I say more power to him. He beat the system from beating him. I hope it works out the way he's planned.

A real estate agent told me (and she seemed to be knowledgeable about this) that foreclosures are more and more common now not only because of ARMs etc, but because the damage to your credit only lasts a few years, whereas it used to be more like a bankruptcy. I imagine it does still last for 7 years in both(?) cases, but as an example, my parents filed chapter 7 bankruptcy several years ago and bought a house 2 years later, so their credit wasn't exactly ruined.

I'll think of this guy when I say: "My condo owns me." I've lived in it for almost three years, and Ohio really didn't have a huge inflation/crash in the market, prices have dropped and sales are slow.

There's little equity in my place, but I've got a 30 year fixed.

A moral lapse would be, say, burning down the house to collect insurance on it, or lying on your loan application. Playing by the rules set down by you, your bank, and the bankruptcy courts does not, IMHO, constitute a moral lapse.

Could someone explain to me how a foreclosure is a bad thing for a bank? Don't they keep both the house and whatever payments were made on the house? So it's like they get to sell the same house twice, or 1.2 times or whatever depending on how many mortgage payments had been made by buyer #1.

@luminus:

Bankruptcies are on your credit for atleast 7 years. When I worked at an apt complex as a leasing agent, I'd see stuff longer than 7 years on people's report.

Unfortunately since it wasn't my job to review/discuss their credit with them I couldn't tell them to get them removed.

I've heard that once you file bankruptcy credit offers will start coming back in, since you can't file again for another 7 years. (Well, I think if you file Chpt 13, you can still turn around and file Chpt 7 later if necessary)

I don't really understand why people view a business decision by a homeowner as a terrible moral lapse. However, when large lending institutions... make mistakes... they are not excoriated and vilified with the same righteous zeal.

Reality check: Yes, they are.

Anyway, this guy is a scumbag. I'm sorry, but the whole "But Enron did it, too!" argument just doesn't fly. This wasn't an example of a large lending institution making a predatory loan. You make it obvious enough that it is within your means to pay for the condo.

It's simultaneously funny and sickening that he tries to rationalize this act by saying he is "[W]ithin my rights to walk away from a bad deal and suffer the consequences," as if the consequences are only affecting him. The only person who gets screwed when you get stuck with an overpriced condo is you.

Now, on the other hand, everyone else in the country gets screwed when people like you pull stunts like this. Have you not been watching the news? Have you not noticed we are on the brink of recession? People like this guy are, in my mind, equally as culpable as the predatory lending institutions which facilitate these loans.

Ugh. Time to sneak some extra blood pressure pills at work today.

@noquarter:

Banks aren't interested in the residental real estate market.

I doubt this guy paid anywhere near the $180K the home has lost in value.

It shouldn't be seen as a moral failing. A failure of judgment? Sure. The person took a risk buying an overpriced house at the top of a bubble using a risky type of mortgage (when he/she could have likely qualified for a better one, since the commenter can afford a second house) and got burned. Given that dumb decision, this is an eminently reasonable response.

@darkened: "He beat the system from beating him."

He beat the system at everyone else's expense.

This line of rationalization is no different than saying stealing a Hummer H3 is acceptable. After all, you're beating the system from beating you, and it's an overpriced car anyway.

@cashmerewhore: I understand how, in this case, with the value of the place going down by so much, the bank might end up losing money on the resale. But, in general, a foreclosure isn't a big financial loss for them, is it?

I am probably mistaken here, but I thought that if you defaulted on any loan and the bank foreclosed, after they sold the property they then had a right to sue you to get the rest of the money owed. So if this guy owes 500K on his house, the bank forecloses but only gets 180K for the Condo, can't they sue him for the other 320K?

@Hambriq: No it's not, your logic is entirely wrong. What you meant to say it's the same as buying a hummer, saying screw the payments and have it repossessed.

Contracts are written to establish this, any contract written no matter what it says can force you to pay, they will most likely outline the consequences of not paying.

He is perfectly free to make this decision, (whether there would be unforeseen legal complications of it, i'm not a lawyer to agrue on that) He is using the credit system exactly for what it's worth. Your credit score has very little to do with your ability to repay a loan, it has to do with your profitability for banks.

