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.

[Sue]

Quote from Ben Franklin's autobiography:
"It is hard for an empty sack to stand upright."

[Aaron Kramer]

Peter,
I've posted about this several times and the bottom line is that borrowers have the legal right to walk away from loans. The reason for the inclusion of this right is that is forces banks to be cautious when lending money, or they will literally be caught holding the bag. I can't believe the sanctimonious people on this blog arguing that borrowers should stay in their homes even if they are upside down on their note, for what? So that they are slaves to their debt for a generation? So that your precious investment/home doesn't go down in value? Due to the impact on society? Given me a break if you were so concerned you should said something before or during the bubble no afterwards.

The worst part about the new stimulus package rolling through Congress is that it will raise the amount for conforming loans. This is only going to allow more people to refinance their home with the government backing the loan. The burden is being shifted from private banks to the public, where is the outrage? Real estate values are going to drop further and we the tax payers will ultimately have to pay more for this stupidity. If the bankers or lenders thought real estate values were going to be steady or rise they would offer the loans themselves. That is capitalism folks, it got into this mess and it will get us out if it, if we let it work without becoming socialists. My advice to those upside down on their loan is to walk away as quickly as you can before Congress changes the legal covenants that protect you.

[Ace]

I must admit that I am shocked that 60 percent of people who voted so far think it is ok to walk away from a house because it went down in value... even if they could still afford to pay for it.

That is a great plan! You have eliminated risk completely in your investment.

Of course you are probably going to hell for all eternity... so there is that small risk.

But hey, BOA is the bad guy right? They are the big evil bank that takes everyone's money. By stealing from them, you are kind of like the modern day Robin Hood. Steal from the rich and give to the house poor!

[Roger Moore]

Isn't there a "A plague on both your houses" option? Walking away from an underwater mortgage is irresponsible, but so were many of the mortgages that provoked people into doing so.

[just me]

Arti,

You're right.... Thanks for the post.

[Anonymous]

I find this whole discussion baffling. How can there be a supervening moral obligation to pay back a nonrecourse obligation to a third party you don't personally know? Each party entered these loan transactions knowing full well that the borrower had the LEGAL RIGHT to walk away from the home if he or she so desired. I see no room for disagreement on this issue; walking away is legal, moral and probably a good decision for many of those in upside down situations right now.

[Walt Harasty]

In my opinion a lot of people do not understand the basic nature of buying a house. When you do not have all the money to pay the purchase price you BORROW the money and you promise to pay it back. In some cases the person or entity making the loan says that I will take the house as security in the event you don't repay the loan and not look to you for any more money. Other lenders say I will take the house back, but if its value is less than what you owe, I will sue you for the balance. which may be against the law in certain jurisdictions. In a simple transaction between two people, what is so hard to understand; does the fact that an "institution" lends you the money any different? If the lender were your grandmother would you "walk away" and let her have a house whose value will not be enough to repay her? If you did, most people would consider you to be an "SOB".

[Walt Harasty]

Looking at the poll results so far, it appears that a lot of people who sign promissory notes that say "I promise to repay the money I am borrowing", do not understand those words.

[Solomon's sibling]

How about considering another dilemma that balances the values of personal well-being against honoring a social contract: you have no money or work or prospects, your kids are hungry and you have the opportunity to steal a loaf of bread to feed them (from Wal-Mart, not from another family). What do you do? I don't even have to think about that one -does anyone else? Yes, it's a more extreme case, but not really different in kind, in my view. It's just a sliding scale from food-on-the-table to roof-over-your-head.

And to those who are holier-than-thou about the real choices made by real borrowers impacting their real families, I say walk a mile in their shoes before rendering judgment.

[Jeremy R]

"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. "

Again, bankruptcy laws are bankruptcy laws. If they are strict, then people cannot get a cheaper payment. When they repurchase a home at a lower price they will pay way more interest and way more money donw.

After 4 years and lots of credit counseling, they can refinance once they repair their credit.

[Jeff]

Typical lousy construction of a poll question. Makes you choose a biased answer that doesn't accurately reflect the situation. It is not a black and white world and this issue, like most others, is much more complicated than good vs evil.

[gary]

"hard to get loan for 7 years"
I think he is brillant. He secures a second home that he can live in then walks away from the lemon loan he has. Smart to me. He stays in the other home for a few years, builds some equity then can get any loan he wants or just dosent move. In a few years these whore banks will be so desparate to make loans they will start the foolish process all over again. I went looking for a car and the dealers offered the world to me if I would just buy. Do I feel for these guys?? yup nobody should be stressed financially, but the bansk and bushco created this nightmare and why not take advantage isnt that called making a good business decision?? after all arent all of you bushcos just hugging business for there wisdom in screwing the public and pretneding to be market driven while depending on the whore bushco friends to protect there millions>>>>

[Cal]

In some way, Wise beyond their years.

