Underwater Borrowers Not So Shy About Mailing Back the Keys 10 comments
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A study from the University of Chicago and Northwestern finds that 26% of mortgage defaults are “strategic.” Which is to say, the borrowers have the ability to pay, but default anyway because they’re so deeply underwater. The notion of moral obligation has its limits, the study reports:
Moral precepts keep large numbers of financially struggling homeowners out of default, but only to a point. Fully 81% of household heads said they believed intentional defaults on mortgages to be "morally wrong." But that high percentage begins to crumble as negative equity grows increasingly larger.
When negative equity rose to $50,000, 7% of those who consider strategic defaults to be immoral said they'd walk away. At $100,000 negative equity, 22% would do so. At negative $200,000, 37% of those with moral objections would nonetheless default, and at $300,000, 38% said they would.
In any event, one out of four defaults--which is a lot of defaults--is essentially voluntary. A lot of these people are speculators for outright fraudsters, don’t forget. They presumably have no interest in getting their loans modified, no matter how much Sheila Bair wishes that they would. . . .
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Homeowners need to do what's best for them, forget what society deems is right.
Also, the Kellog study is seriously flawed - it asks the walk-away question in a vacuum, which is not reality. Part of the question should have asked would they walk-away if they would only save $X/month by renting instead of owning.
People keep paying on upside down cars all the time because they need transportation and they can't get anything significantly cheaper per month. Most people will do the same when it comes to their house.
Could it be immoral for a mom or dad, with kids to support, to pay down principle on a house that they know will never return it? A case could be made that this would constitute a wrongful waste of family recourses.
We advocate honoring all agreements. The problem is that sometimes agreements conflict with each other. All breeches of any contracts written or otherwise will have consequences. The consequences can not and should not be negated.
Ok, I may touch to the moral question anyways. There may not be any morals or ethics in a contacted or at escrow but a moral and ethical individual does not lie on contract and/or application. An individual with high morals or ethics would not place them self in a home they knew inside they could never REALLY afford.
Lastly, do not allow the media to skew the causes on the housing problem in America, because this people rest on both the shoulders of a couple large banks and on the American homeowners that made POOR financial decisions.
On Jul 14 05:29 AM The Mig wrote:
> Where are the morals of the banks? Gave a bunch of bad loans out
> and now getting bailed out. Morals don't play a role in contracts;
> bank bought house for you, you pay bank back with interest, if not,
> bank takes house back and ruins your credit score. I don't ever recall
> morals being included at the closing of escrow, just a contract.
I believe that there are for the vast majority of Americans many disparate considerations which contribute to the decision to default. Perhaps you and your spouse purchased the home when you were both working, and now one of you is unemployed and the other has had their hours (and benefits?) cut back. Yes, you can still for the time being scrape together enough to pay the mortgage, but is it more practical to put more money aside in case that last remaining job is terminated, especially if your savings are low?
And what if you have 3 young children who rely on you for their survival? Do you put money aside for that contingency, rather than pay the mortgage, especially when you know in your heart of hearts that you will be likely to have lost the house within a year anyway?
Where do ethics play out when deciding whether to stop paying a mortgage vs providing health insurance for the family if the wage earners are unemployed now, not likely to find work any time soon, and burning through savings anyway? In that same scenario, is it immoral to pay your child's college bills, thereby giving them a shot at some sort of future, rather than pay the mortgage, when you know that you will in all likelihood be broke and losing the house within a year anyway?
And can a person maintain the same moral standards when their mortgage payments are $1,000/month on the Option Arms mortgage that was thrown at millions of Americans at the height of the boom, and suddenly that first notification comes through that payments are being reset to $2200/mo, and oh yes, by the way the negative amortization on your Pick a Pay you signed when you both were employed has just meant your market value is $230K while the principal owed is now $480K.
