L.A. Land poll: Is walking away irresponsible? Or smart?

A first at L.A. Land -- a reader poll. Yesterday's post on whether it makes sense to "Walk Away" from an upside-down mortgage drew so much comment and discussion, I'll pose it as a poll question:

Opinion Polls & Market Research

Comments

[Keith]

Let's look at this as a business transaction on both sides. Lenders have always kicked people to the curb if they stopped paying, and said "It's just business. You signed a contract. Nothing personal."

It seems to me that for the first time in a while borrowers have the opportunity to say the same thing to lenders. "Hey faceless hedge fund that bought my mortgage, we both signed contracts. I agreed to pay off this loan, and if I didn't make payments I would be kicked out. I am upside-down, I am not going to make any more payments. Here are my keys. Nothing personal. Just business."

[Keith]

Let's look at this as a business transaction on both sides. Lenders have always kicked people to the curb if they stopped paying, and said "It's just business. You signed a contract. Nothing personal."

It seems to me that for the first time in a while borrowers have the opportunity to say the same thing to lenders. "Hey faceless hedge fund that bought my mortgage, we both signed contracts. I agreed to pay off this loan, and if I didn't make payments I would be kicked out. I am upside-down, I am not going to make any more payments. Here are my keys. Nothing personal. Just business."

[jaded]

I guess I'm in the minority, but part of being an adult is securing your own financial well being and future, and creating some cushion when economic forces go against you. That means not buying what you can't afford, making do with less when you have to, and sucking it up in hard times.

you don't just walk away from a legal obligation and whine about honor not feeding your family. This is not the Great Depression, and we're not farmers stranded on our ruined homestead.

No wonder this country is in so much trouble.

[Keith]

In response to Jaded, home owners who walk away from their homes are not walking away from their legal obligations. That would be illegal. They are paying the penalty that was outlined in the contract, which is that they have to make the payments or lose the house. They are not stopping payments and keeping the house. They are not being bailed out. They are paying what they owe, which is either the payments, or the house. End of transaction.

[Pat]

I don't get this walk away stuff. You pay the consequence of giving the house back to the bank. It is not a free lunch. The contract is honored.

On another note, since this blog is moderated, can't you eliminate double posts and such?

[joeinlosangeles]

The poll doesn't surprise me. A certain percentage of people will shrug and say walking away is a perfectly legal option allowable under the terms of the mortgage. A certain percentage of people will rationalize walking away by citing that mortgage lenders were fraudulent and people like the Countrywide head walked away with a ton of undeserved cashed. A certain percentage won't feel any moral obligation against the debt because the debt is with a large faceless person -- it's the difference between feeling a moral obligation to a specific person vs. a moral obligation to a big building. We are also a country of bankruptcy laws and a thriving debt re-negotiation industry, so a debt often isn't set in stone but open to negotiation.

Really, the more interesting piece would be to break down how people feel vs. their situation. If you don't own an underwater home, it's easy enough to think of walking away as immoral. Much more interesting would be the feelings of only those people who actually are dealing with the situation. They are the ones who are going to decide what happens, not the people sitting comfortable on the sidelines saying "Tsk-tsk."

[mike]

i think forclosure is for when you really can't afford the house...maybe you get laid off etc. but they shouldn't just decide thay want a cheaper payment and shirk responsibilities. anyone who does this will have some price to pay at some point weather it be in bad credit or...

[shireen]

Oh boy, if you are walking away from your home because you are underwater and unable to work out another solution with your lender, and doing so will enable you to feed and shelter your family as you struggle along in Pottersville, well okay. But if you are an investor who lied to the Bailey Building & Loan and said that you would live in the home when the entire time you planned on flipping and now your granite counter-top fantasies of getting rich quick in real estate have evaporated and you figure that you can keep your Hummer with spinny rims and the leased BMW too if you just mail in the keys . . . well, that's a completely different movie and I hope karma will get you if the feds don't!

[jb]

I agree with Keith and others - the contract is being fulfilled by walking (I will either pay the mortgage OR the bank will take the house).

Our government is pulling out all stops, trashing the dollar, simply to save banks. Let the banks fail, they used the full power of highly paid risk management professionals who then bought these mortgages like crack addicts. Someone please start a new bank called Post Housing Bubble Bank (PHBB) - I will send you all of my cd's even for a lower rate than others. You can replace WaMu and the like when they fail - as they should.

