One thing I don't feel the article addressed is that there is a range of being underwater, it's not binary. I bought after most of the deflation of value had occurred, but not entirely. I'm about 3-5% underwater right now. But abandoning my house (even if I was not concerned about the ethics) would still be bad, because percentage fees on getting a new one would eat my "savings" entirely. To say nothing of the beating my credit rating would take.
To really make it worth walking away you really have to be underwater by a lot. I don't think that 100% of the people who are underwater are down by 30% or 40%. Real statistics on that would probably be more helpful.
Well, it's obviously true that it's not a step function. But the slope is really steep. Someone with just a tiny bit of equity can sell their home and walk away without having to pay anything. Someone with just a tiny bit of unsecured debt who wants to move loses almost nothing (a beaten credit rating for someone with income isn't nearly as serious as you think) by walking away, and saves thousands of dollars in fees (typical real estate fees in the US are 5/6%, and paid by the seller!). That may not be "binary", but it's pretty close.
The real determining factor in your case, I suspect, isn't financial but one of convenience. Finding a new home is a hassle, and you don't want to bother with it. It makes more sense to stay where you are because moving doesn't get you anything but grief. But if you got a great job in a different city, would you really be seriously thinking about trying to sell your underwater house?
I think you have it exactly right. People with good incomes who are just a bit underwater on houses in San Francisco or New York should probably stay put. But people with low incomes who are hundreds of thousands of dollars underwater in the outskirts of Vegas... well, I actually think that for them, paying off the mortgage would be a financial disaster. It will take up every cent they own for decades, and they will retire broke. Seven years of bad credit pales in comparison to the severe damage they will do to their financial future by trying to pay off this house.
Personally, I think one of the reasons people hang on is that they're too optimistic about a recovery in prices. I'm sure prices on houses in the vegas desert will eventually start to rise again, but from $190k to 550K? Nope.
I agree with this assessment. It definitely isn't a binary decision. Just as it isn't a decision that should be taken lightly. Obviously there are ramifications to abandoning a mortgage and all the risks and benefits need to be weighed based on every situation.
First, the obvious: once you ruin your credit rating by defaulting on your mortgage, it might not be so easy to just waltz right into a lower price rental. Not to mention that you'll be paying more on any other loans you take out for the next <strike>10</strike> 7 years, and probably your car insurance. You might also consider the increasingly common phenomenon of employers running credit checks on applicants.
There are a variety of legitimate factors in a decision like this which aren't purely financial: the time, emotional, and social costs of moving. Do you move your children to another school? Do you take your children away from their neighborhood friends? Perhaps you like your neighbors as well, or the neighborhood businesses you frequent. If you move into a rental, you can no longer make certain changes to your home to suit your needs and desires.
It's naive and insulting to call people "idiots" because they aren't simple money-maximizing machines, particularly if you're going to pretend that monthly housing cost is something that exists in a vacuum.
I generally agree with the sentiment that one is morally obligated to pay debts. This article makes a good argument that free markets don't work on morality, instead they are rooted in the assumption that everyone acts in their personal best interest.
Anytime I think about the morality of abandoning an underwater debt, I remember that $billion corporations do this every single day.
This article makes a good argument that free markets don't work on morality, instead they are rooted in the assumption that everyone acts in their personal best interest.
I read it with just the opposite meaning. I understood it to say that the actual, observed behavior in the mortgage market is that howeowners are being moral. The Fools seem to question why people would act following their morals rather than purely financials.
And this points to one of my favorite misunderstandings of economics, and one that I'm surprised an economist would fall for. Economics is NOT about just money. It's about why people make a choice for one thing, foregoing another. And it's all tied to what people value.
It seems to me that this article validates that people really do value behaving morally, having a clear conscience. And I'm glad, because I don't want to live in the world where people take advantage just because they can.
You are obligated to do what your contract says. Your contract says you can walk away and the bank gets the house. If the bank didn't like that potentiality because they were speculating on a loan, then apparently that's all of our problem.
