When IS it time to walk away from your mortgage?

Robear wrote:

The issue with the financial companies which you raised is the same point I'm making - they've been legally exempted from liability. All we disagree on is the idea that individuals within an ordinary company are not responsible for their actions. They are; I get a briefing every six months on exactly that, and I've seen several people charged and convicted of Federal offenses for violating the rules.

Let me ask you this then. Do you believe that the people charged and convicted are the only people violating the rules or were they just the ones who got caught and couldn't get off? My experience has taught me they are simply the cockroach you see--there are thousands more crawling through the walls that you don't.

Let's just look at Enron as one example. Kenneth Lay escaped all responsibility for his actions, even if it was by a posthumous legal trick. Skilling just got the SCOTUS to overturn part of his conviction (and make it harder for other business people to be held responsible). And I haven't heard a damn thing about all the Enron finance staff that came up with and ran all the shell companies and illegal transactions or all the traders that bilked my state out of billions. So all those people, perhaps hundreds of them, were never, ever held responsible for their actions.

I've been busy the past couple weeks because my landlord decided to walk away from his rental property. Now he started this over a year ago while I was re-upping my lease for another year, he had decided that he owed too much on the house regardless of the fact that my rental check covered the mortgage and taxes. After about 6 months of him not paying the mortgage, the bank started to notice and told him they were going to start foreclosure proceedings. He lawyered up in attempts to get the mortgage re-done so that he could make a profit from the rent payments. The bank wasn't willing to negotiate in any way shape or form, so with only 4 months before the house was to be foreclosed on, he attempted to short-sale it. He found a realtor and had the house shown often, he couldn't put a sign in front of the house as the bank had never said it would do a short-sale. He got offers in, the bank received the offers and never responded. I believe this was due to the fact that there was no way he couldn't have afforded to pay the mortgage.

For roughly 1 year, my landlord took my rent check and paid nothing to the bank. In June the bank had enough and despite my landlord having paid plenty out to a lawyer, the bank foreclosed as it had said it would. I now live in a bank owned property and recently signed the cash-for-keys as they want me out of the house as soon as possible. I am moving next week even though my lease was through July. Of course my landlord will not return my security deposit, I imagine I will have to fill out some paperwork with the bank and maybe I'll get it back. I did receive an angry email about daring to ask for my security deposit back when he had lost all his credit.

So that's the story of an owner walking away from a property while using it as a rental from the perspective of the tenant. As this is a real story I hope it will help in the discussion.

I don't get this. Banks operate within a highly regulated framework. They don't face many ethical dilemmas because rules tell them what they can and can't do. It's not a personal relationship. I don't have much experience with commercial lending, but the times I worked in that area while in law there was usually some kind of security or personal guaranty for a loan, and the loan documents were typically very one sided to favor the bank. The bank's attitude was like, "We're pretty sure you'll try and screw us over if things go bad. So let's have a very detailed contract and a lot of easy remedies if we need them."

Again, was this after the mid-80's? I'm talking about before the easing of regulations. You hit it on the nose - they don't face ethical dilemmas when the regulations constrain them. I'm just pointing out that prior to Reagan's time, they were much more constrained than they are now, and consequently, they were better regarded. The closer you can bring a business relationship to social norms, where both sides are equal, the more comfortable people will be with that relationship.

Robear wrote:

The closer you can bring a business relationship to social norms, where both sides are equal, the more comfortable people will be with that relationship.

This is where we're having a disconnect. What kind of social norm do you have in mind? I don't remember having a social relationship with my bank back then. At least, I don't remember anything different in retail banking that isn't there now, except for the fact that I almost never see a teller these days.

Again, what I'm talking about is that the business relationship was tied to a social one, and the rules for each were similar. The bank was local, and the managers and tellers knew their customers. Likewise, if a bank tried to screw someone over, word got around and people could avoid it, or even complain and be heard. If you wanted to get a loan, you could actually meet with the loan committee and argue your case. Further, the bank's reserves were dependent on good will. If customers lost faith in the bank, they could pull their money and literally put it out of business. Banks participated in the community, not just by issuing real estate and business loans, but by sponsoring sports teams, contributing to fire services, and conducting other local philanthropy, again, because their *relationship* with their customers was the basis for their business.

