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Who's Really the Idiot?

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January 26, 2010 – Comments (53)

Apparently I brought down the thunder when I penned my article Why Are Homeowners Idiots?

The article was inspired by a paper by the University of Arizona's Brent White and a treatment of that paper by U of Chicago's Richard Thaler in the New York Times. There have been plenty of comments on the article, but I'm curious what the rest of you think. Is it crazy to think that homeowners should think of their home as an asset? Or should even those that are severely underwater and have no hope of regaining equity any time soon continue paying down their mortgage?

All thoughts are welcome...

Matt

53 Comments – Post Your Own

#1) On January 26, 2010 at 4:06 PM, Donnernv (< 20) wrote:

There are still a few old-fashioned nuts who believe that when you undertake an obligation in return for an asset you could not otherwise possess, you are honor-bound to fulfill that obligation if at all possible.  Even if the world's assessment of the value of that asset has declined.

I'm one of the old-fashioned nuts.

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#2) On January 26, 2010 at 4:12 PM, davejh23 (< 20) wrote:

As others have mentioned, I don't think it makes sense to walk away if you can afford your home and you enjoy your home...you still need a place to live.  Where I live, there is not a huge supply of rental property, so walking away from a mortgage payment you can afford probably wouldn't be worth the hit to your credit.  Now, I do know several families that find themselves underwater and they need to move for new jobs, etc...  They can afford their homes, but should they turn down a job offer because they can't sell their homes?  Banks aren't willing to work with them on short sales, and they don't have $200K to pay out of pocket to cover the mortgage balance...  I think this is an entirely different situation.  For those that strip their homes of everything valuable and then walk away...they should be in prison.  For those that stop paying their mortgage and rent the home out for a year before the bank gets around to foreclosing...they should be in prison as well.   

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#3) On January 26, 2010 at 4:17 PM, miteycasey (31.38) wrote:

How about a car?

You take out a loan and it loses 20% of it's value the moment you drive it off the lot. 

Why isn't EVERYONE returning their cars? The owner is 'underwater' on the car?

 

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#4) On January 26, 2010 at 4:21 PM, miteycasey (31.38) wrote:

How about marriage?

Half of them end in divorce and males usually get the short end of the stick so why would any male get married???

 

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#5) On January 26, 2010 at 4:22 PM, TMFKopp (98.50) wrote:

@Donnernv

Don't get me wrong, I completely understand the honor argument. In fact, I was staunchly in that camp until the past few years. However, we need to consider this concept of "norm asymmetry" where homeowners are feeling "honor-bound" while the businesses that are lending the money are focused on what's most financially profitable. 

A severely underwater homeowner that walks away from their home faces legitmate repricussions for their actions. Again, we're not talking about people who put no money down and took a crazy interest-only loan. We're talking about folks that paid a significant down payment and took out a fixed-rate loan that they can, and still can, afford. These people lose the money they put down, they lose any money the put into upgrading the house, and they take a massive hit to their credit rating. That's nothing to sneeze at.

But the argument in White's paper is that these folks need to step back and look at the house as an asset and a business dealing and make fiscally sensible decisions.

Matt

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#6) On January 26, 2010 at 4:23 PM, outoffocus (22.85) wrote:

Purchasing a home to live in is an investment in security for you and your family.  If done correctly, you free yourself from the worries of rent increases and eviction.  Homes are not a commodity to be traded like a stock.  The only time a house is an investment in a financial sense is if you recieve some kind of cash inflow from the property.  And no I'm not talking about a HEL or HELOC because lets be real, thats not real cash inflow, its a freakin loan. 

Banks have succeeded in fooling this whole country into a mindset of perpetual debt slavery. The American dream can be ours just as long as we are willing to borrow up to our eyeballs in order to achieve it.  Most people are so brainwashed they cant even see themselves without some sort of debt.  All the virtues of hard work, saving, hunkering down, and purchasing when the time is right (like when you actually have the money) are gone out the window. 

You wanna know who feels like an idiot right now? Renters.  The people who saw the insanity going on and for whatever reason (common sense possibly?), despite all the coaching and prodding to the contrary, decided to sit on the sidelines until the insanity died down.   Then when the insanity tries to die down we have to worry about our political leaders using our tax money to keep the insanity going.

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#7) On January 26, 2010 at 4:25 PM, davejh23 (< 20) wrote:

Donnernv,

I agree that it is a matter of integrity for those that walk away just because they're afraid they'll be underwater for the next 10 years.  I'm not certain, but I believe the vast majority of those walking away are doing so because of financial hardship...whether they've lost their job, or they just couldn't afford the home in the first place.  For those in this situation, I commend individuals that try to work something out with the bank and only turn over the keys and walk away as a last resort.  I certainly don't feel sorry for those that feel they've been wronged by the bank that's foreclosing on the home they never should have bought in the first place.

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#8) On January 26, 2010 at 4:27 PM, TMFKopp (98.50) wrote:

@davejh23

I think as your comment makes clear, the idea of walking away isn't a one-size-fits-all.

@miteycasey

I actually addressed this in the comments section of the article. Here's what I said:

"A few folks have suggested that being underwater on a mortgage is similar to being underwater on a host of other bought-on-credit assets. In simple terms, it's not. Let's take the example of a car for instance. Let's say you pay $30,000 for a brand spanking new car a year before the recession sets in. You put 10% down on the car, so you have a loan of $27,000. With an interest rate of 5% and a five year loan term, you're paying roughly $500/mo. By the time the recession hits, you still owe about $22,000 on your car.

