Man can't pay mortgage, then wonders why car loan has high interest rate

[OhSoClose]

For a recent, in depth article about analysis of the motivations behind NOT walking away from an underwater mortgage, see
Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis at
http://www.sacbee.com/static/weblogs/real_estate/SSRN-id1494467.pdf

Professor White, of the University of Arizona Law School, writes that despite all the hyperbole, the statistics show that the vast majority of Americans do not, in fact, walk away from an underwater mortgage when that choice could save them hundreds of thousands of dollars. A mix of three emotions keeps them from walking away: Guilt, shame, and an unwarranted fear about future financial repercussions. As pointed out by Professor White (and by Brewer above), this is an uneven playing field, because the banks will make the correct economic choice in a second to violate a contract-- but everyday people feel constrained not to act in their own best financial interests.

In Professor White's view, there is NO economic, legal, or moral impediment that should keep a person from walking away from an underwater mortgage.

As a financial regulator, I find White's article strangely comforting. Contrary to the article which kicked off this thread, White's statistics show that the vast majority of folks just don't -- in the absence of other factors that make make it difficult for the borrower to make payments (e.g., losss of a job) -- walk away from an underwater mortgage.

OhSoClose

 

[Westernskies]

In Professor White's view, there is NO economic, legal, or moral impediment that should keep a person from walking away from an underwater mortgage.

If this is what they are preaching in our public schools, then it is no wonder why we are in the mess we are in. So much for personal responsibility, being responsible for your own actions and making sound financial decisions.

 

[clifp]

I can blame her for what she is doing to us.. This is a conscious choice, not a hard-luck situation. Her irresponsible actions (like others of her ilk) are costing responsible taxpayers and consumers billions of our hard earned dollars.

I hope the IRS hammers her on the unearned income and her mortgage company ruins her credit. She consciously made this bed, she needs to be willing to lie in it.

She will probably be on the daytime talk shows next year, extolling the virtues of screwing your creditors and bemoaning their punitive responses.

This whole situation makes me want to puke.

I agree with everything you said. The problem is that relying on people to do the "morally" correct thing isn't going to fix the problem. First there is a reasonable argument that this strictly business and morality shouldn't enter into, much like Brewer posted.

Second and more importantly getting pissed off doesn't help solve the problem. Right now we are in the worse of all worlds the folks who legitimately can't pay their mortgage because the lost there job, wracked up big medical expense etc not only lose there house but generally end up declaring bankruptcy cause they have lots of other debts. The folks who gambled on rising house prices with zero money down and lost walk away with a minor hit to their credit score but little other damage. Meanwhile, the people on this board who were reasonable pay for both sets of people.

I think we should be using financial penalties spelled out by the law rather than moral arguments to get people to do the right thing. In particular, I like to see banks be much more aggressive in going after the assets of people who walk away from mortgages. If the person has no assets and declares bankruptcy so be it. In bankruptcy if you are poor and/or unemployed your debts are erased and you have a clean slate, if you make an above average wage you are obligated to repay some of the debts. Which hopefully eliminates the BMW, cruise, and Disneyland season tickets that we have seen in earlier stories.

In states like CA, or DC where the loans are non-recourse. I think Uncle Sam should step in and attempt to recover some of the money. I think in hindsight passing the Debt forgiveness act, which eliminated the taxation of forgiven debt was a huge mistake. I'd like to see it repealed. In the case of Heather, this would be mean a tax in 80-90K range, much better than being stuck with 465K mortgage on a 225K house but still a severe penalty.
If she couldn't negotiate a deal with the IRS, she also would have the option of declaring bankruptcy (under the old rules this eliminated the tax). Thus putting Heather and the person who really couldn't afford the mortgage in the same financial situation.

For our parts, I think society would need to stop attaching a stigma to bankruptcy and treat like a business decision. I don't get mad at United, Hawaiian, American or any other airline because they have walked away from their debts at various times by filing chapter 11, even when I was Boeing shareholder. It is business and business declare bankruptcy. As long as the person or company has been asppropriately penalized for the bad judgment. I don't think they are a "bad" or person or company. Of course, I would demand a higher interest to loan the money in the future.

