Should we be allowed to walk away from foreclosures? On savingsadvice financial forums a poster called “foolfromAZ” asked the question if he should allow his home to be foreclosed upon. I’ll post the details and discuss what his options are and if they are viable and perhaps we can all weigh in.
FFA bought at the peak in Arizona housing market when he moved from San Francisco. Thinking he got a great deal he bought a single family home for $315k. The current price is $170k, or at least that is what foreclosures in his neighborhood have recently sold for. He owes $280k, so he putdown 10% of the value.
What is the problem? Can he afford the house? Yes. The monthly payments of $2k are very manageable on his $85k base salary. The issue isn’t affording the home. The issue is he is feeling terrible over the deflated value of his home and wonders if he shouldn’t just dump the house and allow it to go into foreclosure. His reasoning?
He could buy a second home for $100k in his wife’s name only, because the current mortgage is only in his name. So the foreclosure would only be on his record. His wife’s income of $55k base can manage the $1k/month new home payment and they would start out fresh. Realize combined their family income is $140k/year, so managing either homepayment is easily affordable.
He is frustrated by having “Lost” money on the value of his home. He wonders if it’s not easier to foreclose and start with new home because they can save more money every month, $1k/month actually, in their new mortgage. He feels he is throwing away good money after bad by staying his home which has lost so much in value.
So what should he do? Should he walk away? Or should he try and stick it out?
There are also a few issues at play here as well. One will his wife really qualify for another house while their current house is in foreclosure? What will happen if they foreclose? Can they go after the couple for the difference between the mortgage and what the foreclosed home is worth?
Are there tax repercussions for a bank allowing you to walk away? Like settling a credit card debt, the forgiven amount is considered taxable income. Will the forgiven amount be mailed on a income tax statement and you have to pay taxes on say $100k at the end of the year? This is obviously not something you just do without consulting a lawyer.
Finally what will happen to your credit score? Will it matter if you need a good score for your job? Definitely. Couple of friends who work in banks said they don’t hire people with bad scores. So I guess if your job is secure then it might matter less. But otherwise could there be other problems with walking away?
I don’t know what to do. Personally I think the guy should suck it up and stick out the mortgage. But what really can be done if he walks away? I mean honestly, people keep blaming subprime mortgages for foreclosures. And we all accept the majority of these foreclosures occurred in “Bubble” real estate ares of florida, california, las vegas, arizona, the coasts, etc.
But he’s the 4th person I know contemplating walking away from a mortgage they can afford and is a 30 year fixed. I know three people who did it in California already, including my friend, who just didn’t want to pay on home more than she could pay for RENT! It makes me upset to know they can afford the home, they got legitimate mortgages, 30 year fixed, 25% guidelines but they just don’t want to pay for a house that is $100k more than the current prices. So they walked away.
So the question rises how many people foreclose because they don’t want the house, NOT because they can’t afford it? And they feel they can get a better deal, save $1-2k/month renting or buying another home instead of forking over a mortgage they can afford?
Is it really because people can’t afford their mortgages or is it because people don’t want to afford their mortgages? If people who afford it are tossing mortgages aside like napkins, we can’t change the mortgage crisis without serious change to our ethics and ways of thinking. That we are responsible for our debt no matter what.
Edited: I found an article explaining why people who can afford it choose to walk away. They want to build equity in a new home. It’s throwing “good” money after “bad”. They say bloggers like me have major vitriol for them (probably true and our commentors), but they don’t have to pay “rent/morgage” for 8-12 months of foreclosure and SAVE the money for a new Down Payment! Get that! It’s ridiculous. I’m sure I sounded nuts earlier, but the truth really is, how many of the foreclosures can afford to keep their homes but think it makes more sense to start fresh?
36 responses so far ↓
1 Kristy // Oct 1, 2008 at 9:39 am
He should not walk away. He signed an agreement to pay the mortgage. It is unethical, IMO to just walk away when you can afford the payment. I’ve said it before I will say it again, a house is not an investment. Suck it up buttercup.
This guy and the people you know that are just walking away are part of the mortgage crisis. They feel like they don’t have anything invested and should be able to walk away from their obligation to pay the mortgage. These people are not thinking long term. A foreclosure looks bad on your credit report and they may not be able to find new jobs.