"Now that recession has decimated the consumer, nobody would be willing to buy your car, and while you might have been able to sell it for the $22,000 you owe before, let's say it's gotten so drastic that the only takers you'd possibly be able to find are only willing to cough up $8,000. So essentially you're now $14,000 underwater on your car. Time to walk away?

"Not so fast. I could give a whole host of reasons why this would be a silly idea, including the fact that your credit is now shot and you're still going to have to find a way to get a car to take you back and forth to work. However, the simple fact is that for most people, a good credit rating is likely worth more than $14,000. The same could be said for any number of other items bought on credit -- furniture, TVs, etc -- if for no other reason, the size of the shortfall simply isn't enough to make it worthwhile to back out of the loan.

"With the deep underwater homes we're talking about shortfalls of $100,000 or more. Are you folks telling me that if someone offered you a couple hundred thousand dollars and in exchange your credit rating would go to dirt you wouldn't take them up on it?"

 

@miteycasey

As for marriage, I'm not sure how this is even relevant...

 

Matt

 

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#9) On January 26, 2010 at 4:28 PM, NEMnyWtch (< 20) wrote:

You are correct that homeowners should  always treat their home as an investment.  Add to this Buffet's wisdom, "Never lose money", and you might add this up to "walk away".  However, there is also the issue of what walking away from your investment would do to your credit rating, and the fact that although I don't know whatsup w/Arizona, in most states you are liable for your obligation.  If you walk away owing $200K, and the bank sells it  for $50K, you still  owe them $150K, and they can seek to recover this money from you.  Now the bank may never  be able to get it if you simply don't have it, but you will likely never own another home again with what is sure to be stricter underwriting in the future.  If you do have the money to  pay, they will take it through tax levy or court order, your credit will still be shot, and you will not have a house.  (I used to have  the honor of flagging brokerage accounts frozen by order of the IRS.)  Either way, it's a bad deal.  It is better for you to fufill your obligation and pay your mortgage.

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#10) On January 26, 2010 at 4:31 PM, Turfscape (46.07) wrote:

As I mentioned in the comments for the article, I can't fathom why people look at a primary residence as an investment. It's a liability by every definition. It should be viewed from the standpoint of needing/wanting a home...whether that home is owned or rented.

If you'd like to invest in Real Estate, great. Do so...but don't confuse investments with home ownership. This has been one of the great failures of our society (as it relates to financial education). We've beat this drum of home ownership so loud for so long, and screamed 'equity equity equity' until we turned purple, that there's a stigma around those who don't own a home. "When are you going to buy your first house?", it's right up there with "when are you going to get married and settle down?" and "when are you two going to have kids?".

Aand then we're surprised that people who really shouldn't be buying houses take on loans they can't afford (and don't really want). Then, we're surprised when the value of said houses plummet and those people who shouldn't own (and probably didn't really want to own) suddenly look to abandon ship.

Home ownership is great...if it's right for you. Renting is great...if it's right for you. Either way, it's not an investment any more than having kids is a smart tax strategy.

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#11) On January 26, 2010 at 4:37 PM, TMFBent (99.82) wrote:

Let's say the safe thing. To paraphrase Homer Simpsons. Everyone's an idiot. That why everyone does everything.

Sj

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#12) On January 26, 2010 at 4:45 PM, imup (52.22) wrote:

Great!  All we have are Fools and Idiots!

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#13) On January 26, 2010 at 4:45 PM, TMFKopp (98.50) wrote:

@NEMnyWtch

One of the comments I put in the article had to do with the fact that White suggests that homeowners overestimate the consequences of walking away. Here's what I wrote:

----

The more interesting point here though, is the fact that in his paper, White highlights the fact that most people overestimate the impact that a foreclosure or short sale will have on their credit, or what bad credit will mean to them.

Here's an except from his paper:

"To be sure, foreclosure comes with costs, including a significant negative impact on one’s credit rating. But assuming one had otherwise good credit, and continues to meet other credit obligations, one can have a good credit rating again – meaning above 660 - within two years after a foreclosure. Additionally, one can qualify for a federally-insured FHA loan to purchase another home in as little as three years if the foreclosure was caused by unemployment or other extenuating circumstance – and in 5 years absent such a precipitating event.

"While the actual financial cost of having a poor credit score for a few years may be hard to quantify, it is not likely to be significant for most individuals – especially not when compared to the savings from walking away from a seriously underwater mortgage. While a good credit score might save an average person ten of thousands of dollars over the course of a lifetime, a few years of poor credit shouldn’t cost more than few thousand dollars. Moreover, one who plans to strategically default can take steps to minimize even this marginal cost. For example, one could purchase a new vehicle, secure a new home to rent, or even purchase a new house before beginning the process of defaulting on one’s mortgage. Most individuals should be able to plan in advance for a few years of limited credit."

---

In states such as AZ, they can't go after anything other than the property itself. In other states they can go after your personal assets, but it's very unlikely that they will. 