I think a lot of very moral, optimistic and loyal Americans made what they believed were ethical and well thought out decisions when the country was in a time of great prosperity and jobs were plentiful... but those days are long gone, and I defy anyone to say that a rational, reasonable, ethical person SHOULD HAVE SEEN the total collapse in the American middle class dream just three or four years later.
So now, in the cold light of reality, practicality must sit side by side with morality as good people face very hard decisions.
On Jul 14 09:47 AM Commercial Mortgage Loans wrote:
> Underwater homeowners face a tough dilemma. They have more moral
> obligations than just the one they have with their lender; they have
> obligations to their families as well.
>
> Could it be immoral for a mom or dad, with kids to support, to pay
> down principle on a house that they know will never return it? A
> case could be made that this would constitute a wrongful waste of
> family recourses.
>
> We advocate honoring all agreements. The problem is that sometimes
> agreements conflict with each other. All breeches of any contracts
> written or otherwise will have consequences. The consequences can
> not and should not be negated.
26% of defaults are essentially voluntary and will happen regardless of government action because defaulting is personally advantageous for the borrower. So in any of the hard hit locales, you could easily see 20-25% overall default rates just because the bubble has burst. Now add the other figures. For properties with a V-to-L deficit of $100K, you could expect up to +/-48% overall default rate (26+22). For properties with a V-to-L deficit of $200K you could expect up to +/-63% default rate (26+37).
Being upsidedown to the tune of $100-200K in a real estate market like California's isn't that uncommon at this point. There other markets that are in similar situations. The study results give us a reasonable basis to expect default rates as high as 50% for recently purchased properties in any of the formerly hot real estate markets.
My personal belief is that only psychology is holding back a huge wave of voluntary defaults. Americans are used to thinking of mortgages as sacred rather than just a contract. Cars get repo'ed all the time when folks get tight and stop making payments. I think Americans are about to start looking at houses in the same fashion.
I also believe the forthcoming ARM adjustments will be the feather that breaks the camel's back. When a chunk of folks are forced to walk away due to payment increases, the concept of walking away will become more acceptable. Everyone will just blame the 'evil' bankers. Then, just like a dam breaking, the trickle will turn into a flood once the stigma of walking away weakens.
I'm not defending the individuals, they're idiots too, but that's to be expected, what I did not expect is a banking industry with it's billions of dollars, board of directors, loan officers, high salaried CEO/CFO/COO to become idiots too.
On Jul 14 12:15 PM RioLeo wrote:
> The questions I have for you is not just discussing the morals of
> the banks or homeowners, but how you can just blame the Banks for
> making the Bad Loans. Do you believe the individuals that signed
> on the dotted line have no responsibility for taking loans they knew
> they could never afford or lying on applications that stated their
> income was 2,3, and even 4 times higher then they actually paid?
>
>
> Ok, I may touch to the moral question anyways. There may not be
> any morals or ethics in a contacted or at escrow but a moral and
> ethical individual does not lie on contract and/or application.
> An individual with high morals or ethics would not place them self
> in a home they knew inside they could never REALLY afford.
>
> Lastly, do not allow the media to skew the causes on the housing
> problem in America, because this people rest on both the shoulders
> of a couple large banks and on the American homeowners that made
> POOR financial decisions.
On Jul 14 04:49 PM The Mig wrote:
> They expected these
> people to lose their homes, pocket the interest, and resell the house.
> What they did not expect is a housing crash, which put a wrench into
> their plans. Unfortunately, in the end, the banks got bailouts and
> extra bonuses for their execs. Now there's morals for you.
>
> I'm not defending the individuals, they're idiots too, but that's
> to be expected, what I did not expect is a banking industry with
> it's billions of dollars, board of directors, loan officers, high
> salaried CEO/CFO/COO to become idiots too.
Yes, I can pay my mortgage, but for my family, I am considering that we just leave. In seven yrs the foreclosure will be off my record, but in seven years I will still be upside-down in what is quickly becoming a bad place to live.
Everyone’s situation is different. But for us, we weren’t a cause of the mess, but we are sure getting the consequences.