When IS it time to walk away from your mortgage?

I think up here in Canada, if you sell a house for less than you owe (and are buying a house in the same series of transactions), the difference gets added to the new mortgage.

Robear wrote:

But the idea that all businesses are immoral and unethical and that's the nature of capitalistic success is based ultimately on outdated understandings of capitalism.

Tough issue. The reasons you posted for ethical behavior are no different than those of self-interest, but we know that self-interest and ethics aren't mirrors of each other.

Businesses which ignore these will always be less efficient than those that do, even though they may be profitable.

Ethical behavior is easy when it benefits you in some way. It's ethical behavior that benefits someone else or outright hurts you that's the problem, and the way the system works, it can be hard to stay in business in some industries if you and your competitors are held to different ethical standards.

mudbunny wrote:

I think up here in Canada, if you sell a house for less than you owe (and are buying a house in the same series of transactions), the difference gets added to the new mortgage.

Probably one of the reasons why your economy is doing better than ours. Plus, the government owns all the banks.

I notice that you now qualify it with "in some industries".

What I'd say to your first point is that the early 20th century understanding of "self-interest" did not include altruism and social considerations that we now understand play heavily in people's reaction to each other. I argue that businesses keep customers through respecting rules like "don't cheat your customers" that were not necessary in more unfettered environments. Likewise, the businesses we see still conducting themselves rapaciously should be found in fields with less regulation and oversight. That's my prediction.

When I was growing up, banks sold themselves on the idea that you could *trust* them with your money. After the relaxing of financial regulations, and the resultant S&L and bank and related financial problems, do you think they could do that now? I don't, and a large part of the reason is that when you remove the ability of consumers to, in essence, react to abuses as they would in social situations, you remove an important check on the behaviors of both parties. Mortgage companies didn't give a damn that they had abusive contracts, and now consumers don't care if the company (or neighborhood) is injured when they walk away.

Regulations in essence can bring customers the possibility of resolving grievances, and so trust is more easily established. Less regulation means less concern by each party for the other. That's my thesis. (And no, that does not mean "more regulation is better", duh. *Effective* regulation is what I'm talking about, not by-the-pound senseless drivel. So don't take the discussion there.)

Robear wrote:

Businesses which ignore these will always be less efficient than those that do, even though they may be profitable.

Unfortunately, businesses aren't judged by efficiency. They're judged by profitability. So as long as you make more profit by being a slimeball than a good guy, you're going to be a slimeball.

I guess I just find it hard to understand how most people would never screw over other people in their personal lives, but put them in an org chart and suddenly they'll do incredibly sh*tty things to other people without hesitation.

From that perspective, I don't see how you could says that corporations are remotely ethical or moral. They are built on premise of diffusing responsibility that is the core of morality and ethics: you are responsible for how your actions affect someone else. In a corporation, you aren't personally responsible for anything.

Robear wrote:

I notice that you now qualify it with "in some industries". :-)

I don't "now" qualify it since I didn't begin with "all industries." But what the hell? Call it "all industries."

Also, despite the fact that when you were young banks publicly sold themselves with the idea that you can "trust them," the reality of that time is that government had regulations in place to make it for them hard to get into trouble while the government explicitly told the public "You won't lose anything if you trust them." That doesn't sound like a social situation to me.

Every day there is a new news item about how the financial reform legislation was watered down. How we can't even regulate derivatives or re-institute the "Chinese wall" between commercial banks and investment banks. We hear daily about the numerous ways in which the "investors" on Wall Street who brought the economy to the brink of armageddon are thriving, never having paid a penalty for creating rickety and unsustainable new ways of manufacturing wealth. We have the Gulf of Mexico filled with oil and we can't regulate that industry. We have a Supreme Court that is basically rubber stamping the rights of corporations to step on the average citizen.

In my opinion, in light of the world we currently live in, morality doesn't enter into the equation. If we were being equal about this then morally I would be allowed to bulldoze my house, ruin the banks investment and hand the keys back to them and NOT get penalized. But the little guy isn't on equal footing. So there is no morality here, in my opinion.

