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Strategic Mortgage Defaults - Beyond A Contractual Decision

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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Comment balloon 106 commentsSara Bonert • May 10 2010 01:33PM

Comments

So, at least some still feel the obligation to honor the contract. It's just the right thing to do.    

Posted by Ellen Dittman, #1 Stop for NE FLA-JAX/OP 904.535.1199 (TEXT OK) r (Watson Realty Corp.) over 9 years ago

I paid my hovel off in three years. Now I own a Corvette and a spa membership that I never use. I wish I could get my money back.

Posted by David Saks ((retired)) over 9 years ago

Sara:  Yes... you made a commitment to the person in the mirror, and, in a way, to the universe.  It sounds like it is very tough for you, but at least you can still look at that person in the mirror... and still like what you see.

I am just appalled at some of the opinions expressed on the "for" walking away/strategic default post.  All that economic "survival of the fittest" talk just makes me crazy.

Thanks so much for writing this post, and for sharing your thoughts with us.  Take care...

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 9 years ago

Sara, wow.  This is a pretty powerful and personal post.  If Wall Street had the mirror clause, we might have avoided a lot of this.

Posted by Patricia Kennedy, Home in the Capital (RLAH Real Estate) over 9 years ago

Thanks all.  It is hard to speak for everyone, because finances are so personal, but for us there really isn't a choice but to continue paying. 

Pat - I ended up not going to Midyear this week.  I hope you get to see some Realtor friends in town for the event!

Posted by Sara Bonert, Real Estate Internet Marketing (Zillow) over 9 years ago

Thoughts without judgment...

There are now two sets of rules in this country - rules for Main Street and rules for Wall Street.  The moral guilt for Main Street is easy to see in these posts.  That of Wall Street barely exists if at all.  Morgan Stanley walked away from upside down real estate investments last year in Dallas and San Francisco - then announced bonuses for their executives at the end of the year. 

Two wrongs don't make a right, but until we feed Wall Street a taste of its own medicine, the cure will never occur.

Posted by Loan Survivor Real Estate Financing Expert (Purchases, First Time Buyers, Pre-Approvals, Refinance) over 9 years ago

Thanks for the opposing view Drew.  I think it is really easy to argue either side of this one, but at the end of the day it comes down to a personal decision.

There are a lot of days when I wish I had that attitude, but ultimately, I don't.

Posted by Sara Bonert, Real Estate Internet Marketing (Zillow) over 9 years ago

I like the mirror clause. Wall Street should have one. Getting from here to there will be a long struggle, as is your battle with your Florida investment. Best of luck with that. Long term, I think you'll do fine. The recovery will be quicker than anyone thinks, because the banks will have money to lend and anybody will once again be able to get a loan.

Posted by Glenn Roberts (Retired) over 9 years ago

Sara,

One university economist recently argued that this meltdown is a system failure and homeowners should not feel emotional about possible strategic default. It's a tough call one way or another.

Posted by Esko Kiuru over 9 years ago

Hi Sara -- Thanks for sharing.  I can't imagine the anguish and grief you must be going through.  One home is hard enough these days, let alone two.  I am seeing more of these stories lately, affecting all walks of life.  It's heartbreaking as there are no easy answers.

Posted by Chris Olsen, Broker Owner Cleveland Ohio Real Estate (Olsen Ziegler Realty) over 9 years ago

Sara, I admire your willingness to continue to pay your loan. I hope given the same set of circumstances that I would do the same thing. Hats of to you and your husband.

Posted by Tom Bailey (Margaret Rudd & Associates Inc.) over 9 years ago

Sara,

It doesn't take away what your boss and COO thinks. The company you work for thinks its perfectly acceptable to do the opposite. Your post only further cements that sentiment.

Posted by Greg Nino, Houston, Texas (RE/MAX Compass, formerly RE/MAX WHP) over 9 years ago

Sara, I appreciate that you admit it is a personal decision however one that's dictated also by the ability to have that decision. So many don't have the income to make those payments and therefore have no choice.

Posted by Colleen Fischesser Northwest Property Shop, A Tradition of Trust in the Pacific NW since 1990! (RE/MAX Advantage | Managing Broker) over 9 years ago

I understand as well.  My wife and I bought our home in 2001... and we are upside-down as well.  This isn't an investment property... it is where we live. 

We aren't walking away.

Posted by Lane Bailey, Realtor & Car Guy (Century 21 Results Realty) over 9 years ago

I struggled with this episode as I think there are people that have to walk away because they got into something they can't afford anymore. But there are people that do this because it's self serving.   When someone cannot afford their mortgage, then they can and should look at this remedy.  I  don't agree with what I heard on this show with the couple that is living in their house, not paying the mortgage when they can afford to, commenting that they'll stay for free until kicked out, and then with the money they saved move into a nicer place.

My wife and I teach our teenage daughters that you do what's right (not what you can get away with).   I applaud Sara and her husband for their decision!

Posted by Scott Smith (Market Leader) over 9 years ago

Sara, thanks for bringing this up. The 60 minute segment stimulated a lot of conversations around here, too. Morgan Stanley did not set a good example of moral behavior when they walked away. Yes, I do understand that it was a business decision but maybe 'business decisions' by huge financial corporations are part of the problem we are all paying for now.

I do not feel bad for the financial corporations if they are truly being hurt by people walking away. The large banks do not have a reputation for being helpful when their customers need help. 'Let them eat cake'.

The other part of the segment that struck me were the people who had no reason to move other than the drop in house values. If you still like the house, if you still like the neighborhood, if it works for you and your family, why move?  You have to live somewhere. Why not live in the house until the value goes up again?

As for walking away being a good business decision:  we won't know if it was a good business decision for years. If your $500,000 home is valued at 300k now and in 15 years it is valued at $1 million, how will you feel? 

The inevitable question is what if values go down? If values are still down in 15 years, then this is not a recession, it is the beginning of a very long depression and our country is in peril of collapse.

Posted by Maria Morton, Kansas City Real Estate 816-560-3758 (Chartwell Kansas City Realty) over 9 years ago

Sara:

You seem very sweet, and obviously this is a personal decision of yours. If it would cause you grief and guilt by defaulting, then by all means don't do it.

But I advise people to do it when it makes financial sense. There is absolutely no doubt that lenders do not care about the decisions they make that hurt us, so we shouldn't feel bad when we make decisions that hurt them. 

And really, how much will banks hurt by these defaults, when taxpayers are footing the bill anyway. And lenders are more cutthroat and ruthless than ever, wasting time, money and lives with calculated delay and avoidance tactics regarding new regulations that seek to help people stay in their homes.

I don't believe, however, that morality has anything to do with these situations. Remember: It's not personal, it's business.

Posted by Aaron Vaughn | Builder | Investor, If the deal makes sense, the cash will follow. (Conifer Homes) over 9 years ago

Sara-I admire your candor.  It's clear that you made a very good point here....and the point that matters...can you live with yourself and look at your reflection in the mirror?  If you can...the decision is right...whether it be to walk away or to keep a property every seller must think like this.  Clearly it's a personal decision for every individual. 