The bank refusing to meet the terms he wanted for continued payment, he stayed with in the system to get a new mortgage on a second residence under the system saying he is currently profitable and would rather live there and take the consequences of his actions by leaving his other obligation.

I see nothing immoral about this. One person attempting to screw another person in the end gets screwed the most for not accepting screwing them less. Corporations and banks do all kinds of tricks to do this to each other and especially to us, the consumers. Actions like this are the corollary of their actions.

@chas7926: Normally it will end up becoming income to the original debtor and become a tax liability. But seeing as they can't even sell homes at the auction block he could go years before having to deal with that. But stuff like this is what lawyers are for, I wouldn't be surprised for 20-30k a lawyer could get you out of any of the liability so spending that on a lawyer to save 5-10x that on your other residence is still very profitable.

I hope some day somebody walks away from a financial obligation to him, see if he can have such a c'est la vie attitude about it.

@Hambriq:

He isn't stealing anything. If he had managed to keep the first condo without paying for it, that might fit your comparison. But since he didn't your comparison is false.

If you want to Compare it to a Hummer H3, he would have had to Buy the hummer, then after making payments for a while realize the car was too expensive. Go out and buy say a Hyundai and start making payments on that, then let the dealership come and repossess the Hummer.

Going back to the house, it is not an optimal solution for him or the mortgage company. However they are clearly unwilling to work with him, and he has found himself completely upside down on the mortgage. He even stated he was willing to take the $120K value hit if he could refi.
So yes, the mortgage company is going to be out the rest of the payments, but they do get the condo to mitigate the damage. And he is going to skip out on the rest of the payments, but he loses the condo, and gets hammered on his credit for a time.

I don't congratulate the guy, but I don't condemn him either. He took a long hard look at where he was, and did what he felt needed to be done.

@darkened:

I see nothing immoral about this. One person attempting to screw another person in the end gets screwed the most for not accepting screwing them less. Corporations and banks do all kinds of tricks to do this to each other and especially to us, the consumers. Actions like this are the corollary of their actions.

Again, I fail to see how the "Enron did it!" argument is acceptable.

If the consequences of this guys actions were solely limited to himself, it would be acceptable. He does the damage to his credit, but that's a calculated risk he's willing to take. But it's not. Because every penny lost on the foreclosure of this home is getting passed on to the rest of us. People like this make life infinitely more difficult for the rest of us.

This isn't self-contained. The consequences aren't limited to just this one guy. This isn't him making a "calculated risk". This is him being selfish. Plain and simple. And just because the big corporations are doing it doesn't make it acceptable for the little guy to do it, too.

@noquarter: not exactly. the bank only keeps whatever it's owed (meaning the balance of the loan and whatever fees), the rest, if there's anything left, goes back to the owner

@chas7926: Depends on whether the mortgage is non-recourse debt: [www.businessfinance.com]

It should be noted that even if the borrow is absolved of the remaining mortgage debt after foreclosure, he/she may still be liable for any equity loans/lines of credit attached to the property.

@luminus: Foreclosure isnt as big of a deal because, humorously, the sub prime market has created a product for people recently (2 years) out of foreclosures to still get a loan (say 30% down or so, rates 3%+ higher then the going rate). While its often a high risk/high payment product, its well worth it for someone like this guy.

@noquarter: @chas7926: Foreclosures are a bigger loss these days, thanks to a weakening of the market and the high number of 100% loans. Thats why 20% down used to be so important, since that covers their cost in a foreclosure (people tend to trash the house, quick sales, ect). Its also why PMI exist.

And yes, they can sue your ass for money they wind up short. You default on a 500k loan and they only recoup 350k you are still on the hook for the remainder. And, if they forgive the debt (not likely for that large a difference) the Feds will take your butt on the forgiven debt, since its viewed as a form of income

Why isn't the guy scared of his creditors going after his car, pay check, and bank account?