 

[bbbamI]

Again, what has this individual done that any corporation would not do?

Prolly not much difference. But in the end, someone will have to bend over.

 

[unclemick]

The un-intended consequences for those of us who are trying to believe we have no dog in this fight are yet to be fullly realized.

When the leverage due to credit reverses to a significant enough extent:

Whuuuu Baby! To paraphrase John Prine.

heh heh heh - My Curmudgeon certificate expects more use in coming years. yep yep yep .

 

[ziggy29]

The bankruptcy code and corporate law are explicitly set up to give debtors relief when things do not go well. It is actually one of the things that drove people to the US in the first place because it replaced debtors' prisons

Yes, but the traditional definition of "not going well," which used to be "unable to keep up with the payments," has apparently been replaced by "if it's financially advantageous to do so."

And that's the problem. And frankly, I think "able to pay but refuses to" should be a LOT worse on a credit report than "got in over their head and defaulted". I think that should ding you *for life*. I don't think the US would have eliminated debtors prisons if the typical defaulting debtor was someone who was *able* to pay but refused to do so, because to me, if someone is financially able to pay back a loan but refuses to, it starts becoming less and less distinguishable from grand theft.

 

[traineeinvestor]

The real solution is to require borrowers to have meaningful skin in the game.

In HK the Monetary Authority will only allow banks to lend up to 70% loan to value on properties. Anything above that comes from a non-bank finance company (usually charging multiples of the interest cost of banks) or requires PMI (which is very expensive). If you are required to put down 30%, you are much less likely to walk away from the obligation (either by choice or by complusion). It also makes for a much more stable banking system - even during the worst of the Asian crisis/SARS period when residential property prices had fallen by more than 60%, the level of defaults was tiny and there were zero bank failures.

As others have said, failure to meet obligations must have consequences or there will be enough defaulters whose misdeeds will raise the costs for the rest of us.

 

[Gumby]

Yes, but the traditional definition of "not going well," which used to be "unable to keep up with the payments," has apparently been replaced by "if it's financially advantageous to do so."

And that's the problem. And frankly, I think "able to pay but refuses to" should be a LOT worse on a credit report than "got in over their head and defaulted". I think that should ding you *for life*. I don't think the US would have eliminated debtors prisons if the typical defaulting debtor was someone who was *able* to pay but refused to do so, because to me, if someone is financially able to pay back a loan but refuses to, it starts becoming less and less distinguishable from grand theft.

I thought we were all full-blooded capitalists on this board. We get and give precisely what we bargain for. Any other result would be an intrusion in the free market. The proper allocation of capital depends on people and companies being able to walk away from uneconomic contracts while paying only the default costs that the other side bargained for. It is only those no-good socialists who think one should consider anything other than the cold hard economic facts. (like morality, for example)

 

[clifp]

I thought we were all full-blooded capitalists on this board. We get and give precisely what we bargain for. Any other result would be an intrusion in the free market. The proper allocation of capital depends on people and companies being able to walk away from uneconomic contracts while paying only the default costs that the other side bargained for. It is only those no-good socialists who think one should consider anything other than the cold hard economic facts. (like morality, for example)

I pretty much arguing for that. At the time mortgage contract was signed, if you lied on the mortgage application,you risked perjury and/or fraud charges. If you walked away from Recourse loan the bank had the option to go after you for additional funds. If you had a debt forgiven it was treated as income and you owed taxes on it.

We can argue if the penalties were sufficiently steep. Agree that in the future we should require more skin in the game like in Hong Kong, and gnash our teeth at the colossal stupid of lots of players.

But the government and the banks (to a large extent based on media and public pressure) haven't even bother to enforce the contract penalties that were in place. In some cases they even changed the rules retroactively to encourage folks to walk from mortgages by changing a decades old law on forgiven debt.

 

[ERD50]

The real solution is to require borrowers to have meaningful skin in the game.