"Years ago there was stigma - a man's word was his bond. But that is gone now, and it is not you, the consumer who made it thus. It is in fact the very people who lent you that money who made it so - who proffered documents to you written in 4 point type that were impossible for anyone with less than a PhD to understand (and sometimes even then), that contained intentional tricks and less-than-honest inducements, and who themselves were in fact stuffing bogus loans into securities that they then peddled out to the masses!"
Do you have examples of big companies abandoning debts like that? The opposite actually comes to my mind: large companies being destroyed by their inability to get rid of underwater debts (putting aside big banks' recent problems, I'm thinking of Enron here)
As a recently newly minted homeowner who paid appropriate price in a non-bubble market I find the title highly offensive and hyperbolic. "Why are underwater homeowners idiots" is the appropriate title.
Re: article itself.
There's also the small matter of jacking your credit for 7 years. With uncertain future and no savings many people rely on access to credit for emergencies. Not saying that is wise or that they should, but that is a fact.
Assuming you took out a mortgage, you are financing consumption by leveraging up. It's no different than buying a pack of beer on the pay-day-loan money. Not a financially smart move (unless your loan interest rates is below the long-term treasury rates).
Its not the morality but the expectation of the housing prices bouncing back to normal like the rest of the economy that is keeping them from walking away.
But the issue with realestate is that its not as agile a market as stocks or commodities. the volatility observed in a month in the stock market is probably going to be observed in a year in real estate market. And I am not not even talking about the phase lag but the different scales of variation between the 2 types of markets.
> Its not the morality but the expectation of the housing prices bouncing back to normal like the rest of the economy that is keeping them from walking away.
Then they could walk away, and buy a different (cheaper) house, or buy first then walk away.
there may also be the issue of credit score. if you file for bankruptcy, it's harder to get a loan in the future. the prospect of future loans may be more valuable than the difference between what you owe the bank and the value of your house. that said, i suspect most people aren't thinking about this
This is an important point that I think supports the overarching message if this article and the Paulson quote. The system of credit reporting has been setup to support this "debt as a moral obligation" assumption. The fear of poor credit scares people into continuing to pay.
In reality, a bankruptcy only lasts 7 years on your credit report and most banks will start lending after merely 2-3 years.
Underwater homeowners should look at the longer time horizon and see that it will take quite a few years for their assets to be above water. That's several years to re-build their credit with a much lower cost of living.
I agree with you almost completely, except that I'm pretty sure that most people in this situation are, in fact, considering the consequences of declaring bankruptcy.
It sounds like a small thing, but I'm glad just to see an article which doesn't just assume that people who are underwater were foolish or reckless buying a house in the first place. I bought well within what I could afford in 2001, and routinely paid down extra principal every month. Now that I am married and have a small child, I'd like to move someplace bigger, nicer, and closer to the rest of my family.
Only thing is, according to the real estate agents, if I'm really lucky selling my house will just cover what remains on the mortgage. If I'm not lucky, selling the house could easily cost us $20,000. Crazily, the most likely reason for that to happen wouldn't be that we couldn't find someone to buy the house for what we'd like to sell it for -- it would be that we couldn't find a lender to appraise it for that much.
Personally, I haven't sussed out the moral implications of just giving the bank the house instead of paying back the loan. On the one hand, it's hard to see how the bank could complain: yeah, they might be getting a house valued at $N in lieu of $N + $20,000, but they also got 8.5 years of interest on it, too, which probably amounted to around $45,000. On the other hand is the notion that implicit in our loan contract was the idea that we would pay it off if humanly possible; that allowed the bank to lend us the money for less than would have otherwise been possible. I don't know how to balance those two things.
In my opinion, you are the prime example of whom this article is discussing.
In my view, the bank will still profit off of your loan. If market value is about equal to what you owe, but it could only be reasonably sold for $20k but you have paid $45k in interest thus far, they still profit $25k from your loan. I have a hard time seeing where the bank could be morally right in damaging your credit for walking away...
