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It's the principal of the thing
The housing market has an enormous elephant in the room, and no one seems to be able to move it. If homeowners start walking away from their mortgages en masse, there's little doubt the housing market will collapse and take the economy with it.
So far, banks have been unwilling to entertain the idea of reducing mortgage principal. They're afraid of missing out on the upside when/if prices bounce back. But their resistance to principal reductions is only encouraging more of their borrowers to take a hike. From last night's Marketplace:
South Carolina real-estate lawyer Cathy Olivetti is seeing more and more homeowners willing to walk away from their mortgages. That's because they owe so much more than what the property is worth now.
OLIVETTI: We've got to start addressing principal reductions.
A new report from First American CoreLogic finds that people whose homes are worth 25 percent less than what they owe on the mortgage are much more likely to stop paying. One in 10 American homeowners will reach that point by June.
This week, a group of mortgage investors proposed a principal reduction plan, as described by Reuters:
The Mortgage Investors Coalition -- which represents holders of some $100 billion in mortgage bonds -- instead of demanding full write-downs on second liens are prepared to consider a principal reduction plan where losses are shared, said Micah Green, an attorney representing the group. This softened position on second liens could help break the impasse keeping big bank servicers from forgiving principal, he said.
This is one of a number of several proposals designed to encourage banks to share losses with the borrowers. The New York Times has a collection of them, including these ideas from Brent White, associate law professor at the University of Arizona:
Here's one idea he suggested: that the government or a consumer advocacy group start a public education campaign to encourage underwater homeowners to walk if their lender is unwilling to negotiate a lower principal. And another idea: Congress should amend the Fair Credit Reporting Act to prevent lenders from reporting mortgage defaults and foreclosures to credit rating agencies. This, he said, would level the playing field and enable borrowers to more credibly threaten to walk if their principal is not reduced, possibly making lenders more willing to negotiate.
This is truly a mess. People who rail against the "walkers" say: They're decimating home values for their neighbors. They're abrogating a contract. They're ruining their credit. They may be setting a bad precedent for their children.
On the other hand, companies walk away from their obligations all the time. The banks snake-oil ways helped create this disaster. If we're talking morality on the homeowner side, how about the banks? Many believe they should help with the clean-up. From the Atlantic Wire:
Traditionally down payments are supposed to prevent this situation from arising. The larger the down payment, the more a "walker" is walking away from. But in the recent real estate bubble, banks demanded smaller and smaller down payments for larger and larger mortgages to less and less qualified buyers. They encouraged people to take second mortgages every time their house value increased. There was no gun to the head of the home buyer, but there was no gun to the head of the bank, either. It was a folie a deux. Both sides of the deal were foolish. Why shouldn't both sides suffer when the deal goes bad?
What do you think? How should we deal with the elephant?
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I believe that there is a double standard in our society, where business and politics enjoys a de facto exemption from taking full responsibility (including the appropriate consequences) for breaking the law or a social contract. It seems to come down to having the resources to sway public opinion or fight your case to the point of an optimally diluted punishment. While I agree that a contract is a contract and one has a legal and moral responsibility to uphold that truth, I also believe that it should be upheld equally between both parties.
Furthermore, if a disagreement arises that should require a party to default then both parties should try, in good faith, to negotiate a reasonable solution. Plain business sense has been replaced with reliance on standard contract clauses. We do not live in a perfect world and while contracts help close the gap between some of that risk and uncertainty it should never used the sole backstop but more of a negotiating platform. Morality should be exercised among all parties involved. Having some rental properties I have been in situations where tenants have fallen on hard times and have had to pay the rent late. While I could have easily thrown exorbitant late fees and the like I chose to understand their situation and work with them.
The banks, the investors and the homeowners all need to take a haircut on this mortgage mess. Responsibility needs to be shared. If these homeowners get the feeling that they are the only ones taking the hit for this mess then they may very well be more inclined to ‘impose†some of their pain back in the form of walking away. Even in the most egregious case of a homebuyer clearly getting into a home that they should not have purchased the banks and investors have to take responsibility for funding that mistake.
There is most certainly is a moral factor to taking a loan. If you fail to pay it, contract or no contract, you become a liar by not keeping a promise and a thief for taking what does not belong to you. The contract serves many legal purposes but it does not abdicate one for lying or stealing.
That said, corporate America no shining example of ethical or moral behavior. I worked for years at the VP level in a fortune 500 tech firm. I was, at first, appalled and then over time, just uncomfortable with the way we would toe every legal line that posed an obstacle to us.
It seems over the past 40 years our society has replace guiding ethical and moral principals with contract law. We need contract law to govern society but guiding principles rooted in ethics and morality is what should govern our actions and behavior.....they should also guide us in which contracts we sign.
Doug said "If you fail to pay it, contract or no contract, you become a liar by not keeping a promise and a thief for taking what does not belong to you."
I do not understand what is stolen. As long as a person is in their house they pay their mortgage. When that person stops paying the house is lost, all money paid (principle)is lost, and the credit score goes down; a mark against their good name - in old world speak. What has been stolen?
If anything, I am confused why the credit score goes down in all cases: If a person willfully chooses to give the bank the house and walk away from the principle, then why does the person look bad for following the contractual terms?
Back on topic. Morality does not play. Nothing is stolen. No lies are told. A business decision is made based on principles agreed to by both parties before the deal is made, and that's that.
What is stolen is money. The house is used to secure a large amount of $$, but the agreement is the borrower will repay the $$ with interest. The agreement is not to repay the lender with a house. The contract does spell out that the house goes to the lender in the event of borrower default, but this does not reflect the spirit in which the loan was taken.