Can't really agree with everybody calling this guy a scumbag...He's making a conscious decision to wreck his credit (at least in the intermediate term). If he thinks that a foreclosure won't cost him plenty later on in life,then he's kidding himself.The fact is,businesses do this sort of thing lots of ways (most notably to get out of bad leases )and they keep coming back to borrow more money to keep going (K Mart walked away from hundreds of bad stores when they went chapter 11 in '01)Does this make it right ? Ask this guy in 5 years when every creditor that gets a peek at his FICO charges him commensurate with the risk that they take...As for making everyone else pay for his stupidity/venality , thats not really a concept with home lending.If a bank raises rates on home loans too much above the competition to "make up for losses" on loans to people like him,they would be at such a competitive disadvantage that they would soon have only the worst risks taking out loans...Not a recipe for a healthy bank.Typically,it's the banks owners(shareholders) that take it in the poop chute when a loan is bad.They are the ones that ought to key this guys car...

@snarkysnake: It also drives down the property values for his neighbors.

"I know the forecloser will stay on my credit for 4 years, but I will have saved a lot of money."

I don't know how many times I have told people this but you can't put a price on your credit. 7 years of bad credit is probably more costly than $300k.

@Inhocmark: Except the equivalent here would be if he then took property of equivalent value from whoever owed him money. After all, most of the foreclosure is the fact that you're getting your (house/car/whatever) taken from you for not paying for it. What's the problem here?

Also, the bank could sue him for the money... Some people think walking away is ok, but in some cases banks sue for the money.

Don't listen to HAMBRIQ. Just go for it dude, do whats best for you. Don't listen to all his fellow man crap. It's a crock.
You make a decision based on the facts and be prepared to suffer the consequences legal and financial. Get a good real estate lawyer he will guide you in the right direction.

@noquarter: Banks really don't like forclosing, since as cashmerewhore said, they aren't in the real estate business. Once the bank takes the property, the entire thing (utilities, maintenance, etc) becomes their problem. Most banks end up taking a loss on the property, esp since when someone hears a property is in "forclosure" they immediately plan to offer far less than the house might be worth. But it's a risk buying a forclosure, since I've seen people pour sugar in their oil tanks, intentionally ruin plumbing, or dump paint all over the floors as they leave.

I think the guy in this article should ask his bank if they'll do a short sale, where the bank agrees to take a loss on the difference between what he owes and what he sells it for. It doesn't hurt your credit the way a forclosure would.

@Hambriq:

"Because every penny lost on the foreclosure of this home is getting passed on to the rest of us."

That's not true. It goes straight to the bottom line of Wachovia or BoA or whoever loaned him the money. I do not pay for it and neither do you. Unless you are a shareholder. Then you are currently paying for it big-time.

It's absurd to lampoon him for "selfishness." Business is selfish. Two parties enter into a business contract and then each pursues his own self interest under that contract. That's the deal. He has the option to walk so he can walk. But if he has assets and they take a bath on the sale, he'll probably end up making them whole anyway.

@chas7926: You are exactly right. The calculated hit on this guy's credit is not the only draw back to walking away from his bad deal. Its not quite so simple to say, "Oops! My bad!", take the credit ding and go on with your life. The bank will foreclose, though it may take up to 6mo. to a year from when he stops making payments. They will sell it for drastically less than its worth (if its bad off now, what will it be like in a year from now?). And they will hold him responsible for the balance.

"I don't really understand why people view a business decision by a homeowner as a terrible moral lapse. "

Really? You don't see how not honoring your end of the deal is immoral? Its not a business decision anyways. You are not a business. You are an individual making a personal decision that says loads about your character.

@headon: Don't listen to HAMBRIQ. Just go for it dude, do whats best for you. Don't listen to all his fellow man crap. It's a crock.

I'm sure he is staying up at night, waiting with baited breath to see what we at Consumerist have to say about his moral turpitude.

I don't see any real issue here. The deal he signed with the bank is: make your monthly payments - if you don't, we'll take your condo. He's well within the terms of the deal. If he were whining "the bank's being mean, they're hurting my credit, that shouldn't happen to me," or "why are they taking my home away just because I can't make the payments," I'd have no sympathy, but so long as he's willing to accept the consequences, it's his call.

FYI, this strategy only works in some states (like CA) where mortgages are "non-recourse." In those states, the lender can only go after the house itself to recover its losses. In other states, where mortgages are "recourse," the lender can go after all your other assets to recover its losses.