A portion of interest rate you pay is reflective of the risk of you walking away. If lenders are understating the risk premium then homeowners are having their cake and eating it too.

It is basically an option contract and people are excercising their option to walk away when it is in their best interest to do so.

What some homeowners might be understating is the total risks/costs involved of walking away (some may be walking away too soon, or it may get to that point). It doesnt stop at housing and they need the complete picture before pulling the trigger. Sadly, most people cant do the math so it will be just whatever the pervailing mood at the time will direct their thinking.

[Dr. JwB]

Ace brings up a good point. Not the fact that 60% of us would go to hell (sorry, I'm a nonbeliever, your mythology won't work on me), but the fact that there is risk involved. If you want to make money, there is always risk. So if my grandmother (to use Walt's example) loans me money with interest, then she must know that there is a chance I won't pay it back. Thats the risk she takes.

Sorry Grandma.

[amir]

I'm with Arti.

Please people, leave your homes now, let the banks sell them for nothing. It's the right economic move for you, for the economy, and most important, for me.

Yay!

[TrojanDLA]

What an easy poll - there is NO SHAME in walking away from a business transaction gone bad. Business is all about calculated risks on both sides of the bargaining table. The banks calculated that the borrower would be able to pay, and the borrower calculated that he had an appreciating asset. Borrower made a bad business decision and has now decided to walk away from the deal. He will now face the legal consequences that range from possibly fraud at worst to bad credit at best.

What's the problem? It's not like there is a moral dilemma in play here. Business is about making money pure and simple. Corporations make bad business decisions and go out of business all the time - hello New Century, Yugo and Gateway Computers. As individuals, we similarly have a right to try and profit to the best of our ability, and if things don't work out, well, walk away and pay the consequences.

[MyLessThanPrimeBeef]

I am with James Bond, aka Roger Moore.

When borrowers stir not themselves into holding declining assets, the lenders are shaken.

[Adolfo]

If somebody did a refi and pulled money out of the house and thinks about walking away...the lightning should hit you right there.

For people who bought a house in good faith, learning that they just lost 50k in equity and can not even refinance the house, well, get your shoes and walk. They should even sue the bank and their appraiser.

[redneck]

yeahhh marc, it cracks me up that if a corp or a politican or a business lies steals makes millions gets people killed thats ok, but some guy use the same law and its immoral and not honorable, why is it the corp or pol world can do it but an individual do it its bad. like many have said. its a contract, you pay and keep home you dont you loose home. there is no free amrket in america its all about what the corps and pols can do to make themselves rich. i for one will hang around afew more years at best and if my sinkhole is still a money pit then goodbye bank and hello renting and building my 401k where i can hide my real money. oh and before ya go too nuts a 401k is judgement proof so cry all ya want. anybody cry when the ceos made millions while running there companies in the toilet? anybody hear of a place called enron?? ken lay walked away with millions and thats moral? and honorable? screw all you loosers that are stuck in your funk. i hope all your rates goe thru the roof.

[LeavinLA]

Jeremy: you're clueless,as always. Within 2 years after BK you can get a mortgage at market rates if you have done your credit rebuilding properly. And there's no ongoing counseling. Check your facts before you post.

[judge dred]

HEY WALT you sound like so old fart still sucking up social security and cryong when they wont raise the rate by $5.00

[Aaron Kramer]

All those saying the borrower takes a risk and should repay are only looking at one side of the equation. BOTH the borrower and Lender take a risk that is why the lender demands three times the loan amount over the course of a 30 year fixed. The non-recourse aspect of the loan is supposed to ensure that lenders actually fact check and strictly adhere to the process of "due diligence ," to ascertain an accurate probability of repayment. The bottom line is both parties suck and those not involved in the contract will be affected the most due to the ensuing extensive collateral damage.

[Al]

Once the decision is made to walk away after trying to work all issues before hand. The black mark on your record will cause more financial pain for years than points on a speeding ticket. A person may not get that job, apartment, or a new loan for a very long time. Any new loan or Credit Card will cost plenty. The best bet is to plan ahead for the rainy day before hand. Some people are blinded by the high life style when they can't afford it. The empty box test -The box looks good on the outside but there is nothing inside.