Maybe people like the house they're living in? Everyone seems to be talking about the financial side of things, but isn't it likely that many of the people still paying their mortgage do so because they like where they're living and don't want to be foreclosed on?
Exactly.....something that i never understood in all these articles is this: If I have bought a home for living in it, and not for speculation, how does it matter what its market price is? I knew _before_ I bought it what I will be paying the whole way and I don't want to sell it.
But you're not going to be living there for the entirety of your 30-year mortgage in most cases. What happens when 5-6 years from now, you want to move, but you're underwater and can't pay off the mortgage by selling your house?
Successful capitalistic democracy requires a moral foundation. Many things that are arguably "in the best interest" of an individual are not in the best interest of a functioning economy, and not honoring one's agreements is one of these. The fact that corporations are not being ethical does not justify on a moral basis the same behavior by anyone else.
Further, if the coming predictions of high inflation turn out to be correct, the people who are still holding their mortgages will be paying them back with cheap dollars vs. people who walk away from their current debts and then need to borrow again later.
> The fact that corporations are not being ethical does not justify on a moral basis the same behavior by anyone else.
That is the beauty of Morals and ethics, is that groups of people subscribe to different ones just as you say it does not give them the right. Other subscribe to an-eye-for-an-eye morality.
I personally think that it does justify it, my moral compass says that if a cooperation is abusing the people via deception, unethical and immoral behavior then that corporation should be dissolved and all debts to that corporation should be terminated. covering it up their appalling nature with a double ethical standard just emboldens more corporations to engage in unethical behavior and allows more abuse of the people.
Let me be clear, I am not anti-corporation, i am just anti-double standard.
One issue the article ignores is the damage to your credit. I would assume that having a foreclosure on your record would make it very difficult to get credit at a reasonable interest rate in the future, and that some of the people who continue to pay on a nonrecourse mortgage are accounting for the effect on the price of debt they may wish to incur in the future. I expect that this factor is ignored by economists because it is difficult to quantify.
If there was someway to manipulate the way credit is damaged by looking at individuals so that only sub-prime borrowers are punished - that would be a possible solution. Let the responsible buyers walk away without penalty. But I understand that this has a potential for regime change and is far fetched in our situation.
An example is set at the top, by those in power, that self-dealing and self-interest above all ethical standards is standard operating procedure. Eventually this moral decay 'trickles-down' and people start to realize that they are chumps if they don't start playing by the same rules.
The problem is that they are chumps if they don't play by the same rules. Which is why the people 'at the top' really need to be used as an example of not acting in such as self-interested way. If the people at the bottom are keeping society together by ignoring the example set at the top, then the people at the top are just plowing over everyone else in a bid to further their own selfish goals.
The Motley Fool seems to have forgotten this, but rational-agent theory is a useful fiction, not a statement of reality. The best analogy I can think of is Skinner's behaviorism; rational-agent theory seems to fail in the same kinds of places as behaviorism does, too.
Look up the "Ultimatum Game" for a particularly effective demonstration of where it fails -- and the commenter here who points out that rational-agent theory would destroy civilizations is completely correct. (Mental exercise: apply "the tragedy of the commons" to a defensive war.)
It's not like walking away from a mortgage gets you off scot-free. The entire point of a mortgage is that it's a contract. If walking away from the contract and enduring the penalties associated with doing so is less financial pain than keeping with the contract, then why not?
It's not like these 'underwater' people are going to immediately move to some island in the Caribbean with bags full of money and sit on the beach in the sun living the good life until the end of their days while the poor, sickly bank dies alone and impoverished in a gutter somewhere.
thats okay - but this is like paying for music/porn to be taken away from you. A big part of the equity you got when you signed up and paid for has been taken away but you are still paying the full price!!