I'm simply curious if, as a business decision, it makes sense. My wife and I are underwater in our house. Having paid 230k for a house that now appraises (just based on the market) for around 185k. And that's in a GOOD market. If this was a 401k I would stop contributing immediately and use that money towards something better like bridging the gap between unemployment and what we used to make.

In our case, though, we love our community and we love the house. So while it's a business decision, we're irrationally choosing to roll the dice because we value where we live more than the market does. Either way, though, that irrational decision is akin to overpaying for an iPhone or the new XBox, but on a larger scale. We want it, so we pay it. As a business decision it's bad. And nowhere does morality play into it.

Anyway, good discussion. Keep it up. But please resist the urge to get self-righteous. Many of us are even thinking about these things because the economy is in such a strange place, both in terms of unemployment, but in terms of how we got here and how the rules are rigged for one side and not the other. In that kind of a climate I think you have to realize that everyone is looking out for themselves, so why would you do any differently? At that point then the question becomes a technical one. How underwater does one have to be? What is the gap between renting and what you pay in mortgage payments? How soon can we expect the housing market to pick up and at what rate? At what rate of unemployment do you need to pull the plug so you have the mobility to live elsewhere where jobs are available?

I think these are the questions that need answered.

DSGamer wrote:

In our case, though, we love our community and we love the house.

Then why do you want to sell the house? I'm missing something here. Is the mortgage too much to pay?

Funkenpants wrote:
DSGamer wrote:

In our case, though, we love our community and we love the house.

Then why do you want to sell the house? I'm missing something here. Is the mortgage too much to pay?

I think you're missing the part where at the first of this post I said this wasn't about me and was just curious about it from a technical perspective.

But the idea that all businesses are immoral and unethical and that's the nature of capitalistic success is based ultimately on outdated understandings of capitalism.

Most people signed very explicit contracts that they have the right to walk away from a mortgage, and the bank gets the house. That's what was actually agreed to.

Exercising this clause in these contracts is not immoral behavior. It's there, in writing, for a reason. You may wish the banks had chosen different language, but they were the ones who wrote it.

DSGamer wrote:

I think you're missing the part where at the first of this post I said this wasn't about me and was just curious about it from a technical perspective.

I see my mistake. I got your situation confused with BonusEruptus' story.

Malor wrote:
But the idea that all businesses are immoral and unethical and that's the nature of capitalistic success is based ultimately on outdated understandings of capitalism.

Most people signed very explicit contracts that they have the right to walk away from a mortgage, and the bank gets the house. That's what was actually agreed to.

Exercising this clause in these contracts is not immoral behavior. It's there, in writing, for a reason. You may wish the banks had chosen different language, but they were the ones who wrote it.

Any way to exercise this clause without completely boning your credit?

Not as far as I know. You'd probably want to talk to a lawyer. It may actually be better to declare bankruptcy than to default without a bankruptcy.

Malor wrote:

Not as far as I know. You'd probably want to talk to a lawyer. It may actually be better to declare bankruptcy than to default without a bankruptcy.

Either is probably going to keep me from being able to buy a new house for the foreseeable future, then. Looks like I'm probably going to just have to eat the loss.

DSGamer wrote:

I'm simply curious if, as a business decision, it makes sense. My wife and I are underwater in our house. Having paid 230k for a house that now appraises (just based on the market) for around 185k. And that's in a GOOD market. If this was a 401k I would stop contributing immediately and use that money towards something better like bridging the gap between unemployment and what we used to make.

In our case, though, we love our community and we love the house. So while it's a business decision, we're irrationally choosing to roll the dice because we value where we live more than the market does. Either way, though, that irrational decision is akin to overpaying for an iPhone or the new XBox, but on a larger scale. We want it, so we pay it. As a business decision it's bad.

Well, I think the question is *which* business decision is bad. The original one to buy the house might have been, but my uneducated, barely informed opinion on your situation is that this isn't about whether to keep paying for an underwater house: you're actually paying a debt where you used a house that is now underwater for collateral.

