With the national housing fiasco continuing to pick up steam, I thought this was especially interesting.
It is now considered ok to walk away from your home if you no longer think it is a good business deal.
From NPR: Why Not Just Walk Away from Your Home?
There’s a photo of a happy family in a park, smiling. Another family, also smiling, is packing up boxes… The not-so-subtle message: Foreclosure need not be a shameful, life-ruining experience…
Foreclosure, we’re told, is a last resort, an option that no responsible homeowner would ever choose. But some distressed homeowners — no one knows exactly how many — are doing just that. They’re voluntarily walking away from their mortgages, engaging in a practice the mortgage industry calls “ruthless default.”
But is it really ruthless — or just good businesses sense? Some economists argue it’s definitely the latter.
Sometimes, they say, walking away from your mortgage makes economic sense, especially for homeowners who find themselves “upside down” — that is, they owe more on their mortgage than their house is worth. In those cases, “voluntary foreclosures are not by themselves evidence of a newfound irresponsibility on Americans’ part,” says Nicole Gelinas, writing in The Wall Street Journal .
Separating the economics of foreclosure from the morality (and the stigma) is not easy, though.
“We need a culture of responsible consumers and homeowners,” says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, echoing a deep-seated American belief that one should always honor financial obligations.
The current housing crisis is different, argue some economists: Since some financial institutions sold these loans in a deceptive manner — for example, by approving people for loans they couldn’t really afford — then why should homeowners feel obliged to honor their commitments?
I can guarantee you that many of us who read here are going to know someone – in the family, at work, at school, at church – who is going to be faced with this kind of situation in the months ahead.
Would you honor your word and keep making your mortgage payments if you owed $150,000 on your mortgage and your house is now only worth $90,000 or $100,000?
Does taking out an unwise loan, even if the mortgage company or bank was less than forthcoming about the details, give people the right to walk away from a contract?
Is this ethical? Should Christians, specifically, honor their mortgage contract even if it means the loss of tens or hundreds of thousands of dollars? Is bankruptcy no longer a shameful thing in this country?
Something to think about because you’ll probably be discussing it with someone sometime soon.
You might also find these posts interesting:
Erin
The evening news in my city has been doing a series of stories about people who can’t afford to make their mortgage payments. They’re always portrayed as victims who didn’t know any better. Call me cynical, but I think reports like what I’ve seen on the news and the article you posted are just ways to shift the responsibility away from people.
Stacy
A co-worker actually just did this, thinking that it was the best way out, while still having 3 horses, a new travel trailer, a $30,000 boat (that money is still owed on), 4 cars for 2 people and just took a two week vacation to some island. My husband and I shake our head as we are reading Dave Ramsey’s book and doing our own “Total Money Makeover”. Yes, we might not own our house, we are on our way to being debt free and being able to buy the things we want for cash.
Ohapizgud
A sad sign of the times. The “victim”culture is celebrated and thrust in our faces on a daily basis. Society makes escaping responsibility too easy, be it marriage, parenthood and now home ownership. It reminds me of a toddler throwing a tantrum over a toy. Gimme, gimme then 5 minutes later they are tired of the toy and move on. So sad…
Brandy
Sallie,
I am so glad you are talking about this issue! I think Christians need to hear it from the pulpit. Walking away from a loan in a foreclosure situation–or even selling a home for a loss as a short sale (where the bank eats the difference between the sales price and what the debtor actually owes)–both of these are a form of stealing in my opinion. After all, to be foreclosed on, a person has to have not made payments for a minimum of three months, and usually closer to six before the process is over. And then the bank loses thousands trying to sell the home once its vacant. In a short sale situation, the bank is eating thousands, and sometimes hundreds of thousands of dollars.
I have yet to meet a single person who plans to pay the bank back the difference.
Now, granted, the banks were very foolish also. But most folks I saw (we have been in the loan business for many years) were just plain greedy. They saw their houses appreciate, and sold them to buy bigger and better houses. They wanted more, more, more, and often they worked out deals for interest-only loans, or loans with minimum payments (like making minimums on a credit card and debt piling up over time), or adjustable ARMs where they really couldn’t afford even a small upward adjustment. We would tell people they could afford up to a certain amount, and they would push us to increase the amount even though we often told them the maximum was actually too large of a burden of debt in the first place.