[tarbubble]

part of me wants to blame people who were, to be blunt, stupid and bought homes they could absolutely not afford. we had all the same pressures applied to me: "buy now or you'll never own" "oh no, you don't want to be in that neighborhood, you want to be in this one" (the more expensive one) "your income will keep increasing, so stretch yourself right now and in a few years you'll be glad you did." we mostly resisted these pressures, buying a condo in 2002. even then it made our money tight and we had roommates for three years. now as i see values dropping in some areas back to 2003 and 2002 prices (the IE and the south OC condo market), i think to myself "good gosh, were we caught up in the frenzy, too?"

i cannot imagine that we would have been as prudent if we had somehow been approved for a loan twice as big as the one we took out for our condo. we were reasonably young (27), somewhat naiive regarding major financial decisions, and if somebody had fed us the right lies we might have fallen for them, although not on as large a scale as some have done. we are inherently frugal people (got through college without student loans, drive older cars) and that may have saved us from having to make this sort of disastrous decision.

basically, i blame everybody. i blame banks, appraisers, realtors, and the suckers they got to buy ridiculously overpriced mortgages. yes, i think that buyers were suckers, that they were probably lied to by everybody else involved in the exchange, but suckers have to blame themselves as well - they allowed themselves to be duped. i'd like to believe in some sort of karmic retribution, but our culture has pretty much eliminated any sense of shame or culpability so i doubt that anybody involved in this will ever point the finger at themselves and ever feel any guilt about it. they can all blame the machine, without acknowledging that they were willing cogs.

[Uncle Billy]

Petros Vilesonikus, Petester, The PeteMan, Peteroonio,

Anyway to see how many people are voting?
Would be interesting to give this a day or two, collect the results, then post it on the front page of the times.com and compare the results between blog and main site.

[Arti]

People, you are all missing the point here!

Let's face it, the majority of the people reading and following this blog, including me, are people who did not buy into the boom, and for a variety of reasons want home prices to fall and the market to eventually stabilize.

Well, what is more likely to achieve this aim, flippers/lemmings who walk away from these houses, or flippers/lemmings who stay in them and draw it out with the banks by refinancing, asking for government bailouts, etc.??

Clearly the answer is the former. So get off your stupid high horse about the morality of walking away, the ones doing that are doing what is in their economic best interest, which any reasonably intelligent person would do. Nothing illegal about it, get over it. But more importantly, the ones walking away are the ones that will help the system!

By walking away, they create yet another vacant home. Vacant home that the bank now has to sell, which means it has to cut costs, which means comps in that neighborhood further deteriorate, which means prices inch back just a little more to where they should be. What we DON'T need, are deadbeats and greedy flippers sitting in or holding on to homes, using government handouts (see Hillary's idiotic stimulus idea) and refinancings in order to avoid selling the house and maintaining the inflated home prices.

No matter how you look at it, whether you are the homeowner or the housing bubble blog reader, the correct answer is: walk away from that house.

[TakeFive]

Is Walking Away irresponsible or wise?

Both. Depends on the situation.

That said, I've seen people walk away from mortages where their parents were the co-signers. In that case, I don't think there's any wiggle room. Shamefully irresponsible.

BTW, traffic on this post probably increased because it was discussed on KFI last night. I think Peter Hong was going to be interviewed, but missed the segment

[GDC]

It seems people here are biased against borrowers because they helped push home prices way up. I can understand the anger, but in California, the non-recourse mortgage has been the law for many years. The banks KNEW THIS yet still made loans without any protection (0 down payment, teaser rates). Borrowers who are underwater are smart for walking away. You are a fool to pay on a mortgage which is higher than your home value. Banks, not borrowers, made HUGE profits the past 5 years. Now, because of their greed, they are suffering. I say it's well-deserved.

[Joseph...The Real Estate Guy]

To whomever it may concern:

Next time around, make sure you do your homework!

Make a wise decision. Don't get sucked in by all the "Media Buzz".

If can honor your commitments, you should. If you lost your job, have an illness, that's another story.

[vultur]

How can you guys so flippantly ignore the consequences of having a mortgage default on your credit?!