"And let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator -- and one who is not honoring his obligations." - Paulson
Every time these GoldmanSachs critters open their mouth is yet another oblique reminder that the masses are brain dead.
With finances you always have to sit down and do the math, which could be already a fair ammount of work.
I think that this situation happens in part for the "moral"restrictions, in part for the credit rating, but also because of the effect that once that you invested a certain ammount of money in something, you keep pouring money on it even when its not good for you.( the famous throwing good money after bad money)
"i have already commited to buying this house, and pay this much already, so i might as well put more".
Im sure many of the readers here have put money into fixing their computer several times before acknowledging that to buy a new one would be cheaper :).
[+] [-] jerf|16 years ago|reply
To really make it worth walking away you really have to be underwater by a lot. I don't think that 100% of the people who are underwater are down by 30% or 40%. Real statistics on that would probably be more helpful.
[+] [-] ajross|16 years ago|reply
The real determining factor in your case, I suspect, isn't financial but one of convenience. Finding a new home is a hassle, and you don't want to bother with it. It makes more sense to stay where you are because moving doesn't get you anything but grief. But if you got a great job in a different city, would you really be seriously thinking about trying to sell your underwater house?
[+] [-] geebee|16 years ago|reply
Personally, I think one of the reasons people hang on is that they're too optimistic about a recovery in prices. I'm sure prices on houses in the vegas desert will eventually start to rise again, but from $190k to 550K? Nope.
[+] [-] chrisgoodrich|16 years ago|reply
[+] [-] kscaldef|16 years ago|reply
First, the obvious: once you ruin your credit rating by defaulting on your mortgage, it might not be so easy to just waltz right into a lower price rental. Not to mention that you'll be paying more on any other loans you take out for the next <strike>10</strike> 7 years, and probably your car insurance. You might also consider the increasingly common phenomenon of employers running credit checks on applicants.
There are a variety of legitimate factors in a decision like this which aren't purely financial: the time, emotional, and social costs of moving. Do you move your children to another school? Do you take your children away from their neighborhood friends? Perhaps you like your neighbors as well, or the neighborhood businesses you frequent. If you move into a rental, you can no longer make certain changes to your home to suit your needs and desires.
It's naive and insulting to call people "idiots" because they aren't simple money-maximizing machines, particularly if you're going to pretend that monthly housing cost is something that exists in a vacuum.
[+] [-] pyre|16 years ago|reply
I thought that bankruptcy came off your credit score/rating/listing after 7 years.
[+] [-] chrisgoodrich|16 years ago|reply
Anytime I think about the morality of abandoning an underwater debt, I remember that $billion corporations do this every single day.
[+] [-] CWuestefeld|16 years ago|reply
I read it with just the opposite meaning. I understood it to say that the actual, observed behavior in the mortgage market is that howeowners are being moral. The Fools seem to question why people would act following their morals rather than purely financials.
And this points to one of my favorite misunderstandings of economics, and one that I'm surprised an economist would fall for. Economics is NOT about just money. It's about why people make a choice for one thing, foregoing another. And it's all tied to what people value.
It seems to me that this article validates that people really do value behaving morally, having a clear conscience. And I'm glad, because I don't want to live in the world where people take advantage just because they can.
[+] [-] toddh|16 years ago|reply
[+] [-] tc|16 years ago|reply
[+] [-] kyteland|16 years ago|reply
"Years ago there was stigma - a man's word was his bond. But that is gone now, and it is not you, the consumer who made it thus. It is in fact the very people who lent you that money who made it so - who proffered documents to you written in 4 point type that were impossible for anyone with less than a PhD to understand (and sometimes even then), that contained intentional tricks and less-than-honest inducements, and who themselves were in fact stuffing bogus loans into securities that they then peddled out to the masses!"
[+] [-] maweaver|16 years ago|reply
[+] [-] unknown|16 years ago|reply
[deleted]
[+] [-] njharman|16 years ago|reply
Re: article itself.