That leads to my guess that just because you walk away from the house, you haven't walked away from the mortgage. When businesses walk away from their debts, it's usually because there's some kind of limited liability: creditors can't pursue the 'owner' of the corporation beyond the value of the corporation. When an owner walks away from a corporation, all his personal assets are usually safe.

I don't think mortgages work like that. I don't think your liability is limited to the value of your house the way an business owner's liability is limited to the value of the business. I think you *personally* are on the hook for the full value of the mortgage. You get a lot of legal protections with mortgages that you don't get with other loans, but I don't think the value of the asset you used as collateral acts as some kind of 'cap' on your debt.

Also something to keep in mind: even if the bank does forgive the portion you are underwater, you might have to claim that amount as income and pay taxes on it:

Federal and state tax laws have long viewed canceled debt as income because consumers who borrow money to buy a house—or who pull money out of their house to buy cars and such—and then don't pay it back "wind up ahead of where they were," says an IRS spokesman.

Thus far this year, Michele Knight, a CPA with a high-end clientele in Keystone, Colo., has had five clients owe taxes tied to houses and another five tied to credit cards and auto leases. "They're calling me in tears and saying, 'What do you mean I owe taxes?'" she says. "I never would have expected it."

http://online.wsj.com/article/SB1000...

Um, sorry to be such a downer, but that's my layman's opinion on the matter. As much as it sucks to hear it, I hope it helps.

That leads to my guess that just because you walk away from the house, you haven't walked away from the mortgage.

It depends on the state. Many, perhaps most, are 'no recourse', meaning that the mortgage company can't go after anything but the house to settle the debt.

Do we have any real estate lawyers who post regularly? I'd be interested to hear a medium-dumbed-down* version of the pros and cons of "mailing the keys back to the bank" vs negotiating a better loan vs declaring bankruptcy.

*the only sources I can find online are either so pedestrian that I can't really get anything useful out of them, or so in depth and detailed that they explode my tiny brain.

Bonus_Eruptus wrote:
Malor wrote:

Not as far as I know. You'd probably want to talk to a lawyer. It may actually be better to declare bankruptcy than to default without a bankruptcy.

Either is probably going to keep me from being able to buy a new house for the foreseeable future, then. Looks like I'm probably going to just have to eat the loss.

Yeah, what Malor said--my guess is you really need to be informed by someone who knows what they're talking about and can look at the specifics of your situation. Here's an article on banks pursuing deficiency judgment; on the other hand, it all depends on your contract and applicable law. Some states have anti-deficiency judgment laws:

http://jaydiatribe.blogspot.com/2008...
http://www.enotes.com/everyday-law-e...
http://www.helocbasics.com/list-of-n...

Seth wrote:

Do we have any real estate lawyers who post regularly? I'd be interested to hear a medium-dumbed-down* version of the pros and cons of "mailing the keys back to the bank" vs negotiating a better loan vs declaring bankruptcy.

*the only sources I can find online are either so pedestrian that I can't really get anything useful out of them, or so in depth and detailed that they explode my tiny brain.

I ain't no real estate lawyer, but, IMHO, your options should go in this order:

1) negotiating a better loan
2) mail the keys back to the bank
3) declare bankruptcy

Robear wrote:

But the idea that all businesses are immoral and unethical and that's the nature of capitalistic success is based ultimately on outdated understandings of capitalism.

This.

I'd also say that the notion that individuals are any more "moral" is laughable. Companies end up on the hook for all kinds of shady actions by individuals.

As far as walking away from a mortgage, I don't think it is a problem to view it a financial decision. But most individuals will fail to take into account all of the consequences, and then complain when a prospective employer does a credit check and refuses to hire you. A prospective landlord will do the same thing. Then you get to earn less and pay more for rent because you did the "smart" thing.