[the terminator]

hey walt guess what i am not paying on my home and have moved in with my Girlfriend who is getting allimony for another 4 years so we cannot get married and by then my credit will be great because she owns her condo and dosnet want me to help because her ex can make her reduce the alimony

[CallMeJinglemail]

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.

Posted by: Uncle Billy

yea -- and i see we are split here in beverly hills one for jingle mail and one against!

[brettdl]

Is the moral question still really relevant at this point? I mean, if you are a parent stuck with a house that is taking food from your kid, you're going to do what you have to do. If you are a flipper, you are going to dump your house and look for greener pastures. It's human nature.

If you want to view them as morally bankrupt, that's fine with me. But people will always take care of themselves. It's human nature.

And while some people might take advantage of the "option to walk," the fact is the faster all of this shakes out, the better for everyone:

1. People get back to the basics of living, which many cases will mean renting, instead of scraping up $3,000 a month.
2. Financial firms will know where they stand financially, which removes all the uncertainty from the market.
3. The faster all this happens, the less likely ill-advised bailouts will be created by politicians.
4. The economy may tank for a while, but the faster all these problems are solved, the sooner a recovery can kick in.

In the end, isn't the biggest moral imperative to fix the economy?

[GDC]

William Jones,

I don't think buyers who buy more house than they should are greedy; they are risk takers. Some have very high tolerance for risk; you and I don't. Sometimes they get rewarded; sometimes they get whacked. I personally know someone who at at $60k income bought $700k home in Cheviot Hills in 1997. He sold in 2003 for $1.5m and bought a $2.0m 6bd/5bth house in Manhatten Beach while he was making $140k. A similar house to his just sold last month for $2.8 mil. He's got a fixed 30 year mortgage at 5.25%. He still has huge profits from the sale of his Cheviot Hills house and he can comfortably pay his mortgage payment at his now $180k salary. He is a risk taker and he got rewarded. I know plenty others like him. I, on the other hand, am still sitting on the sidelines waiting to buy my first house.

[Anonymous]

Thank you "Bill Clinton and Henry Cisneros" for losing the "Lending standards!

Good job!

[Hula Girl]

This is scary - If I loan money to friends or family, it looks like 60% would stiff me. Humans. No damn good.

[RichW]

Breaking a contract simply because you are dissatisfied with your lack of equity is dishonest and fraudulent. The only reasonable exception would be cases where the lender was dishonest with the borrower, in which case the lender will have reaped what they sowed.

[Mike S]

I'm one who has expressed disgust with the delusional notion that walking away from a loan is a "business" decision.

This matter is wholly about irresponsibility and the personal choices one makes. Some folks suggest guys like me would readily change their tune when things get tough. Oh really?

Tough times reveal one's character. In Dec '89 I bought a "sure thing" rental house, couldn't flip it and by '94 it was worth 1/2 of what I paid with rent covering 60% of the carrying costs. THEN... the place was vandalized after the tenant moved out.

As you would expect from my tone, I didn't walk away. A got a small insurance settlement ($12k), a GREAT REALTOR doing rent management, worked my butt off, and with some contracting help from the realtor we managed to return the place to rent condition and get it rented. I continued eating the place for several more years. We went without 'this or that' and it eventually broke even. We overhauled the place in '04, sold it '05 for a handsome profit despite the carry and rehab. Real estate is a long-term investment.

So when real estate times are tough... I've "been there." My dad has "been there." He was a residential electrician in Houston during the downturn yet managed to not lose the home I grew up in. Both my grandfathers "were there" and made it through the Depression raising families without losing their family farm [and house]. No brilliance, just average Joe's taking responsibility for their lives and their decisions without expecting the government to save them.

And yest it hurt in the short term, it means making coffee at home and using a thermos instead of swinging by Starbucks. It means eating at home most nights and even (sic) foregoing cable TV.

But it also means things you cannot put a price on. Things like looking your kids in the face, looking any man in the eye, and speaking with self-confidence and deep-contentment that you stay on your feet while playing fair and square.

America is nothing more, or less, than those who comprise it. The same is true for LA. Anyone who engages in self-deception that walking from one's commitments is a "business decision" needs to look no further than the mirror when complaining this country has problems. The problem is you.

Mike S.

[markl]

This is scary - If I loan money to friends or family, it looks like 60% would stiff me. Humans. No damn good"

big difference between friends/family and a abank that has you sign a fraudulent loan,without checking your income,a background check or anything else.God for 400K you'd think they'd check dontcha?
The bank proposed an immoral/dishonorable contract(liar loans etc...) in order to exploit a situation for financial gain so how ar ethey a victim?They are the perpetrator,no?

if somebody mugs you in the street are you supposed to pay their hospital bill because they fell down and injured themselves when they ran off?

the banks engineered and manipoulated this ponzi scheme and now they are reaping what they have sown....crocodile tears.