I too have lost at least 20% of my value since we bought in 2006, that does not give me the right to just walk away from the mortgage payment. What the hell is wrong with people?
2 Sparkyk1971 // Oct 1, 2008 at 9:46 am
Back in the day, delinquent debtors were sent to prison. I’m not suggesting that anything like that should be done now, but I do believe that if you took out a debt, you have a moral obligation to repay it if you are at all able. To walk away from such an obligation is wrong in my mind.
3 Jim ~ mydebtblog.com // Oct 1, 2008 at 10:13 am
This is a personal responsibility matter. The house value is only determined by what someone else is willing to pay for it. At the time he got the mortgage, the value was higher. Today the value of the house is lower and he feels as though the market has cheated him. He thought the value would go up as he made his mortgage payment, but instead it has gone down in value.
I have personally lost 8% of the value of my house from when I bought it. Today I consider myself lucky to owe just at or below what it is currently worth. Some people have lost considerable amounts, 1/3 to 1/2 of their home values. The best thing they can do is to hold steady and stay put.
4 tom // Oct 1, 2008 at 11:52 am
I don’t think I would walk away, but I am not in his situation. We can say “don’t walk away” all we want, but none of us owe an extra $145,000 over what our houses are worth.
What he needs to do is contact his bank and tell them that he needs help and work with them to get a handle on his mortgage.
5 LivingAlmostLarge // Oct 1, 2008 at 1:06 pm
I am not sure what the right answer is. Why? Because these people are even worse than subprime borrowers. How so? Well they actually “qualified” for loans and if the requirements were good credit 10% minimum DP or even 20% DP, jobs, 25% PITI, they QUALIFIED!
Yet they still are willing to walk away because they owe way more than what they put down. If they sold they would have to bring $50k to the table to sell to just pay the realtors and closing costs.
So this is not about people with “bad” “subprime” mortgage. HECK no, they qualified and CAN still afford their mortgages yet don’t want to PAY!
So the twist is they would have qualified anyway and walked away anyway. I can see that subprime borrowers should never have been given loans or signed, but these people did understand, they didn’t buy too much house, but they just are not interested in keeping their homes now that it’s dropped 30-50% in value!
This is a whole different set of people walking away. People who can afford to walk away.
That’s why it’s scary and weird at the same time. People who just don’t care about walking away, they aren’t even trying like many of the subprime borrowers to stay in their homes. Nope, they are packing up, buying a new home or renting a new place and not looking back.
To them it’s no a huge deal. Do you see why it’s so frustrating and weird? They don’t want to “fight” to stay in their homes, because it makes more financial sense to foreclose! Like it was financially “smart” at the time to buy a home that was “affordable” but now that it’s overpriced they leave!
6 fengshui // Oct 1, 2008 at 1:08 pm
I agree. Walking away is unethical. He made a purchase and agreed to pay for it. Home values WILL go back up. People just need to stay put for awhile and stop buying a new house and moving every three years. He may need to stay in his current home for another 10 years before he makes the difference back (likely sooner than that). People should not be allowed to just walk away because then everyone else has to pay for their mistakes.
7 LivingAlmostLarge // Oct 1, 2008 at 1:10 pm
But I know a large % of those walking away are NOT subprime borrowers who can’t afford it. A nice chunk are people who can and just choose not to.
How to deal with the situation that exacerbates the mortgage crisis?
8 Christianne // Oct 1, 2008 at 2:40 pm
I had no idea this was going on but then I forget not everyone has my ethics. Should allowing a house to go into foreclosure be tantamount to declaring bankruptcy where all of your assets are taken into consideration? The effect of lowering your neighbors’ home values means those actions not only hurt “the big-bad corporation” but the little people as well.
I work in finance for a corporation and had a principle reiterated to me when we issued some bonds recently. Investors/Lenders have very long memories. If you screw with them or not treat them fairly, they will remember. And it will cost you in the future. Past management shenanigans, while none were illegal, were classic examples of putting your shareholders needs well in front of your bondholders. This cost 25-50 bps on our deal (IMHO). Business should always be done with the long-term in mind.