It's easy to blow that kind of stuff off if you are single, or married without kids. But that is a lot of baggage to force on a family to depends on you for support. It would be a dealbreaker for most people even when it comes to dating. No one wants to get caught in the fallout of the poor financial decision made my a potential mate.

If someone is truly desperate, then it is probably a good time to consider selling short and filing for bankruptcy. That sucks, but probably suck less than walking away. What people want is a nice easy reset button. But there are always consequences.

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).

From that perspective, I don't see how you could says that corporations are remotely ethical or moral. They are built on premise of diffusing responsibility that is the core of morality and ethics: you are responsible for how your actions affect someone else. In a corporation, you aren't personally responsible for anything.

Absolutely untrue. I'm legally responsible for the actions I take during business activities, as is my company. I can go to jail for things I do for work. I'm also personally responsible for my quota, and my customer relationships.

Also, despite the fact that when you were young banks publicly sold themselves with the idea that you can "trust them," the reality of that time is that government had regulations in place to make it for them hard to get into trouble while the government explicitly told the public "You won't lose anything if you trust them." That doesn't sound like a social situation to me.

That's my point. I drew that relationship because with regulation, the banks were much closer to behaving like a person. If my bank didn't handle my money or my loan well, I had recourse. That creates a situation that is much closer to an actual social relationship - if you screw me over, I take you to court. And banks were careful not to piss off their customers, because people depositing and borrowing money were the only way they were going to make money. My thesis is that the closer to a social relationship a business relationship becomes, the less abusive it is likely to be. And regulation can certainly put a finger on that scale.

Now, the banking operations are secondary to investments, so, why would they care? And oddly enough, the responsible credit unions *do* care, and conduct themselves as such, and so have gained many customers in the last few decades. A large part of that is psychological - you *can* reach the loan committee to plead your case, the credit unions are more transparent, and they are not allowed to get into risky behavior that encourages them to treat customers poorly for profits.

Every day there is a new news item about how the financial reform legislation was watered down.

Actually, it got stronger in committee, even according to some consumer protection groups.

Here are the key provisions that will provide all Americans with economic stability.

• Real consumer protection: independent from the biggest banks that have put their profits ahead of us. Now credit cards and mortgages will offer terms in language we can all understand. It will also offer help for those abused by predatory lenders.

• Mortgage reforms: For the first time lenders are prohibited from making loans that borrowers cannot repay, and banned from receiving kickbacks for steering people into high rate loans when they qualify for lower rates.

• Ending the casino economy and bringing sunlight to shadowy derivatives market: The $600 trillion derivatives market will now have the light of day shining on the market (with exchange trading) and be held accountable with capital requirements (with clearing).

• Putting the brakes on risky speculation to prevent future crises and tax payer bailouts: Unregulated shadow banks like AIG will face strict oversight for the first time and our biggest, riskiest banks will have tougher leverage and capital requirements. When a financial firm does run into trouble, it will face a new liquidation regime so that we don’t need to bail it out or prop it up—it will be put out of business.

• Strong investor protections: Enhanced shareholder rights will allow for a say on pay of executives and give long-term shareholders a meaningful voice in holding corporate directors accountable. Additionally credit ratings agencies will not be just the handmaidens of the biggest financial institutions. Better controls at rating agencies hold them accountable for the reliability of their reporting.

I'd also say that the notion that individuals are any more "moral" is laughable. Companies end up on the hook for all kinds of shady actions by individuals.

Individuals don't usually have reams of special legal exemptions and advantages when interacting with each other. If an employee writes software for you and it fails, you can deal with them. But try suing a software firm for buggy code...

Again, the contracts are black and white. It doesn't matter what anyone thinks they SHOULD say, just what they DO say.

Robear wrote:
From that perspective, I don't see how you could says that corporations are remotely ethical or moral. They are built on premise of diffusing responsibility that is the core of morality and ethics: you are responsible for how your actions affect someone else. In a corporation, you aren't personally responsible for anything.

Absolutely untrue. I'm legally responsible for the actions I take during business activities, as is my company. I can go to jail for things I do for work. I'm also personally responsible for my quota, and my customer relationships.