Matt

 

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#14) On January 26, 2010 at 4:50 PM, TMFKopp (98.50) wrote:

@Turfscape

I don't disagree with your distinction of a house as a bad investment, that's a good point. Maybe rather than say homeowners need to treat a house as an investment, we should rather be saying they should be treating it like an asset. While it may not be an investment in the sense of the word that someday you'll sell it and be able to profit greatly (after all, you'll still need a place to live), owning a home means that you're paying part of your mortgage to paying down principal, which is a better deal than spending the money on rent, which you get nothing of long-term value for.

For somebody that's $100,000 underwater and is paying a mortgage of $2,000/mo when they could be paying rent @ $1,000/mo, you're talking about a nonsensical situation where the house has very truly become a massive liability.

So the question here isn't whether a house should be an investment, but more whether a homeowners moral uprightness should be on the line along with the mortgage contract.

Matt

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#15) On January 26, 2010 at 4:50 PM, TMFKopp (98.50) wrote:

@TMFBent

I couldn't agree more...

Matt

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#16) On January 26, 2010 at 4:53 PM, chk999 (99.97) wrote:

Crosses TMFKopp off the list of people I will lend money to.

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#17) On January 26, 2010 at 4:55 PM, motleyanimal (90.01) wrote:

Why do the lenders insist you have mortgage insurance? Obviously they know the risk of default always exists and they make you pay for it. If I walk away from a mortgage there is no moral question at all, as I have met all the terms of the contract and even provided coverage to the lender for his potential loss.

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#18) On January 26, 2010 at 4:56 PM, brickcityman (< 20) wrote:

Lest we not forget Homes were not looked at in the strictest sense as investments until doing so was the last logical rationale for justifying their stupendous price appreciation over the last decade.

 

Prior to that, most people thought of them as a glorified and personalizable form of shelter.  Sure they had certain adventagous financial characteristics, but strictly speaking if you slept there it was more than a mere financial transaction.

 

Now as for the honor bound issue... I'm not sure where I come down on that... Personally I feel more honor bound to my family and my neighbors than I ever will to a bank or a credit bureau...  So in a sense there is a responsibility to keep paying, but only in that it allows you to not disrupt the lives of those you hold dear.

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#19) On January 26, 2010 at 4:57 PM, sckboyspotatrain (75.35) wrote:

MICRO

No absolute here IMO; every situation is different.  Would vary very much case by case and circumstance

MACRO

I think the bigger issue is the moral hazard that has been set up by the banks, govt and bank/govt (e.g. fannie/freddie).They are totally irresponsible and have created a system where if the banks go down, they take the nation with them.  Americans are screwed either way.  Tax $ goes to bail them out, or the banks all fold and take everyone with them.  Either way the regular joe get's to give the bank $ and never see anything for it!

A culture of selfishness has killed this nation.  The joe who wants a house he cant afford, demands it from the greedy bank, and the gov't all too willing to facilitate in exchange for votes and contributions.

who needs to regulate derivites?  Lending should be wide open! Repeal Glass/Sthegall!

Disgusting.

 

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#20) On January 26, 2010 at 5:11 PM, SandmanKy (95.24) wrote:

As with any situatiuon the details matter. For some it will be in thier best interest to walk away. For others they are being lazy and having buyers remorse (these are the people whose credit should be ruined for very long time.) 

One of your questions was should we look at our houses as assets. I think the answer is yes.  It is an asset.  Now whether it's an earning asset, one that cost you or one that does nothing for you will probably depend on the person.  My coffee maker for example IS an asset. It costs me and damn if I don't need it.   

 

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#21) On January 26, 2010 at 5:14 PM, TMFKopp (98.50) wrote:

@chk999

"Crosses TMFKopp off the list of people I will lend money to."

:)

Matt

 

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#22) On January 26, 2010 at 5:21 PM, bigcat1969 (92.28) wrote:

It's funny how 'doing the right thing' works only one way.  Selling is exempt be it housing, cars or anything else.  I can tell you anything and put false numbers down on a form when I'm selling you something, but if you stop paying for that something then you are the one with moral problems.  I've worked at commish sales and the vast majority of those who do sell at all costs.  Nothing matters but that sale.

So do the folks who sold people homes they couldn't afford with mortages that increased yearly (sometimes including no payments at first), have any responsibilty?  Do the banks who rewarded those top sellers have any moral fault here?  If someone walks away from a home that they should never have been able to buy, who is at fault?

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#23) On January 26, 2010 at 5:22 PM, Turfscape (46.07) wrote:

TMFKopp wrote:
"So the question here isn't whether a house should be an investment, but more whether a homeowners moral uprightness should be on the line along with the mortgage contract."

For owners in that situation, I can't comment. I don't think there is necessarily one outstanding moral obligation on part of homeowners to uphold their loan payments regardless of all other situations. The agreement between borrower and lender is a transactional agreement, not a moral agreement. It's bound by money, not honor. It's up to each individual how they feel about honoring the loan versus foreclosure. I agree that foreclosure is not the worst thing in the world...for either the borrower OR the lender.

My comments reflect more the attitudes that get people into this situation to begin with. With just a little financial education each year as kids go through school, we wouldn't have some of the prevailing attitudes that bring us the tomfoolery of the mortgage industry, CDS contracts, pyramid schemes, life settlement contracts...and Market America.

But, alas...I'm fighting windmills. Such is my life, sometimes.

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#24) On January 26, 2010 at 5:27 PM, TMFKopp (98.50) wrote:

@Turfscape

I agree 100%...