Sorry. I could go on and on about this. It has been painful to watch. I know there are folks out there that really did hit on hard times. They lost a great job and can’t find another. I get it. But I remember what I saw–the greed, especially–and I have trouble not being skeptical about all of this.
My thought? One of the most powerful witnesses of the Christian church in this next decade might be our determination to pay back our debts, no matter how much, no matter how hard. This is what will set us apart from the world at large.
Ann
This is a tough one. I think it’s really on a case-by-case basis, I would not want to judge anyone for walking away. Job loss, disability, death, medical crises, all things that can make it untenable to stay in your home and keep paying the payments.
I’ve been thinking a lot about real estate lately as we just bought a house. The best favor we could do for ourselves is return to an older way of thinking about houses. They are not investments, they are not ways to make quick money.
We bought this house and I don’t know if we will ever be able to sell it again at the price we bought. Who knows. But the thing is, we can stay here for ever, God willing and be fine. And yes, we will keep paying the payments even if the value of the house drops to nothing.
The important thing, especially for young people right now, is to not buy something that you cannot live in forever. If you plan to get married and have children, don’t buy a 1 bedroom condo. Rent it right now. Only buy something that you could live in forever, because you may not be able to sell it in the short-term without losing money.
I think there is so much blame to go around, the lenders shoulder a lot of it. Is it right to sell a loan to a family that won’t be able to afford it once the rate adjusts? Don’t get me wrong, there is a huge aspect of personal responsibility here too, but we cannot forget that lots of companies made lots of money in this.
Brandy
Ann,
I like your point about not buying a 1-bedroom condo. We have friends who did this when they didn’t have children. Now they have one baby, but feel that they cannot have more because of the living situation. And I just don’t know what I would do if I were them, though they have wonderful attitudes about it.
I was thinking about what you asked:
We did this in the past, and there are mixed feelings about it. One thing that I think is overlooked in the news is that many of these loans were an attempt to “fix” an already bad situation. The families (and individuals) who came to us were mired in credit card and vehicle debt. We saw car payments, for instance, up to $800 and $1000 per month. These families were headed to foreclosure already. They could barely afford minimum payments, and they assured us they had “future costs” to consider. So getting them into some of these loans was an attempt on the part of the loan officers to help clients (who really become friends over the years). Now, I can’t say all lenders do this, but we always tried to talk with them (counsel them, if you will). We told them that this would lower their monthly payments, but they were only safe if they sold those cars and quit spending more than they could afford.
Some of them took our help and learned their lessons. Others are now calling the office, saying they need “more help,” but there is nothing more anyone can do. Rescuing those buried in debt with a home loan only works if they agree to actually change their ways. I will say that we have learned our lesson and try to make every cash-out loan (not that there are as many of those with the declining values) a direct pay instead of handing the clients a check. This means that any cash they take out directly pays off a credit card or other, higher interest loan. Handing a needy client a check, we have learned, tempts them to take a cut of the money and have fun with it!
abrianna
I don’t feel sorry for the banks if they misled clients about the terms of a mortgage. If that happened and then that family faces foreclosure, it is the bank’s fault. In fact, I feel bad for the family if that was the case.
I agree with Ann-it’s on a case by case instance. I could have been one of those families a couple of years ago. DH got laid off from his job. It took 3-4 months for him to find another one. He was diligent about looking too. We were almost out of money and we had to take out a loan to help us with some final expenses and for money to get out here. Yes, the new company reimbursed us, but we had to have cash first to get out here-we turned in the receipts to get reimbursed.
And once we got out here, we still had our home to pay for. We discussed whether we should rent or buy here, knowing that we would have to carry our old house for who knows how long? Fortunately, we only had to carry two mortgages for one month, but we were prepared to be very careful until the other one sold-however long it took.
So we could have been foreclosed on-not by choice, and not because we got a house we couldn’t afford, but you can only go so long on savings without any money coming in. I can tell you that if we had been foreclosed on, we would not have been happy about it.
If people ignored wise counsel as Brandy’s, then they should bear the brunt of it. I think one of the worst things to happen to the housing market was the push of comapnies like Fannie Maes and the ARMs to get people into home ownership. People that those companies knew couldn’t afford the houses to begin with.