You also made the point that you and your husband have very good jobs...if you look at unemployment you will see that there are many families...who are now attempting to live on one salary, not by choice in most cases.  Ask yourself a question...if one of you lost a job...what would you do or better yet what could you do?  I think everyone who passes judgement should ask themselves that question.

I also think...people should not judge Zillow in general on this matter...why its kinda like Activerain...and each member has their own opinion.

Fabulous post Sara!

Posted by Midori Miller, Online Marketing For Real Estate Professionals (Talk 2 Midori, LLC) over 9 years ago

Sara - You've made a decision with which you can live and which allows you to face yourself.  I think it's hard to judge this on a wholesale level and that people have to make decisions based upon their own situations and beliefs.

Posted by Christine Donovan, Broker/Attorney 714-319-9751 DRE01267479 - Costa M (Donovan Blatt Realty) over 9 years ago

Sara I'm cutting an pasting this.  This is the crux of what I think would happen:

When the banks stop lending, buyers and businesses can't get loans, employees are laid off, sellers can't sell and the most likely option for the masses would be to continue renting therefore creating fewer real estate transactions.  Also, with the thousands of "walk-awayers" now in the rental pool, rents would more than likely increase due to the law of supply and demand.

This country is already in a huge deficit with a fragile dollar that will only become weaker if this strategic default trend continues. What if your dollar became worth 30 cents, would you still be pro-strategic default then? If the banking system implodes while we are in a deficit, the dollar weakens.

People have been buying during peaks and losing during downturns for centuries. But now we're gonna let every one pay for it in the cases where SOME people walked away when they clearly bit off more than they could chew or bought during what turned out to be bad timing? We're in serious trouble if it becomes the average mindset of the "average American homeowner" who can afford to pay, but choose to walk away by strategic default and not honor their contracts.

Posted by Andi Grant, Helping 1st time buyers and home sellers in LA! (310-508-4354 | FirstTimeHomeBuyerRealEstate.com) over 9 years ago

glad to see some still feel the need to fill there obligations! 

One of the reason we got into this economic mess is people just giving up!

tom

Posted by Tom Ramsey (Century 21 Northland) over 9 years ago

Sarah, it is a personal decision. As you have read on many posts to some it is "just business" and to others a moral consideration.

I appreciate you and Spencer taking a stand on it. Too many people are afraid to let fellow bloggers know how they feel on a subject. I have read and re-read Spencer posts, and the comments.

I honestly think like you to it comes out to a personal choice. I have not been in that situation so therefore it is hard for me to take a position on it. I am sure if I was in that position like many are, it would be easier but now it is not. What's funny is I am a very opinionated person, but in this case, I don't have one.

 

 

Posted by Missy Caulk, Savvy Realtor - Ann Arbor Real Estate (Missy Caulk TEAM) over 9 years ago

For me a contract is giving my word in writing. Even when I just give my word verbally I don't go back on it.  For me it is a moral obligation.  Yet if I were in the same situation I am sure I would also think about walking away.

Posted by Teresa Boardman (Boardman Realty) over 9 years ago

Sara...

I applaud you for keeping your word and fulfilling your obligation. hang in there, and who knows, it might pay off one day!

Posted by Richard Weisser, Richard Weisser Retired Real Estate Professional (Richard Weisser Realty) over 9 years ago

Sara, Kudos for your position.  Now lets talk about the mortgage broker here in Texas who did a short sale on his home and then showed up with cash to purchase his next home!  Funny set of morals!

Posted by John Axt, Spring Texas Real Estate (Prudential Gary Greene, Realtors) over 9 years ago

Sara, I appreciate your candor and openness. I can only wish you luck. It seems to me that you should do a short sale and be done with it. 

What is problematic for me about Spencer's post (and Zillow all too often) is that there seems to be a inability to grasp, even a little, how much damage is done when inappropriately controversial views come from the Zillow platform. 

Posted by J. Philip Faranda, Broker-Owner (J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY) over 9 years ago

Sara - It is a tough call. Remember when as a child you were told "because everyone else is doing it is not a valid reason?" Oh, you were always good...me, I tried the excuse and it still cost me. Strategic default will cost but I am not one to judge motives. I understand that behind every short sale and foreclosure (and standard sale) is a person with issues I am not qualified to judge. Good for you!

Posted by Gary L. Waters Broker Associate, Bucci Realty, Fifteen Years Experience in Brevard County (Bucci Realty, Inc.) over 9 years ago

You are talking about the same banks that charge people 32% interest that have late payments, take bail out from YOU THE TAX PAYER.

I am an honorable man, I agree with the notion of doing the right thing.

 

BUT

We are no longer playing with other players that give  rip about you. 

Posted by Rob Aubrey over 9 years ago

Strategic default is a lot like discretionary bankruptcy.  For decades, there have been people who have chosen to run up assorted debt and then get it wiped away through bankruptcy.  I'm afraid that it's just the shrinkage that we all pay for through higher prices whenever we buy anything.

The fact that you owe money on something does not change the amount of loss when the value decreases.  If I paid cash for a property identical to the one you financed, we both lost the the same amount.  If one will never need to finance real estate again, then strategic default could make economic sense.  For most, it is a short-sighted maneuver.

Posted by Mike Carlier, More opinions than you want to hear about. over 9 years ago

I agree. If you borrow money, pay it back. Whether you borrow to buy a car, take a vacation or buy a home, it is your responsibility to pay it back.  Anything less is stealing. Ask any of the homeowners who are walking away how they would react if someone stole from them.

Posted by Andrew Larson over 9 years ago

The old adage "what goes around comes around" might apply.  You will be rewarded for you position someday...I am sure.

Posted by Keith over 9 years ago

I applaud you and your husband for hanging in there!!  You will report the rewards in the end if nothing more than being able to hold your chin up high in public knowing you did the right thing.  I do have to ask the question though if the home is the way you describe it, why are the taxes going up?  If the value has fallen that much and the rent is declining I would think the taxes should too.

Posted by Tony Hager, Broker (United Realty Texas) over 9 years ago

Dear Sara:  I know how you feel about personal obligation.  Three years ago I saw this all coming but was too afraid to sell the home that my ex-wife and I lived in at the time.  By the time I woke from my foolishness the market had choked in March of 2007 and began the roller coaster ride downward.  Luckily, we owned a very attractive home and people bought it at the first leg down 25% and we made up our own "short sale" out of our savings and 401K program. 

When the escrow closed we were broke and the financial and emotional strain ended our marriage.  However, the lender (who, by the way, approved an appraisal of $700,000 on the home only a year earlier as we refinanced only to receive a better interest rate), didn't lose a penny on the $450,000 home the new owners bought for $595,000 in June of 2007.

So...now...if the economy doesn't get better and the family who bought our home for $600,000 which is now worth $450,000 and might go down to $300,000...what will THEY do?  Maybe they will make a much better business and family decision than I did.  One can always feel obligated to repay the lender in 20 years (it may take that long to get over the Largesse of the current Government), but one MUST look at the damage that holding on paying and paying can do.

