Bob Lawless considers why fewer homeowners walk away from “underwater” mortgages than you might expect. [Credit Slips]

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  1. Buran says:

    Don’t you mean “upside down”?

  2. kellsbells says:

    I got really excited for a moment because I thought the headline read “Bob Loblaw” and there was going to be a link to Bob Loblaw’s Law Blog. That is all.

  3. howie_in_az says:

    @Buran:

    By “underwater,” we’re not talking about Homer Simpson’s imaginary home under the sea, but situations where the mortgage on the residence is more than the value of the residence.

  4. ext212 says:
  5. Anks329 says:

    @kellsbells: you know, I thought the same exact thing…

  6. BlondeGrlz says:

    @kellsbells: I thought the same. I’m very disappointed.

  7. Ex_EA_Slave says:

    What is wrong with people like this? When did it become ok to walk away from huge financial obligations like a mortgage? Behavior like this should be shunned and those who do it treated like social pariahs. If you are legitimately at your financial wits end and bankruptcy is your only option, that is ok. But simply saying you’re not going to pay anymore because you owe more than it is worth is deplorable. If that was the case, wouldn’t anyone who financed a new car be walking away? After all, new cars depreciate to less then the value of the loan as soon as they’re driven off the lot.

    And, yeah, I was also disappointed this wasn’t Bob Loblaws Law Blog.

  8. Throtex says:

    @Ex_EA_Slave: I think we do shun them as long as their credit rating tanks. Fundamental to our contract laws is the ability to breach, and sometimes breaching is a strategic move.

    This makes sense, economically speaking, since (barring ill-conceived bailouts) lenders would have to factor in the cost of the risk of breach into the cost of the loan, and everything would be happy in the end.

    Or we could bring back debtor prisons. I’m not terribly opposed to that idea. :)

  9. thirdbase says:

    A mortgage is a fiscal contract not a moral one. Don’t ever confuse morals with business decisions. There are repucussions with breaking a contract if you can live with that than go ahead and break it. Morality is not the issue.

  10. JiminyChristmas says:

    I don’t see a single thing wrong with it. And why declare bankruptcy? These people aren’t necessarily bankrupt; they are just taking a loss on a bad investment. If it came down to it, I would rather have a foreclosure on my credit report than a personal bankruptcy.

    Stop your car payments and they repo your car. Stop your mortgage payments and the bank forecloses on your house. That is the deal. The bank is entitled to one of two things: 1) your mortgage payment; 2) its collateral, i.e.: the house. Legally and contractually, giving the bank the house instead of your money doesn’t make a damned bit of difference aside from the credit consquences the borrower faces. As for the collateral losing its value: that’s a risk the bank takes as well.

    Flip the focus to the bank instead of the borrower for a moment. Are their actions guided by anything other than what is spelled out in black and white in the mortgage agreement? No. Ergo, why hold the borrower to some amorphous moral standard that the bank doesn’t follow anyway?

  11. thirdbase says:

    @JiminyChristmas: That was a perfect post. You could not be more correct. Hats off and kudo’s

  12. Rupan says:

    @JiminyChristmas: I agree completely. Most homeowners inject sentimental value in to the equation and muck the whole thing up.

    Buying a home is a business decision. You and your mortgage lender entered in to a contract. They agreed to loan you X amount of $ in exchange that you had to repay with specific terms. If you don’t then they get the house.

    If you choose to walk away then you have to deal with the consequences that society deals out. When your credit score tanks then you have to deal with the floowing and then some. Being unable to get a car loan, higher insurance rates, possible tax issues and being unable to get an apartment.

    It’s a business decision people. Get over it. Look at your situation and decide if the benefits outweigh the negatives. That’s what your lender did when they handed over that check. Why should it be any different to you?

  13. timmus says:

    Agreed, it’s a business decision. If the companies want harsher consequences, they’re the ones in control of Congress for all practical purposes.

  14. Rupan says:

    @Rupan: floowing=following

    Gawker sites need edit buttons.

  15. rbcat says:

    I fail to understand all the moral griping here. You can’t have it both ways: either this is a capitalistic society governed by the “invisible hand” of Joseph Smith, or it’s not.

    AT&T routinely drops customers for roaming on other wireless networks too much, even in contract. Comcast disconnects people for using too much data transfer. Your bank will charge you penalty fees for doing something it doesn’t like. Consumerist itself advocates taking companies to small claims court to recoup damages. ALL of these are business decisions. There is no moral play anywhere in here.

    Do I think morality should come into play? Absolutely. However, given that the “rules of the game” make no allowance for that consideration, I have no desire to be the broke schmuck who refuses to believe that everyone else is acting solely in their fiscal best interests while I take the moral high road.

  16. humphrmi says:

    @JiminyChristmas: +1, good job articulating that thing, that I couldn’t say as good as you.