9 LivingAlmostLarge // Oct 1, 2008 at 4:32 pm
I have to ask that question, because I know someone not working who walked away with over $100k in the bank saved, and didn’t lose a penny of their investments. They just dropped their home, and what they put down but their retirement accounts, 6 figure taxable accounts were all SAFE!
They did not have to liquidate anything. And the were completely able to afford their home and walked away because they “feared” losing their job. They hadn’t done it yet, but wanted time to find a new place to live.
So it’s tough to really say that this mess is due to only subprime. I’m going to edit the end of the post to include people who can afford the home but just walked away.
10 Mary@SimplyForties // Oct 1, 2008 at 5:10 pm
It is morally and ethically reprehensible to walk away from your mortgage obligation. Presumably there was no guarantee built in to the purchase of the home regarding the home’s future value. I am pretty shocked that people can be so cavalier about their responsibilities. Some people will always try to take advantage of misfortune and someone who walks away from a home they can easily afford under the guise of the sub-prime mortgage crises is just that sort of person. Shame on them!
11 Jake // Oct 1, 2008 at 6:14 pm
My name is worth more to me than that. He signed an agreement saying he would pay this amount over this many years, and he can easily make the payments.
His word and his name will both become completely worthless if he walks away from this.
12 Scott @ The Passive Dad // Oct 1, 2008 at 6:15 pm
I look at my mortgage contract as a binding agreement to repay a debt. I couldn’t walk away from my home just because the value had decreased. How is a home losing value any different from purchasing a car or any other asset. If I buy a new camera it has lost value the minute I walk out of the store. Do I throw it away after a few months? We purchased our home to raise our family and enjoy our neighborhood.
13 LivingAlmostLarge // Oct 1, 2008 at 6:44 pm
I have no idea. But I had to raise the question about walking away because so many people are walking away even though they qualify for the mortgage and can afford it!
They just don’t want to. Which makes this mortgage crisis so much worse. We don’ t just have people who can’t afford it and bought too much house. We have people who walk away because they just don’t care.
They don’t care about their credit, name, etc. As long as it saves them money they walk away and save for a NEW down payment.
There are no repercussions. Because even with poor credit they have a large Down Payment and can buy a new home. So what’s the repercussion?
14 fengshui // Oct 1, 2008 at 7:58 pm
This is a perfect example why some REGULATIONS are warranted. Because we all run around and do whatever we want without any repercussions (apparently a portion of our country has limited morals, or only care about profit and money)……
15 Jen // Oct 1, 2008 at 8:42 pm
I agree with the previous comments. He should not walk around. He is walking away from more than just a mortage payment. He is walking away from his ethics and responsiblies. Clearly he can afford it, but he just wants to walk away because it is the easy thing to do. Our home is $150 K below what we paid for. We are not walking away because we are responsible citizens and we will wait for house market to pick up before selling our home & buying another one. I can’t imagine why people think they can or should just walk away…Geeze…
16 LivingAlmostLarge // Oct 1, 2008 at 8:57 pm
I guess it looks like personal responsibility is gone. Yes we should be responsible but many aren’t and we don’t seem to care. We allow people to just leave problems behind.
The same can be said of bankruptcy, but at least there is chapter 13 bankruptcy.
17 Barb1954 // Oct 1, 2008 at 11:52 pm
Ask your friends how they feel about contributing to the mess our financial system is in. Borrow money and don’t want to pay it back? Sure, just stick it to the bank. Well people, those are our savings deposits used to make loans. All of us will be hurt when there isn’t any more credit to extend to anyone.
18 LAL // Oct 2, 2008 at 12:27 am
Much like the poster these ex-coworkers don’t care. They only care about their own finances. It’s all about me. It’s a me, me, me set of responsibilities.
Actually it is personal responsibility. Responsibility to look out for themselves and their own money. Less taxes? Great. No repercussions for walking away? Great.
Most of these people by the way aren’t into taking responsibility. They said they thought they were going to make money on their homes. Too bad they didn’t. So they are happy to walk away.
19 Barb1954 // Oct 2, 2008 at 11:07 am
Well, I hope their screw up their credit so that they won’t be able to buy another house.
20 Amy @ The Q Family // Oct 2, 2008 at 2:05 pm
It’s unimaginable for someone to just do something like that. It’s like they basically are cheating the bank. It’s true that the bank is thought to be the ‘Evil empire’ but still. How do they feel if someone borrows their money to buy something and just don’t pay them back??