On a business level, banks were not allowed to both lend and invest, so they made their money by keeping depositors. As I've noted above, relationships in business follow social rules to the extent that those are necessary for business. When regulations are removed, and management is no longer local, relationships fall by the wayside and the bank can become abusive to it's customers - it's making more money off of investments, perhaps, and so doesn't view individual customers as particularly valuable.

My argument is that the older situation, where the business relationship was also a social one based on *mutual* trust and respect, was more stable and beneficial to both sides. I feel that deregulation has led to the takeover of banks by national chains, and a de-emphasis on banking as a responsible part of the community, and turned it into one aspect of a financial company which is more interested in investing than in making money by helping people and communities.

This is important because banks control so much of the financial power of the country, and they are now able to risk it in the markets and outside of them, all for profits. This is not a good situation, but I think the current bill addresses some of the problems pretty well.

LeapingGnome wrote:

That is pretty much one of the big problems in this country, people take their morality from the law. Things would be a lot better if people didn't think as long as they don't get arrested for something then it must be ok to do.

In case this was in response to what I was saying about regulations and corporate culture:

My argument is not that individuals take their morality from the law, but that large corporations certainly do, and that is corrosive to the morality of individuals within these organizations, even if those people would otherwise be inclined against immoral actions.

Which is why responsible companies spend a lot of time and effort encouraging employees not to fall into that behavior. It still happens, but at least at the customer facing level it's unusual. At least in the companies I'm exposed to (and this directly concerns what I do for a living, because I sell to the Federal government.)

Robear wrote:

Which is why responsible companies spend a lot of time and effort encouraging employees not to fall into that behavior. It still happens, but at least at the customer facing level it's unusual. At least in the companies I'm exposed to (and this directly concerns what I do for a living, because I sell to the Federal government.)

Short term profit always trumps long term relationships, or at least that's what business has devolved into these days.

Your company might try to be squeaky clean, but every company I've worked for has always put quarterly numbers above ethics, whether it's performing a little creative accounting to increase revenues or hide some costs, pushing a product out the door when it's not quite ready, or selling a customer a bunch of software they don't need but aren't smart enough to realize it. Of course there are consequences of that behavior, like having the performance numbers of your services group take a pounding in the months to come, but most of the time executives will still make that decision because they aren't worried about what might happen two quarters from now, they're worried about this quarter.

Floyd Norris has something relevant to the development modern financial system. Talking about compensation, an old investment banker wrote him:

“The old pay system (era of John Whitehead): you work at an investment bank for 30 years, have a reasonable draw and cash bonus, build up stock in the firm as most of your bonus, and when you decide to retire you request of the partners their permission to go limited. If they assent, you get to withdraw your money over five years, all the while continuing to expose the balance to the risks of the enterprise.

The new pay system post-Donald Lufkin Jenrette’s original I.P.O.: you’re a young 29-year-old punk playing with OPM (Other People’s Money), taking huge risks for which you get huge bonuses, while the outsiders shoulder the losses on your bets. You make all the money you’ll ever need in three years, stay around 15 years to pile up five times as much as you need, and then you retire with your cash hoard, buy a winery in Napa/Sonoma or a huge farm in Connecticut, living above the fray for the rest of your life.

Which system, do you think, makes people consider the downside of their actions?”

This is the end state of the kind of financial capitalism that Reaganism helped foster. It's not about risking your capital and building a business. It's about working the system to get a payout and then walking away.

Yep, I agree Funken.

Funkenpants wrote:

This is the end state of the kind of financial capitalism that Reaganism helped foster. It's not about risking your capital and building a business. It's about working the system to get a payout and then walking away.

This is why I didn't want to talk about the morality of this, but rather the technical nature of it, if it truly made sense economically, etc. There is no morality on the lending side, by and large. Why should the little guy work two jobs because the lender broke the whole economic system?

DSGamer wrote:

Jayhawker, that's why the subject line is written the way it is. Because Ratigan (in the article) lays out a compelling case that it's not a good business decision to keep paying for an underwater house and that's why I was curious at what point and under what circumstances would it really honestly be a good idea to walk away ("walk away" obviously being relative).

I would say this is the time(s) to do so:
1) When your mortgage payment goes up (taxes, ajustable rates, etc) and you cannot afford the payment.
2) When you lose your income and cannot afford the payment.