@hypnotik_jello: A non-recourse mortgage? Unless he owns the entire condo building, I doubt it. As stated in your link, those are for large (multi-million dollar) commercial mortgages.

@ANATAK: Geez, backoff the dude. It's nothing more than a business decision. There is nothing personal about it at all. You must run your financial life as a business that's what permits you to make proper fiduciary decisions.

Not immoral at all. The mortgage is a secured loan. The contract says if you don't make payments they repo the house. He can't make payments so he loses the house and takes a hit on his credit. He is following the contract.

Him doing this is no more immoral than the bank throwing someone out of a house they have made payments on for 29 years. Yeah it sucks but not immoral.

Clearly he only cares about himself and thinks this an acceptable risk with him being the only to suffer. If only that were true. If he abandons home #1 and it's foreclosed, that property will sit vacant until it's sold by the lender. Neighborhoods all across America are suffering because of these empty, foreclosed homes. They bring down property values for everyone else, pose a safety hazard for being vacant, take away property tax dollars, etc...everyone around him will suffer. Our school system has a SIGNIFIGANT budget shortfall for two reasons: declining property values and an influx of illegals in the school system who require special resources. Now I think I need BP medication....

@Tracy Ham and Eggs: It's a condo. It's not like he is leaving a lawn to mow or a roof to re-shingle.

So is it also immoral to do a short sale? I have been trying to sell my house for 1 1/2 years, and at this point I think the only way to sell it is to take a loss (when the realtors' fees are figured in). I have truly been trying to sell it, but I have put my life on hold for 1 1/2 years and really need to be moving to another city for personal and business reasons.

Just because something is good (economically) for an individual does not mean that it is morally right.

It is economically good for an individual to rob someone if that person knows that he will not be caught. However no one would argue that what he did was morally right, just economically advantageous. The primary reason it is morally wrong is that someone that is innocent is hurt. It is that simple.

People who walk away from their bad investments (stocks, bonds, etc--things that they put their ACTUAL MONEY into) is one thing.

People who walk away from a mortgage are not walking away from an investment that they have put their ACTUAL MONEY into. They are walking away from an investment that they have put VERY LITTLE ACTUAL MONEY into (principle v. interest) but that a bank (and the investors behind it and the other citizens have money in and take loans out through) has put a LOT of ACTUAL MONEY into. This hurts the bank (whatever), the shareholders (big business but also the average Joe, retirees, etc.), and those that are qualified and seek to take out new mortgages.

Black and white, really.

So he runs away from his obligations and adds his debt to the rest that are dragging your economy down.

Well all right. As long as things work out for him. Why should anyone else care?

I can only pray for karma.

Keep in mind that when guys like this walk away, it drives property values way down such that those who remain suffer for it.

Ok all this "it effects everybody" is a load of shit. Going by this logic I should be pissed off at everyone that pays $30k+ for a new car. If it wasn't for all you bastards willing to pay that for a new car the prices would line up with the inflation rate and I would be able to buy a new car for $10k.

The man has a contract. This is just between him and the bank.

I don't really understand why people view a business decision by a homeowner as a terrible moral lapse.

Because most people view a contract as a formalized version of giv... Since most people also believe that corporations have no morals, they are neither surprised nor indignant when the big companies do it, but you'll get the ol' fisheye when you do it.

@Hambriq: He beat the system at everyone else's expense.

He's going to lose the condo, lose all his equity, and have an enormous black mark on his credit for the better part of a decade, and you think he's "beating the system"? Take a breath, dude.

And "at everyone else's expense"? Spare us. It will be at the bank's expense, and theirs alone. If the larger picture of banks making too many risky loans, or being unwilling to renegotiate less profitable loans is causing an economic crisis then take it up with the banks. He certainly seems to have given them plenty of opportunity to avoid this situation, but they wanted nothing to do with it.

this guy is a scumbag.

And you're a... sigh, you really do bring out the best in people, eh? This guy made a business decision, pure and simple. He realized that honoring the contract was not in his best interests, so he breached the contract and willingly paid the appropriate penalties. A simple, and common, business choice.

Acting in your own best interests is not immoral if you're not harming anyone else, or if you make whole anyone you do harm.