An interesting article opinion piece in today’s New York Times Magazine says that it’s okay for a homeowner to walk away from a mortgage if his or her home is underwater. His reasoning is that it’s okay for homeowners to walk away from their financial obligations because financial institutions routinely walk away from theirs.
Putting aside the obviously infantile excuse that it’s okay to do something because everyone else is doing it, I have some real problems with the idea that a mortgage is a disposable legal and financial obligation that ceases to exist whenever a homeowner deems it to be in their personal interest to leave it behind.
First, the homeowner and the mortgage holder are not the only two that will be affected by this behavior. There almost certainly will be significant externalities like higher mortgage rates and required larger downpayments that will apply to others who want to buy or refinance a home as lenders seek to protect themselves from this happening again. The homeowner who is walking away almost certainly won’t give a damn whether I will have to pay more, but I sure as hell do.
Second, the rationale Lowenstein uses — that financial institutions default on obligations when they no longer see the return they were expecting so homeowners should be expected to do the same — isn’t the correct analogy. The far better one is: Homeowners shouldn’t be allowed to walk away from a mortgage that they can but no longer want to afford because the mortgage holder can’t sell the home to someone else while the mortgage is in effect just because the prospective new buyer will pay more. That’s the deal between the lender and the homebuilder: We’ll buy this house for you and won’t sell it to anyone else and you’ll be responsible for all of the agreed-upon payments.
Third, while most homeowners in the U.S. hope (or used to, anyway) to get more than they paid for their home when they sell it, there never was a guarantee that would happen. History may have convinced them that the price would always go up, but there was and is always the possibility that it would go in the other direction. Get over it.
Fourth, while most homeowners in the U.S. hope (or used to, anyway) to get more than they paid for their home when they sell it, most don’t buy it as an investment; they buy it to get a place to live. There are significant tax and other advantages to buying that homeowners enjoy in addition to (hopefully) making a huge profit. If underwater homeowners are saying they really bought their homes as investments, we should rethink the mortgage deduction and seek a refund of the taxes they didn’t pay while the mortgage was in effect.
Fifth, there is an exquisite irony to what Lowenstein is saying. Underwater homeowners typically complain vociferously about the practices of financial institutions, but Lowenstein is arguing that they should be allowed to do the same things as financial institutions. Stop complaining about what they do if you want to do what they do. And if you want to do what financial institutions do, expect the same type of regulatory oversight.
My very strong preference is that any homeowner capable of paying his or her mortgage who walks away from it simply because they don’t want to pay it any longer have their credit rating lowered significantly. I don’t want them to be able to buy another home any time soon or get a loan for any other purpose without paying extra for the privilege. That will impose on them at least some of the costs others will bear for what they’re doing.
I’m also not convinced about a federal program lowering principal for all underwater homeowners. I’m not sure why the underwater homeowner who can make the required payments but doesn’t want to do so shouldn’t be forced to declare bankruptcy and in the process bear some of the costs of his or her actions. That will likely lower what the mortgage holder can get for the home along the same lines as a reduction in principal and it will impose costs on the borrower that he or she should have to consider before walking away.
Don’t worry the housing market will collapse as soon as the FED stops backing up all the mortgages at which point most people will be able to buy a house with 20 or 30 percent down.
I can understand your argument but suppose you bought a 30-yr fixed mortgage home at $450K back in 2004 but in 2010 that same house is worth $230K, what should a wise person do? With such a price reduction the neighbors are feeling the same pinch. It will take many decades before the house can (probably) be sold at the purchase price. What is not mentioned is Congress has given corporations a lot of latitude to write down debt. In some cases, Congress provided morale hazard for some industries by taking tax payer money to pay off failed enterprises debts no matter the risk. Double standard?
In you article you mention that your “very strong preference is that any homeowner capable of paying his or her mortgage who walks away from it simply because they don’t want to pay it any longer have their credit rating lowered significantly.” Are you saying that doesn’t happen? The last Fannie Mae underwriting guidelines I checked stated that Fannie Mae will not purchase loans made to borrowers who have had a foreclosure in the last five years or a deed in lieu in the last four. In terms of raw credit point scores I’m very certain both of the above events have strong negative effects as well. Perhaps there are exceptions to the above but I believe that’s the general result (among others) from having a foreclosure on one’s credit. It’s hardly fun and games. People speaking or writing about others who have walked away from their homes do so with an insinuation that there’s a certain “glibness” to the act that I just don’t think is there in the vast majority of cases. The idea that they’re walking away from the home they currently own and then buying the one down the street “on the cheap” is the other fantasy I see played out alot. By and large it simply does not happen. To see Fannie’s guideline changes go to https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf.
Not a word was mentioned in your op ed about predatory lending, and that seems to be the white elephant that no one in mainstream media wishes to discuss. Thanks to recent legislation, if corporations-and perhaps that includes the banks-can enjoy the protections of “personhood”, shouldn’t they be expected to follow the same moral guidelines as the average homeowner? Also, please consider that homeowners who can still afford their mortgages walk away for purely financial motives ;corporations act in bad faith for the same reasons. Homeowners who walk away suffer bad credit for years thereafer. Many won’t even have the proper credit rating to rent a home. Banks who’ve engaged in questionable lending practices get bailed out. Why the double moral standard? If our lending institutions can’t be trusted to act in good faith, then it’s hypocritical to expect the American public to get in line like good little boys and girls. The problem is, those who abandon their homes and mortgages do so to their own detriment, and as you say, the rest of us end up paying as well. The banks need to be better regulated, and if that day ever comes,then we can have a real discussion about what constitutes moral, “mature” behavior.
This article does not take into account that these are unique times that require unique outcomes. This is the first time there has been a major collpase in the Housing Market. The govt. offers bail outs to major industries that are hurting financially, but if homeowners decide to bail themselves out because no one else will, it is considered a terrible thing.
Americans don’t want to pay their debts – Even to each other. And seem to have become well versed in the art of convincing themselves they shouldn’t have to – Much like the Greeks? Good heavens; If word of this was to get out overseas, foreigners may begin to suspect America was a poor credit risk. And tell it to fund its own present and future liabilities with its freshly printed paper – Good luck with that!