As you said, the tears and fears are many.  One could also, sell the property and make an agreement with the lender to pay the "short amount" via a note secured by your current residence over the next 15 or 20 years.

Remember...the MARX BROTHERS made fun of Florida real estate in the 1930s in the movie Coconuts, right?  Maybe in the 2030s you'll have equity, again.

Tom Waite

Posted by Tom Waite, So Cal-Apartment Bldg Investments (Thomas Waite Real Estate Broker) over 9 years ago

Sara,

Thanks for the thought provoking / poke in the ribs post.

I know people (no zero credit blemishes) who made the decision to walk away.   It is tough decision.

Part of my moral decision would have to include the question WWTBD?

If the tables were turned - what would the the bank do?  

I am not sure there is one in country that would stick it out and pay me on an asset that they (along with me) misjudged the value of.

Thankfully I am not facing that decision.

Posted by Lee Walsh, Executive Talent Scout for Mortgage Professionals (SecurityNational Mortgage) over 9 years ago

I sold a condo last year after their values had dropped 15%; and yes I brought the money to the settlement table.  I was aware of short sales and I chose to do what was right for me.  I just don't think the system is fair to consumers that is why I applaud anyone who has the guts to tell the banksters to choke. 

Posted by Cliff Kavanaugh, ck@kw.com - 434-466-5128 - www.CvilleHomeSearch.com (Keller Williams Realty of Charlottesville Virginia) over 9 years ago

Sara,

Thanks for the post and doing what I think is the right thing.  I have noticed, both on T.V. and some responses to this post, that it seems to be a generational thing about staying and paying or walking away.  The younger crowd seems to think that they are once again the victims of what has gone on and can escape personal responsibility by claiming that they are making a business decision.  Wow, I can't believe how much smarter they are then those of us that have lived through other recessions and took it on the chin only to get back up and move forward.

Of coarse there are those that can not afford to keep their homes because of job losses or other reasons but as the gentleman on 60 Minutes stated he was able to pay his mortgage, he just no longer wanted to and smiled and laughed through the whole interview.  I wonder what his emplyer thought of this individiual after the airing of this show?

I hope all go well for you but if not thank you for making the attempt.

 

Posted by Gary Pike (Better Homes and Gardens Real Estate Metro Brokers) over 9 years ago

Walking away is easier if a person has lost their job.

No mon, no fun, your son........................

There are many other reasons why people walk away.  I know you know all of them so I won't go there now.

Let's look at this from the other side, such as the banks.

It is now common knowledge that banks locked their good business practices in their vaults so it wouldn't get in the way of increasing their lending which resulted in higher bonuses.

No income verification, no job verification, cursory credit checks, etc.

In Collier County FL. we had a borrower apply for 50 mortgages and got every one of them!  Apparently, banks don't have a database to verify how many mortgages a borrower has at any one time. 

Greed took over.

It is still in play.

The Obama administration passed a credit card reform bill.

Before it was to take effect most banks did an end around play and increased most of their fees to offset the loss once the bill did become effective.

Who pays all those new fees?  We do.

Borrower's found themselves underwater on their mortgages.

Many of them went in or called their lender to discuss loan mods.  Most of the banks wouldn't talk to them unless they were behind in their payments!

Lesson learned..........................................

In order to get assistance we must be behind in our mortgage payments. 

Many I've talked to told me their lender representative told them to fall behind!

How's that for good money counseling from a bank?

Lesson learned............................

So more people fell behind in their payments.  Then they were referred to their lender's Loss Mitigation Department (Black Hole)

So much has been written about the inequity of Short Sales I won't go there.

But suffice it to say, it is the banks that have perpetrated their wide-varying Short Sales processes upon us. 

How many of you reading this received a letter from your lender saying they were canceling your Equity Line of Credit because the value of your property has declined?

They didn't just adjust your equity line of credit, they cancelled it, not allowing you one more dime of credit even though you may still have a $100K or more in equity.

In summary, bankers greed lent money to many who wouldn't have qualified under normal scrutiny.

It was a business decision.

Bankers send us several credit card solicitations monthly offering below market rates or gifts to entice us to buy things we really don't need.

It is a business decision that drives banks to give everyone a credit card.

It was a business decision that drove banks to cancel our equity line of credit.

All around us we see new business come and go.  New strip malls that open and close.  New restaurants come and go and so on.

It is business decisions that drive these openings and failures.

We see developers start new communities and later walk away once their lenders file against them.

It is business decisions that drive the lenders to foreclose on developers and small business operators.

So why isn't is a business decision for a family to make a realistic assessment of their current situation?

So, why is it a moral dilemma when a family realizes it only has enough money to buy food, clothing, school supplies, pay the electric bill, etc, but cannot pay the mortgage?

 

 

 

Posted by Jim Shaw, Real Estate Sales Associate, Naples Luxury Real Estate (Premiere Plus Realty Co.) over 9 years ago

Thanks for all comments!  Just read them all, and truthfully I can at least appreciate the point of view of almost everyone. 

Ever mulled the question of 'if my house caught on fire, what is the first thing I'd grab to save?"  My answers are my favorite photo scrapbooks (I am a Cropper), wedding photos and some sentimental jewelry. 

A couple of years ago when I was living in Atlanta, my condo building did have a fairly large fire.  Guess what I grabbed?  My laptop, purse and some spare cash I had on hand.  That is still a "huh?" moment for me. 

Other thing that amazed about the fire was that only two people actively fought the fire while I ran floor to floor breaking glass to grab as many extinguishers as a could for them, with blood gushing everywhere.  I couldn't believe that other unit owners would just stand there, waiting for the fire department, watching their building burn. 

Point is - Without really being in the situation yourself, it is hard to truly know how you would react.  It is easy to speculate and rationalize, and maybe what you do in the heat of the moment surprises you.  Sometimes we are fortunate that we can make choices for ourselves, sometimes the choices we make get us in particular situations, and sometimes we are flat out dealt a bad hand.  And the ‘mirror clause', as some have said here, is something that I chose to apply to the decisions I make in life.  

It is messy now, but I have faith that we will all get through this.  I know, if nothing else, I have learned many lessons that can apply to other investment properties I own and to how I buy/sell real estate in the future.   

[Oh, and fortunately the fire was contained so only a few units were affected, mine was not one of them, thankfully.]

Posted by Sara Bonert, Real Estate Internet Marketing (Zillow) over 9 years ago
All I have to say is ... Have the banks Been fair with their customers ? I believe we must all take a stand NOW. This issue is growing and it must be resolved on a national scale. It is headed For taking us all down if we collectively Don't fix it. The depression unfolded over Years ... It is happening again. Good intentions won't fix this!
Posted by Jake at the Lake over 9 years ago

Morning Sara,  Another thoughtful and well written post.  I commented in an earlier post that the term " strategic default " is so sanitized that it takes the emotion out of the formula and makes it sound like a solid business decision.  It is anything but.  It is a risk we all took in hopes of claiming some appreciation.

