A new academic paper by Arizona Law Professor Brent T White has people talking, called “Underwater and Not walking away: Shame, Fear, and Social Management of the Housing Crisis.” He suggests that people walk away from their mortgages because it will take years to recoup their losses.
More interestingly, he suggests that if the 15 milllion homeowners underwater do this, it will force the banks to renegotiate the mortgages ASAP. It will make them bend and compromise, after all they allowed people to buy without down payments, no income checks, and inflated appraisals. Thus they were guilty of allowing these people to get mortgages in the first place.
In fact, if you play your cards right, you can strategically default. What that means? Buy everything you might need in the next few years now before defaulting and then default. Get a new car, new home, appliances, etc and then get off scott free. If you play your cards right you’ll have a 660 credit cards within two years if you pay everything else responsibly.
On the other hand, here is a post about a family underwater who won’t walk away. They understand the situation, but aren’t ready to let the house go. They have time for the market to recover, which is how I feel and many people I know who bought feel.
I wonder what the repercussions of this article will be? Will people start to strategically default because of it? Will this article encourage people to think outside of the box and walk away? I wonder if people haven’t considered it, but felt ashamed? And now with it written in black and white that it’s okay morally since it’ll change how banks do business, they’ll justify it in their minds? That seeing a reasonbly laid out argument that they didn’t have to think of, supported by an academic paper will be enough?
I still think it’s immoral and I wish that every state allowed banks to go after people’s assets in lieu of walking away. Why should someone with $100k or more in retirement accounts be allowed to walkaway from an underwater house scott free? Or $100k in cash savings becase they lived rent free for 1 year while foreclosure was happening and saved their mortgage payments?
If this strategy is to make banks renegotiation, why not renegotitate with me too? I pay my mortgage on time, can easily afford it, etc. I put down 20% and it’s less than 28% of my gross income. And I can afford it, but I “lost” possibly $25k on our townhouse. Thus shouldn’t I get the same deal since I’m responsible?
I just hate the fact that personal responsibility is gone.
6 responses so far ↓
1 R.May // Dec 14, 2009 at 9:41 am
Agreed. His artical made me naseous. There is no clause in anyones mortgage documents that your house will retain it’s value.
2 Not My Mother // Dec 14, 2009 at 4:54 pm
Agreed. I actually think the fact that in the US you *can* walk away from mortgages like that has contributed to the massive plunge in values and to the crisis. In the UK and Australia, where I live, you can’t do it – if you default on your mortgage they’ll seize your house but you are still liable for the rest of the debt, and they *will* get it from you, unless you go bankrupt in which case you lose everything else.
Granted I don’t live in the US and I don’t know all the nuances of the situation, and I certainly don’t mean to disparage the system. But it just seems it makes it far too easy to walk away, which causes the banks grief, which causes everyone else grief either from higher interest rates, no credit, or plunging markets. I can see why people would be tempted to do it though.
3 LAL // Dec 14, 2009 at 8:37 pm
R May I am worried that it will encourage more people to be dishonest.
And Not myMother, I wish the US didn’t allow it in any states. That they can come after your assets unless you don’t have any!
4 Josh // Dec 14, 2009 at 9:37 pm
“In so-called anti-deficiency states such as California and Arizona, mortgage lenders have limited or no legal rights to pursue defaulting homeowners’ assets beyond the house itself, White said. In other states, lenders may decide that it is not worth the legal expense to pursue walkaways, or consumers may be able to find flaws in the mortgage documents, disclosures or underwriting to challenge the original contract.”
These laws should be changed.
I wonder if he’d be for a similar thing for all the people who made money during the housing boom. Should these people “socialize” their winnings as well.
5 Meg // Dec 15, 2009 at 4:05 pm
Gah. What does that say about people?
I couldn’t do it. I have a sense of honor, of personal responsibility. I care that my actions do have consequences for others.
I hate to assume I know what really makes people tick, but I don’t see how anyone who felt the way I do could do that and it scares me that so many can.
But then according to The Sociopath Next Door, 1 out of 25 people are sociopaths — people with no guilt whatsoever, people who are entirely selfish. I’m not saying that all those people are sociopaths, but if someone I knew did something like that without guilt that would sure make me think twice about a person.
6 LAL // Dec 16, 2009 at 10:53 am
Josh, I fully agree. There should be no allowances for walking away scott free. It’s different to walk away broke, but with money?
Meg, I wonder too about people like that. How do you they manage to just go on like nothing happens and don’t worry about the consequences?
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