When is it OK to walk away from your mortgage?

Posted by: Peter Coy on June 30, 2008

home price abyss.jpgCheck out this week’s BusinessWeek cover story, The Home Price Abyss: Why the threat of a free fall is growing. I and Mara Der Hovanesian wrote the story with help from a bunch of other BW staffers.
Our core argument is that price declines could potentially feed on themselves. Big price declines make people unable to keep paying their mortgages (because their ARMs are resetting and the banks won’t refinance) or unwilling to keep paying their mortgages (because they see no point in throwing good money after bad). That drives up the foreclosure rate, which drives the prices of neighboring homes, adding to the downward spiral.
We’re already seeing this happening in some of the markets with the worst price declines such as southern California, Nevada, Arizona, and southern Florida. The question is whether it could spread to more areas and become a national problem.
One person we quote in the story says that the taboo on walking away from your home and leaving the keys behind could be diminishing. He says that in commercial real estate it’s business as usual. I would like to know what Hot Property readers think about the pros, cons, rights, and wrongs of walking out on a mortgage.

Reader Comments

Dave B

June 30, 2008 7:58 PM

In my dream world...The home buyer who bought a home to live in, should be given some slack and allowed to "work out" the loan with the lender to prevent a foreclosure. If they are too deep in a hole, try a short sale to mitigate the loss to the lender and the buyer's credit. For the "professional" investor, who by definition is much more experienced, they should be held more accountable for their bad decision and somehow be held responsible for the bad debt and not be allowed to "walk away" without a huge penalty (ie. prevented from obtaining any type of loan within 7-10 years from the initial walk away). I know it's a dream, but I strongly feel that some people were taken advantage of by unscrupulous real estate agents and lenders. There were also those buyers who took advantage of the lender's greed. However, there are those who weren't that sophisticated and got caught just trying to buy a home for their family. These are the people that should be helped. Just my 2-cents.

Jim D

July 1, 2008 12:14 PM

It's always OK to walk away from a bad business deal that you executed with a faceless corporation. It's legal, and it's ethical.

You owe a personal obligation to *people*, not corporations.

If you got cancer, and needed to be cut a break, they'd put you out on the street. Why should you treat them any more humanely than that?

On the other hand, if you borrow money from family and friends, it's never OK to walk away, regardless of how badly things go for you.

People confuse those two circumstances too much, and businesses take advantage of that every day.

And BTW - remember that Banks have the legal right to get cramdowns on their debts - while lobbying Congress to prevent you from having that same right. Don't fall for it.

Elvard K.

July 2, 2008 3:51 PM

people who engage in brainless behaviors are looking for hurt. Just as it is brainless to rail about "lenders greed" and "unscrupulous real estate agents". The cold facts are that ALL these parties, including buyers, are regulated by legal constraints. The full disclosure requirements in Real Estate comprehensive. The shame is that the politicians don't have the spine to bring down the perp-walk hammer on the hundreds of thousand borrowers who feloniously perjured themselves on a stupid gamble that prices would rise indefinitely: they should ALL be provided free housing, and food, in the slammer.

Salvador Trinxet

July 13, 2008 10:49 AM

As a banker, and as a consumer, I do not think this is a good option. You will always will owe the money to the Bank, with penalties, etc. It is much better to sell the house for less money you think is right and still paying some to the Bank, but at the end you will be debt-free.

Salvador Trinxet
CEO
Banco Internacional de Investimentos
www.bancoii.com

george

October 22, 2008 11:21 PM

I think theres some legal rights here also for the buyers. You cant blame them for walking. If i gave you a $5 bill for some work you done, The $5 bill is legally worth what it is. It isnt gonna turn into a$1 bill. If they paid for a 250,000 home and now its 70,000 less dont ya think they been misled. Blame the coke heads on wall street before you blame people who just wanted a home for there familys and got screwed by banks and the country. so for all of you that have equity in your homes good for you But dont put down innocent people like they dont eat breath and shit like you do.

Jay

April 16, 2009 8:26 PM

It's absolutely ok to walk away from a mortgage that has lost considerable equity. In fact, many times, it's the intelligent decision to make.

my residence has lost almost 65% of it's value. I owe 304k on a home that just appraised at 160k. The banks are a joke, they won't even modify the terms of the adjustable rate, so my payments keep increasing every 6 months.

I've paid the bank about 180k (mostly applied to interest) over the past 5 years. That fact coupled with the fact that they are unwilling to modify the terms of my AMERIQUEST originated mortgage just makes it an easier decision.

I was hung up on the "morals" of it for a while (over a year), but as I keep throwing more and more good money after bad, watch my value sink more every month and get interest increases twice a year on the terms, I've found it much easier to come to terms with.

Thanks obama, for bailing out the banks that are capitalizing on predatory lending.

Fu man chew

April 19, 2009 1:58 PM

It's ok for banks to fuck the taxpayers by proxy, but not ok for the taxpayers to give it back?

Fuck that noise.

Hippy liberals are all financial idiots.

Zhir

April 28, 2009 12:00 PM

A friend of ours walked away, lost their credit and worked their butts off for 2 years while living in a 500 square foot apartment. They are much happier even with their credit loss as it has caused them to be more disciplined. There credit is getting better and they look to be in a great position to buy a home in the not too distant future that will be a STEAL.

We are looking at the same thing as we have high earning careers and would rather live in a box with cash in our pocket and the mobility to leave as we wish rather than continuing to be beholden to the NIGHTMARE OBAMA MACHINE.

Matt

July 12, 2009 10:39 PM

It is not ethical to walk away from one's debts, but capitalism assigns the following economic value to ethics: $0. Moreover, public policy is providing economic inducements for people to walk away: 1) in most states primary mortgages are non-recourse loans, meaning that after foreclosure your debt is settled and you owe nothing more. 2) "Forgiven debt" has traditionally been taxable as income, but until the end of 2010 the forgiven debt is temporarily not taxable. This will lead to a spike in walk-away foreclosures over the next 18 months before the taxation resumes. The damage to credit can been severe, but the damage is inversely proportional to the rate of foreclosures; if the lending demographic has a high rate of foreclosure, that has to be overlooked if a bank is going to find enough people to lend to. The only real economic decision depends on which will occur first: your home returns to a value higher than your mortgage, or your credit record recovers? For anybody more than 20% under water with only a primary mortgage (no piggyback or home equity loans) it is very likely they can recover from a bad credit mark sooner than their home value will return to its previous value.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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