Posted by Bill Gillhespy, Fort Myers Beach Realtor, Fort Myers Beach Agent - Homes & Condos (16 Sunview Blvd) over 9 years ago

Very thought-provoking post. We're in the same position as you with a rental.  It's not as bad as you describe, but it does feel different, not being our home but being a business investment. When the bank gave us the loan on the house they knew it was an investment property, they charged us a higher interest rate and required a larger down payment to cover their risk. We are not planning on walking away from this house, but I would definitely think long and hard about it if it was as bad as your situation. At least we get enough rent to cover the mortgage, just not any repairs.

Posted by Joetta Fort, Independent Broker, Homes Denver to Boulder (The DiGiorgio Group) over 9 years ago

What if you & your hubby were not blessed with great jobs? Then you wouldn't be so moral.

Posted by LD over 9 years ago


I don't see any 'Moral' definition to Strategic!

 

stra·te·gic

  [struh-tee-jik]  Show IPA
–adjective
1.
pertaining to, characterized by, or of the nature of strategy:strategic movements.
2.
important in or essential to strategy.
3.
(of an action, as a military operation or a move in a game) forming an integral part of a stratagem: a strategic move in a game of chess.
4.
Military.
a.
intended to render the enemy incapable of making war, as by the destruction of materials, factories, etc.: a strategic bombing mission.
b.
essential to the conduct of a war: Copper is a strategic material.

Posted by Katerina Gasset, Get It Done For Me Virtual Services (Get It Done For Me Virtual Services ) over 9 years ago

Ahhhh, integrity still exists. I'm in the same position with a rental property and I am going to continue to pay and pay. I can make more money, but not more integrity.

Posted by David Knox (David Knox Productions, Inc.) over 9 years ago

Nestor and Katerina (#45) - I just read your post on the topic, and think is a compliment to mine.  Mine is emotional, yours is very factual. The word 'stragetic' actually applies to yours. You are right that maybe I shouldn't use that word for mine, maybe 'optional default' would accurately describe it.

LD (#44) - I can assure that I would act as morally possibly no matter what the situation. Even those that are forced in foreclosure, and don't have the option of being 'strategic', can act ethically. 

Jake (#41) - You are right that intentions won't fix anything, but actions have the potential to!  

Jim (#39) - Thanks for the thoughtful comment, and you make points that are hard to argue with. To answer the question you pose at the end, I don't think that is a moral question/decision at all.  I think that is a survival question, and you have to do what you have to do, I don't consider that 'strategic'. 

Gary (#38) - So are you saying that I am in the 'older crowd'?  Ha ha!  I am sure generational influences do come into play in some way here. 

Unite Realty (#34) - Taxes based on value shot up, then did come down.  However the millage rate has increased too.

Glenn (#8) - Let's hope!

Posted by Sara Bonert, Real Estate Internet Marketing (Zillow) over 9 years ago

Sara: I agree with Colleen. If one or both of the homeowners isn't working, that can change the whole dynamic. I would bet in most cases these are the strategic defaults going on. I believe most people have ethics. But if something is no longer affordable, choices need to be made. They're either made by the homeowner (strategic default, short-sale, etc.) or by the bank (foreclosure). Thanks for the post!

Posted by Paul McFadden, Pest Control, Seattle, WA. (Paratex) over 9 years ago

Sara- This decision is for you to decide. 

There comes a point in many people's strategic business decisions wherein the question becomes: To whom are you accountable to? If you have a family, kids, husband and they come first in your life- and that house is draining all of your savings- that is called throwing good money after bad. If I were to look at this as a moral decision- I would be looking at my family wondering how long I can screw them and pay the bank. You see, my family comes first. We do live in an under water house in Fl but we love our home and we are going to keep it. We bought our house way before the boom so we are in a good place- we got a refi to do a new roof and some other improvements- so we are upside down because of the refi- otherwise we would have equity but we chose to use that equity and now we are paying it back. But what is our option? Renting? i don't think so. I have not ever rented a house in over 30 years and have no plans to rent! So we pay. We are happy to pay because that is the best decision for our family, not for the bank, not for my contractual obligation to the bank. 

That is why we don't have debtors prisons any more. If you bring up morals- let's talk about forgiveness of debt. There is a moral obligation given to all those who lent money in ancient Israel- forgiveness of those debts every 7 years, that is where bankruptcy comes from- that is because God knew what humans will do to each other, that carrying around the heavy yoke of debt will ruin the spirit of man, and so therefore he created the means of releasing man from debt. It should not be any different today. Katerina

Posted by Katerina Gasset, Get It Done For Me Virtual Services (Get It Done For Me Virtual Services ) over 9 years ago

Great post, fantastic topic.  This is going to be a HUGE problem unless the powers that be figure out a way to offer principle reduction.  This is slippery slope, when it happens in one neighborhood it starts the ball rolling...atleast the conversation. 

 

Posted by Stephen Garner, Hub Media Company (Hub Media Company) over 9 years ago

I'm hearing a lot of stuff about the reasons that it's okay to walk away all blaming the government, banks and mortgage companies.  Yes, they are what got us into this mess in the first place but investing in a home at the height of the market was a financial decision that many thought was sound, property values were increasing rapidly and many of us wanted to get on that gravy train.  Not unlike any other financial gamble.  Actually now that I think about it, I should find some way to sue over the decrease in value of my stock portfolio. 

Anyone thinking of walking away from a mortgage contract should really get some professional advice.  For those whose decision is simply that the home is not worth what they paid for it and can make the payments, it is likely the lender won't forgive them of the debt.  The debt will stay on the books and the borrower will not be able to purchase much of anything.  Sure filing for bankruptcy is an option but then how would the court decide?  Can the debt be repaid or is the borrower insolvent?  Then there is the IRS.  If the debt is forgiven there could be a taxable situation on that amount.    To qualify for an exclusion of the taxable amount, the debt must have been used to buy, build or substantially improve the principal residence and be secured by that residence.  Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

Posted by Leslie Hackmeister (Moon Real Estate, Utah) over 9 years ago

If you bought a new Mercedes and one day when you opened the garage, you saw a old Geo Metro in it's place, wouldn't you feel ripped off? That is how alot of the borrowers feel, and I'm not talking about the one's that did stated (liar) income loans, I'm talking about people that were 100% honest. I have a single mom, bought her condo for 195k and now her next door folks place sold for 130k. Bank won't modify cause she pays on time, over 125% and Freddie owned, so no help there, and shes being taxed based on 175k assessed. She trying to pay for her daughters college and, maybe, after about 15 years of payments, she will finally be at ZERO EQUITY, instead of negative. She's called me crying, not knowing what to do, has perfect credit. What advise would you give to her? I know what I told her to do.

Posted by Nick Krehnke over 9 years ago

Strategic defaults and short sales are but techniques that will stabalize the housing market. Not a moral or ethical situation. We know the lender isn't going reduce the principle, even if they were partially responsible for the bubble (by writing loans to everyone and their mother). So why should anyone be obligated keep paying for a mortgage essentially made useless by the entity that gave it to you? Especially when they won't meet you halfway?

