Strategic Mortgage Defaults - Beyond A Contractual Decision

By
Real Estate Services with Zillow

The 60 Minutes segment last night has created many discussions on whether strategic defaults are right or wrong.  

Some say is it simply a business decision.  If you take emotion out of it and look at the black and white facts on paper, strategic defaults can be the right thing to do from a financial position. And haven't businesses been doing this for years?

Those that are against say you are morally obligated to pay your debts when you are in a position of being able to do so.  If everyone defaulted, what would that do to the economy?  What does the action of walking away do to your neighbors and the neighborhood? 

To make a blanket statement of being for or against something is hard, as there are so many unique situations.

For me, this topic is especially hard.  I have a property I bought in Florida in 2005, with 20% down.  The property is today worth about half of what we paid.  There has been drama after drama with the home (termites, bees, squirrels, insurance nightmares, and of course, tenants from hell).  Money pours out of this home every year, in amounts we never dreamed possible. Insurance payments on the home have increased over 100% since we purchased it, taxes have gone up significantly, and rent rates have declined.  I can't even begin to describe the stress and tears this home has caused my husband and me. 

From a financial position, we should have walked away years ago. 

From an ethical position, we can't. 

Do I have a moral contact to pay US Bank every month?  No, there is no moral clause in our mortgage contract.  But there is a moral clause between me and the person I have to look in the mirror at every day.  So I keep paying. If the home has increased in value, I certainly wouldn't expect to share my profits with the bank.  This was a risk I knowlingly took. 

My husband and I are blessed to be employed with good jobs.  It absolutely sucks to get the bills for this home every month, but we are fortunate that we can cover them.  If paying them keeps one more foreclosed house off the market, then we will continue to pay them.  And when the day comes that we actually sell the home, I am sure we'll be bringing money to the table.  That will suck too.  And while we may be a little poorer, we will at least feel good about ourselves that we acted as ethical as our financial position allowed us to be. 

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Re-Bloggged 5 times:

Re-Blogged By Re-Blogged At
  1. Dane H. Ginsberg (Your Trusted Mortgage Advisor) 05/11/2010 05:43 PM
  2. Sybil Campbell 05/11/2010 11:43 PM
  3. Ric Mills 05/12/2010 01:17 PM
  4. John Pusa 05/12/2010 01:48 PM
  5. Kate Jackson 05/13/2010 03:09 PM
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Rainmaker
451,192
Allison Stewart
St. Cloud Fl Realtor, Osceola County Real Estate 407-616-9904
St.Cloud Homes

Sara

The fact that you are able to make the payments mean you would not qualify for a short sale. So "biting the bullet now" makes absolutely no sense.  Capital Losses however do. Talk to you tax preparer, and setermine what benefits long term Capital Losses may have in your current financial situation.  It may be better news that you think. Even with bringing money to the table.

May 17, 2010 06:53 AM
Rainmaker
122,426
Kent Dills
Real Estate 817-495-8028, Bellingham, Washington
Broker, Dills Real Estate

Great post.  Lots of great comments supporting a variety of positions.

Sorry to hear about your personal scenario but I'm glad you've made a decision that you can live with. Good for you.

I've got to add though, that personally, I believe that there is an absolute double standard vis-a-vis "Main Street" and "Wall Street".  For example, there is no mention of "moral hazard" (i.e., the moral delema), or lack of integrity, etc., when big business aren't doing well, and instead of making profits are taking ever increasing losses.  If the banks think there's no way to turn the situation around, they simply make the "business decision" to cut their losses, declare bankruptcy within their business entities (thereby saving their personal credit), and then simply walk away.  This scenario happens every day on "Wall Street" and is not only accepted but expected.  This give business the opportunity to limit their "down-side".  So, they can profit without limits on the "up side", and can greatly manage their risks by limiting the "down-side".  This isn't considered a lapse of morals, ethics, integrity, etc. - just business

But, this doesn't hold true for us "regular folks" or "main street".  We are expected to totally absorb any losses or "down-side" without any limits.  And our morality, ethics, and integrity are played upon especially by the same "Wall Street" business who are prone to just make "business decisions" should or would they be in the same position.  Or they rely on, and ask for, bailouts funded by us "regular folks" on "Main Street".  Ironic - isn't it?.  

So, for my real estate business, I shall support whatever decisions my clients and future clients come to in terms of their personal morality, ethics, integrity; in those cases where they make a "business decision" and decide to act like "Main Street" and cut their losses and limit their "down-side" - I'll be there to support them and help them execute a short sale.   

May 17, 2010 12:26 PM
Rainer
146,715
Coleen DeGroff
Haile Plantation Real Estate - Gainesville FL
eXp Realty

Hi Sara - You need to be true to yourself. And thank God you and your husband are in a financial position that you can keep taking the beating. We bit the bullet and kept paying on our vacant home in Pittsburgh PA for 18 months, forcing us to move 3 times in Gainesville FL until we got the place sold. I have to say the experience left us completely disgusted with the banks, who were NO help at all in terms of helping us modify our loan from a 20 year to a 30 year mortgage, because we no longer lived in the state where the property was. So what happened? We sold the home for $100K less than we bought it for 3 years previously, had to pay $2500 for a gas main fix (due to neighbor construction), and had to bring $10K to the table.  Now, if our loan had been modified to a 30 year mortgage we would have had a little more financial breathing room and wouldn't have to totally kill neighborhood home values by taking first lowball offer that came along.

 

If only lenders had to operate with a moral compass as well, I wonder how much better things would be for everyone right now.

May 22, 2010 12:31 PM
Rainmaker
23,783
Karen Hunt
Seattle Real Estate Broker | Hunt Seattle Homes, Skyline Properties
www.SeattleHomeBuzz.com, Skyline

The banks are probably laughing all the way to the...hey wait a minute!

The bank is loving the fact that people are focusing on "Strategic" defaulting and the morality of it and "liar loans", etc. rather than the debilitating economy many of us are trying to survive. In fact there are many more people who are suffering in this economy and have lost one or both incomes or become one of the walking wounded, the underemployed. Our nation is at nearly 10% unemployment. It's not about morality for most people and acting self-righteous about how people got their loans or how they have to get our their loans doesn't serve the greater good.

Sara, you have the luxury of having a decision to make. Many people who are upside down do not. The banks are foreclosing and not modifying loans because the servicers can recoup all their fees in a foreclosure, even before the investors get their money. With a modification they do not recoup their fees and it costs them more money upfront. With a short sale they may get some of their fees. The banks are acting in their own best interests in the short term. Let's see what happens when they end up with more and more inventory.

Katerina and partner I respect your opinions and find your posts insightful. Richard, I'm sorry you lost your home because the banks are making such ridiculous decisions. I am hearing of so many similar experiences with the banks.

Great discussion. Thank you Sara.

June 30, 2010 11:59 PM
Rainer
47,628
Steve Opacke
LI House Tours

The blog was about people who can afford the payments but chose to just walk away.  If you can't afford the payments you can file for bankruptcy, which is different from walking away.

 

 

Support fellow Realtor Carolyn Capalbo.  Click here. 

July 01, 2010 11:40 AM
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