NY Times: Why Not Walk Away from Your Mortgage?
Elle
---
John Courson, president and C.E.O. of the Mortgage Bankers
Association, recently told The Wall Street Journal that homeowners who
default on their mortgages should think about the message they will
send to their family and their kids and their friends. Courson was
implying that homeowners, record numbers of whom continue to default,
have a responsibility to make good. He wasn't referring to the people
who have no choice, who can't afford their payments. He was speaking
about the rising number of folks who are voluntarily choosing not to
pay.
... [T]he housing collapse left 10.7 million families owing more than
their homes are worth. So some of them are making a calculated
decision to hang onto their money and let their homes go. Is this
irresponsible?
Businesses, in particular Wall Street banks, make such calculations
routinely. Morgan Stanley recently decided to stop making payments on
five San Francisco office buildings. A Morgan Stanley fund purchased
the buildings at the height of the boom, and their value has plunged.
Nobody has said Morgan Stanley is immoral perhaps because no one
assumed it was moral to begin with. But the average American, as if
sprung from some Franklinesque mythology, is supposed to honor his
debts, or so says the mortgage industry as well as government
officials. Former Treasury Secretary Henry M. Paulson Jr. declared
that any homeowner who can afford his mortgage payment but chooses to
walk away from an underwater property is simply a speculator and one
who is not honoring his obligation. (Paulson presumably was not so
censorious of speculation during his 32-year career at Goldman Sachs.)
...
Mortgage holders do sign a promissory note, which is a promise to pay.
But the contract explicitly details the penalty for nonpayment
surrender of the property. The borrower isn't escaping the
consequences; he is suffering them.
...
[and the coup d'grace --]
No one says defaulting on a contract is pretty or that, in a perfectly
functioning society, defaults would be the rule. But to put the onus
for restraint on ordinary homeowners seems rather strange. If the
Mortgage Bankers Association is against defaults, its members,
presumably the experts in such matters, might take better care not to
lend people more than their homes are worth.
---
Tad Borek
> ... [T]he housing collapse left 10.7 million families owing more than
> their homes are worth. So some of them are making a calculated
> decision to hang onto their money and let their homes go. Is this
> irresponsible?
>
> routinely. Morgan Stanley recently decided to stop making payments on
> five San Francisco office buildings.
I see a big distinction between voluntary default in a commercial
setting vs. a residential one. Commercial borrowers pay higher interest
rates and typically can borrow a smaller percentage of the purchase
price, specifically because of their ability to walk away. The cost of
default is built into their loan, in effect, and the risk of bankruptcy
is factored in as part of the game of business. If an institution loans
them the money anyway, it's their problem.
But home ownership is heavily subsidized by the government, which is
just another way of saying that people who pay taxes subsidize home
owners. In part this is because of tax deductions (mortgage interest and
property tax) which, if they didn't exist, would result in higher tax
bills for homeowners. But more directly, Fannie Mae and Freddie Mac's
debt has been implicitly guaranteed by the federal government. Which is
to say, when these borrowers don't pay and walk away, and a portion of
the Fannie/Freddie bond that their mortgage was bundled into is starved
of expected cash, those of us who pay taxes foot the bill. This is not
something we should be very happy about, though on the flip side, the
stock market is doing awfully well so maybe it's a wash.
To me the solution would be to create a strong disincentive towards
walking away, akin to the penalties of bankruptcy (but stronger). For
example, a 10-year prohibition on receiving a Fannie/Freddie mortgage.
The borrowing costs of walk-away types would increase as a result,
because they couldn't get those taxpayer-subsidized loans. The higher
rates would compensate lenders for their proven higher risk of default.
But it wouldn't be "for life" recognizing that mistakes do happen.
And maybe pigs will fly, too!
-Tad
Don
> No one says defaulting on a contract is pretty or that, in a perfectly
> functioning society, defaults would be the rule. But to put the onus
> for restraint on ordinary homeowners seems rather strange. If the
> Mortgage Bankers Association is against defaults, its members,
> presumably the experts in such matters, might take better care not to
> lend people more than their homes are worth.
We law-abiding Americans pay our debts for the most part, but when
things get really bad, like the Stamp Act, then we thumb our noses at
authority and don't pay and hold something like the Boston Tea Party.