I am not defending wall-street for taking us for suckers. I think Wall-street scum epitomize the abandonment of professional and personal ethics and the embracement of literally interpreted contract law as the only guiding principle.
My point is that this mentality has permeated all segments of society. How many people do you know who leveraged the heck out of themselves to buy a house simply because prices were going up? How many people do you know that leveraged the heck out of themselves for a car and a lifestyle? How many people do you know that would alert a cashier he missed an item? How many people do you know would walk from their mortgage? Lastly, how many people do you know that you would lend money to based on their word and a handshake?
What is stolen? One, the equity of other homeowners as the values of their homes fall to keep pace with the foreclosures and short sales in the neighborhood. Two, the earnings of the lender (and the lender's shareholders). Three, the net worth of anyone who purchases mortgage-backed securities as the value of these securities fall (this includes individual and institutional investors - and in an ironic twist it may include the institution managing the pension funds of those who default, so the defaulter manages to steal from himself).
If you simply can't pay the mortgage anymore, that's one thing. If you can but choose not to, you also choose to harm others, therefore morality enters into it whether you like it or not.
Theft occurs when something is taken such that the rightful owner is denied use their property. If not paying a mortgage is theft, then people would go to jail for stealing. Since there is no theft I can not see theft as the basis for saying morality is involved in the decision for deciding whether or not to pay a mortgage.
If the value of houses in a neighborhood go down because of a person walking away from their mortgage, then the non-payer has not robbed the neighbors. The neighbors still have their homes and all the principle that they have invested. No theft has occurred.
If a lender agrees to give a person a sum of money with (basically) two options then the lender can not be upset if that person picks the option less profitable for the lender. The lendee can pay back the loan with interest, or the lendee can give up all rights to the property and all equity. The lender has not been robbed. No theft has occurred.
If a person invests in something then by definition there is a risk that investment will go up, stay the same, or go down. The investment can be a house, an education, a mortgage backed security, or a relationship. If the value of the investment goes down then the investor cries/sells/moves on and invests more wisely next time. There is no theft, though, and as such I am still blind to seeing how morality plays into walking away from a mortgage.
I am a homeowner that is $120,000 underwater right now. My situation could improve or it could get worse. At one point my 2500 sq ft, 4 bdrm 2.75 bath with a pool house was valued at $118,000. Seriously? That is the true value? I don't know anymore.
I have waited and waited for the banks, mortgage companies, investors whoever to step in and fix the housing mess so I can sell my house.
90% of the houses in my development have been foreclosed. The houses have been bought by investors who are renting to some questionable people. Crime has increased and the types of crimes have gotten worse. I am afraid to go outside of my house. I found a discarded syringe in front of the common mailbox. I have found a bullet in front of my driveway. The neighbor next door was burglerized just before xmas. They kicked his door in. He thinks it was done by a neighbor on the next street over.
Wait, oh yeah, that's the rooster crowing from the house next door. I am not kidding. Whenever I am outside doing necessary yard work with the garage door open for any length of time someone has to "turn around in my driveway" or they stop on the street in front of my open garage door. Nice.
I am turning into a paranoid, suspicious person who thinks anyone in my neighborhood is the person who will attack me or break into my house, including the neighborhood kids!!! I hate it.
When I bought the house it was a new build in a new development with its own elementary school and several play areas for the kids. The area around it was being commercially developed. I thought I was buying into a nice family oriented development. I was planning on retiring in this house. I didn't know anything about no doc loans or interest only loans. I didn't know 40% of the houses were being sold to investors who apparently don't do criminal background checks. ARMS I did know about but avoided that with a fixed loan.
This neighborhood is only going to get worse and I am not going to live somewhere where I have to put bars on the doors and windows. I am not going to wait around for the drive by shootings to start.
I've tried to hang on but its getting to be too much and besides all that my income isn't keeping up with the rise in prices and taxes.
And those with the car depreciation example. If your car depreciates by 75% and new cars are 75% cheaper, yeah you are going to let it get repo'd and go find cheaper transportation.
I don't want to walk away but feel I have no choice at this point. I'll try a short sale but from what I understand banks are denying those too.
So unless some miracle happens, I am on the way out.
<i>If we’re talking morality on the homeowner side, how about the banks?</i><P>
Sure the banks and brokers are full of foolish and fraudulent agents that have already been paid.<p>
What is a bank but an institution servicing investors. Investors are real people who have sacrificed their past and present for the future. So there are real but faceless people on the other side of every mortgage that are going to get killed in these mortgage abortions but they don't matter do they?
If you have any investments of any kind, even merely the hope of what was once the American dream, and you walk away from a mortgage when you have a choice, you are stabbing yourself in the back.
Back in the seventies when I was getting a degree in Economics at a private college here in New York I remember taking required courses such as "Religion and Moral Decision", "Metaphysics" and others.
Along with my business and mathematics courses an ethical foundation was built. While I've bent the rules a few times in my business life I found the grounding in morals and ethics I received as an undergraduate comforting. That education along with my parents upbringing provided me with a conscience.
Over a 30 year career I was struck by the slow but constant erosion of business ethics. Where I worked as a mid level markeeter I grew increasingly uncomfortable with the attitudes of younger workers coming up behind me. No, I wasn't just getting old, these people were increasingly ruthless and single-minded in their goal of getting ahead at almost any cost. It was more than ambition, it seemed that for many it was a lust for power, wealth and control that could not be satisfied.
Like many, I see the underwater homeowner who files a quit claim deed and walks as a social issue as much as a business problem. There may be no sense of "morality" on the borrowers part, but really now, show me a lender today that has a sense of obligation to the borrower.
I'm very uncomfortable with what is on store for us economically and socially in the near to mid term. This is really scary..............
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