+100%

Without that, the rest of this is just blabber.

That, and Hong Kong has what, 15 pages of tax code total? I think we could learn a lot from them.

-ERD50

 

[ziggy29]

I thought we were all full-blooded capitalists on this board. We get and give precisely what we bargain for. Any other result would be an intrusion in the free market. The proper allocation of capital depends on people and companies being able to walk away from uneconomic contracts while paying only the default costs that the other side bargained for. It is only those no-good socialists who think one should consider anything other than the cold hard economic facts. (like morality, for example)

Sarcasm duly noted.

(uh.... that *was* sarcasm, wasn't it?)

 

[harley]

Not to distract from this nice repeat discussion of the other thread, but I'm a little confused about some of the facts in this case. Mostly, as a resident of the DC metro area, I'm not aware of any homes that have dropped over 50% in value, even in the outlying suburbs. I know of a number of people who have bought foreclosures and short sales, and none of them were aywhere near that far below purchase price. Not saying I know it all by any measure, but it makes me question the rest of the information in the story. I think it's worth remembering that this, just like those "why you should never retire" stories are the work of people out to make a buck with as little effort as possible.

Edit for clarity: I'm referring to the Heather Baker story in post #5.

 

[clifp]

Not to distract from this nice repeat discussion of the other thread, but I'm a little confused about some of the facts in this case. Mostly, as a resident of the DC metro area, I'm not aware of any homes that have dropped over 50% in value, even in the outlying suburbs. I know of a number of people who have bought foreclosures and short sales, and none of them were aywhere near that far below purchase price. Not saying I know it all by any measure, but it makes me question the rest of the information in the story. I think it's worth remembering that this, just like those "why you should never retire" stories are the work of people out to make a buck with as little effort as possible.

Edit for clarity: I'm referring to the Heather Baker story in post #5.

I was surprised to see that DC prices had dropped that much also. Since DC isn't normally listed in the hard hit states. I wonder if Heather Baker isn't rationalizing a fair amount, it is probably easier to say I am walking away cause it dropped 50% rather than 20%.

 

[youbet]

My biggest surprise, as discussed on the related thread, is that the hit to your credit score for walking away is only 160 pts max. Start with 800, walk away, still have at least a 640 score. Continue on with life as normal with only minor impacts.

 

[growing_older]

I was solidly in this "ethical" camp in the other thread, but I was seriously swayed by the arguments about the banks having set up contracts that allowed people to walk away without significant penalty, so tough luck for them.

This is not too far from the idea that anyone can commit any crime with impunity as long as they do not leave enough evidence to convict them. There are specific laws about proof and about the consequences - but only if culpability can be demonstrated beyond a reasonable doubt.

Still doesn't make it right, so I'm still in the ethical camp. Just because there is a loophole to wiggle through doesn't mean you should abandon ethics and stick it to the other guy (or general public, as in some taxpayer bailouts).

 

[deserat]

Excellent points by all - and sorry for hijacking the thread, although I thought it was related.

My point was that she made a choice...and was led to that choice by the 'rules of the game' at the time...‘Go get whatever house you want. It doesn’t matter.’ "Baker and two daughters plan to live in this house payment-free for the next several months." I agree with the poster that says she needed to have more skin in the game initially...also, that if she is able to pay something, the other contractual partners should get some recompense.

There is a certain amount of trust needed in society for an economy to survive. There needs to be trust in the 'rules of the game' and the enforcement of those rules. Frankly, I'm amazed at how much trust is needed. Knowing a little about technology, trusting that the bits flowing to my computer from my bank and/or any financial organization with regard to what assets I have - yes, the virtualization of it - is amazing. I.e. I trust that the information displayed to me represents a 'tangible' or physical/material entity somewhere. Trust in the system becomes paramount, the underpinning of the enterprise.