Don
> I see a big distinction between voluntary default in a commercial
> setting vs. a residential one. Commercial borrowers pay higher interest
> rates and typically can borrow a smaller percentage of the purchase
> price, specifically because of their ability to walk away. The cost of
> default is built into their loan, in effect, and the risk of bankruptcy
> is factored in as part of the game of business. If an institution loans
> them the money anyway, it's their problem.
>
> But home ownership is heavily subsidized by the government, which is
> just another way of -
I would call that a small distinction rather than a big distinction.
The crux of the matter is that in one case default is regarded as a
part of business and in the other case as a moral or ethical failing
and dishonorable act on the part of an individual. I see it as sort of
"pushing the little guy around" for commercial benefit. Two sayings
relevant to making a distinction between the different kinds of default
are "What is good for the goose is good for the gander" and "You can't
have your cake and eat it too."
Augustine
are underwater immediately upon driving out of the dealer lot, beats
me. The author has a point that we all need a roof over our heads,
not an investment. But that was the first mistake committed by the
homeowner, consciously or not. So, since the homeowner is living in
his investment, it gets murky when the investment goes under. Since
he also has a responsibility of providing for his family and it takes
precedence over the lender's satisfaction, a wash-sale is the best
alternative, not defaulting.
Elle
> Elle wrote:
Correction: Elle quoted from the NY Times.
> I see a big distinction between voluntary default in a commercial
> setting vs. a residential one. Commercial borrowers pay higher interest
> rates and typically can borrow a smaller percentage of the purchase
> price,
I am curious about how much higher the interest rates tend to be and
how much smaller the percentage of purchase price; how it compares to
the interest rates lower income folks pay; how much more negotiating
room and skill a corporation gets from and applies to a lender
compared to Joe and Jane Smith.
? specifically because of their ability to walk away. The cost of
> default is built into their loan, in effect, and the risk of bankruptcy
> is factored in as part of the game of business. If an institution loans
> them the money anyway, it's their problem.
>
> But home ownership is heavily subsidized by the government,
Corporations are not? Especially the recent financial institution
bailouts?
> which is
> just another way of saying that people who pay taxes subsidize home
> owners. In part this is because of tax deductions (mortgage interest and
> property tax) which, if they didn't exist, would result in higher tax
> bills for homeowners.
Given how high the standard deduction is I am doubtful this is very
significant. (Granted today one does not have to itemize to deduct
property tax.)
> To me the solution would be to create a strong disincentive towards
> walking away, akin to the penalties of bankruptcy (but stronger). For
> example, a 10-year prohibition on receiving a Fannie/Freddie mortgage.
This is a solution mostly in hindsight, it seems to me. The contracts
were signed long ago. Can't change them now.
> And maybe pigs will fly, too!
Yes. I for one think more regulation of the financial trading
industry will occur first.
I am a little surprised at your position here. Anyway, Don I think
captured well the point of the article.
Elle
> We law-abiding Americans pay our debts for the most part, but when
> things get really bad, like the Stamp Act, then we thumb our noses at
> authority and don't pay and hold something like the Boston Tea Party.
I do think the chances of a violent revolution are higher now than
they have been in decades. I also think this is a characteristic of
all societies over time, not just the United States. Take away enough
people's ability to make a living (that keeps up with others well
enough), and then they have nothing to lose and in fact much to gain
by revolting. It just takes a critical mass.
Don
> I do think the chances of a violent revolution are higher now than
> they have been in decades. I also think this is a characteristic of
> all societies over time, not just the United States. Take away enough
> people's ability to make a living (that keeps up with others well
> enough), and then they have nothing to lose and in fact much to gain
> by revolting. It just takes a critical mass.
Agreed. My guess is the USA will escape violent revolution this time,
because even in the Great Depression with the poverty and despair at
that time, the elected government survived. On the other hand, with a
few more Bush-Cheney administrations in a row and a few more financial
meltdowns that even Obama-like saviours couldn't fix, anything could
happen.
Elle
> My guess is the USA will escape violent revolution this time,
> because even in the Great Depression with the poverty and despair at
> that time, the elected government survived. On the other hand, with a
> few more Bush-Cheney administrations in a row and a few more financial
> meltdowns that even Obama-like saviours couldn't fix, anything could
> happen.
I had in mind riots in the streets and possibly mobs killing at random
in parts of the country. I do not expect some kind of coup. I think it
is something for which everyone at all levels of community should be
vigilant at this point, especially as high unemployment persists. But
we are on the same page.