[Long time listener . . .]

There you go again RichW, thinking you know a little about the legal consequences of breaking a contract. The law doesn't treat such actions as dishonest or fraudulent, or even illegal. You break a contract, and the law enforces the terms of the contract against you. In the case of home mortgages, you lose the home. The fraud here occurred either with the appraisal of the house or the stated income by the buyer (if there was any fraud at all). But simply breaking a contract because things have gone south is not fraud. At least under the law.

[condoblue]

It had to happen: http://www.youwalkaway.com/
index.html

[Hula Girl]

Markl : I agree the banks were idiots to make loans w/.o verifying income, etc.
But, buyers were liars, too. They claimed income where none existed in order to obtain the loans. I'll bet my fixed rate, 20% down, verified mortgage that those very liars, er, I mean buyers are the same ones walking away.

It's a matter of character..And if those very same walkers were my friends and family, I believe they'd stiff me, too. Corruption is the new integrity.

[m]

....when it comes down to it, what things in our lives can't be whittled down to business decisions at this point? People are willing to spend excessive amounts of money on all of the necessities for life -- shelter, food, water, air. They are willing to buy children (adoption and fertility treatments), animals and "life"-- medical bills out of the ears to keep someone on life support, pills and surgery to make you look younger. It's kinda disheartening if you just look at the world and your life through "business" eyes all of the time with the focus on money and what it can get you. It kinda sucks the life out of everything...

[Tombstone Realty]

Clarification -

Okay, I don't have a home loan, I am one of the pitiful bitter renters - But I was assuming it worked like my Staffords. I borrowed money for school, then I paid it off after I was done.

But if it true that the loan contract states you pay x dollars, or you must turn over the house (a collateral type loan)...., then you'd be able to walk away as long as you are current in payments without ramification. There would be no moral issue.

Is this the true reading of a home loan contract? Because if it is, the banks are screwed if other people figure it out. It doesn't make sense to me, but then, very little of the current housing market is understandable.

[Ray Black]

I would like to add that I too was caught by the sudden shift in the market. I had just finished building a new home and did a lot of the work myself to save funds and insure affordability. Because of circumstances, the house had to go on the market and I sold with virtually no profit. The sweat equity from roofing the house myself, acting as my own General Contractor, and performing numerous other construction tasks allowed me to essentially break even. I essentially was in a negative equity slide, but never considered letting the house go back to the lender. My reputation, character and resolve would never allow me to make such a decision. I made a commitment and a person's word is their bond and should never be sacrificed at any cost. Maybe, this is why the divorce rate is so high, easier to walk away than work through the commitment.

[Anonymous]

Mike S --

You simply don't understand the concept of a nonrecourse mortgage. The borrower agrees to pay back the loan or give back the house. The borrower DOES NOT agree to pay back the loan in all cases. There is NO commitment to pay back the loan with money. Every purchase money borrower has the opportunity to "pay back" the loan by giving the lender the house. In any event, may I posit that the problem with America is not the people who understand the concept of nonrecourse mortgages but sanctimonious people like you who do not understand facts and reality?

[SeanK]

Thank you Mike S for some sanity and morality. Whining about the evil banks and corporations is so typical of what is wrong with this country - all of these people bought houses they could not afford because they believed (ignorantly) the market would continue to go up and up and up and they would make a huge profit by either refinancing or selling. Nobody forced any of these people to do stated income, interest only, zero down loans they did it so they could make the most money possible with the least amount of invested capital. The banks (who will take a hit for loaning money to these people when they shouldn't have) fulfilled their end of the bargain when they gave you the money to buy the house you wanted, in return you PROMISED to pay them back - loans are made based on that promise. The bank is not your partner in the purchase of the house, you own the house, the house is just the bank's security in case you do not live up to your end of the deal.

[jb]

Mike S,
Your story is interesting... but irrelevant.

You have bought property before so you will be able to answer this better than me - it is my understanding that you agree to either 1) pay the mortgage OR 2) the bank takes the house (in which case you do suffer substantial consequences). It is my understanding that you are fulfilling your obligation 100% by doing either one.

Is this the case or not?

I am sure that banks protect themselves by requiring a 10-20% down (oops, no they dont...). I want WaMu and the like to fail. They purchased these impossible mortgages like crack addicts with an army of professional risk management number crunchers. We now have an average price of houses 8-10X incomes that is directly due to their actions. They engineered this problem with purchasing crazy mortgages, and enjoyed ALL of the benefits while housing went up, but want to pay NONE of the costs on the way down.