Basically, when you cannot make the payment, you have to go. Just because your house is worth less than you owe isn't a reason to leave if you can continue making the same payment you argeed on when you bought the place. For many, the house is still a good house, and they have no real reason to leave. Now, I can see problems where you *need* to sell, and you're upside down, what do you do? Well, if you can afford to sell and pay the difference, then that's the best bet. It will preserve your credit. Short sales are painful, and full of restrictions, and are generally a bad option for everyone. Some go smoothly, most do not.

I saw an article in the WaPo this weekend noting that many mortgage companies and banks are now willing to write a contract that absolves owners of any further financial obligations if they want to walk away. You sign the contract and hand over the keys. The bank won't come after you for fees, taxes or the difference in value. Apparently it's becoming more popular.

OG_slinger wrote:

Short term profit always trumps long term relationships, or at least that's what business has devolved into these days.

Any business operating in that manner is a failing business (at least the top knows it, even if the middle/bottom does not). Many successful businesses I have worked for are the opposite. Some have even been around for 90+ years.

Robear wrote:

I saw an article in the WaPo this weekend noting that many mortgage companies and banks are now willing to write a contract that absolves owners of any further financial obligations if they want to walk away. You sign the contract and hand over the keys. The bank won't come after you for fees, taxes or the difference in value. Apparently it's becoming more popular.

But why? How does this benifit the bank?

Your company might try to be squeaky clean, but every company I've worked for has always put quarterly numbers above ethics, whether it's performing a little creative accounting to increase revenues or hide some costs, pushing a product out the door when it's not quite ready, or selling a customer a bunch of software they don't need but aren't smart enough to realize it. Of course there are consequences of that behavior, like having the performance numbers of your services group take a pounding in the months to come, but most of the time executives will still make that decision because they aren't worried about what might happen two quarters from now, they're worried about this quarter.

All I can say is that I know people who went to Federal prison for this; I've seen companies lose the right to sell to the government for it; and I've seen executives lose their jobs and a lot of money for it. I just disagree with the blanket statement that people in business don't pay attention to ethics, because it's not true of all companies. Make sense? I'm not a big corporation supporter in general, but this is something that I know from first-hand experience. Maybe selling to the government requires higher corporate standards?

Shoal07 wrote:
Robear wrote:

I saw an article in the WaPo this weekend noting that many mortgage companies and banks are now willing to write a contract that absolves owners of any further financial obligations if they want to walk away. You sign the contract and hand over the keys. The bank won't come after you for fees, taxes or the difference in value. Apparently it's becoming more popular.

But why? How does this benifit the bank?

Bank doesn't face someone squatting in the house waiting in foreclosure and potentially damaging the value of the home through physical neglect, perhaps? Then they get the house as it is with the chance to resell it and collect the fees off of the new sale. Just guessing.

That's really weird, though. If they're willing to do that then why aren't they willing to cramdown the overall cost of the mortgage in order to make things more affordable. There is a law coming into effect in the fall that creates a program for principle reduction, but its scope seems to be very very limited. You have to be REALLY underwater.

DSGamer wrote:

That's really weird, though. If they're willing to do that then why aren't they willing to cramdown the overall cost of the mortgage in order to make things more affordable.

Because that impacts the value of the house thereby undermining neighboring home values. You can't refinance without an appraisal. And appraisals inform local home values.

Essentially, everyone on that block could end up underwater if such a deal could be made. In order for the market to survive in its current state without a catastrophe, we have to keep pretending that these homes were really worth what we paid rather than the result of too much cheap money flying around.

Deeds in lieu also are surging because they provide a win-win for borrowers and mortgage investors that short sales often cannot match. Tops on the list: speed. Travis Hamel Olsen, chief operating officer of Loan Resolution, a Scottsdale, Ariz., firm that works with lenders to solve troubled borrowers' problems, said deeds in lieu represent "a very expeditious way to move on" for underwater borrowers who are facing potential foreclosure.

"A lot of owners just want to be finished with it now," he said. "They don't want to deal with [the house] anymore." They don't want to deal with real estate agents or signs on the front lawn that reveal their financial squeeze to neighbors. They don't want to haggle with potential buyers coming in with lowball offers. But they also don't want to simply walk away -- strategically default -- because that will crater their credit files and scores for as much as seven years.

Greg Hebner, president of the MOS Group of San Diego, which also works with banks and investors across the country to resolve defaulting borrowers' situations, said a key motivation is that lenders are stuck with massive backlogs of underwater homes that haven't yet gone through foreclosure and been put on the market -- the so-called shadow inventory.

