David over at My Two Dollars blogged about whether he thinks it’s okay to walk away from a mortgage. Originally, back in 2008, he said he didn’t think it was okay and was just wrong. Fast forward to today and he has changed his mind. He now believes, in light of all the government support the banks are receiving (and not really passing it on to their customers) that it’s okay to walk away. I completely agree.
I was just talking to my neighbor about this last week. I’ve mentioned him before. He bought the house across the street back in 2006 right at the peak of the market for a sales price of $440K. If he was to try and sell it today, he’d be lucky to get $315K. Fortunately, or unfortunately, he didn’t put much down on the house because he hadn’t sold his previous home. Instead he got two loans. One for 80% of the sales price and another for 20%. That put him at zero percent equity and it’s just gone down hill from there. To top it off, he lost his job about 9 months ago. He has stayed current on his mortgage but he’s taking a long hard look at how much longer he can do that. He also believes it’s okay to walk away, probably more out of necessity, than anything else.
From my viewpoint, the banks offered a loan against a piece of property. By holding the deed to the property they are, in effect, saying, “If you don’t pay this mortgage off, we are going to foreclose and take your house”. Now that it’s happening with increasing frequency (read: A LOT), there is all this talk about how it’s immoral to walk away. I don’t agree. The banks normally go to great lengths to loan to credit worthy individuals. That’s why they invented credit scores. It just so happens that they threw all those rules out the window during the real estate feeding frenzy of the mid 2000’s. It is due to their lack of prudence that they are now faced with taking back hundreds of thousands of homes (as their contracts state). Do I think they should be lowering loan amounts? Nope, not in most cases unless it’s to their benefit to do so. I think they should take the houses back and do their best to minimize their losses by selling the properties. Hopefully, if you are walking away from your home, you live in a state that doesn’t allow deficiency judgements. In these cases, you can’t just simply walk away. You could very well be billed the total loss that the bank takes on the property once they sell it. While there has been some press on this recently, apparently it doesn’t happen too often.
Anyway, in the end, I think that the banks made calculated risks with each of the loans they doled out. They are going to yield a positive return on some of the loans and they are going to lose on others. Don’t get me wrong, there is certainly some personal responsibility that is called for here. Personally, I think where morality comes in to play in all of this is where the people took out loans they knew they could not afford. It was at that point, that they made an immoral dishonest choice. At the same time, had the banks used their very old and very reliable guidelines for lending, these loans probably wouldn’t even have been approved in the first place. The folks that took out loans that they could afford but have since found themselves unemployed or underemployed and now can’t afford to pay their mortgages are really the ones that I completely sympathize with. They made a good faith effort to honor the loan, but now can’t. I don’t think they have a lot of choice other than to walk away, unless they have enough equity to actually sell the house and break even.
Let the flaming begin!