[Flaaash]

Arti makes a valid point. Let them walk, so the prices can come down to more reasonable levels. But one point Arti is missing is when these banks fail, the government will be there to bail them out and at whose expense? Tha taxpayers like you and me. Look at what's happening now. With the decline of the market, we're seeing our retirement funds dissappearing. So the Fed lower interest rates to try and fix that problem. Interest rate drops causes the dollar to go down against other currencies and we get inflation. Either way, we pay.

[planetmort]

These comments are really very interesting. Both sides, IMO, are right. When you sign mortgage payment you're agreeing to loan terms based on a price (which presumably you have agreed to). However, in the event you can't (or won't) pay the loan, the lender does have the legal right to take back the house from you.

I think where people differ is through what prism they view this obligation. One side says "Well, I never expected to value of the house to go down, and neither did the bank; I'll stick them with the house. We both took a risk, and now they're taking a loss, and I'm getting crappy credit for 7 years. Done deal!"

The other side says "I made this gamble, and now I'm stuck losing money, but I'll stay with it, thus preserving my credit and hopefully I'll come out okay eventually."

In the end, I think the major difference between the two sides is whether you view a house to live in more as a monetary investment, or more as a place to live. I don't think either one is right, per se, but they are fundamentally different views. One side will always follow the bottom line, and the other side may not.

I, for one, bought a house at a "stupid" time. If property values slide as much in 2008 as they did in 2007, I will be upside down. (I made a 15% down payment, and shopped for many, many, months until I found what was a "steal" by the then-current pricing standards, but another year of comparable price decline will eat up those margins). I don't plan on walking away from my mortgage (which I can afford to pay) simply because the value of my house is less. Financially, it would make sense, but I bought my house primarily as a place to live, not as a monetary investment. As long as I can pay, I will, because I like this house and this neighborhood, and I like my excellent credit score more than I dislike being upside down.

Clearly I am in the minority, though.

[jaded]

I'm going to go out this weekend and find a business deal, and sign a contract of some kind. When I change my mind, I'll just renege without any regard whatsoever to the other party. It's just business, right? I'm free to act on whatever financial whim I choose with no shame or second thought.

Then I'll blame the other party for being greedy anyway. Sounds like a win-win for me.

[nn]

You have every right to walk away.

The motgage is nonrecourse, and that was
known by all parties when it was originated

[Tmoney]

Caveat Emptor Banker. You lent money to deadbeats. If they walk whose fault is it ? Oh you wanted them to hold the bag and not you ? Too bad life's not fair.

[RichW]

"There you go again RichW, thinking you know a little about the legal consequences of breaking a contract."

Obviously you didn't get a pair of glasses and a dictionary for Christmas this year. If you read my post, you'll find that I never claimed it was illegal. If you look up "fraud" and "dishonest" in the dictionary, you'll find these words are used to describe deceit outside of the legal context you erroneously claimed I inferred.

[ex-realtor]

You got to be nuts to continue paying for something worth less than you owe and getting worse FAST!! Save your mortgage payments. By the time they foreclose you'll have money saved to easily start again. In the future with all these bailouts, the banks will forgive people with foreclosures. This will go down in history. Banks can't blacklist foreclosures when MILLIONS will go thru this. SAVE YOUR $$$$ and buy again when it's much cheaper. It will be a while so you have time to regain your credit.

[Unsympathetic]

All this talk about "moral obligation" to keep paying on an underwater loan is amusing and, frankly, ignorant.

At all times, a person taking a loan has the option of walking away from the item purchased with that loan - always has, always will. There is no moral imperative to do anything! After all, it's just business.

Each and every person who claims that an individual has a "moral" requirement to keep paying on a loan has chosen to support the investment banks. Because investment banks have always and will always get hundreds of billions of dollars of "favors" from all governments, I have zero sympathy for their losses at the present time. I-banks pushed the bad loans down the throats of the lenders!

The home loans that are blowing up today did not exist 10 years ago.. why? Because they're fundamentally bad business! People choose to forget that ARM's were originally created for the uber-wealthy who could pay the entire balance with one check. Today, ARMs were deliberately given to people who had no chance of repaying the loan simply because the I-banks could earn a fee for processing it.

Send in your keys, put an I-banker out of work!

[ET]

I don't understand why people think this is new. Los Angeles, Orange counties & California had terrible housing losses in the 1990s. I know 2 homeowners who back in the mid 90s walked away from their houses after they purchased new homes. I don't think anything happened to them. They walked because they wanted new houses in better neighborhoods at reduced prices, they both could afford their mortgages. It was very selfish. As far as I know subprimes have been around along time, I think they may have been "rediscovered" but I was warned in 93 to be careful of loans that add dollars to the back end. It's just sad that some people will just look out for themselves and don't care about the impact of foreclouses in neighborhoods.