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#25) On January 26, 2010 at 5:35 PM, ElCid16 (94.10) wrote:

"You wanna know who feels like an idiot right now? Renters.  The people who saw the insanity going on and for whatever reason (common sense possibly?), despite all the coaching and prodding to the contrary, decided to sit on the sidelines until the insanity died down.   Then when the insanity tries to die down we have to worry about our political leaders using our tax money to keep the insanity going."

huh?

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#26) On January 26, 2010 at 5:39 PM, jason2713 (< 20) wrote:

I am one of the many that had a home that is underwater significantly (45% underwater - ouch!)

I bought a home in late 2007, it was my first home, and man was I excited to be a proud home owner!  The real estate bubble was unwinding, but I had no idea how bad it was going to get or I would have never gotten myself in that mess!  Within 2 1/2 years of living there, I lost 45% of the value, people were foreclosing and using short sales to off load their properties, and crime spiked in the area.  It got so bad, I couldn't trust my neighborhood enough to have company over in fear that they'd come out to their car broken into. It was time to leave.

After careful thinking over a span of 6 months, I called my bank to start the short sale process.  It took 4 months to get an offer, and 2 months to get it approved.  All in all, I sold the house for $148,000...I purchased it for $299,900...ouch again!   I wasn't trying to flip the house, I was fully intending on staying there for at least 5-7 yrs, but after seeing the insurmountable amount of negative equity, and figuring it would take me more than 15 years to even break even (if it ever does), it was worth the hit on my credit. 

I've heard the morality BS from many of my friends, but this was purely financial, and I'm now $152,000 richer (or less poor, which ever way you look at it).

I hated every second of selling my home, and now I'm living in my parents basement at 32 yrs old, not exactly luxery.  I'm going to save my a$$ off since no rent, and i've paid all but $1000 of my $12,000 in credit card debt.

I try to explain this is simple deleveraging, many people are going through it.  You can look down on me for it, but I did what I had to do.

The end :)

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#27) On January 26, 2010 at 5:45 PM, truthisntstupid (87.24) wrote:

In 1994 a divorce cost me evrything including a house I paid cash for in 1989.  My credit was ruined.  Perhaps now, years later, I actually could have credit. 

NO, THANKS!

P.S.  A commitment that involves decades of payments is a liability rather than an asset up until the day it is paid off, unless you live in some sort of Bizzarro world. 

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#28) On January 26, 2010 at 5:46 PM, jason2713 (< 20) wrote:

And i'm supposed to get married in Sept of this year.  You guys are scaring me, geeez!

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#29) On January 26, 2010 at 5:49 PM, Pmccorm (91.01) wrote:

Morality!!??  HA!!  You think Countrywide, BoA or any of the other sharks had morality!!??  I agree that this is a case by case decision, but if I was in jason2713's shoes then it would be a no brainer!!!  If the bank would not cooperate on a short sale then let them eat it.  Everybody pays the consequences of their decisions.... (including taxpayers who elect morons)

 

my 2 cents 

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#30) On January 26, 2010 at 5:55 PM, miteycasey (31.38) wrote:

@miteycasey

I actually addressed this in the comments section of the article. Here's what I said:

"Not so fast. I could give a whole host of reasons why this would be a silly idea, including the fact that your credit is now shot and you're still going to have to find a way to get a car to take you back and forth to work.

With a car you walk to work, ride a bus, ride a bike, or car pool, to name a few. You don't HAVE to have a car. There are other options.

Same with a house. You have to find somewhere else to live, uless you are suggesting people live under a bridge for free.

"With the deep underwater homes we're talking about shortfalls of $100,000 or more. Are you folks telling me that if someone offered you a couple hundred thousand dollars and in exchange your credit rating would go to dirt you wouldn't take them up on it?"

Depends how soon you are going to need credit.

If you take the 100k will you be able to get another plave to live once they check your credit? What penality will you have to pay? Can you get a place to live if your credit is 'goes to dirt'?

The difference is with a house you have 30 years to make your value back. A car is 3-5 years and unless it's a collector you'll never get it back.

 

 

@miteycasey

As for marriage, I'm not sure how this is even relevant...

You idea is everything is an investment, a house, a car, furniture, TV, etc. 

Using your logic men should never marry becuase it is a losing situation when you get a divorce.

People spend money for things other than the ROI.

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#31) On January 26, 2010 at 5:56 PM, truthisntstupid (87.24) wrote:

To the guy above, ummm....just how is it that you think renters (like me!)  are the ones who feel like idiots?   I have a positive cash flow and no bills to speak of. 

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#32) On January 26, 2010 at 6:17 PM, truthisntstupid (87.24) wrote:

The country's drowning in credit woes.  I get along just fine without it. 

Depends on how soon you are going to need credit.

Can you get a place to live if your credit 'goes to dirt?'

Yes.  And you can also laugh at everybody else around you as they all continue to believe they can't live without it.  Someone comes in to work showing off a great deal they got on a nice used truck.  "It was only $11,000!"   I'm thinking "wow you make $7.50 an hour and how many years will you be paying for that?"

When my car craps out I'll buy another one.   But you know what?  I won't owe any money on it.  My choices might be limited, but I won't be spending money I haven't made yet. 

