels, but watch the judgy attitudes. Not everyone who finds themselves in this situation is a buy-buy-buy deadbeat.
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I still think it would be great if Sierra would do some posts on families with children and money. That’s a big part of finances that GRS doesn’t address as often or as in-depth as it does other parts of finances. And it’s a part that someone who teaches her children to eat kale has personal experience with. The retreads of controversial topics frankly aren’t that interesting.
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I have an issue with some of the “all debt is fair” commenters who are lamenting the moral state of our country.
I know some people (before the laws changed) that were committed to paying their debts. They paid for years, didn’t take on any new debts when they realized they were in trouble, went to credit counseling, etc. The mail was late on their electric bill and once their creditors found out, their interest rates skyrocketed over night. Now, they COULDN’T afford groceries, or the mortgage. So, they called the creditors, sent letters, continued to pay what they could afford, and here’s the sticker, the creditors wouldn’t budge. They wouldn’t negotiate. No reduction in interest rates or payments. They had to declare bankruptcy. Is this all on those people? Is it entirely their fault? Would you consider this fair? Because I sure wouldn’t.
I’m well aware that people take out mortgages they can’t afford, and certainly don’t condone that. But, you know what? Our society doesn’t do a good job of educating people on what these things mean, either. If you’re a family that’s been living in a cramped apartment and suddenly, this great deal pops out of the woodwork and no one bothers to explain the risks to you, who holds the blame? Because I don’t think that it can be pinned entirely on the homeowners here. Yes, they share the blame, but the way you simply write off these corporations that *let* these people get into these exotic mortgages knowing what would happen and lambaste everyone else just illustrates the first few paragraphs of this article. Of course, as Bogey pointed out, it’s not the bank’s responsibility to tell you what you can afford, but banks and creditors also do not let you just borrow whatever you want. More than a few of these were glaringly obvious pushes by these creditors to make people *believe* they could afford what they couldn’t. IMO, that’s just as reprehensible.
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I do know people who are in danger of losing their homes and it’s horrible for them and their children. Stressful, depressing, debilitating, humbling, and embarassing.
But even so, talking about strategic defaults not because you can’t pay but simply because you don’t want to? That’s not getting rich slowly. That’s get rich quickly thinking and it’s crap.
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I am so tired of people blaming the banks. The banks did not do anything wrong. In fact, people praised them a few years ago for making home ownership possible for people. Take responsibility for yourself.
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First, I want to say I understand people going into foreclosure because they had to spend every penny on medical bills to their child’s life. I think we need more programs in this country to help people who have had huge medical expenses that wipe them out.
I see too many people who just don’t feel like working collecting their government checks. Why do we give them money?!?
Now, a lot of people who were getting into the sub-prime mortgages didn’t have a dime in their savings account or a job. They didn’t even need any money to close on the house. The borrowers figured their house will go up in value and they’ll get a job next week, so there is nothing to worry about
. Sure, the banks were stupid enough to lend the money, but why on earth would somebody accept a mortgage when they don’t have any savings?
There are too many people out there playing the system, and they don’t care who it affects.
If I bought a house and wasn’t able to make the payments I’d go get another job. I would do what it takes to make that payment. What’s that you say? There are no jobs in this crappy economy?! Look around! Everyday I drive to work I see dozens of “Help Wanted” signs. I’m sorry they’re not the ideal job for you, but it’s a job that pays the bills!
Errrggghh!
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I feel like I’m witnessing a witch burning or something. Poor Sierra.
Thanks for writing this post, I think it is important for people to have this information when they feel they have NO other option.
I can’t believe so much hate and blame is being spewed on the irresponsible borrowers. What about the lenders? These mortgage companies basically lent WAY too much money, to WAY too many people who had no means to pay back that money. They then bundled up these cheap debts into “investments” that were then sold off. Their irresponsibility led to and economic CRISIS that then triggered one of the largest recessions since the 30s, and effected people all over the WORLD. And then they got BAILED OUT while people lost their homes, their jobs and their retirement savings.
If anything it’s these banks and mortgage companies that need a morality lesson.
Thanks Sierra for including the quote from Matt Taibbi’s book. I wasn’t familiar with it. And thanks @dee for the NPR link, this looks really interesting.