[m]

"You got to be nuts to continue paying for something worth less than you owe and getting worse FAST!! "
-ex-realtor

... isn't that exactly what happens when people buy new cars?

[Lord]

Is it immoral? Probably, but no more so than putting them in these loans to begin with. (Excluding cases of fraud.) Let them both pay, borrowers with their credit ratings and lenders with losses. They both deserve it.

[David Binkowski]

"Morality" has no place in discussions about money or the markets.
The person walking away has used the terms of the contract to his advantage, when it became advantageous to walk away. Being foreclosed on is not against the law, or immoral.

Choosing to be foreclosed on is simply part of the new world we live in, and the economic conditions we have been confronted with.

[Mike S]

Thanks for all the concern and offerings to advance my understanding on real estate and mortgages. Guess I've got a lot to learn having bought my first house at 23 with three decades of buying/selling since.

Another person's immorality or stupidity does not vindicate or justify one's own immorality or stupidity.

Lenders offer stupid and misleading loans. Duh! Even a straightforward mortgage is 13 pages of arcane text. The underlying principle is YOU are responsible for understanding what YOU are signing. If YOUO cannot fathom what YOU are signing than get a real estate lawyer to explain it to you. When you don't, that $250 bucks looks cheap in retrospect.

I've often thought we would of never got in this mess if we forced people to carry out true cash transactions for real estate. While it wouldn't be as efficient, when the lender hands you that cool $1 mil in $20's and you haul that pallet of cash over to the escrow agent it would really help folks understand this is "real money"--not some abstract piece of paper.

The BOTTOM LINE is simple: Be personally responsible and quit blaming everyone else for your decisions and your problems. I bet you don't blame everyone else for your wife and kids, why the heck should should every one else bear responsibility for your inability to manage your personal finances?

Mike S.

[jb]

Mike S
Please answer my question above - IMHO walking is a responsible option as offered by the lender. After all they require 10-20% down to be sure you wont walk (oops, no they dont)

[RichW]

It is good to see there are a few people here (Mike S, Hulagirl, et al) who have the moral character to hold up their end of a bargain without resorting to legalisms if/when things aren't to their advantage.

Professionally I've found that honesty will reap you much more in long-term gains. Dishonest personal or business practices have a limited lifespan. Good news may travel fast, but bad news will travel faster.

[LeavinLA]

RichW: But (and I realize this doesn't cover the OP, but does cover others who ar underwater) isn't it honest to say to the bank "I can't make these payments per the contract and I wanted to let you know. Take the house as you agreed?" Nothing dishonest there.

Or are you the only arbiter of truth? You and the rest of the "take them out and kill them so prices plummet and I can buy a house for $100K" crowd?

Feh.

[sacundim]

People here are not looking at this in a nuanced enough way. Is it irresponsible to walk away from a mortgage where you're upside down? Not necessarily.

However, look at the case this story is describing: a buyer who is planning to default on the mortgage to his current home, which he soon won't be able to afford, just as soon as he closes on a new, cheaper home, so as to obtain financing for the new home without the black mark on his credit that his premedtated default on the current home will create.

The first word that comes to my mind in that case isn't "irresponsible"; the first word that comes to my mind is "fraud." I'm not saying that this is mortgage fraud (I'm not a lawyer), but the guy is certainly obtaining that new mortgage under less than completely honest grounds—if the new lender knew that the guy was about to default on the mortgage on his current home, they might not want to give him as good of a deal as they did, or they might want even to refuse. (Though arguably, the new lender should be able to figure all this out through due diligence, in which case, it's their problem if they don't.)

This sort of situation also sounds like a good argument for recourse loans. If the first lender's loan is a recourse loan, then they can go after the guy's new home to satisfy the debt.

[Anonymous]

Mike S and RichW --

It is unfortunate that you are upset over being presented with facts. There is nothing irresponsible or dishonest with giving back a home to a lender on a nonrecourse mortgage. It is not a "legalism." In fact, it is the basic principle of the deal. It IS the deal. Everything else in the loan document is boilerplate. You only have to know that the loan pricipal can be paid back with interest or you can give back the home. I'm sorry if you never realized this in all your experience buying and selling homes. The deal in a nonrecourse mortgage is that you don't have to pay back the loan with cash. You can fufill your obligation (honorably) by returning the house.