Perhaps nobody should have to live this way, but...then again, I bet a lot of people would choose to...once they tried it.

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#33) On January 26, 2010 at 6:46 PM, truthisntstupid (87.24) wrote:

Living without credit is the answer to many people's problems.  It is the most wonderful thing that I've ever been forced to learn to do.  I'm never broke.  Utility bills are virtually my only bills.  It is the best way to live better than everyone else who makes the same money you do and always have more money too.  I save money without having to really try to.  There will always be people living on $8,,,$9...$10 an hour.   I make $8.85 an hour and live better than many who make a significant amount more.

You don't need credit.  The people who make their living from you "needing credit"  need you to "need credit."

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#34) On January 26, 2010 at 7:01 PM, truthisntstupid (87.24) wrote:

I apologize.  My last two posts were somewhat off-topic.

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#35) On January 26, 2010 at 8:34 PM, TMFKopp (98.50) wrote:

@miteycasey

"The difference is with a house you have 30 years to make your value back. A car is 3-5 years and unless it's a collector you'll never get it back."

You assume that you are the owner of the house in question that you're hoping to pay off over the next 30 years. You're not. The bank is on your back every step of the way until day 30 years + 1. So what of the situation where you need to move or can't pay your mortgage five years down the line? You've "dutifully" paid your mortgage (which is double what you'd otherwise be paying in rent) over that period, but your house is still underwater. You own nothing. In fact, it's worse than that, you own nothing and you owe. You now are in a far worse predicament than if you had walked away five years prior. Do you think the bank is going to look kindly on your situation because you've been such a good, upright citizen in the interim?

To be sure, for many people who are severely underwater, staying put and paying down the mortgage over the next 30 years can eventually prove profitable. However, I can count on my abacus the number of people I know that have been in the same house for 30 years. And I don't have an abacus.

@truthisntstupid

Yes, off topic, but very interesting nonetheless. Credit has gone waaaaay overboard in this country. Personally, I think the fact that I've had so many comments asking me "why not walk away from my car?" is a sign of that. Why are we taking out big loans on cars? I save up and pay cash. If I can't afford a shiny new model, I'll buy used... Then you never have to face the prospect of walking away from it...

Matt

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#36) On January 26, 2010 at 10:10 PM, oldfashionedway (35.73) wrote:

Asset or Liability?     Financial Investment or Financial Obligation?

I'm in agreement with Donnernv. 

There was a time that a house was considered the family home, an estate if you will, to be passed on to one's heirs.  Agriculture was once the primary means to obtain wealth, therefore having a clear title to land, with a house and/or other associated stuctures, was the obvious prerequisite to creating and amassing financial wealth. So yes, a dwelling is an asset under certain conditions:  paid for in full, with cash, at the time of purchase.  Such "assets" have the potential for appreciation or generating income, with the proper planning and management.

Enter the banker, who willingly provides a so-called service, that is loaning money to anyone who found the desire for housing and/or land, but lacking the necessary capital to make the purchase.  Buyer, seller, and lender enter into a financial menage-a-trois, almost always conceiving a contractual agreement in which someone agrees to financial abuse.  Instant gratification comes with a price: interest.

The uneducated homebuyer is usually clueless, or in denial, to the fact that a 20 to 30 year loan will actually cost them many multiples of the "cash price" of they home they are "purchasing", as comparatively small monthly payments are compounded over the years. Maintainence, insurance, utilities, taxes, and a multitude of other recurring costs are all expenses which continually conspire to eat away at the true value of the "asset" in which one chooses to live.

Renters may be "throwing away money" to their landlords, but the homeowner who is unwilling or unable to make their monthly payment, and is considering walking away from their obligation may very well be throwing away much more than the renter ever will.

In a world where "flipping houses" is considered an occupation, interest-only loans are commonplace, equity is used as an ATM,  the Federal government is complicit with the financial industry by encouraging loans to anyone who can simply sign on the dotted line, and most borrowers make promises they never intend to keep-  a house is simply a place to sleep until your next payment is made or missed.

The financial industry was elated to perpetuate the charade until one day, when it became apparent the "assets" that they had convinced so many to "borrow/buy" into, had come home to roost as "liabilities" on their own balance sheets.  The banks have no need for your house, they only have need of your money.

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#37) On January 26, 2010 at 10:36 PM, jddubya (45.36) wrote:

When you are loaned the money for a house you promise to pay the loan based on it's terms.  The penalty for not meeting your obligation is the loss of the house.  In good times banks have no problem taking the house, so then why should there be a problem during bad times (a loaded question for sure)?

In my mind it's pretty simple, of course I'm pretty simple minded.

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#38) On January 27, 2010 at 9:55 AM, miteycasey (31.38) wrote:

To be sure, for many people who are severely underwater, staying put and paying down the mortgage over the next 30 years can eventually prove profitable. However, I can count on my abacus the number of people I know that have been in the same house for 30 years. And I don't have an abacus.

Maybe that's the gulf between you and I.

I know several people, in my family alone, who have lived in the same house for 30 years. Of my seven aunts/uncles on my mothers side five have lived in there houses for 30+ years. Of the other two one was in the military and the other was a VP of a company that was moved by the company every 5 years till he retired.  After he retired he lived in the same house 20+ years  till his death. Even now, into there 60's and 70's,  three of the five live in the same house. Two elected to move when the kids moved out and were windowed, for something smaller that they could better manage.