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HAHA, apparently the article was right about Americans believing it to be immoral to not pay your debts! I, also, agree with most of the comments. As someone who graduated college and entered the workforce during the recession, when I eventually buy a house it will be with the understanding that the value could drop astronomically within months of purchase. Houses are not sound investments, we have to stop treating them like they are!! Houses are for living, raising kids, and hopefully one day being able to live without a mortgage.
Taking out a mortgage and then walking away, especially when you are still completely capable of paying, is most definitely immoral.
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This has always been a controversial topic with people raging on either side of the debate. I think most of the comments reflect the savvy of people who read this site and their knowledge about finances and what is financially right and wrong. However, most people are not as educated and don’t always understand the legalese in contracts or take the time to drill into what each clause means. When I bought my house, I think I signed about 80 pages of a 300 page stack of papers. I sure was intimidated and made my lawyer work for his money, but not everyone is going to do that. Sure there are people that want to beat the system, otherwise we wouldn’t have so many Ponzi schemes, blackmailers, etc.
Bottom line is that banks KNOW what they are doing and some individuals do and some don’t. Also, you can’t always forecast the cards that life will hand you that will effect your financial situation, i.e death, divorce, job loss. Some people will try their best and others will do what’s best for them and will say “too bad, that’s the price of doing business.” I don’t think tax payers are left holding the bag any more because the banks have been paying back the US Government Bank for the loans, it’s the Fannie’s and Freddie’s that haven’t recovered and probably never will.
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Add me to the list of people who were shocked by this article. Not able to pay your mortgage is one thing; able to pay but unwilling because it’s not a good financial decision is another.
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The only time foreclosure should become an option is if you cannot AFFORD your mortgage.
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My cousin and his wife are walking away from their home soon. They aren’t doing it because of the mortgage exactly. They’re doing it because of the property taxes. They are more than 15 years into a 30-year mortgage and don’t have any home equity loans. But the property taxes in their area, which was re-classified as “resort” from “farming” have gone up and up and up. Their monthly payments have more than tripled in the last few years alone. And not a dime more is going to the mortgage — it’s all taxes.
They built the house themselves, and it’s beautiful with hardwood floors and hand-crafted molding, and they are moving into a double wide trailer with their three kids in a different tax district. They are horribly ashamed, but both parents are working 60+ hour weeks to pay their property taxes, and they can’t do it anymore.
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Money Smarts Blog with comment #17 is spot on.
I don’t see anything “moral” about the situation either. It’s simply the cost of doing business.
Walking away from my mortgage in Florida was the best investment I ever made. Check to see if you’re in a recourse state or not!! Florida is in a recourse state and they can garnish your wages for balance of the loss on your house!!
In this case File Chapter 7 Bankruptcy to wipe out all debts and you will be better off than being a slave to the banks that made shoddy loans to overvalue their assets.
My Chapter 7 was discharged 10 weeks ago and I have a 651 Experian Score. I can get a car loan now and might be able to get a 4-5% APR here in 2-3 months. Not a bad deal in my opinion.
Now I’m in a better financial position than ever as my bank (for whatever reason) doesn’t want to take my worthless property. Maybe it’s to cook their books and overvalue their assets?
Just my 2 cents that thinks it’s more to be a debt slave to the banks.
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@Liz…that just sounds weird. How could property tax increases make a mortgage payment triple in a few years? Did they fight the assessments? Can they sell the home rather than walk away? I assume the value of the property has gone up with the assessment for property tax, and if not, then the assessment is wrong. And – If both parents are working full time and 60 hour weeks but they can’t afford the property taxes on their home, then something is seriously wrong with the picture that I’m not seeing. (I’m not up on American property taxes to be fair, but it sounds weird to me).
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My spouse & I have been through foreclosure – not “strategic” (our circumstances changed dramatically and we didn’t have the money to pay even if we wanted to). For credit ratings & much of the foreclosure process it makes relatively little difference whether a foreclosure is “strategic” or involuntary. My spouse has actually become a short sale consultant for a local realtor…
I found GRS well into our foreclosure process, and we have found a whole new (almost) bank-free, debt-free and less consumerist lifestyle thanks in large part to GRS. Our next step is moving to a much lower-cost area of the country (thankfully also closer to family).
