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Walking away from your mortgage

Acquiring a mortgage loan

TEXT OF INTERVIEW

Kai Ryssdal: When you buy a house and you sign those mortgage papers -- that's it. You're on the hook for many hundreds of thousands of dollars until the thing's paid off. Unless, you decide otherwise. With almost 11 million homeowners underwater in this country -- that is, paying for a house that's not worth the mortgage -- there is a new trend in real estate. Just walkin' away. Roger Lowenstein wrote about it in The New York Times Magazine yesterday. Good to have you with us.

Roger Lowenstein: Kai, it's a pleasure to be on the show.

Ryssdal: Let's define who we're talking about here. These are people who could conceivably pay, but they're just not.

Lowenstein: Yeah, you know it's a twist on the old-fashioned American nightmare of not being able to pay your mortgage and being forced out, in the dark of night, having to go live with your in-laws or something. What we have now is tens of thousands, hundreds of thousands of people, potentially, who could pay their mortgage. But they're deciding that the darker night doesn't look so bad compared to what I owe, I don't think I'm going to pay it. I think I'm going to pull that trailer up and leave.

Ryssdal: You point that companies do it all the time.

Lowenstein: That's right. It's common practice in business for business to say, we owe more on this company or on this piece of real estate than it's worth, so rather than keep paying, we'll leave it to the banker, whoever the creditor is. Let them worry about it.

Ryssdal: So here's the point where I reveal my bias. When I read your piece, I said a couple of things. One was, wait what about their credit ratings, that will just be terrible? And the other one was, man, what about the shame and public opprobrium of just walking away from this debt that you signed onto?

Lowenstein: Is it really right to say that there are moral... Both the administrations, both of the recent ones -- the Bush administration, Hank Paulson, and even Obama recently -- has called on people to do what they call the responsible thing. Hank Paulson even said people who walk away from their homes are no better than speculators, which is kind of amusing because Hank Paulson spent 32 years at Goldman Sachs. But presumably once in a while they speculated on something or other, right?

In my view, you're not a social pariah. You're not any worse than the company that gave you the mortgage and probably flipped it about five minutes later.

Ryssdal: Well about those banks and the folks who gave you the mortgage. Is there a chance that if a lot of people did this, it would actually fix the housing market faster? It would change lending standards, and it would get the foreclosures through the system and all that stuff?

Lowenstein: The theory is that if enough people said we're not afraid of the opprobrium, the social shame, whatever. We're not going to pay. The banks would say, you know, I think we have to renegotiate with these people because otherwise we're going to have a tidal wave on our hands. That's the theory.

Ryssdal: Let me argue the flip side of the argument you make that it might actually fix the housing market faster. It is, just flat, not a very neighborly thing to do. Because once your house falls into foreclosure, it looks bad, property values around it go bad, and it just makes the whole market in that neighborhood go down the toilet.

Lowenstein: That's true. If I'm your neighbor, I'd rather you kept paying on your mortgage. On the other hand, if you think about what happened to the housing market in late '00s, it was financialized. It was turned from just people's homes to financial assets. People got mortgages that were worth far more than the homes were worth. They were given home equity deals so they could take money out of them. The banks and society began to treat homes like any other financial asset. With any other financial asset, if you want to buy oil futures, say, it may have a bad effect on me because I may have to pay more for gasoline tomorrow. But that's sort of how the system works, right?

Ryssdal: It does sort of take that idea of home ownership out of The American Dream, though, doesn't it? It just commoditizes it in a way that I think we're not used to hearing about when you're talking about this place you own.

Lowenstein: Well in Europe they have very strong communities. They have much lower rates of home ownership. People rent their homes, but they're very connected to their communities. The philosophy here has been all we need is for people to own their homes, P.S. whether they can afford them or not. Maybe that's the best way to build neighborhoods, but maybe it's not.

Ryssdal: Roger Lowenstein, he's a contributing writer for The New York Times Magazine. He's got a new book coming out in April. It's called "The End of Wall Street." Mr. Lowenstein, thanks so much for your time.

Ryssdal: Kai, it was a pleasure.

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