Her decision to forgo this financial burden should have some serious repercussions on her and the person that entered into the contract with her - their reputations should be sullied and any financial contact with them should carry a high price, i.e. reflect the risk one takes in associating financially with them. If that does not happen, then the trust one has in the system should justifiably be lowered, because then I and many other non-original participants in this transaction will pay for their poor decisions. Additionally, I don't remember a document telling me I am responsible for their poor decisions......

 

[Orchidflower]

Ditto totally.

 

[tryan]

There are consequenses for those who choose to walk away. I can remember in the early 1990's (carrying 3 upside down properties) when it was time to buy - again - and all the "investors" who walked were foced to pay cash. No lender would touch them with a 10 foot pole. Meanwhile I was able to pay 20% down and finance the rest of the REO purchase (even while carying the upside down properties). Point being, the walkers paid a heavy future price for thier actions.

Of course eventually the market turns right side up (took 12 years for me) then you sell and the burden is lifted. But this is not for the faint heart.

 

[youbet]

Point being, the walkers paid a heavy future price for thier actions.

Well, in this case. But I think in non-recourse states a borrower who already has credit cards, isn't in the property ownership business and doesn't plan to borrow for another property can walk and have it have minimal impact, especially if their credit score is high to begin with.

I can certainly see where someone in the business of owning properties through financing could be hurt by having a "walk away" on their record however.

 

[FUEGO]

I wonder if finance companies or credit reporting agencies/credit scoring companies will add in a new metric for "walked from mortgage".

Walking from the mortgage may cause a medium sized dent using today's standards, but the metrics could be rejiggered to look at type/magnitude of default as well what with the plethora of data available these days.

 

[youbet]

I wonder if finance companies or credit reporting agencies/credit scoring companies will add in a new metric for "walked from mortgage"

You'd think they would. I suppose it depends on whether they think that one time "walkers" present an ongoing credit risk or not. I dunno. If someone with an otherwise fine credit rating who pays all their bills on time walks on an upside down mortgage to save $200k (even though they could easily absorb the $200k hit), does that make them more likely to be a credit risk on incidental, small debts?

 

[FUEGO]

You'd think they would. I suppose it depends on whether they think that one time "walkers" present an ongoing credit risk or not. I dunno. If someone with an otherwise fine credit rating who pays all their bills on time walks on an upside down mortgage to save $200k (even though they could easily absorb the $200k hit), does that make them more likely to be a credit risk on incidental, small debts?

Good point - it may not necessarily mean they are worse credit risks just because they strategically default. Heck, maybe they are better credit risks. I'm sure the banks/lenders will data mine and figure this out, and if useful look at the strategic default instances as a factor in assessing risk.

 

[Sarah in SC]

Funny that their walking away doesn't impact their credit score, but my paying off my mortgage drops mine (supposedly, though I haven't seen it). What a world we live in!

 

[CCdaCE]

You'd think they would. I suppose it depends on whether they think that one time "walkers" present an ongoing credit risk or not. I dunno. If someone with an otherwise fine credit rating who pays all their bills on time walks on an upside down mortgage to save $200k (even though they could easily absorb the $200k hit), does that make them more likely to be a credit risk on incidental, small debts?

Hence, the irony, to me, of a credit score. I thought a high score meant you weren't likely to walk/default/not pay, etc. Turns out, as I suspected, that credit scores are BS, and all kinds of crap is hooked to your credit score. I'll let the insurance company continue to think that I "drive nice" because I pay my bills on time.

-CC

 

[youbet]

Funny that their walking away doesn't impact their credit score, but my paying off my mortgage drops mine (supposedly, though I haven't seen it). What a world we live in!

It does impact their credit score, just not as much as you'd think. We discussed this in another thread. A magazine article the OP of that thread posted said that the max hit to your credit score for "walking away" is 160 pts. So if you have an excellent score to begin with, you still have a mediocre score afterwards.

Hypothetically speaking since I haven't had a mortgage in many years, if the only thing of consequence that happened from walking away from a mortgage that was upside down by $200k was that my 800+ credit score dropped to the upper 600's, that wouldn't stop me. I'd probably never notice any negative impacts from the drop in credit score.

It's strange really.......