People need to be more responsible to their actions! We can’t live in a society that put money above integrity. What kind of message they will send to their children!
21 LivingAlmostLarge // Oct 2, 2008 at 8:14 pm
Sad but true. I have to wonder where we are moving to as a society?
22 Ginger // Oct 5, 2008 at 11:23 pm
You all wont like this but I think if his conscience will let him walk away then why not? There are many things we dont know about his financial situation and with the market the way it is? It is truly a every man for himself. What if the market doesnt go up for another 5-8 years? What if things come up but he has an albatross of a house around his neck and is suffering because of the bad decisions of others all around him?
I write for a real estate blog and I believe AZ is one of the states where legally the bank can’t come after you once you walk away and it goes into foreclosure.
I’ll write a follow up to your post once I dig through the archives of the other blog I write for because it lays out on a state by state basis whether or not you can walk away and the potential ramifications.
Sorry but Im so frustrated with the market right now and sick of the banks sticking people with crappy loans and people taking on houses they cant afford AND people who are at no fault but suffer as a result from the former two situations that whatever you can do to get out from under this mess-if you like it, then I love it.
Banks screw us all the time.
24 LivingAlmostLarge // Oct 6, 2008 at 9:01 am
Ginger, thanks! And CA you can walk away without repercussions and AZ might be another state too.
26 Funny about Money // Oct 6, 2008 at 9:10 pm
Well, back in the Cretaceous Period we had one word for this sort: Jerk! But maybe times have changed….
Ginger’s right: in Arizona, where I’m hunkered in my trench, the real estate market is unlikely to turn around for another six to ten years (no matter what anyone tells you). But that’s not an excuse to welch on your obligations.
28 Bill in NC // Oct 7, 2008 at 7:18 pm
Lenders understand when they make the loan that it is only secured by the underlying property.
In theory you can go after a borrower for a deficiency after foreclosure, in practice that isn’t possible (some states like CA prohibit)
The borrower meets obligations by either paying off the property or surrendering it to the lender.
If I was going to be 50% upside down and the lender would not renegotiate I’d put my money to work elsewhere as well.
29 LivingAlmostLarge // Oct 7, 2008 at 9:08 pm
I believe that in the states with the highest rate of foreclosures, have the most lenient rules of walking away.
30 I must walk - no other options // Oct 14, 2008 at 8:51 pm
Please don’t paint everyone with the same brush. I have always been a very responsible person and hate what is happening to me…but cannot find a way out. When purchasing in Feb.’06, I planned to update and sell exactly three years later, to coincide with my retirement, using the profit to buy a condo in Sun City, and live happily ever after. I put 33% down to get lower payments, then spent my weekends working my heart out, painting and updating the kitchen and baths, replacing all the flooring and re-doing the landscaping. Before I could complete all the projects, I was diagnosed with breast cancer and went thru three surgeries and all the treatment. I don’t mean to whine, and feel lucky to be a survivor. I still work at age 66. It’s draining, but I can’t quit as my SS would be $1160 per month. The lender is belly-up and my mortgage is in the hands of a collection agency. They won’t talk to me and have simply denied requests for reconstruction or refinancing the $270k loan on a property now valued at $230k. Yes, I could keep paying the mortgage, while I work, and while I watch the value spiral downward, but I’ve added medical bills, too, I’ve already started taking money out of my 401k to do so. So, own up, keep paying, you say. OK, if I can keep working another six or ten years, but at 72 or 76, I wonder if I can physically maintain the house and still be effective at work. Will the value come up to the mortgage amount by then? When selling, would I break even, or would I still be under water? Let’s say I made it through and sold at a breakeven price, or even made $2k, I could not buy another place on my SS check. I wonder if I could even pay rent, and have enough left over for food and prescriptions.
Hey, you can’t possibly know how terrible I feel. Walking away is not something I am proud of — I actually feel I’m a victim, too. I must have been quite gullible, swallowing what the lender said. He made it sound so right, and it was so, so easy. He told me the loan was “perfect” for me and would lead to a great profit for my retirement. They did a drive-by appraisal and told me there was no need to verify my employment. They would just take a statement. They assured me I didn’t need to worry about a thing. Sure, I wanted to believe all the hype. I did not stop to wonder what the market might do as I put my savings into the down payment. I did not foresee cancer and unbelievable medical expense ahead. I had bought and sold properties for 15 years, making a little each time, with no problems.