Al Pacino had saying that I won't bother to repeat, but would be my answer to the fradulent, predatory lenders that contributed to the destruction of the economy.

Posted by Nogui Aramburo, Real Estate Professional in the Raleigh Area (Linda Craft & Team, REALTORS®) over 9 years ago

Here's hoping the market turns around and that you got the "bugs" out of your money pit.

Posted by Juli Vosmik, Scottsdale/Cave Creek, AZ real estate 480-710-0739 (Dominion Fine Properties) over 9 years ago

I say let the bank have the damn thing...

My income is down 60% due to no fault of my own. WELLS FARGO bank refused to do anything to help us keep our home, All they wanted to do was to foreclose and that is just what they did. They took a $300,000 LOSS, rather then lower the payment at all until the market recovered. Now I am a renter and all I wanted was to keep my home. They took BILLIONS and would not let me keep my home... They lost their client $300,000 rather then costing them about $50,000 in working with us...

EXPLAIN THAT...

Screw the banks to death I say... But that is just me... As a REALTOR, good for you keeping the houses off the market, the last thing we need is one more home to sell at this point.

Posted by Richard Foster, J.D., Broker Owner - ABR/M, CREN, CRS, GRI, RRG, SFR (Nevada Perfect Homes) over 9 years ago

Sara, I appreciate your candor, and think this is a great post.  I agree with you, it would be agonizing to walk away and I don't think I could do it if I could afford to stay.  However, adding a job loss, major illness to the picture, I can see where well-meaning folks will consider this option.

I thought your comment about you not expecting the banks to share in the profit if the situation was reversed and your home had tripled in value.  It IS a risk, and hopefully the last two years will teach people to think long and hard about the risk as they purchase real estate.

I know that as a realtor, I'm always harping my buyers about re-sale value and the risks involved.

Good luck to you and your husband.  I hope you come out ahead someday!

Posted by Melissa Brown, Realtor - South Charlotte NC Homes for Sale (Helen Adams Realty) over 9 years ago

Sara, I fully agree with what you are doing.  Financially.  If you run a full set of numbers over 10 years, I bet you come out ahead.  All that you stand to "save" right now is 30% of the 2005 purchase price.  

I'd like to applaud you morally, but even as an adult I'm still terrified that my mom would tan my hide if I started thinking I was in a position to judge another person's morals.

Posted by Chris Richter (Wintrust Mortgage) over 9 years ago

I commend you for taking the high road. I'm amazed there are people on here justifying walking away when the owner can afford the property because the banks are "evil". I'm like you I have to look myself in the mirror every morning. I sold my former personal residence for $50k less than I owed and I told the bank that I would repay it which I am doing.

I wonder how the individuals on here that are saying it is alright even if you can afford would feel if the issue involved a contracted buyer on property they owned or carried a mortgage on. If the buyer could afford to complete the contract or pay their mortgage they sure are not going to say it's ok if someone says I found a house I like better so I'm going to quit making payments to you or not honor my purchase contract.

It's easy to justify someone else losing money but it is a different story when you are losing money to someone who can afford to pay.

 

Posted by Wayne Thompson, CMB (Walden Mortgage Group) over 9 years ago

I didn't know that banks set the price that someone pays for a house.

The guy in the 60 minutes video said he bought the house for $250,000.  The value went to $150,000.  Even though he could afford the payments he wanted the bank to lower his payments.  If the value of his house went to $350,000 would he have increased his payments to the bank?

If you bought a house to live in and you can afford the payments, the value of the house is not relevant.  These walkaway people are just gaming the system, which is perfectly legal, but there will be consequences for all.

For someone who can't afford their payments it is a different situation.

 

Posted by Steve Opacke (LI House Tours) over 9 years ago

Well, we are really lucky there are so many suckers willing to keep paying!

Posted by Jim over 9 years ago

Sara,

The irony of your position is that if, for the sake of argument, you had the diametrically opposite view on this issue then the PR department at Zillow would not have allowed to write such a post.

I know that you are a sweet person, but the reality of the American business space is that PR is disguised as communication. PR is NOT communication. It is PR. :)

In any event, best of success!!!

Posted by Lee Ali (Las Americas Real Estate) over 9 years ago

Lee - Not true. Click on the first link in my post to see the opposite view articulately expressed by a collegue.  However, both posts were written, independent of who employs us.  I know I mix personal and professional posts here on my blog so maybe it can be confusing, but I hope that it is clear which is which. 

Posted by Sara Bonert, Real Estate Internet Marketing (Zillow) over 9 years ago

Sara, if you are referring to this link, then Spencer is talking academically and not personally.

The real test would be if Zillow allowed one of its strategic defaulter employees to show up and defend his strategic default.

In any event you are a sweet person and Zillow is fortunate to have employees like you.

Best of success.

Lee

 

 

Posted by Lee Ali (Las Americas Real Estate) over 9 years ago

     The key statement you make in the post is that you and your husband have good jobs and can afford to keep paying for your Florida home.   What if you didn't have such good jobs and couldn't pay for the home, and trying to pay for it took funds away from paying your owner occupied mortgage payment, your electric bill, your car insurance bill, and maybe even food.   Would your sense of right and wrong be modified?

     This is a tough topic to tackle from a moral standpoint, and I fear the higher ground morality stated by many may change if it was a matter of paying the debt or eating.   I know a few people who have walked away from their homes after making a herculian effort to sell it, rent it, pay for it, and anything else they could think of to maintain their 'morality'.   In the end, the current situation presented to some because of the housing and job market gives them no choice but to walk away from something to survive.   Attempting to evaluate this from a moral standpoint seems unfair to those without the financial capability to honor the moral integrity they share with most honest people, but don't have the financial wherewithall to back it up.

Bruce

www.ratewindow.com

Posted by Bruce Bills (RateWindow (Powered by RealEspace)) over 9 years ago

Sara, I aplaud your stance over your comrade at Zillow who is also featured.  Thanks for having a moral compass.

Posted by Damon Gettier, Broker/Owner ABRM, GRI, CDPE (Damon Gettier & Associates, REALTORS- Roanoke Va Short Sale Expert) over 9 years ago

I think for the sake of the debate, it is important not to confuse a strategic (or optional) default with a necessary default.  The two situations aren't even close.  I don't think morality can be a factor in the second situation, it is just plain doing what needs to be done to survive.   

Posted by Sara Bonert, Real Estate Internet Marketing (Zillow) over 9 years ago

My husband and I are in the same position, bought a duplex for $225,000 in Fl. just sold it short for $60,000 5  yrs later. What a nightmare...bank would not lower intrest rate or payment. Tenants won't pay rent. Taxes and insurance costs have sky rocketed.Meanwhile both our incomes dropped 50%. It was strategic....pay on an underwater property or pay my primary mortgage and eat??? Tough decision....NOT 

Posted by lorraine over 9 years ago

In the early 90's I bought my first home for 130K and watched the values drop to about 60K.  I hung in and the value came back to the 200K level when I sold.