Ann
Brandy, it sounds like you give sound advice to your clients. And good for you and your business partners for making payouts direct pay instead of checks. I’ve known of people who got payouts for homeowner’s insurance for various damages and because they received it as a check, spent it on other things, sometimes necessities mind you, and the house never gets repaired.
Abrianna, I agree so much with your last paragraph. We need to really question this idea pushed upon us that everyone should own real estate and now. Renting is a good and wise option for many and is nothing to be ashamed of. I’m glad that you and your husband made it through your husband’s layoff financially whole.
Marianna
Sallie asked: Does taking out an unwise loan, even if the mortgage company or bank was less than forthcoming about the details, give people the right to walk away from a contract?
I’m not quite sure where the idea is coming from that banks are not being forthcoming about details…When you close on a house the terms of your loan are, by law, spelled out. Are there unreputable lenders out there not following the letter of the law? Absolutely. However, they represent a tiny fraction of loans now in default or being carried as a burden to homeowners.
The bottom line is too many people took out risky loans. It doesn’t take a lot of common sense to know that a loan for 100% of purchase price, interest only payments, and an adjustable-rate is a very risky form of gambling. I have absolutely no pity for people that are now getting caught in that net. They gambled that values would continue to increase, that rates would continue to stay low, and that they would continue to stay healthy and fully employed. History has shown us time and again that none of these can be counted on and we must make wise decisions accordingly. Add to this the fact that most of the homeowners taking out these high-risk loans have negative savings rates and it is a recipe for disaster, and not one the government should be bailing them out of! Save the bail-outs for families like Abrianna’s that lose a job or suffer a medical crises and subsequently exhaust their savings.
Would I honor my loan…been there, done that. Thankfully, we saw the writing on the wall AND had the cash to sell at a loss. A house that we bought for about 115k sold three years later for 110k is now worth about 90k today, four years later, simply due to a high rate of foreclosures in the neighborhood. If we hadn’t had the money to sell at a loss we would still be there simply because we honor the agreements we make.
Elizabeth
The consequences of filing for bankruptcy or walking out on a mortgage loan are pretty dire. It’s not just a matter of deciding it’s no longer a good business deal and cutting one’s losses. Bad credit can cost lots and lots down the line. I hope that some of these people who were apparently unable to do their homework before signing these loans will investigate the consequences of walking or bankruptcy before they do it. It might be cheaper in the long run to stay put and hope that the market will eventually turn.
One other thought- few things can turn a good neighborhood bad faster than a growing inventory of empty, foreclosed houses. And people who are paying their debts and keeping up their homes then see their house value decrease through no fault of their own. I think consideration needs to be given to those homeowners, also. (The thing that makes my blood boil is when I read about people who trash their houses when they can’t pay the loan anymore and have to turn them over- what a mentality!)
Sallie
Thanks for the excellent comments, ladies!
So much to say… where to begin?
For starters, just sorting out this mess is going to be a huge headache. I’ve read many reports of people being a year or more behind in their payments and they haven’t even received a notice from their mortgage holder. The banks are so overwhelmed with defaulting owners that they can’t even begin to process all of the paperwork to deal with the problem. This is going to take a LONG TIME to sort out and deal with the fallout.
There are going to be “innocent” people really hurt by this. People who have worked in mortgage lending and did so ethically are going to lose their jobs right along with the cheating scumbags. People who put 20% down and have never touched their equity are going to find themselves living in deteriorating neighborhoods. People who have practiced sound financial strategies are going to find themselves in a huge pickle when they need to relocate for a job and can’t possibly sell their house. The list is endless.
And then that doesn’t even begin to touch on the people who are going to suffer true hardships like abrianna mentioned and will be in dire straights because of it. I’ve been open on AGH about the fact that David and I have gone through a few very lean years with our business. We had done everything “right” prior to that. No debt other than a very modest mortgage, significant savings in the bank, giving back to the Lord, etc. But even that was not enough to get us by with the multiple challenges that hit us all at once. If work slows down, you experience significant medical costs, and you are unable to work as you normally do, having all those things in place actually buys you very little time. A job loss and/or medical expenses will wipe out the average family in just a matter of months, if not weeks.