Call me foolish, a deadbeat, someone who should keep on paying till the well runs dry, until I fall over dead at my desk. I did sign for the loan in good faith. I have never missed a payment or even been late…but I can see only two options….walking away with a slim chance of making ends meet as a senior citizen, right now, before every dime is drained from my meager 401k….or, being totally responsible by paying the mortgage each month and going to work each day as long as I can. When I can no longer make it to work, and there’s no check, just social security, maybe I can live in my car and try to survive on welfare. But, wow, I can hold my head high while in the food stamp line….nobody can say I have NOT been responsible. Maybe I am a jerk — but every jerk has a different story. I’m one of the jerks who does feel responsible. I’m one of the jerks who would desperately like to pay for the loan I committed to. There are jerks who just don’t care, don’t really have an investment in the property anyway, and just don’t want to pay. Judge if you will, but please, please don’t slam and degrade, belittle and shame, when each circumstance is different. I’ve looked everywhere for help, for an honorable solution, but I’m going down in defeat. My failure will drag your house value down, too. I wish it could be different. I am truly sorry, but some of us have no options.
31 Ginger // Oct 17, 2008 at 12:38 am
@ I Must Walk-I totally understand your situation. Do what you have to do for yourself. In the end, the govt is more concerned with bailing AIG out who takes lavish vacations with that money than you the homeowner on hard times.
LAL, I will be posting my follow up to this post in a few minutes.
32 bob // Oct 20, 2008 at 12:29 pm
Most of you commenters are absolutely way off base and frankly out of your mind.
There is absolutelty nothing unethical or immoral about walking away from your mortgage. You may not agree with it, but it is not unethical because both parties are following ALL the terms of the contract.
A mortgage is a legal contract. Both parties know the obligations, and the repurcussions if the obligations are not met. Default remedies are written into the contract. The penalties for default are spelled out up front.
If you don’t agree with the penalties, tough S**t. Those are the penalties. Don’t like them, don’t sign the agreement.
Besides, don’t you know that the interest rates paid reflect a level of default in them. Rates have default risk baked in. If no one defaulted, rates would be risk free. But they aren’t, so the bank is being compensated for the additional risk by charging everyone more.
Now why do you suppose that is. Because default is an OPTION. Just like paying is an option, so is not paying. Both options are addressed by both parties up front. That is why the Deed of Trust is 20 pages instead of one- Default remedies.
Check your rules about unethical or immoral behavior. Unethical is the borrower being allowed to stay without paying. Unethical is the lender being allowed to foreclose even though the borrower never missed a payment.
Unethical or immoral is when one party DOES NOT adhere to any terms of the contract. That is not the case here. The borrower is simply excercising their option to not pay, and the bank is then excercising their option to reclaim the collateral. That is why there is collateral in the first place. This is a contract-not a favor.
Get off your high horses and understand that this is actually responsible, thought out behavior for some people. Banks do the same thing. Should we foreclose, short sale, or modify. Guess how they come to the decision. They think responsibly about their self interests.
The same thing our example is doing.
33 LivingAlmostLarge // Oct 21, 2008 at 4:08 pm
Maybe Bob, but that’s why it’s personal opinion and open to debate. Many here feel differently than you. And others agree with you.
I’m okay with people not affording it walking away. But I’m not so sure about those who can afford it walking away?
34 Jeann // Oct 24, 2008 at 7:50 pm
Has anyone here thought about this from another angle? If banks hadn’t been issuing so many bad (sub-prime) loans, there wouldn’t have been all that bad debt out there just waiting to come back and bite the banks… then the housing market wouldn’t have taken the turn that it did when the bottom fell out of the subprime market. Without the downturn in the housing market, these people wouldn’t have lost, in some cases, up to half the value in their homes. The people you are discussing wouldn’t have been put in this bad situation. They wouldn’t have been faced with this decision.
Whether or not you *think* it was a difficult decision for these people, it just might have been. For someone to lose $150,000 — depending on who you are and your situation, that can be a fair amount of money, or that can be a lot of money. If someone had $150K in bad debt, they would probably be advised to take bankruptcy.