However, Wall Street is doing what is best for Wall Street, Government is doing what is best for Wall Street, the only people getting screwed are the common American People.  People need to do what is best for thier family.

Posted by Gene Riemenschneider, Turning Houses into Homes (Home Point Real Estate) over 9 years ago

Sara that was a honest personal post which mirrors the frustration that so many people are feeling.  Most of our clients and friends are in some sort of confusion/agony/frustration regarding the economy, real estate and the political culture.  We have been selling and buying real estate for 26 years for ourselves and our clients but it has never been this raw or difficult.  We have a division in our brokerage that does No Up Front Fee Loan Modifications and we see so many individuals who used their equity in their personal residence to purchase investment properties which have lost value.  This period of time has intense pressure on most households and they all look for relief from anyone they can trust to understand and to professionally advise them.  Sometimes the advice is to complete a Loan Mod, Short Sale or Deed-in lieu but it has never been our advise to just default and walk.  The tax implications and moral damage is difficult to measure so we have to be careful with our recomendations.  Full releases from Lending Institutions and no releases are factors to consider.  In some cases there might be a tax loss if an investment dimishes in value.  It is wise to seek the advice of an experienced Tax CPA or Attorney who can advise the pros and cons.  Good Luck to You  

Posted by Fred Gregory over 9 years ago

Sara,

Nice post.  Congrats on hanging in there.  I think your last comment hit the nail on the head.  A strategic default versus a default by necessity couldn't be any different.  The fact that you are doing what you (and I) think is morally correct when it is just as easy (for some) to walk away speaks volumes about your character.  Good Luck!!

Posted by Jamie Daws (Town & Country Realty, L.L.C.) over 9 years ago

Sara - Thank you for sharing a very beautiful and helpful blog.

 

Posted by John Pusa, Your All Time Realtor With Exceptional Service (Berkshire Hathaway Home Services Crest) over 9 years ago

Sara,

I am in a similar scenario. The policies of the banking industry and the federal government have decimated the value(-50%) of a home I bought for my Mother and Grandmother. They've bailed out my bank, my home builder and my neighbors. All of which decreased the value of my home and disincentivized the bank from working with me to fix the issue. They refuse to work with me because it is not my primary residence. In other words..."Pay or get foreclosed on".  There seems to be no other REASON to continue paying for something that is so far underwater. When everyone else either bails or gets bailed out, you're left wondering if you should jump off the sinking ship too.

Let's do some math. -50% equity means at a rate of 5% growth per year(which would be extremely unlikely at the current rate), you would eventually get back to the purchase value in around 9-10 years. Depending on the mortgage payments, you would probably be paying more in interest over that period of time than the current value of your home. Personally, I would rather take the credit hit and buy my neighbors forcelosed house. Just remember, this is a FINANCIAL DEBT...not a MORAL DEBT.

Keep your head up. I know it's not easy.

Posted by Dean over 9 years ago

Thanks for the post.  I'm not sure what I'd do , I'd have to be faced with the problem and then I'd know, I think. I watched 60 mins as did many of us.  I have to think that I'd walk away at some point.  Yikes what a mess!!

Patricia

Posted by Patricia Aulson, Realtor - Portsmouth NH Homes-Hampton NH Homes (BERKSHIRE HATHAWAY HOME SERVICES Verani Realty NH Real Estate ) over 9 years ago

Thanks for the post.  I'm not sure what I'd do , I'd have to be faced with the problem and then I'd know, I think. I watched 60 mins as did many of us.  I have to think that I'd walk away at some point.  Yikes what a mess!!

Patricia

Posted by Patricia Aulson, Realtor - Portsmouth NH Homes-Hampton NH Homes (BERKSHIRE HATHAWAY HOME SERVICES Verani Realty NH Real Estate ) over 9 years ago

Sara, great post. Certainly heartfelt and it reflected the agony of the decision based on your personal circumstances.

There is no right or wrong answer to the problem. The decisions made by the individual homeowners are made based on their individual circumstances. Whether we agree or not, unless we are "walking in their shoes" it's hard to know if it's the right decision for them.

Whether the banks should do more to prevent these "strategic foreclosures" is a business decision each has to make. Just like the homeowners, they have to be prepared to accept the consequences of their actions. With bailout funds, there aren't any real consequences.

For the record, I'm continuing to make the payments on home even though it is worth less than 50% of what we paid for it. Am I bleeding a little each month? Absolutely! But I will continue to make the payments, until the bleeding is becoming fatal. Why? Because it's our home, we put in a lot of work, time and money to make it the way we like it and have shared a bunch of great memories with our friends and family.

Posted by Greg Cook over 9 years ago

What’s wrong with purchasing something (in this case a house) and finding it’s not going to work out and then giving it back to the seller. So you actually ended up “renting” the house for whatever period of time you paid the mortgage payments and in the end the bank gets the entire house back. It’s not like you are refusing to pay but keeping the house anyway. How many items have you returned to the mall. I’m sure the mall would have been happier if you kept the items. But it’s not morally wrong to return something.

Ok, you could say but the bank is receiving a house that is worth less than when they first sold it. True, but you made mortgage payments based on the higher amount for the entire time the value of the house was dropping. So the bank took a risk and it paid off for a while. And you had a place to live, so you were benefited for a while. Now the bank will have the property back and that property will sell eventually bringing the bank benefit. And you have no house...and you’re feeling guilty?

Posted by Donna Stellhorn (Feng Shui Form) over 9 years ago

Sara, I think you have really shown why so many are up in arms about this. Financially it may make sense. But I think what concerns me the most is the people who think it's OK, and can look at themselves in the morning and feel good about their decision.

You are so right that if it had increased in value, you wouldn't expect to share the profits with the bank. That just struck me as the perfect way of thinking about the topic.

I understand the logic, I do. But logic doesn't always make for the right decision.

Posted by Marney Kirk, Towson, Maryland Real Estate (Cummings & Co. Realtors) over 9 years ago

Tyrone Baker "...the person I have to look in the mirror at every day." This great Sara! Great because this is what each and every individual has to do everyday with their [our] decisions.

Posted by Tyrone Baker, Mortgage, Home Loans over 9 years ago

I'm sorry, but I don't see any logic in this.  It seems to be a way to make some money.  Simple as that.

A mortgage payment has no relationship to the changing value of a home.  It is based on what you were willing to pay and what you could afford.  Therefore if the value goes up or down you still have the same payment.  This is what allows us to sleep at night, a fixed payment.  If you want to walk away from your home go right ahead.  Just don't blame it on the value of that home or what your neighbors are doing or how mean the banks are or how greedy Wall street is.  