[Mike S]

To JB,

The responsible thing is aggressive letter writing to the lender. The biggest pile of crap I hear is "I called and got the run around. The bank won't help me." What a pile of crap yet a repeated theme in postings throughout this blog and media.

Our legal system is based on written correspondence. Actual letters, and when it is serious, certified letters to the Corporate President/CEO. If the lender is unresponsive, write the State Banking Commission. California's Department of Financial Institutions has a local branch at 300 S. Spring Street, Suite 15513, Los Angeles, CA 90013-1204. This isn't rocket science and I challenge you to find one example in the postings over the last few days where some guy wrote even a 1/2 dozen letters and complained in writing to DFI before walking from his house.

Anybody that suggests, let alone believes, phone calls or email protects their legal rights is a fool, only to be trumped by the fool who actually thinks some guy receiving the call or email really gives a crap about your problem. Letters work, everything else is a waste of effort. (BTW, the same is true with writing your Senator and Representative.)

Think about it, most of those walking are too lazy or incompetent to aggressively write the lender but expresses outrage the lender isn't responsive to their phone call or email. Recall the lender is modifying a legal contract the borrower previously found perfectly acceptable as evident by his signature on the loan documents. And walking is a borrower's "business decision???" The borrower has done "all that is possible???" Yes, tragedies (e.g., debilitating accidents) strike some who subsequently lose their house through no fault of their own but in the vast majority of cases the cause is laziness, incompetence and/or immorality--often termed greed.

Perhaps I simply have too high an expectation of adults. Fools got themselves into the position where they are losing their houses. Nothing there to suggest such fools will suddenly demonstrate the competence to aggressively correspond with the lender and State agencies to reach a favorable outcome.

Mike S.

[RichW]

LeavinLA,

If you re-read my post, you'll find I attributed dishonesty to flippantly breaking a contract "if/when things aren't to their advantage" (quoting my original text). Deciding not to honor a contract because you happen to be upside-down is much different than not having the resources to continue the contract, as the former involves making a decision to be dishonest.

As to your second point, I already own a nice piece of property thank you. Paid all my bills on time too. What a concept, eh ?

[LeavinLA]

Mike, Mike, Mike... if you write to a lender, you get even less response than if you call. They are set up to respond only to phone calls.Paperwork is too easy to ignore.

[Rainer Klein]

As long as society is accepting no accountability from top managements running huge losses and destroying jobs, I couldn't blame someone for walking away from an overexpensive home.

[Todd in WeHo]

In years past I would have said walking away was irresponsible, but that was when I also believed if you were honest, worked hard, did well in school, and nice to others that life would be easy and success guaranteed. I'm the most optimistic person I know but that doesn't change facts like employers not having to ask whether you want to be laid off or insurance companies canceling your policy as soon as you make a claim. As long as home buyers (and lenders) know the consequences of walking away that are built into their contract, then all is fair game.

[jb]

Mike S,

It is interesting - your anger against borrowers seems to be identical to mine against the banks.

It is not that I dont think these folks are greedy, lazy, irresponsible and often moronic... BUT I think the banks are far more reprehensible. I visualize an army of highly paid suits crunching numbers all day for years and missing what untrained folks have been screaming about. They pocketed profits from these mortgages on the way up, never considering what happens if it is a bubble as so many proposed????

They should fail - make no mistake, any rescue plans are not for the borrower, they are for the banks who are now crying - who are the incompetent lazy ones???

(I am not sure where the letter writing comment came up - my question was simply whether walking was part of the stated deal with the bank - I believe it is)

[Hula Girl]

I wouldn't be surprised if Condobleu and all the other posters siding w. him walked out of their marriages, weaseled out child support and dumped their parents in a old-age home. If you or any other man disclosed to me that you'd dumped your house, I'd dump your slimy ass.

I might think you were a "smart" investor, but I'd never trust you.

(I'm assuming Condobleu is a man - if CB is a woman, I wouldn't buy a duplex w. her. Ever.)

[joeinlosangeles]

Personally, I don't think you're all over the place on this. This strikes me as black-and-white view of the morality -- "stealing a piece of candy from a 7-11 is morally exactly the same as committing mass murder." Number one, leaving a marriage isn't necessarily necessarily a moral lapse. Nor is putting your parents in an old-age home. I know many people who have put left marriages or put parents in old-age homes because they believe that's the best thing to do. Now, I appreciate you might believe such people are Satan incarnate, but my guess is, based on this post, your opinion on a lot of stuff wouldn't matter to me, so that's okay.
--

I wouldn't be surprised if Condobleu and all the other posters siding w. him walked out of their marriages, weaseled out child support and dumped their parents in a old-age home. If you or any other man disclosed to me that you'd dumped your house, I'd dump your slimy ass.

