Stop paying on your mortgage if you owe more than your house is worth.
And most important: Don’t feel guilty about it. Don’t think you’re doing something morally wrong.
That’s the core message of a new academic paper by Brent T. White, a University of Arizona law school professor, titled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.”
White contends that far more of the estimated 15 million U.S. homeowners who are underwater on their mortgages should stiff their lenders and take a hike.
Doing so, he suggests, could save some of them hundreds of thousands of dollars that they “have no reasonable prospect of recouping” in the years ahead. Plus the penalties are nowhere near as painful or long-lasting as they might assume, he says.
What kind of law school professorial advice is this?
Aren’t mortgages legal contracts?
“Homeowners should be walking away in droves,” White said. “But they aren’t. And it’s not because the financial costs of foreclosure outweigh the benefits.”
Sure, credit scores get whacked when you walk away, he acknowledges. But as long as you stay current with other creditors, “one can have a good credit rating again — meaning above 660 — within two years after a foreclosure.”
Better yet, homeowners can default “strategically”: Buy all the major items they’ll need for the next couple of years — a new car, even a new house — just before they pull the plug on their current mortgage lender.
“Most individuals should be able to plan in advance for a few years of limited credit,” White said, with minimal disruptions to their lifestyles.
The main point, he said, is that too often people’s emotions get in the way of clear financial thinking about mortgages, turning them into what he calls “woodheads” — “individuals who choose not to act in their own self-interest.” Most owners are too worried about feelings of shame and embarrassment after a foreclosure, and ignore the powerful financial reasons for doing so.
Buttressing these emotions is a system that White labels “the social control of the housing crisis” — pressures and messages continually sent to consumers by the “social control agents,” namely banks, government and the media. The mantra that these agents — all the way up to President Obama — pound into owners’ heads, White said, is that “voluntarily defaulting on a mortgage is immoral.”
Yet there is an inherent imbalance in the borrower-lender relationship that makes this morality message unfair to consumers, White says: Banks set the rules during the housing boom, handing out home loans with no down payments, no income checks and inflated appraisals. Now that property values have dropped 20% to 50% in many areas, banks have been slow to modify troubled mortgages and reluctant to reduce principal debts.
Only when homeowners cut through the emotional fog and default strategically in large numbers, White argues, will this inequitable situation be seriously addressed.
Source: Los Angeles Times
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Nice post, as usual, Dan. Much of what the Prof. advises is good advice. Folks need to look at their houses and try to take the emotion out of it. I wrote a post on this on my blog at http://www.scbankruptcyattorney.com/blog/filing-bankruptcy-to-surrender-assets-sometimes-its-best/2009/09. I deal with this in my own practice all the time. When clients have no equity in their homes, I call it renting. Some are so upside down, they won’t have equity for 10 years or so. It’s sad, but it’s but to deal with reality.
I get the whole, “sticks and bricks,” argument – I use it all the time when dealing with distressed homeowners. A house is not a home and all that.
But to tell people to walk away even if they can afford their mortgage payments is … absurd to say the least. If you can afford the payment and can keep a roof over your head, that’s a good thing. The market is down today, up at some point in the future. Why willingly put yourself in a position of financial distress when it’s not necessary?
Perhaps the equation differs in states that prohibit deficiency judgments, but in New York a mortgagee can continue to collect when the sale price falls short of the balance due. In such a situation, a defaulting borrower may be backing into a future bankruptcy when one might otherwise be unnecessary.
I understand what you are saying Jay and in many cases, maybe even most, you would be right. But I remember what I learned in my first semester Contracts class in law school, namely that the law is not about what is moral but what is legal. And sometimes a party to a contract weighs his options and decides that it would be more beneficial to him to break a contract and bear the resulting consequences than to comply with the terms of that contract.
Just because a homeowner can easily afford his mortgage payment doesn’t always mean that making the mortgage payment is the best thing for the homeowner to do. There can be numerous issues that make a once attractive house no longer desirable to a homeowner. And when that is the case, the homeowner may decide that his best option is to default on the mortgage and bear whatever consequences arise from his breach of the contract so that he can rid himself of a house he no longer desires to own.