Posted by Steve Opacke (LI House Tours) over 9 years ago

sara, one thing you may fail to realize is that bank is sharing the profit with you. its called the interest payments you make to the bank every month. do you really think a bank would give you a 30 year loan if they did not believe that the home would continually increase in value? the bank knows the risks too, and made the same assumptions you did. they expected your home to continually increase in value. they are in it for the money, not because they are an altruistic organization. banks go out of business all the time, even before this meltdown, and i am sure those people (bankers) have no problem looking at the person in the mirror. let me finish by saying that i believe many people would not consider strategic default if they could renegotiate or refinance their loan, but the bank and/or market circumstances will not let them. the banks were given plenty of bail out money. i would bet that if it (bail out $) were offered to the borrowers, they would gladly stay in their home.

Posted by Joseph Mazzei (Wholesale Mortgage Services) over 9 years ago

Carla-Comment #72  And that is just the TIP of the iceberg of what the banks and their pals in the White House now, before and for a long time now- have been doing. This is but a small problem but we focus on it because it hits us in our homes and pocketbooks but there is a much more dangerous result that they are heading for. They just passed the Fed Reserve audit bill which is a good thing but not when you read what it really says! THe white house and their Goldman Sachs buddies- you should see how many of them are floating around the white house- raised objection to this bill but then succumbed to it only if there were provisions of timing put in the bill- well heck- how stupid do they think we are!!!!! Just a dog and pony show for the stupid people- they are doing the slight of hand thing on us. The goal is to get a global currency and allow the global bankers to take over the entire economy. THis is the worst form of cronyism ever in our history. This is not free markets, this is not capitalism- far from it! Our founding fathers warned us about letting business sleep in bed with government. They warned us well- did we ever heed the warnings? DId we even pay attention all these years? 

Posted by Katerina Gasset, Get It Done For Me Virtual Services (Get It Done For Me Virtual Services ) over 9 years ago
Here's another way to look at it. You have a contract. The contract says, if you don't pay, they get the property back. You agreed to this and- importantly for my point- so did they. If you stop paying and they take it back it's simply business, simply contractual. Simply what both parties agreed on. I don't see the moral angle as being particularly relevant. We've been conditioned to see it that way, buuuuut... the bank sure as bleep isn't seeing this in moral terms. They are operating on contractual terms. Walk away. Move on. The government will take care of the bankers; don't lose any sleep over THAT. Just my .02.
Posted by Jeff over 9 years ago

Actually the contract doesn't say "if you don't pay, they get the property back" The banks don't agree to this and neither do you.  Otherwise when the value of a house goes up the bank could take it back and say don't pay us anymore.

This walk away only works in certain states.  In a lot of states the full mortgage will still be due and unless you go bankrupt the courts will find you in default and they will garnish your pay.

Posted by Steve Opacke (LI House Tours) over 9 years ago

If all of us who are in that situation would act like the banks do and did, then walk away. The banks ARE the reason wwe are in this mess with real estate and economy. Banks are very unwilling to accept short sales, although they will get much less formproperty at trustee sale. As soon as banks become "ethical" ( and of course their greedy ceo's), then maybe we should all reconsider.

Thanks

Posted by Antoine over 9 years ago

Hi Sarah ~ I'm having trouble with this topic and like Missy find myself as a person who always has an opinion to be without an opinion. There is no black and white on this one. You hit the nail on the head, it's a personal decision and no outsider can decide what is right for you. I may not like the idea of people walking away from their obligations when they are in a position to pay, but I'm not walking in their shoes, so feel I should reserve judgement.

Denise

Posted by Denise Hamlin, Broker/Owner, Helping Happy Clients Make Smart Choices (Cardinal Realty ~ 319-400-0268) over 9 years ago

Even those that are forced in foreclosure, and don't have the option of being 'strategic', can act ethically. 

I'm curious on the ethics that would be considered moral in a foreclosure situation??? I'm with Richard in comment #55. As Realtors how embarrassing is it to admit that you couldnt get your lender to modify your own loan and save your own house?

Posted by Teresa K. Nelson (Windermere Real Estate/HLC) over 9 years ago

Sara, I so appreciate that you shared your story.  We tend to put higher-profile folks like yourself up on pedestals and think that "it doesn't happen to them", but the reality of the matter is that this economy is affecting all of us.  On a personal level I hope that you find relief from the stress of this property soon, so that you may enjoy more of your life.

Posted by Lisa Moroniak, SFR - Short Sale & Foreclosure Certified (Keller Williams Realty | Northern Virginia | 703.635.0388) over 9 years ago

Sara. This is always a difficult decision to make. We sold several of our properties in 2007 and 2008 and took $10,000s to closing. It hurt. But at the time I had the same attitude as you do and I sucked it up. . In retrospect...I wish I would have sold them short and kept my money.

My only advice is to thiink real long and hard about it. If you feel you will eventually sell and have to bring money to the table later then lower the price right now to the price it will take to get it sold and bite the bullet now. if the figure you'll have to bring to closing is more than you have then do the short sale now and then start on the road to recovery.

This is not a moral issue.

 

Posted by Bryant Tutas, Selling Florida one home at a time (Tutas Towne Realty, Inc and Garden Views Realty, LLC) over 9 years ago

So many people are quick to walk away with every intention of buying another home in a "few years"  I can't help but wonder if the people that are doing these "STRATEGIC DEFAULTS" were informed "due to your lack of committment, you will never be able to get another home loan"  Perhaps they would reconsider and wait this market out?....

Posted by Angela, Prudential AZ over 9 years ago

Sara, we are in a similar situation in a rental property but we are continuing to make the payments. At some point we may not be able to do this, but for now we are. I totally understand where you are coming from. BTW, where is Carla's comment that Katerina referred to?

Posted by Sharon Alters, Realtor - Homes for Sale Fleming Island FL (Coldwell Banker Vanguard Realty - 904-673-2308) over 9 years ago

Sarah,  I know where you are coming from, and I would do the same if I were you..  What I don't understand is sellers who decide not to pay their mortgage and then use that money for personal gain, ie nice cars, spas, designer clothing,  Its these people that I have a big problem with.

Posted by Judy Greenberg, Coldwell Banker - Buffalo Grove - Long Grove Homes (Coldwell Banker Long Grove) over 9 years ago

I applaud you sticking to your principles, even though you are throwing your money down a hole. You would actually be better helping society by giving that money to a charity.

Posted by Wayne B. Pruner, Tigard Oregon Homes for Sale, Realtor, GRI (Oregon First) over 9 years ago

You have to do what you feel is right. If that means putting hard earned money into this situation, then by all means do. Its your money, and you have the right to spend it the way you see fit. You're one of the few who feel that the contract is worth more than the financial gain. Just be aware your hard work, and moral ethics is probably being taken advantage of by someone out there.

Don't be angry when you find US Bank handing out big fat bonuses to their executives.

Posted by Eugene Lew (RE/MAX equity group) over 9 years ago

There is a HUGE difference between choosing to "walk away" and having limited options due to hardship...we had a couple...he lost his job, got cancer and she lost her job...their home became a successful short sale...it isn't what they wanted...it is not where their moral compass pointed...it was the only thing they could do.

Posted by Sally K. & David L. Hanson, WI Realtors - Luxury - Divorce (EXP Realty 414-525-0563) over 9 years ago

Sara, My default move when I'm stressed is to run the numbers and I'm invariably less stressed.  I'm hoping there are at least less tears based on this. 