Not only is it cheaper for them to do deeds in lieu to gain control of those properties, but with mortgage rates below 5 percent, they also will probably be able to resell them faster and on potentially more favorable terms in the summer and fall.

"If you can get a lot of inventory moving in the next couple of months" of prime home-buying season, Hebner said, "you are solving a lot of problems."

"Foreclosure Alternative Gaining Favor", Kenneth R. Harney, WaPo Saturday Jun 26, 2010

So what would have been the effects of universal cramdown? I wondered since the start of the financial crisis why TARP money wasn't just used to cramdown every mortgage. It would have been far cheaper and it would have made the mortgage backed securities less risky, no?

We still would have had an asset and credit bubble to deal with (as I'm sure Malor will point out to me ), but at least we could have "reset" housing prices at pre-bubble prices.

DSGamer wrote:

So what would have been the effects of universal cramdown? I wondered since the start of the financial crisis why TARP money wasn't just used to cramdown every mortgage. It would have been far cheaper and it would have made the mortgage backed securities less risky, no?

We still would have had an asset and credit bubble to deal with (as I'm sure Malor will point out to me ), but at least we could have "reset" housing prices at pre-bubble prices.

It's a nice thought, but only one part of the economy. I'd bet that the continued availability of cheap money would just drive prices back up due to the increased demand of renters suddenly entering the housing market.

GioClark wrote:
DSGamer wrote:

So what would have been the effects of universal cramdown? I wondered since the start of the financial crisis why TARP money wasn't just used to cramdown every mortgage. It would have been far cheaper and it would have made the mortgage backed securities less risky, no?

We still would have had an asset and credit bubble to deal with (as I'm sure Malor will point out to me ), but at least we could have "reset" housing prices at pre-bubble prices.

It's a nice thought, but only one part of the economy. I'd bet that the continued availability of cheap money would just drive prices back up due to the increased demand of renters suddenly entering the housing market.

Couldn't you argue, though, that anyone who wanted to get into a house got into a house at this point. So if you were a renter looking to enter the market at that point either you were a savvy buyer or you would need one of the shady loans which would, theoretically, no longer be available.

DSGamer wrote:
GioClark wrote:
DSGamer wrote:

So what would have been the effects of universal cramdown? I wondered since the start of the financial crisis why TARP money wasn't just used to cramdown every mortgage. It would have been far cheaper and it would have made the mortgage backed securities less risky, no?

We still would have had an asset and credit bubble to deal with (as I'm sure Malor will point out to me ), but at least we could have "reset" housing prices at pre-bubble prices.

It's a nice thought, but only one part of the economy. I'd bet that the continued availability of cheap money would just drive prices back up due to the increased demand of renters suddenly entering the housing market.

Couldn't you argue, though, that anyone who wanted to get into a house got into a house at this point. So if you were a renter looking to enter the market at that point either you were a savvy buyer or you would need one of the shady loans which would, theoretically, no longer be available.

Not if we're talking about an accompanying price drop that comes with the mortgage readjustment. A 25% price drop would immediately bring new buyers into any market. And as long as money remains cheap with record low mortgage interest rates, everyone who was waiting a year or two to save up a down or clear some consumer debt will now jump at the chance.

It seems like the lenders are content to keep pretending that these houses are really worth what they were paid for until inflation catches up. Therefore, expect interest rates to remain low. The continued availability of cheaper-than-savings credit will continue to deter any notion of consumer sanity.

Edit: (Before I get jacked by the finance wonks) I'm basing my 'cheaper-than-savings' credit metric on a presumed inflation rate of 4%.

GioClark wrote:
DSGamer wrote:
GioClark wrote:
DSGamer wrote:

So what would have been the effects of universal cramdown? I wondered since the start of the financial crisis why TARP money wasn't just used to cramdown every mortgage. It would have been far cheaper and it would have made the mortgage backed securities less risky, no?

We still would have had an asset and credit bubble to deal with (as I'm sure Malor will point out to me ), but at least we could have "reset" housing prices at pre-bubble prices.

It's a nice thought, but only one part of the economy. I'd bet that the continued availability of cheap money would just drive prices back up due to the increased demand of renters suddenly entering the housing market.

Couldn't you argue, though, that anyone who wanted to get into a house got into a house at this point. So if you were a renter looking to enter the market at that point either you were a savvy buyer or you would need one of the shady loans which would, theoretically, no longer be available.