Brandy mentioned how this could set apart Christians from the rest of the pack. It should, but pardon my pessimism in that I think it probably won’t. Well, I think there are a lot of people who CALL themselves Christians who really aren’t and therefore won’t feel compelled to do the honorable thing. (Please note: I’m NOT saying if you walk away from your house you aren’t a Christian!) What is sad is that when there are Christians in true need there is often no real help available to them from the church. Either the church is so strapped for cash paying for the new multi-million dollar sanctuary that they can’t possibly help someone in true need or the members themselves are so unnecessarily overextended that they wouldn’t be able to be of any help to any of their fellow church members. Or, our uniquely American Christian way of looking at things says that if someone is struggling financially then they must not be working hard enough or they must be sinning and they need to pull themselves up by their own bootstraps. We certainly can’t help them because then we would just be enabling them to continue in their ways that we don’t agree with. (We got this response from someone who was not supportive of David working at home and thought David should basically just be able to go out and get another job that week!) I truly don’t think most Christians want to know if someone around them is struggling financially even if it is a true need. Call me cynical, too, but that’s what I think.
That’s it for now. Have to hit the shower before Caroline wakes up! 🙂
Lindsey
Well, I think there is blame enough to go around on ALL sides, really. And please don’t think I’m sympathetic to bankruptcy. 99.9% of the time, yes it is a legal form of stealing. However, I have seen cases where I do believe bankruptcy is warranted. I know of an 60 year old lady whose husband died very unexpectedly from a heart attack. He had over $50,000 of IRS debt she did NOT know about. He had hidden his financial stress (and subsequently this stress is what probably killed him so young) from her.
When he died, the IRS came after everything they had. problem is, all they had was debt.
She had to let the house go. She is 60 years old, her life is ruined financially and she will never own anything ever again. She will die renting a “low income housing” apartment. The sad thing is, she is a very, very nice and kind lady. She is a Christian by every definition of the word.
Now, this lady and most people’s situation are VASTLY different, I understand that. But I do believe for ladies like I described, there should be some sort of recourse to file bankruptcy. And anybody who thinks it is “easy” to file bankruptcy and walk away scot free is very ignorant. Do some reading. Start by reading Maxxed Out.
Now, on to the foreclosure crisis and who is to blame:
The lenders/banks/mortgage brokers. If they couldn’t find you a mortgage, they would “create a mortgage package” that would work for you. They let people borrow 100% (or more!) of the value. They were not verifying incomes. They would underwrite anything. They were greedy.
The realtors. They knew who could and could not afford the house. But they willingly sold them to people anyway knowing FULL well the person could not afford it. Why? Because the lenders had those “special packages” available that would let anyone achieve the so-called American dream. Once they had their commission check in their hand, it was a done deal, and who really cares if Jon Doe defaults? It isn’t the realtor’s problem anymore. They were greedy.
The buyers. They bought into the hype that ANYONE could own property—and that you simply must if you wanted to have the “good life” or the “American dream.” If you rent, you’re a financial slouch and failure for sure. Owning something gives you hope! And hey, the lenders said I qualify for XYZ so I must really be able to afford it! Buyers were snowballed and hoodwinked and looked in the other direction. They were greedy.
GREED. It is a nasty thing for all of us.
Susan
Do you want to know what I think?…I think that the church who has the widow in attendance (whose husband owed money to the IRS and has now lost her home) should have her housing provided to her by the families of the church. In almost every congregation there is SOMEONE who either has a lot of money, or has some kind of living quarters that they could rent to her for cost. Talk about the world sitting up and taking notice!! But I agree with Sallie that this kind of response is so rare that you’d never know that caring for one another is something that the Bible is pretty specific about. I guess I am cynical, too, about what goes on in a lot of churches because of some of the life experiences we have had, but I honestly think that most of what our country is going through right now, in terms of moral and family decay, the political mess, and most, if not all, of the financial mess, can be traced back to our churches not doing what they are supposed to be doing. Obviously, we could get into a whole theological and philisophical discussion about what our churches are supposed to look like, but when churches don’t make us uncomfortable about our sin- be it in relationships, money, or whatever- they probably aren’t adressing things that they are supposed to do. The Bible has a LOT to say about money and debt, and yet it absolutely amazes me that most Christians get the majority of their advice from secular sources, Oprah, Suze Orman, etc., rather than FIRST going to God’s word. And I think that the mess we’re in proves the folly of doing that.