I might think you were a "smart" investor, but I'd never trust you.

(I'm assuming Condobleu is a man - if CB is a woman, I wouldn't buy a duplex w. her. Ever.)
--

[Hula Girl]

Joeinlosangeles,wrote "Number one, leaving a marriage isn't necessarily necessarily a moral lapse. Nor is putting your parents in an old-age home. I know many people who have put left marriages or put parents in old-age homes because they believe that's the best thing to do."

Joe - I agree there is a big difference being doing the right thing and the best you can with any difficult situation. Walking away from challenging financial or personal situation so as not to be inconvenienced by obligations and responsibilities just seems to be the height of selfishness.

[jojo]

"Got a pulse? Get a Loan!!"
WTF did people expect to happen.

The situation demanded that people take advantage of it.
Perhaps some lessons will be learned until they are AGAIN forgotten.

[David]

I think it is really stupid not to walk away from those deals. Let's say I put 5% down payment on a house. If I walk away I lost that down payment and the house. I already pay the price. It's just a bad business deal.

[Ivan]

There's an excellent discussion on this very topic at Irvine Housing Blog:
http://www.irvinehousingblog.com/2007/12/12/
are-short-sales-moral/

I don't think this is all that complicated, really. The agreement one enters into when getting any secured loan, mortgages includes the ability to stop paying it and handing the asset backing the loan to the lender, and in the case of mortgages in CA, the balance is non-recourse. This is the deal the borrower agreed to and no other, and they have no moral or legal responsibilities beyond what was specifically agreed to.

The people making the argument that it's "immoral" to walk away are attempting to impose an obligation on the borrower that he never accepted. There's nothing moral about that.

Furthermore, the lenders know full-well that mortgages are non-recourse, and the risk of default and reposession is built into the interest rate they charge. Therefore, the lender *paid* for the right to walk away - by paying higher interest that he would've paid if the mortgage was a recourse loan. He has every right - legal *and* moral - to avail himself of an avenue that he has paid for.

[jess]

check out this video from sixty minutes. they condensed this blog!

http://www.cbsnews.com/sections/i_video/
main500251.shtml?id=3756665n

[godless]

People make the banks out to be victims, but they don't talk about the "immorality" of the lending institutions. Banks lent money to people who made less than 60k for a 600k house knowing full well these borrowers could not continue making payments after a rate increase. They did this out of greed because subprime loans and ARMs have higher returns than the standard 30 yr fixed. Lending institutions saw their stock prices soar and people earned big bonuses pushing ARMs and subprimes to consumers. Financial institution execs knew the good times weren't going to last forever but took advantage of a lack of government oversight and are laughing all the way to the bank or should I say all the way to their mansion on the French Riveria while the tax payers bail out banks and consumers.

The people who make this moral argument are so blinded about "righteousness" their vision is obscured. You should not loan money to people who you KNOW will be unable to continue making payments. On the outside this does not appear to be a lapse in morality but in common sense. Not paying back your best friend is immoral because he's not profiting from your loan. Not paying back a "foolish" bank because they wanted to pad their balance sheets is simply a business decision based on economic reason-not morality.

It's hilarious how these moral crusaders align themselves with the GOP and big business but don't understand a single thing about basic market forces and fail to realize how they're being gamed by the people they're supporting.

[MyLessThanPrimeBeef]

Gary S. Becker, the Nobel prize in economy, partly, for his work equating money and marriage, is, all would agree, even atheiests, one smart man, one of the smartest in fact.

So, for him, marriage is just another business decision.

Now, if it doesn't pay for the father to stay, should he just 'mail in the key' and walk out?

[Sue]

People....let's get a grip...we in this country have been living from bubble to bubble. I watched this mad frenzy for the years that it did and sat and saved and waited. I do already have a home that I purchased 15 years ago on a 30yr. loan.....now payed off. I knew this day would come, and I'm glad I followed my better judgement not to jump on the bandwagon. Americans wake up, we are living in a time when "it's each man for himself".....if we are going to talk morality, then NO people walking away from such obligations is wrong. But is it not wrong too that the CEO's selling such mortgages gettings "millions" in bonuses. Corporate America is dead...people are saying enough is enough and they will risk their credit and walk away!!!......for someone like me, I say.....let them walk away so I can buy at rock bottom prices............and if you think things are bad now, just wait until the soon to burst credit card bubble(UNSECURED LOANS)...............America..........from "in God we trust" to "in bubbles we trust"