  17. backbroken says:

    @JiminyChristmas: No, they are not taking a loss. Taking a loss would imply selling the house for what it’s worth and then paying off the difference over time. These people are walking away from the obligation and transferring the loss to the bank…who then transfers it to you and me via our lovely federal government.

  18. burgundyyears says:

    @wesmills: So the Mormons are behind it all?? Whoa, creepy.

    @thirdbase: I take it you’ll be interested in my new product, soylent green – purely a business decision to market and sell it you understand, no morality involved!

  19. Buran says:

    @howie_in_az: I saw that. However, “upside down” is the term I’ve seen for years and years and years for when you owe more on a loan than what the item you bought is worth.”

    Underwater? Never heard that anywhere other than this article on some random website.

  20. Throtex says:

    @backbroken: First off, the bank shouldn’t be able to transfer any losses to us — that’s an entirely separate matter, though irrelevant to the issue at hand.

    But secondly, they are not “transferring the loss to the bank,” in a very technical sense. When the bank drafted the contract terms, the rates were selected based on the risk associated with lending to the consumer. This is why a consumer with a lower credit score would have a higher rate on the same loan than someone with a better score, because it’s riskier to loan to this individual.

    Therefore the loss was not “transferred” to the bank, it was assumed by the bank from the start.

    But back to your second point, no one should be getting help from the government for their own stupid decisions.

  21. humphrmi says:

    @burgundyyears: I take it you’ll be interested in my new product, soylent green – purely a business decision to market and sell it you understand, no morality involved!

    You can market it if you want. But it will still be a poor business decision, because nobody would buy it. Not all morally corrupt decisions are also profitable.

  22. kittenfoo says:

    @burgundyyears: beat me to it. Joseph Smith = Mormon prophet; Adam Smith = invisible hand dude.

  23. burgundyyears says:

    @humphrmi: Actually, I’m pretty sure that I’d get in some amount of trouble for actually making and marketing soylent green. The point being is that “business decisions” do not all get made in some moral-ethical vacuum where profit can legitimately and completely justify any action.

  24. hypnotik_jello says:

    @humphrmi: Tastes like chicken?

  25. Me - now with more humidity says:

    It’s a business decision. Period. Buyer and lender agree at signing on a remedy if the buyer can’t pay.

    And a BK won’t keep you from being able to get a car or an apartment. You may pay more interest or have to put down more deposit, but plenty of landlords will do it if you’re honest with them about it.

  26. rbcat says:

    Whoops!

    Wrong Smith!

    Sorry guys ‘n’ gals. :)

  27. madanthony says:

    The problem I have with the whole “walking away” thing is that while it may be good for people short term, long term it’s going to make mortgages way more expensive and harder to get. The past assumption was that people would do whatever it took to not lose their house, and default was rare. Now that people are viewing homes as more akin to buying stock options, mortgages will have to be more expensive to compensate.

    As far as why more people don’t do it, I would add the damage to one’s credit report (and higher cost of future loans) as well as the transaction costs/hassle of walking away – moving, finding a new place to live, ect

  28. JiminyChristmas says:

    @backbroken:

    How is the homeowner not taking a loss?

    If they are underwater on their mortgage that means they have negative equity. So, if they made a down payment, that money is gone. Likewise, payments against principal that would have otherwise created equity for the homowner: also gone. The value of any improvements made by the homeowner? Gone.

    Second question: These costs are then borne by the government? How you figure?

  29. I also wonder how many of these people will wind up renting in the same area for 10 or 15 years, at which time the house they walked away from will have increased from what they paid for it.

    It’s usually a bad idea to panic and sell a stock that’s worth less than what you paid for it. I’d imagine the same is usually true with a house.

    Now there are times when it would make sense – if it was a second house bought to flip, or if you needed to move for your job. But unless your house is on the market it’s value is theoretical (except at tax time.)

  30. JiminyChristmas says:

    @wesmills:

    Do you think it was Joseph Smith who inspired investors to buy multiple houses?

    Sorry. Couldn’t resist.

  31. backbroken says:

    @Throtex: Problem is that everyone gets lost arguing who is at fault, the bank or the homeowner.

    It’s quite possible for two parties in a transaction to both be at fault, which is the case here. Just because the bank screwed the pooch by giving you the loan doesn’t mean you are morally off the hook for walking away. Maybe you agree with me. Dunno.

  32. backbroken says:

    @JiminyChristmas: The guv’ment gonna bail out the banks. We gonna give the guv’ment our taxes to allow them to bail out the banks.

    That ain’t right either, but it’s gonna happen.

  33. eightbt says:

    Moral issues aside. Was anyone else utterly confused by the words in the linked article? Or in the original posting by Buce? Either they’re speaking in terms only accountants understand, or it’s all meaningless rhetoric.

    I’m guessing it’s the latter.

  34. revmatty says:

    @burgundyyears: Are you nuts? This is the USA! Profit trumps all and success makes every excess forgivable.