It will be very difficult for him to get a new mortgage at anywhere near a reasonable rate for 7 years! There are enormous consequences to this default! That is the penalty for the borrower not honoring his obligation- he values and respects a clear credit history! That is the primary reason why underwater borrowers don't do this- it is not a moral argument at all.

[Uncle Billy]

Update: Never mind... click on the comment button on the poll box and it will show the number of votes and their mapped locations... looks like half are on the east coast... wowers.

[Krackemkid]

Ahh the American Way!, "Enjoy it now and Blame someone else later". Personal Responsabitly is over rated.

[TR]

I can not buy the so-called moral argument people want to make here. Buying a home in California has not been simply about shelter for a while now. Buying a home in California has become about getting rich, funding retirement, etc. All the run up that has taken place over the last seven or eight years was fueled by people with this mentality. There was no chorus from existing home owners calling for sanity. Existing homeowners profited as the home down the street sold for three times what is worth six years prior.

That opened the door to refis, cash outs, and everything else. Now folks have to finally pay the piper people want buying a home in California to simply be about having shelter and the morality that comes with making good on that payment. Come on! Californians have been buying homes as business decisions for years. Walking away is not some great breach of morality. It is the best business decision of some pretty bad choices.

For the record I am not a homeowner. I would love to be one, but decided I could not afford anything comfortably that was not located in a gangster’s paradise. So I continue to rent. I made that decision in 2005. I thank God for that foresight every day now. I would rather be renting than risking foreclosure. Of course I would rather own, but I will not take that plunge until prices come back down.

One other thing, it is partially because irresponsible buyers that LA homeowners have so much of that much lauded ‘equity’.

[John]

Why don't we have a choice "C. Both wise and irresponsible"

It's irresponsible, because if everyone did it, our economy would be in shambles, but it's wise if you've run the numbers and your long-term financial position is sounder if you walk away.

These buyers are like the cast of Jackass. Their stunts are completely irresponsible, but they may end up laughing all the way to the bank.

[Dr. JwB]

I've been pondering and not commenting on this issue because I'm trying to decide if what I would do (walk away) makes me a terrible person.

Now the questions are: Given that the transaction cannot be undone, what does the least damage to this family? Does avoiding that damage justify the damage this does to other people (and what is that damage)?

The bank gets the house, which was agreed by both parties as fair value for the loan. The market gets a foreclosure sale at what would in theory be a more reasonable price (sooner rather than later). The family gets a ding in their credit, and maybe loses a little sleep because of guilt.

So what am I missing?

[Edgar]

I understand that the proposed stimulus package (compromise between WH and Congress) includes a temporary increase in the conforming home loan limit to approximately $700,000. Is there any truth to that? If so, it will surely have an impact on LA prices. Please discuss.

Thanks!

[Jeremy R]

if they cost of foreclosing is less than the cost of owning, then it is simple math.

The cost of foreclosing is a function of credit and bankruptcy laws. Can you rent an aparmtnet with poor credit? If you can, how large is your deposit? Can you finance anything, including medical bills? If so, what is the interest rate to people with poor credit?

How long will it be before you can repurchase a home on poor credit? What will your interest rate be?

It isnt about honor. Its about cost.

[William Jones]

GDC-

I agree with you about banks being greedy - they have ALWAYS been gredy. However, isn't it greedy for someone to want a bigger/better house than they can afford? Someone who makes $65,000 per year and buys a $700,000 house is being greedy. They are wanting more than they can reasonably afford. The fact that a lender is willing to enable that greed does not change its character.

[good faith]

Strikes me that for homeowners who are underwater, this is a classic "efficient breach" of a contract... very basic contract law. It happens sometimes that it makes more sense to not follow contractual obligations because economic circumstances have changed. This is why in contract law there aren't punitive damages even for intentional breach of contract. So walking away, and incurring the known consequences of breach--foreclosure and reduced credit rating--is the rational way to do things, and I don't have a problem with it.

I think people do have a problem with people who "buy" homes with no intention of ever making a payment, and have basically entered into the mortgage contract in bad faith, expecting to game the system by taking advantage of mortgage law by living in a place for 12 months before it gets foreclosed. Should there be some extra liability for that kind of behavior? Maybe. But previous commenters who said that banks entered into these extremely high LTV deals knowingly is correct--they were sophisticated enough to know better.