Maybe our paradiam  of 'living' is so different we'll never see eye to eye on this.

I'll let you in on a little secret. Some people believe in putting down roots and not chasing the next hot job., being stable, dependable, and trustworthy to the point that you can be counted on when times get tough.

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#39) On January 27, 2010 at 10:06 AM, Retiree2035 (20.04) wrote:

Matt,

 I appreciated the article.  I understand the point you were making.  It's considering dishonorable to walk away from your obligation, but if you have a family and can save a ton of money by leaving your house and renting why wouldn't you do what is best for you and your family.  Who else is going to take care of you and your own.....NOBODY.  I think the major concern with people that disagreed with your article is they are all afraid that if everyone took advantage of this the economy would collapse and chaos would ensue.....and who knows.....it still may.

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#40) On January 27, 2010 at 10:18 AM, russiangambit (29.27) wrote:

#38 - the job situation is completely different now from 30 years ago. There is much less job stability and many people have to move 5 years or so to go where the jobs are. many cities are now so big that if you change jobs even in the same city you still have to move to avoid 3 hour commute.

The realities of the modern life are so much less pastoral than 30 years ago when people could live ina single place and work at the same job for their whole life.

Almost nobody these days buys a house with expectation of staying their for 30 years. For most people being able to stay in the same house for 5-7 years is already an accomplishment. Therefore , if you expect the house to be still significantly udnwerwater 5 years from now, you should walk. It has nothing to do with honor, it is purely a financial decision. Contract substitutes honor when it comes to business. And whatever you can use in the contract to your advanage you should do so because the other party will most definitely do it as well. game theory, my friend.

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#41) On January 27, 2010 at 10:26 AM, MotleyPicker (< 20) wrote:

Stay? Walk away? The "morality" of it all? 

Frankly, I think most of you folks are overthinking this.

People are not staying out of morality. They stay out of inertia. For the common man, It's a big PITA to buy or sell a house. They take the path of least resistance, and for most of them that means staying right where they are for as long as possible .

I'm one of the lucky ones who bought and sold and bought at the right times, and now my equity is not only positive based on realistic market value, it's more than my total investment in the house including the 7 years of payments I have left.

I'm staying, but if I was upside down I'd still be staying. It's just an expensive PITA to buy/sell/move/etc.

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#42) On January 27, 2010 at 10:53 AM, miteycasey (31.38) wrote:

russiangambit,

The author said he didn't know a single person who had lived in there house 30 years. I was just giving him examples that his paradigm didn't apply to everyone.

I also think it's a shame if people don't plan on staying in a house more than 5 years. I purchased my house 5 years ago and refinanced it last year with positive equity still baked in. I never plan on moving again, not saying I won't, but I chose to buy when I found the right job and right house at the right price.

 

I should say I did the moving thing.I moved 13 times between 2000 and 2006 so I know what it's like to have a nomadic home life style and I wouldn't wish that on anyone. it's a shame more people accept that as a way of life.

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#43) On January 27, 2010 at 12:06 PM, Turfscape (46.07) wrote:

miteycasey wrote:
"I should say I did the moving thing.I moved 13 times between 2000 and 2006 so I know what it's like to have a nomadic home life style and I wouldn't wish that on anyone. it's a shame more people accept that as a way of life."

I, too, led a nomadic life in my younger days. I think it was a good time of life to do just such a thing. It's the perfect reason to be a renter. However, I, too, eventually found my "community", my sense of home. That's when I looked to buy.

When I reached the appropriate time of life, it was the right decision for me. I no longer wanted to be beholden to a landlord. I wanted to personalize my home to suit my specific tastes and whims. I wanted to NOT have to present a letter from my landlord to the Humane Society saying that I had permission to have a pet in my apartment.

But, that's what was right for me. I enjoyed my nomadic life while I lived it...and for some, it may be the perfect situation throughout their entire adult life.

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#44) On January 27, 2010 at 3:03 PM, TMFKopp (98.50) wrote:

@miteycasey

A few things to consider:

- As russiangambit pointed out, the job situation in the U.S. has changed drastically over the past couple of decades. Long gone are the large, paternalistic companies that hire employees for life and agree to pay them generous pensions when they retire. Putting down roots is a great thing and frankly I think our society would be better for it if there was more of a sense of community in the country (not to get off topic...). However, the reality is that people need to make money in order to pay for things like housing and food and if your employer lays you off or asks you to relocate, you may not have many choices other than moving.

- I conceded that by paying off the full 30-year term of the mortgage loan many borrowers who are even vastly underwater wouldn't do terribly. However, as I noted above, the problem is that interim period of, say, 5-15 years. If they are forced to move in that timeframe they'd likely be stuck with a house that's still underwater and things like the government waiving taxes on forgiven mortgage debt are gone.

- You note your own housing situation and I have to imagine that it's difficult for people that are well situated to imagine the situation that less fortunate homeowners are in. The fact is that in many areas that have been hit the hardest it's not just a magical downward slump in housing prices, it's a slump that's been caused by a massive number of irresponsible -- that is, borrowers who took out loans they couldn't afford from the get-go -- borrowers being forced to walk away from their homes. That means that many neighborhoods in places like Arizona have turned into ghost towns. So these areas not only are facing hefty declines in house values, but they're also just not that pleasant to live in anymore.