So, I don’t mean to take a position on “choosing” foreclosure, but if you find yourself facing a foreclosure…a couple of process thoughts:
1-each case is unique, and it is very hard to make generalizations, in part because no single bank’s policies are completely consistent (and policy differences from bank to bank can be vast)
2-each state is different. In some states, if the home is your principal residence the bank can’t come after you for the deficiency (the loss the bank takes). In others, they can but rarely do. A lawyer can help negotiate whether and to what extent you are on the hook for the deficiency (whether you have money is the main issue-if you are broke, the bank is more likely to not seek the deficiency from you). In some cases the bank may have you sign a new, personal (not secured) loan with a future balloon payment (no current payments) for the deficiency. In some states the process is very rapid with few ways to delay, in other states it is relatively easy to delay for many months.
3-if you have the time and are persistent, you can save a lot of lawyer dollars by doing most of the negotiating yourself and using the lawyer only for court dates & filings and any face-to-face meetings with bankers. Many areas have non-profit foreclosure avoidance organizations, but in our area they are a little swamped and so you won’t necessarily get a lot of personalized help (still, free is a good price). A good lawyer will be able to help you determine how much you can do yourself vs. what makes sense to pay professionals to do. In some states, folks who aren’t otherwise licensed for real estate or law must be licensed to negotiate debt on your behalf (many of these are new laws).
4-banks now have big departments to deal with their distressed properties, but this means there are lots of representatives, and some have different levels of effectiveness – we called on one issue 3 different times, got 3 different answers, eventually one that stuck. If you are not yet delinquent, you may not be talking to a dept dealing with distressed property. In some cases (depends on bank, state, and who knows what all) you won’t get anywhere until you are delinquent, in other cases it is best to start before you are.
5-short sales can happen (as noted they still crunch your credit history- but perhaps not as much as foreclosure) but will usually make the process even more paperwork intense. If you are living in the home, a short sale may mean you will have to move sooner than if you go all the way to foreclosure (but not always).
6-be ready for some randomness in the process. I’ve seen 2 properties in similar situations with the same bank in the same city proceed in very different time frames. Also, the bank’s lawyers have a lot of cases and sometimes will leave a message for a homeowner’s lawyer that turns out to be a mistake. Sometimes a file seems to get lost for a while and then all of a sudden, when it is found, tries to make up for lost time.
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When should you walk away from a bad mortgage? When you admit to yourself that you are a total failure as a human being and that you have lost any shred of decency that you had left.
Seriously! What’s next, “when it’s okay to cheat on your taxes?”
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These stories should always include the state that the house is in. The consequences for the borrower are so different depending on whether it’s a non-recourse state or not.
It also bears on the moral question. The lender knows the legal environment in which they’re making the contract – I think it’s morally fine to mail in the keys in these states.
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never, ever, ever ever buying a house. never ever.
even with my apartment’s leaky ceiling and my dodgy electrics, i will never set foot out of a rental situation unless it’s with enough cash to buy a place outright.
which will be never ;P
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1. It IS immoral to intentionally take out a loan that you don’t intend to pay back. In US law this crime even has a name: Fraud.
2. It IS immoral for a company to fool you into signing a contract with provisions you did not expect. This is also fraud.
3. However, once an agreement is in place and both parties have acted in good faith it is a BUSINESS ARRANGEMENT. You should do everything you can to fulfill the terms of this arrangement but this may not be possible or, in fact, wise.
4. Each party in this arrangement takes a risk. The bank takes a risk in that you could leave the home before the value – foreclosure costs – sale fees is more than the loan is worth.
5. You take a risk that the bank will foreclose on your house when there is extra value in the home.
6. The bank has insurance against the issues in #4. Also, as noted in the article, the other costs involved in walking away are very, VERY steep.
7. You have NO recourse if #5 happens.
So – if the amount of extra money (above what the house is worth) is more than the cost of walking away and you took the loan in good faith what is the moral issue with walking away?! After all, the bank would have NO issue in taking your house if you missed payments and you had paid 90% of your loan. This is just the inability of people to separate their feelings from what is a business deal.
Jake
PS There are so many other options, some described in the article, that just walking away is probably a bad idea in all scenarios.
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The responses to the article are very predictable. Some holier-than-thou preaching from people who dont really understand what happened, and the consequences of both the housing boom and bust.
As bad as it might sound, strategic default makes sense for the country as a whole. Contrary to the uneducated opinion of people claiming its morally wrong to walk away from an overpriced mortgage, people doing just that was and is neccessary for the US to recover from what happened. The immoral thing was taking out the loans in the first place, causing young people starting families to be unable to afford a home.