Not if we're talking about an accompanying price drop that comes with the mortgage readjustment. A 25% price drop would immediately bring new buyers into any market. And as long as money remains cheap with record low mortgage interest rates, everyone who was waiting a year or two to save up a down or clear some consumer debt will now jump at the chance.

It seems like the lenders are content to keep pretending that these houses are really worth what they were paid for until inflation catches up. Therefore, expect interest rates to remain low. The continued availability of cheaper-than-savings credit will continue to deter any notion of consumer sanity.

Edit: (Before I get jacked by the finance wonks) I'm basing my 'cheaper-than-savings' credit metric on a presumed inflation rate of 4%.

This money, while existing in a loan, seems like it would be easy for lenders to "just reduce" by 25%. The problem is, the lender has already paid this money out. For example, if you buy a home for 300k, you're not just getting a loan for 300k, but the bank is paying 300k to somebody. So, if the bank just drops the mortgage to 250k, they lose 50k. They have little incentive to do this for the vast majority of homeowners who are paying on their current mortgage, upsidedown or not.

Now, if you're saying the individuals who profited at the hight of the market had to return that money to the bank, and the bank then adjusted the mortgage down, then maybe this would be possible. I give that about a zero chance of happening.

Actually, I had already thought of that. That's why I mentioned the TARP money. As odious as it sounds and as politically volatile as it sounds, would it have been any worse to have used TARP money to pay the difference in cramdowns? It would have been much cheaper than the bailouts.

DSGamer wrote:
Shoal07 wrote:
Robear wrote:

I saw an article in the WaPo this weekend noting that many mortgage companies and banks are now willing to write a contract that absolves owners of any further financial obligations if they want to walk away. You sign the contract and hand over the keys. The bank won't come after you for fees, taxes or the difference in value. Apparently it's becoming more popular.

But why? How does this benifit the bank?

That's really weird, though. If they're willing to do that then why aren't they willing to cramdown the overall cost of the mortgage in order to make things more affordable. There is a law coming into effect in the fall that creates a program for principle reduction, but its scope seems to be very very limited. You have to be REALLY underwater.

They won't do that because your mortgage is considered an asset on their books. If they reduce it to make your payments smaller, they have to report that they have fewer assets then they said they did. Since they made other loans or investments using your mortgage when it had a value of $X, they'd be up sh*t creek if they'd admit your mortgage was really worth $X - 30%. They'd either have to scramble to find cash to make up the difference or they'd have to admit they are effectively insolvent.

The accounting of banks right now is a joke. They forced through a change to the Generally Accepted Accounting Principles (GAAP) that allowed them to ignore the old "mark to market" rule, which required banks to value assets (in this case, mortgages) according to their current market value. So instead of reporting the actual value of all those mortgages, the banks are still pretending that houses are worth as much as they were when they wrote or bought the mortgage. They don't want anyone knowing how overvalued those mortgages are, which is what would happen if they gave homeowners a break.

5 cats in the house?! That's the problem right there!

Robear, I think you're confusing ethics and legality. Employees have an extremely high incentive to avoid breaking the law, but in general they get few incentives for acting in ways that most of us would consider ethical.

You don't get fined or locked up for being an insensitive asshole, you go to jail for breaking the law.

Malor wrote:

Robear, I think you're confusing ethics and legality. Employees have an extremely high incentive to avoid breaking the law, but in general they get few incentives for acting in ways that most of us would consider ethical.

You don't get fined or locked up for being an insensitive asshole, you go to jail for breaking the law.

I agree with Robear, and don't think he's confused. Well... not about this, anyway.

Robear, I think you're confusing ethics and legality. Employees have an extremely high incentive to avoid breaking the law, but in general they get few incentives for acting in ways that most of us would consider ethical.

You don't get fined or locked up for being an insensitive asshole, you go to jail for breaking the law.

Yes. And you lose customers for being an insensitive asshole focused only on your own immediate benefits. Just like, in a social situation, you lose friends for behaving that way.

That's what I'm saying - businesses have good reasons to behave ethically, not just legally. Customers react badly to being treated badly, and corporations which get away from that understanding suffer, unless they can get to the point where interactions are all transactional and essentially anonymous. I argue that removing that social-like aspect from business leads to easier abuses on both sides, because there's no personal (or social) connection.

I *do* get incentives for acting ethically. I get more customers that way, even if it involves walking away from business now. And I keep them, even if I screw up, because they know that they can trust me not to screw them over.