Matt

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#45) On January 27, 2010 at 6:21 PM, miteycasey (31.38) wrote:

You note your own housing situation and I have to imagine that it's difficult for people that are well situated to imagine the situation that less fortunate homeowners are in.

Not really. I can imagine it vividly. Having lived in a major metro area where they wanted $255k for a 1500 sq/ft house in the early 2000's. I thought they were crazy...and I was correct.

I was just smart enough not to get stuck in a bad situation like the irresponsible people were.

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#46) On January 27, 2010 at 6:37 PM, gilliam1983 (< 20) wrote:

There are ten million different scenarios out there and i'm sure there is moral justification for walking away from alot of them.      But this is not about morally right are wrong, this is a financial (business) decision. When you applied for your loan, do you think the bank was like,  well his family needs a roof over their head I guess I gotta give it to him, its the right thing to do, HECK NO! They made a financial decision and until recently odds were they came out on top. People need to remember these companies made alot of bad bets all you had to do was show up OH you have NO JOB NO MONEY DOWN ahh you'll come up with it. They were betting you would pay long enough for them to package it and sell it before you defaulted. What ever the case their was "NO Morally Correct Clause" in your contract so walk away if its in your best intrest. 

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#47) On January 27, 2010 at 7:00 PM, truthisntstupid (87.24) wrote:

What, your neighborhood's turning into a cesspool and crime is rising but your "honor" oh, that's more important, so, you stay there.  After all. it was your mistake so you'll do "the right thing" and suffer the consequences...right?  It doesn't matter what kind of environment your children grow up in.   Your  "honor"  will be intact.  Unless, of course you get your head screwed on straight, get your priorities straight, take the blow to your damned "honor"  and get your kids out of there. 

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#48) On January 27, 2010 at 7:35 PM, Donnernv (< 20) wrote:

In my comment (#1) about walking away, I implicitly ("if at all possible") exempted those who could not continue their obligations.  When you can't, you can't.

Though my opinion of those who "can't" varies depending upon the circumstances motivated by: greed, stupidity or "have-it-all-now" mentality, job loss, divorce or medical catastrophes...I exempt them.  I don't admire them, I exempt them.

Those whom I do not exempt are those who can continue meeting their obligations but choose not to do so because the "asset" is under water.  Regardless of the asset valuation, these buyers who view trading their honor and reputation for avoiding a financial obligation they willingly undertook are not my heroes.

Anyone with two peas to rattle in their brain sac should understand that any leveraged asset purchase can have a negative (temporary?) outcome.  But to my mind, if you can continue to live up to your willingly undertaken obligations, you should.

Certainly lenders allegedly have no honor.  But in their defense, they do not "walk away" from you if you honor your obligations.  They don't raise your rates, accelerate your payment period or arbitrarily terminate their side of the agreement, except as you agreed to in the initial agreement.

To them, a deal is a deal.  Only when you abrogate your side of the contract do they become arbitrary, stupid or inflexible.  As they are entitled to do when you abrogate.

When those who can continue to meet the terms they agreed to decide to walk away and rent, not only have they unilaterally decided to cast aside their part of the bargain, although the lender has done nothing "wrong", they have traded their honor and image for a perceived financial gain.

I hope America does not come to view this as a rational, acceptable action.  This behavior is not what made this country great.  I have owned homes (some mortgaged, some not) for 47 years.  Never once has the thought crossed my mind to "mail the keys".

I would never do business with nor hire anyone who had ever done this.  A handshake will never be good enough again.  What a loss.

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#49) On January 27, 2010 at 8:03 PM, TMFKopp (98.50) wrote:

@Donnernv

"A handshake will never be good enough again.  What a loss."

A handshake bargain has its place. But we're not talking about handshake bargains here. Many people never meet their mortgage broker face-to-face, let alone shake their hand. We're not talking about a deal here where one side is saying, "If you lend me this money, I give you my word that I'll pay it back." There's a written contract that stiplates that one party is borrowing money to buy an asset and if that party doesn't continue making good on the loan, the lender can take the asset. Plain and simple.

We could even go one step forward here and put it back on the banks even further. After all, they're funding the purchase of an asset that they have been funding for decades. How many mortgages has Countrywide, B of A, JPM written over the past 20 years? If anyone should have a good sense of the collateral value of the asset that they're lending against, it should be these massive lenders. Fact is, they blew it. They lent vast sums on assets that were far overvalued and they signed themselves up to a contract that made their recourse taking that overvalued asset. And the homeowner should be chastised for taking advantage of an out in the contract because the banks did a bad job mitigating risk?

What do you think a commercial lender does when making a collatoralized loan to a business? You better bet they'll be taking a hard look at that collatoral and making sure that it's worth what the borrower thinks its worth. In this case, the banks should have done the same thing and they simply failed at that. Homeowners overpaid, but banks made bad business judgements by making loans on those overvalued assets.

When people get back to actually doing handshake agreements we can start talking about the value of a person's word, but as long as agreements are made based on clearly defined contracts with legally-enforcable recourse, all parties should be free to operate within the bounds of those contracts. As far as I know, mortgage docs don't make any distinction between default due to a borrower not being able to pay versus a borrower deciding not to pay.