Considering the SCOTUS decision yesterday I'm sure Jeffrey Skilling disagree with you.

How many people who were at the root of our economic collapse have seen the inside of a jail or even at risk of doing so? How many of them continue to get huge bonuses? Is that responsibility? Hell, were having a hard time of holding the people at the center of the last round of corporate malfeasance responsible for their actions.

With the current crisis, the companies they worked for aren't responsible for vaporizing trillions of dollars of wealth because of their risky actions. Just like BP ultimately won't be responsible for the true extent of the damage it is causing. Yeah, it'll pay pennies on the dollar, but it won't come close to any real responsibility. The fines for all the spilled oil passed the $11 billion mark days ago, but they'll likely never be assessed.

Being responsible for a sales or revenue target isn't exactly the responsibility I was taking about. Yes, you have client relationships, but what happens when you're in a transactional business that doesn't rely on repeat business? Heck, who am I kidding. Even in businesses with long term relationships sales reps always oversell and pass the problems off to whoever has to do the implementation or the actual work because they aren't worried that the customer will be pissed off in six months, they're worried that they have just a few weeks left to hit their quarterly quota.

Robear wrote:
I'd also say that the notion that individuals are any more "moral" is laughable. Companies end up on the hook for all kinds of shady actions by individuals.

Individuals don't usually have reams of special legal exemptions and advantages when interacting with each other. If an employee writes software for you and it fails, you can deal with them. But try suing a software firm for buggy code...

Drifting away from the main thread of conversation, but...

I think the defining quality of the "immoral corporation" isn't so much all of the legal frameworks, but the lack of a sense of individual responsibility for the collective actions of the corporation. This is especially telling because the root goal of a corporation is to provide profit to the shareholders. As a result, things that don't directly impinge on that goal get easily neglected. Regulations provide legal recourse for certain kinds of bad behavior that directly hit that bottom line, and as a result there's more accountability for the kinds of actions that can lead to breaking regulations--it's still all about the profit at the purely corporate level, but the kind of oversight needed to prevent (at least some) regulations from being broken leads to more of a sense that individuals must act in an upright manner, and that they'll be held accountable if they're not.

The larger the organization, the less sense there is that anybody "up top" notices anything except the bottom line.

If there are no negative incentives for breaking "safety" rules until something bad actually happens, then people are encouraged to take risks by the positive incentives of being noticed for something that *improves* the bottom line. That's because by the time things come to a head on any corners that they may have cut, they're probably far away from the problem they left behind. And, the people who started the mess don't even realize they're responsible, because after all, they only cut a few *little* corners to save some money, and it worked out great. It's the guys who came in later and cut even more corners who must be to blame.

That's my feeling, anyway... Sure, regulations lead to bureaucracy, which is bad once you reach a certain point. But you do need at least some bureacracy to make sure the people who are *really* involved take the credit, positive *or* negative, from what they have done. You need that sense of rules, of law and order, in order to inculcate a culture of individual responsibility, otherwise the long view is lost, as the responsible people have already left the frame once the end result is seen.

It's not that anyone involved has to be actively evil--it's just that the importance of being actively good has been minimized.

Even in businesses with long term relationships sales reps always oversell and pass the problems off to whoever has to do the implementation or the actual work because they aren't worried that the customer will be pissed off in six months, they're worried that they have just a few weeks left to hit their quarterly quota.

All I can say is that in the companies I've worked for, they won't *be* there to collect their commission check. And yes, individual sales people do go to jail for fraud, as do their bosses at time.

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.

Pissing off customers is about the worst thing you can do in a relationship business where you want repeat sales. Transactional is different, and transactional without regulation or oversight, dealing with hundreds of billions, and with no need for repeat business is different yet again. Don't mash them all together into the same stew, is all I'm saying.

Robear wrote:

That's my point. I drew that relationship because with regulation, the banks were much closer to behaving like a person. If my bank didn't handle my money or my loan well, I had recourse.

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."

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.