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Has It Become Stupid NOT to Walk Away?

Yesterday I posted on the latest Negative Equity Report from First American Core Logic. In that post, I quoted the report as saying that one of the ramifications of negative equity is that it is:

a major factor in changing homeowners’ default behavior.

That change in behavior could take on many different forms. One of the most alarming is the concept of ‘walking away’. By that I mean the borrower just decides to no longer make mortgage payments whether they have the financial where-with-all to pay or not. We have posted on this before.

In those posts, we followed the evolution of the concept from its beginnings in the blog-o-sphere, to the creation of a web site (www.YouWalkAway.com), to the main street media covering the issue. We then reported on how a law professor at the University of Arizona wrote a paper supporting the idea.

Then something strange happened. Main stream media started to not just report on the concept but instead actually started to support a person’s right to walk away from their mortgage obligation. The New York Times in an article in January said:

“Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property…The borrower isn’t escaping the consequences; he is suffering them.”

A few days later, in their blog, The New York Times went further by giving step-by-step directions on how to walk away.

That brings us to last week. Brett Arends of The Wall Street Journal wrote in Market Watch, which is part of WSJ’s digital network, an article suggesting you may be stupid for not walking away. Here are a few excerpts from that article:

Millions of Americans are now deeply underwater on their mortgage. If you’re among them, you need to stop living in a dream world and give serious thought to walking away from the debt…No, you shouldn’t feel bad about it, and you shouldn’t feel guilty.

Stop trying to chase your lost equity. That money is gone. Don’t think like the gambler who blows more and more cash trying to win back his losses. That’s how a lot of people turn a small loss into a big one.

If you are reluctant to give up on “your” home, realize that it isn’t “yours.” If you are in negative equity, it’s the bank’s home. You’re just renting it. And right now you may be paying way above market rates. You need to be ruthless about your cash flow.

Still, when it comes to the idea of walking away from debts, many people are held back by a sense of morality. They feel it’s wrong to abandon their obligations. They don’t want to be a deadbeat. Your instincts, while honorable, are leading you astray. The economy is fundamentally amoral.

Whether we like it or not, walking away from debts is as American as apple pie.

Wow! The Wall Street Journal is telling people to walk away. I’m not here to say that advice is correct or incorrect. I’m just shocked they are saying it.

What does this mean to you?

If you are hoping that the housing market will recover soon, read the following thoughts from Professor Robert Shiller, founder of the Case Shiller Index and one of the leading experts on housing in this country:

“The market has shown a lot of momentum,” Mr. Shiller said. “What trend are we seeing now? It’s very ambiguous.” Mr. Shiller said that one of his greatest worries about the housing market are so-called strategic defaults, where borrowers who owe more than their homes are worth and can afford their monthly payments choose to default anyway.

Where did I read Mr. Shiller’s remarks? The Wall Street Journal. Two days before the Brent Arends article.


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11 replies
  1. Mary Lynn Carner
    Mary Lynn Carner says:

    Shame on you, Mr. Arends, for saying it’s OK to default on a promise to pay. It isn’t as American as apple pie to most of us. I grew up in a family where my grandfather actually paid weekly insurance premiums for his customers during the depression so they would remain insured. That’s American. There is always someone who beneifts or is hurt by our actions. I vote for those who do not hurt others. A bank may look like a faceless entity to a borrower, but it is a conglomerate of people who trusted the borrower enough to give him the opportunity to own a home. Respect the institution, the investors, the people who make our way of life possible. And pay your debts.

    Reply
  2. Michael Mekler
    Michael Mekler says:

    Steve,
    It was a real pleasure to meet you in Dallas and listen to your presentation. Although I still feel the recovery is not as distant as 2015 your numbers are sobering to say the least.
    The main purpose for this comment, and since a large part of your audience is in the real estate and mortgage fields, I often wonder how many professionals will still be allowed to conduct business after the new transition to the National Mortgage Licensing System. Namely I am referring to the new credit and background check guidelines. I know in the state of California the law was clear no to strip anybody from a federal or state issued licenses when there is a hardship that drives the individual to foreclosure or bankruptcy. It seems now that the only license protected by the law is your drivers license. Since we have been a sector affected directly and severely by the downturn of the economy, do you have any insight as to how the licensing agencies are interpreting the word “financially responsible” in the new license application guidelines?
    Michael Mekler

    Reply
  3. TMR
    TMR says:

    I have to LAUGH at people who make the argument that those walking away are those who couldn’t “afford to pay”. Talk to ANY professional in the real estate industry and you’ll realize that the next wave of foreclosures and housing declines are those who DID buy what they could afford.