And at the risk of going way off topic here, our country was born in the wake of a displaced native population and has a history of rich barons stomping on the necks of hard-working citizens. For all of its faults, I love the U.S., but don't fool yourself into thinking that borrowers walking away from a devalued asset is a sign of the U.S. populace sullying a pristine history of moral uprightness.

Matt

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#50) On January 28, 2010 at 1:55 AM, Donnernv (< 20) wrote:

Matt:

As I said near the end of my post, if anyone ever did this (walk away from an obligation they could service) because they did not like the asset valuation outcome, I would never do business with them nor would I ever hire them.

Join that club.  Your lack of seeing the honor in upholding your word places you in the select group of young Americans to whom honor is a meaningless concept in comparison to f**king the Man because you made a stupid decision.

Enjoy the next 30 years.  It will be populated by those like you, lacking morals, honor and a sense of dignity born from a rigid view of what is right and what is wrong.

Think deeply.  If you do not abrogate your part of the mortgage bargain, to which you freely agreed, the lender will never, ever back out of the specific terms to which you and he agreed.  Right?  RIGHT?

Is this so hard to understand?  They will never f**k you if you hold up your end of the bargain.  Is this so hard to understand?  Can you not integrate that into your concept of right and wrong?

Only a person of shallow or nonexistent morals and honor would would walk out on an agreement which he could afford to uphold, just because he "guessed wrong" on the future value of the asset.

May you meet only your kind.  You will have no business dealings with those who still believe in a handshake.  And I wouldn't loan you 50 cents for a cup of coffee.

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#51) On January 28, 2010 at 1:21 PM, Turfscape (46.07) wrote:

Donnermv wrote:
"Is this so hard to understand?  They will never f**k you if you hold up your end of the bargain."

Are you kidding me? Suddenly the lenders are altruistic and holy? This is about profitability, purely and solely...on both sides of the equation. Morals don't enter into the contract at any point. You live in a fantasy if you think otherwise.

A home loan is a CONDITIONAL agreement: You can either pay the monthly amounts OR you can surrender your home (or other collateral) to the lender. That is the consequence for not paying the mortgage and it is CLEARLY understood by both parties in the agreement. The lender makes the loan knowing this just as much as the borrower takes the loan knowing this.

Now, I don't know how I feel about the original article. It's not an approach that's relevant to me, as I bought my house for very different reasons than are illustrated. But to claim that honor exists on one side of this agreement is ridiculous. There are no morals involved in this type of transaction. If there WERE morals involved, the people who are most underwater would not have RECEIVED loans. The lenders would have had an ethical standard that prevented making the loan. But...I suppose it's just downright un-American™ to question the almighty "free-enterprise". Business indeed is infallible: Caveat Emptor, YES. Caveat Vendor, No!

Maybe you disagree with the article, and the papers on which it was based...but to attack the writer with such venom is far from the moral righteousness you proclaim to exude. And far from what I could ever consider rational.

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#52) On January 28, 2010 at 3:17 PM, truthisntstupid (87.24) wrote:

Donnenv

Some of these neighborhoods are becoming infested with crime but these people should value your opinion more than the environment they're raising a family in?

I am debt-free.  As I said, I have no stake in this.  But I would think that they should care more about their family than about what other people might think. 

You always seemed likeable to me.  I didn't know you were so judgemental.

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#53) On January 28, 2010 at 3:35 PM, TMFKopp (98.50) wrote:

@Donnernv

I think we can discuss this as adults without resorting to swearing, though I understand that this is obviously a very emotional issue for you.

I responded to you in the main article comments section, but a few more thoughts here:

"because you made a stupid decision."

You fail to see that there are two sides to this. Not only did the buyer buy the house, but the lender agreed to finance the purchase based on the collatoral they would collect if the loan went sour. Both the buyer and the lender made a stupid decision. The buyers that we're talking about here put down payments down, which they will lose, and many may have made upgrades or repairs to the house to boot. They're also sacrificing their credit rating. If they do the "honorable thing" and keep paying, they suffer all of the consequences for their poor decision and the bank (which also made a poor decision) suffers not at all. I'm not saying the banks need to be punitively punished, but suggesting that they suffer consequences of poor lending stands hardly seems like a leap.

"They will never [stick it to] you if you hold up your end of the bargain."

Stepping outside of the realm of borrowers I focused on in the article (again, long-term, fixed-rate borrowers that put down a reasonable down payment), what about the case of borrowers that were on ARM loans that were adjusting just as those borrowers lost their jobs? 

If moral uprightness stood up on both ends of the transaction, wouldn't it be the right thing for banks to do to avoid jacking up the interest rate since this borrower is now obviously in a very precarious situation? This may seem absurd to think about -- of course the bank is going to jack up the interest rate, it was part of the original agreement. All parties go into the transaction armed with the details of the contract -- in fact, the banks in 99.9% of the cases probably know a heck of lot more about the implications of the contract than the borrowers. Part of that initial agreement was also that if the borrower stopped paying the loan, the bank's move is to take the property, it's as simple as that.

For the bank, the best move within the bounds of the contract is to jack up the interest rate on the ARM when the contract allows. For the borrower, the best move is to walk away from the loan when the financial implications of continuing to pay no longer make sense.

The banks themselves know that making this decision is often the best route:

http://www.bloomberg.com/apps/news?pid=20601206&sid=aLYZhnfoXOSk

Matt

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