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The Allure of Strategic Defaults
What is it w/ the NYT? Lowenstein wrote that home owners should just “Walk Away!” in an article back in January, and today there is another article on more homeowners walking away. The discussions in these two articles are lopsided, painting what could be construed as a positive picture of why walking away from one’s home mortgage is justified, but they do not adequately talk through the long term effects on either the homeowner or the housing industry.
I have written about this subject repeatedly here because I believe it is an important component of our housing crisis. If there is a move to somehow give mortgage defaulters amnesty or otherwise provide cover for reneging on a debt, then where does it end? What creditor would then be confident in giving any one a loan at anything above 50-60% Loan-to-Value? What would this mean for valuations of real estate if suddenly the ability to finance was curtailed?
On the personal side, there is much better treatment of this subject from Bloomberg here, where the discussion is more in depth about how banks and other lenders pursue the assets of those who strategically default…even in the case of short sales. One of the determining factors is whether or not your home is in a non-deficiency state, which is a state like CA or AZ where it is illegal for lenders to come after other assets if you default on your home mortgage. This is unusual. In most states, mortgage lenders can come after you, even years after the fact.
The difference in treatment between lenders and borrowers is appalling. If you are a homeowner who put down 20%, paid your mortgage on time every month, but now your home value is below your mortgage, well tough luck. If you are a large lender who did a poor job of protecting your balance sheet and now you are stuck with a lot of assets that are far below what you paid for them (a lot like homeowners) then you get a massive bailout at taxpayer’s expense and live to collect not only your pay but bonuses in the future. It is this basic difference in how poor decisions are treated that is causing so many to question the responsibility to repay their personal debt.
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Harry,
Seems that you are suggesting people walk away from their underwater mortgage (… related to your Florida property?). How about suggesting people do the responsible thing and cut Cell Phones, Cable TV, etc and pay their Obligations?
Mr. Johnson’s concluding comment contains a truth that needs elaboration … “It is this basic difference in how poor decisions are treated that is causing so many to question the responsibility to repay their personal debt.”
We have a national political leadership that has expanded the national debt for decades, without regard to the known but ignored eventual consequences.
They have thereby sent a message across the land that they do not respect the consequences of inordinate debt.
Thus, we now have a very serious credit crisis arising from far too many of the populace who likewise have no respect for sound management of their personal (and in some cases, business) financial obligations.
It is sickening to see current national leadership (leadership in name only) continuing to ignore that which will greatly undermine America’s future prospects.
As a wise person once observed, “Ye shall reap what ye shall sow”.
grossi100,
Absolutely not! I (Rodney, not Harry) am pointing out the suggestion of others, which I find to be irresponsible because 1) they ignore the full consequences of walking away to the homeowner, and 2) it would lead to a series of consequences in terms of how we as a society view credit extension that would seriously harm our future growth. If you expected any borrower to default when “the numbers didn’t work,” then you as a lender would make sure to NEVER lend at a rate that might come close to being under water. 80% financing? gone. 0-20% down on cars? gone. Amount available on lines of credit and credit cards? seriously curtailed. These are the potential results to our lending environment.