    We had 30% equity in our house because of money we saved, earned and put sweat into. Our loan is now 117% of our equity. We are looking at 20 years to get back to 100% equity. 20 years. The amount of savings we can get over 20 years will pay for our children’s futures. At this point it’s not a wise investment to keep paying. We might as well just take our money to the Casino and gamble.

    WE ARE NOT RESPONSIBLE…the BANKS ARE. They created this mess, they can clean it up.

    Reply
  4. romeotybalt
    romeotybalt says:

    I walked away from a 350K home in Chicago. I bought a bank foreclosure for 60K cash. I will live in my old home until they kick me out while I save money to fix up the new place. Thanks, Youwalkaway.com

    I finally convinced my wife that walking away is the best thing, so now she is totally supportive of the idea.

    I am teaching my kids that captains go down with their ships, not homeowners.

    Reply
  5. Matthew Ferrara
    Matthew Ferrara says:

    Why not look at it this way: Walking away from the home was a contractual option in the mortgage document? In other contracts, we specify the terms of the exchange: different parties make different contributions. The banks contributed the funding, the borrowers contributed interest paid on each payment. At the same time, the contract specified how each party could “terminate” the agreement; in essence, the borrowers could terminate at any time by forfeiting the property; and the banks agreed to take the property back in lieu of other recourse for the loan. It was all spelled out clearly. The banks’ risk was ownership/operation of property they really didn’t want to own/operate, but they have to deal with that; and the borrower’s risk of a walk-away is serious damage to their credit report, which will keep them from borrowing from other lenders in the future, either at all (for a while) or at low-risk terms (ie., higher interest).

    I don’t understand why everyone is so emotional over the terms of a contract; if it were any other “investment” and you were taking a loss, you’d eventually decide to “dump” it. Sometimes that means everyone takes a loss (in a stock, on a car, etc) which is the case for both parties in this deal.

    Especially during a recession, “you have to be ruthless” about cash flow is the right advice. Inflation of energy, food and other costs, plus government debt and increasing taxes are all factors in deciding when to walk away. For many people it is the absolutely correct decision; and perhaps best for the industry, too.

    Reply
  6. John
    John says:

    There is no moral component in a decision to walk away. Accepting a mortgage is a business deal. The bank made a business decision to offer the buyer a loan based on supposedly sound lending practices. The borrower made a business decision to accept the loan based on hopefully sound personal financial abilities. If a persons circumstances change dramatically and they are unable to continue making payments the bank will certainly exercise it’s right to foreclose on the property used as collateral. If the individual decides that making payments on a $400,000 mortgage is not sound business when the property is now worth $250,000, and the bank will not accept a new negotiated mortgage principal after recieving billions of taxpayer dollars in a bailout then a decision to walk away may be sound business thinking. Morals did not enter the banks decision to lend the money, only business decisions did. Therefore morals have no part in a decision to walk away. Business decisions have no morality, only financial factors.

    Reply
  7. dg
    dg says:

    The answer is yes, if you are upside down by 25% or more it is probably financially stupid to not walk away. The more upside down you are, the more stupid it becomes not to walk. What many people really don’t consider is how long the banks will wait to foreclose if you stop paying. For most this number is running around 18 months right now. If you have a $3000 a month mortgage that’s $54,000 in mortgage payments alone you will save.

    Reply

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  1. […] aren’t sure? We can’t be sure either. However, I believe Shiller’s concern about strategic defaults is well founded and I’m convinced housing inventory will increase going forward. If I was […]

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