Why aren’t we calling out the financial institutions for their particular role in this? Why aren’t we looking at the whole picture? Sure, it seems contrarywise that someone would not pay when they could afford to, but I’m not sure that’s immoral in this case.
The mortgage contract does, after all, spell out default conditions (which were agreeable to both mortgagor and mortgagee). And, as Bob pointed out, the bank’s proportional risk (as calculated by the actuaries they employ) in extending the loan is figured into the interest rate. It is a business agreement, and the bank is in the business of making money.
Taking a loan from a friend or relative, but then deciding to not repay even when one could afford to do so… I would consider that to be immoral. The friend or relative in this case would have none of the protections inherent in a mortgage contract, and often people do not even charge interest on loans of this type. The loaner here would just give the loan to help someone they care about, not for income or personal gain. The loaner here is not in business, they are granting a personal favor.
I remember reading articles by finance gurus in the late ’90’s, many of which considered sub-prime mortgages to be a predatory lending practice. Predatory lending may not be a *good* business practice, but I believe that it would be considered a business practice. Definitely not a personal favor. Why do we expect an entity which engages in bad business practices to have their karma come back around to them? Why is an individual an awful person if they don’t break any rules (as per the contract), but just don’t behave in the manner that would be most advantageous to another party?
It seems to me that business ethics and the ethics one employs in a personal relationship would differ. If not, then no one would ever offer for someone to enter into a business agreement that was not fair or not a wise choice for an individual. Sub-prime loans would never have existed.
According to business ethics, as long as the person follows the rules laid out in the contract as far as what happens when they default, that is fair. It is not personal, but is just a business decision. The bank is not this person’s friend or family — they owe them nothing more than to follow the rules as agreed to in the contract. The person defaults and the bank takes its lumps. If ‘walking away when you can afford to pay’ becomes a trend, the bank’s actuaries study the data and configure a new risk model, which the bank then uses to determine new interest rates and qualifying criteria for the products they offer. If the behavior becomes quite prevalent and really cuts into their bottom line, they then lobby the politicians (who are supposed to represent us, the ‘little people’) to pass new laws to prohibit behaviors on the part of mortgage consumers.
Now, I know that the focus of this discussion is not on sub-prime borrowers who default, but how can we pick up an apple and tell ourselves that it didn’t fall off of the tree? Why do people assert that an individual in a business agreement should act according to an interpersonal mode of ethics, when it is apparently acceptable for the banks to conduct themselves at all times according to business ethics? If banks can put their interests ahead of any individual’s interests (as long as the rules are spelled out in a contract), why is it so terribly wrong for an individual to put their own interests first in a business agreement, as long as they abide by the provisions laid out in the contract to which both parties agreed?
On the subject of acting on one’s own best interests… I’ll also note that many sub-prime borrowers most likely knew that they probably would have difficulties meeting the loan obligations, and probably should not take the loan. Of the people I have ever spoken to who accepted such a loan, all but one were incredulous that a bank would approve them at all, especially for the amount of the loan they were offered. Most knew that accepting the loan would give them an incredibly narrow margin for financial error in all aspects of their financial lives. But, faced with the opportunity to accept a somewhat questionable loan and the opportunity to realize the dream of owning a home… guess what they did? In this instance of entering into a business relationship and making a business decision, these people figured that the banks knew what they were doing and *did what was best for them.* I don’t see anyone calling out the poor and disadvantaged for trying to pull one over on the banks, for not saying, “I’m sorry, you must have made some mistake. I’m not sure this loan is in your best interests, even though it might fare well enough for me.”
Now, if we want to get into a “what kind of a world are we living in today” kind of discussion… we might have to pick a new topic. There are many morally reprehensible behaviors which people engage in quite frequently (and view as normal and acceptable) that signify a steep decline in the quality of our culture and collective character… much more so than two parties following the terms laid out in a written contract.
35 LivingAlmostLarge // Oct 29, 2008 at 10:59 am
Nope. But we allowed the deregulation of banks in 1989 and again in 1999. I wonder how we didn’t learn our lesson. And John McCain wants to deregulate healthcare?
If you feel so strongly about banks being immoral can you imagine insurance companies given free rein?
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