Strategic default has caused the price of a single family home to plummet back to reasonable levels so that normal people can actually buy and afford a home. You cannot run an economy on the sale and resale of homes. You cannot have your population spending 40% of their income on a mortgage.
The reset in the housing market was neccessary. If you bought a home during the height of the frenzy, then you are probably an idiot. I dont really feel sorry for you. However, deciding to walk away from your mortgage the last two years did have positive impacts on the nation.
As usual, things are much more complicated than people think.
Excellent article.
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The banks did nothing wrong? Go read some books. They specifically went after minority and people with low education levels and pressured or lied to them to get them to rework their mortgages. It was a common tactic that if a homeowner missed a mortgage payment banks would send the homeowner credit extensions. From the bank’s perspective, a bad loan was a great business plan, either the person paid way too much money or the person defaulted and the bank took ownership of the home. Go read some books. The banks were and are evil.
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Second, remember that I don’t necessarily agree with every article published at Get Rich Slowly. I’m not religious, but I occasionally publish articles about why religion is an important part of personal finance, for example. That doesn’t mean I’m endorsing that viewpoint. It simply means that I know that religion is an important part of personal finance for many people, so it’s a topic worth exploring.
I’ve never walked away from any of my debts, and I don’t advocate that anyone else do so, either. But not everyone shares this viewpoint. I’d rather have this article about financial options out there in the search engines than articles actually explaining how to walk away from a mortgage.
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For all of you so absolutely convinced of the moral decrepitude of someone who would walk away from their mortgage, congratulations on your life being morally flawless in not just your finances but all other areas of your life as well.
You *are* morally flawless, right? Right?
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I can honestly tell you I understood the risks of walking away better than I understood the risks of buying that house. Why? Because there was a big effort to cover up those risks when I was buying. I was young, inexperienced, and yes these jerks out there took complete advantage of me. Knowing everything I know now, yes I can tell you the banks should not have approved the mortgage for my husband and me. Our debt to income ratio was all wrong. But, and I am speaking honestly even if it makes me sound completely stupid, we believed if the banks approved it (our application was NOT falsified in any way), we were obviously more credit-worthy than we thought and yes, when we bought it, it seemed like a sure thing. Like I said: young, inexperienced, and foolish. You call me a deadbeat, I feel swindled.
There has never been anything like what was going on in the housing market a few years ago and some markets were much worse than other places in the country. We’d all love the tried and true to stick to everything but it doesn’t. The best decision I made, personally, was walking away from that nightmare of a house. I would never have had a chance in hell of recovering from that disaster for tons of reasons, not the least being how underwater the house was. “Fool me once, shame on you. Fool me twice, shame on me.’ Every mortgage payment I made was the bank fooling me into staying in a worthless propety that was putting a major strain on my family. The longer I stayed, the harder it would have become to recover.
By the way, my experience with the bank? We tried and tried and tried for months to talk to them. Nothing. We called. Voice mails and voice mails and voice mails. Most times, the mail box was too full to leave a message. When it wasn’t, we left a message. They never called back. We wrote. Certified letters, regular letters, express letters. Nothing. Not a damn response on anything except the same generic letter with the same generic form we submitted over ten times. It’s a joke.
We’re not done with this mess. Wait until they start their lawsuits. Talk about wreaking havoc on the credit system. Maybe this will be the end of FICO and force banks to go back to true, moral lending practices that force them to review applications invidually and completely.
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“Americans feel that there’s something morally wrong with not paying your debts, even when those debts are astronomical or unfair.”–Of course there’s something morally wrong with not honoring your promise to pay back the money someone gave you: it’s STEALING. The debts are not ‘unfair’: you knew the terms and agreed to them. IT’S STEALING to take money and not give it back.
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Of course there’s something morally wrong with not honoring your promise to pay back the money someone gave you: it’s STEALING. The debts are not ‘unfair’: you knew the terms and agreed to them. IT’S STEALING to take money and not give it back.
You’re not “taking” money; you’re signing a contract to borrow money secured by collateral, which is a house. If you forfeit the collateral, you’re taking a path contemplated at the time of the loan.
I’m not saying there aren’t moral implications to it, but equating it to “theft” is just silly.
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