This isn't great stuff, but it's not "retirement ruining" type of bad.  It's not "our kids can't go to college" type bad.  It's a speed bump (like our new 3 feet tall ones in the East Village), but it's not a head on crash with a semi.

If the 2005 price was $200k.  At a 50% drop, that's $100k now.  Loan started @ an 80LTV or $160k.  A 30 year would have paid off $10-12k in principal.  Net appears to be $50k "gained" by default.

(I was under the impression that Florida is a deficiency state, but that type of stuff is above my pay grade.  If it is a deficiency state, then this "value" goes to $0 pretty fast.)

The monthly figure requires a CPA.  You save some cash, lose some tax benefits.  That's also above my pay grade.

Normal people who "strategically default" simply get higher borrowing costs & insurance costs plus the added goodie of not getting that job in a 10%+ unemployment market because the other candidate's public records are clean. 

You are not normal.  Your job gives you more data than 99% of real estate professionals, let alone consumers.  You live in Chicago which is also not normal.  I don't know if a Roscoe Village 2-flat on the Brown line for a song fits your financial goals, but it's only an option because you didn't default.

With each passing day and each strategic default, those with unblemished credit have increasingly better options in general.  With your job, wow, you probably have greater access to opportunities than almost everyone.  Plus that whole deficiency detail may make this a moot point.

It's a speed bump, not head on crash.

Just my unsolicited $0.02,

Posted by Chris Richter (Wintrust Mortgage) over 9 years ago

Sara - I get what you're saying and I really respect you for it.  You have the means to pay so you are meeting your obligation.  If you didn't have the means you'd figure something else out.  But people "just walking away" because their home didn't turn out to be the investment they envisioned are no better than the banks, CEO's, wall street, etc.

 

I'm rooting for Iowa.

 

Posted by Alyce Martin, Albuquerque - THE Place To Be! (The Realty Group, LLC) over 9 years ago

There are those who have no choice and have to leave, but we are not talking about them here. To me this is no different than the exotic mortgage products that these banks came up with and then told people they can just refinance it in 2 years, or worse yet, the unlicensed mortgage brokers who chose to lie on their clients behalf just to get some of these NINJA loans through. That was just as unethical as the people who are walking away because values have fallen. I do understand the concept of a business decision, but I think that is why we are in this place now. If we were all to throw in the towel and walk away, we would have nothing left. A better solution is to avoid doing business with people like this, go to a local bank where they still have to look in the faces of their clients. Don't reward them for their bad behavior, take your business elsewhere!

Posted by Rachel Luckow over 9 years ago

Appreciate your honesty.  These are times in which our actions say more about who we are than our words.  It takes courage and conviction to do what you're doing. 

Posted by Lola Audu, Audu Real Estate~Grand Rapids, MI ~Welcome Home! (Lola Audu~Audu Real Estate~Grand Rapids, MI Real Estate) over 9 years ago

These are great comments. Thanks for posting!

Posted by Nogui Aramburo, Real Estate Professional in the Raleigh Area (Linda Craft & Team, REALTORS®) over 9 years ago

I agree.....for myself. I have a few properties I'm upside down in equity, but I make my payments, it's not a hardship to do it, so I do. Does it make more sense financially TODAY to walk away, maybe....long run? probably not. But I don't like the judging of others....it's none of our business, they will suffer as a result.

Posted by Karen Fiddler, Broker/Owner, Orange County & Lake Arrowhead, CA (949)510-2395 (Karen Parsons-Fiddler, Broker 949-510-2395) over 9 years ago

I agree with Joseph Mazzei in #82.

Moral obligation or not, if banks worked with the owners/investors instead of making idiotic demands of "prove the income", "pay a hefty downpayment for settlement", "catch up in 6 months", etc., a huge number of those owners/investors would continue to make the mortgage payments.

The way $700 billion (and more) were dished out to the banks, they have more incentive to force foreclosure and/or short sale compared to keeping the same mortgagor.

It is the morality of hard working Americans that is being exploited by the financial industry. Glass–Steagall Act needs to be reinstated.

Lee

Posted by Lee Ali (Las Americas Real Estate) over 9 years ago

America was once the home of revolutionary's. It now seems to be the home of lambs. It's been proven in study after study that corporations have been paying little or nothing in the way of income taxes for the last 40 years or so. Yet still partaking in the massive infrastructure we all pay for so they can make a profit at all costs. FYI: This is not the behavior of patriots! We are no longer "All in this together." They have made it so that it's US against THEM. Mean while, nearly every government program of any kind has shifted to being funded solely by main street tax payers. People are falsely assuming that congress will remedy this situation. But that will never happen with the way our election system is currently funded and operated. What people are failing to realize is that we don't need government to solve this problem. If everyone in America united and stopped paying their mortgages, credit cards, and any other debt they have, we could bring the entire banking system down or at least bend it to the will of the people in a matter of days. No government involvement necessary. They can't arrest 150 million people. But everyone in this country is so scared that they MIGHT be one of the few that are arrested, we will all do nothing instead, and continue arguing with each other over nonsense as individuals while the country continues to spiral down the drain. Politicians all preach that this division is "The American way." That the political process in America is "ugly" and that's the way we like it. That kind of rhetoric is divisive and promotes the status quo as the solution to our issues. We're all being lead like lambs to the slaughter when we choose "not to act" by continuing to promote "individualism" as the American way. Until we unite as a nation and say "no more," I'm afraid all this arm wringing over what's moral and what isn't will be our downfall. You can't slay a wolf if you behave like a lamb.

We've traded our revolutionary heritage for a 3 bedroom, two bath, home in the suburbs, a college education for ourselves and our children, and a couple of matching BMW's in the driveway. The trouble is, "You can't eat that." We're trading our freedom for a "risk-less" lifestyle. Unless that attitude changes soon, I suggest that we brace ourselves for the worst or find a different country to reside in and play it safe.

IMHO

Carl S

Posted by Carl Schumacher (CIDM Real Estate) over 9 years ago

Lets assume for the moment that it's true that companies don't pay taxes.  There is one thing they do pay. Salaries to the people that work for them.  They don't take everything in and not pay anything out.

Posted by Steve Opacke (LI House Tours) over 9 years ago

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.

Posted by Allison Stewart, St. Cloud Fl Realtor, Osceola County Real Estate 407-616-9904 (St.Cloud Homes ) over 9 years ago

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.   

Posted by Kent Dills, Real Estate 817-495-8028, Bellingham, Washington (Broker, Dills Real Estate) over 9 years ago

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.

Posted by Coleen DeGroff, Haile Plantation Real Estate - Gainesville FL (eXp Realty) about 9 years ago

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.

Posted by Karen Hunt, Seattle Real Estate Broker | Hunt Seattle Homes, Skyline Properties (www.SeattleHomeBuzz.com, Skyline) about 9 years ago

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. 

Posted by Steve Opacke (LI House Tours) about 9 years ago

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