There's also the small matter of jacking your credit for 7 years. With uncertain future and no savings many people rely on access to credit for emergencies. Not saying that is wise or that they should, but that is a fact.
[+] [-] DenisM|16 years ago|reply
[+] [-] prat|16 years ago|reply
But the issue with realestate is that its not as agile a market as stocks or commodities. the volatility observed in a month in the stock market is probably going to be observed in a year in real estate market. And I am not not even talking about the phase lag but the different scales of variation between the 2 types of markets.
[+] [-] ars|16 years ago|reply
Then they could walk away, and buy a different (cheaper) house, or buy first then walk away.
[+] [-] lurkinggrue|16 years ago|reply
[+] [-] andylei|16 years ago|reply
[+] [-] chrisgoodrich|16 years ago|reply
In reality, a bankruptcy only lasts 7 years on your credit report and most banks will start lending after merely 2-3 years.
Underwater homeowners should look at the longer time horizon and see that it will take quite a few years for their assets to be above water. That's several years to re-build their credit with a much lower cost of living.
[+] [-] kscaldef|16 years ago|reply
[+] [-] colomon|16 years ago|reply
Only thing is, according to the real estate agents, if I'm really lucky selling my house will just cover what remains on the mortgage. If I'm not lucky, selling the house could easily cost us $20,000. Crazily, the most likely reason for that to happen wouldn't be that we couldn't find someone to buy the house for what we'd like to sell it for -- it would be that we couldn't find a lender to appraise it for that much.
Personally, I haven't sussed out the moral implications of just giving the bank the house instead of paying back the loan. On the one hand, it's hard to see how the bank could complain: yeah, they might be getting a house valued at $N in lieu of $N + $20,000, but they also got 8.5 years of interest on it, too, which probably amounted to around $45,000. On the other hand is the notion that implicit in our loan contract was the idea that we would pay it off if humanly possible; that allowed the bank to lend us the money for less than would have otherwise been possible. I don't know how to balance those two things.
[+] [-] chrisgoodrich|16 years ago|reply
In my view, the bank will still profit off of your loan. If market value is about equal to what you owe, but it could only be reasonably sold for $20k but you have paid $45k in interest thus far, they still profit $25k from your loan. I have a hard time seeing where the bank could be morally right in damaging your credit for walking away...
[+] [-] kylec|16 years ago|reply
[+] [-] adharmad|16 years ago|reply
[+] [-] chengas123|16 years ago|reply
[+] [-] ams6110|16 years ago|reply
Further, if the coming predictions of high inflation turn out to be correct, the people who are still holding their mortgages will be paying them back with cheap dollars vs. people who walk away from their current debts and then need to borrow again later.
[+] [-] kls|16 years ago|reply
That is the beauty of Morals and ethics, is that groups of people subscribe to different ones just as you say it does not give them the right. Other subscribe to an-eye-for-an-eye morality.
I personally think that it does justify it, my moral compass says that if a cooperation is abusing the people via deception, unethical and immoral behavior then that corporation should be dissolved and all debts to that corporation should be terminated. covering it up their appalling nature with a double ethical standard just emboldens more corporations to engage in unethical behavior and allows more abuse of the people.
Let me be clear, I am not anti-corporation, i am just anti-double standard.
[+] [-] bd_at_rivenhill|16 years ago|reply
[+] [-] prat|16 years ago|reply
[+] [-] rleisti|16 years ago|reply
http://www.economist.com/sciencetechnology/displayStory.cfm?...
...which basically says that entitled people in positions of power tend to hold others to a higher moral standard than themselves.
[+] [-] tc|16 years ago|reply
An example is set at the top, by those in power, that self-dealing and self-interest above all ethical standards is standard operating procedure. Eventually this moral decay 'trickles-down' and people start to realize that they are chumps if they don't start playing by the same rules.
[+] [-] pyre|16 years ago|reply
[+] [-] dkimball|16 years ago|reply
Look up the "Ultimatum Game" for a particularly effective demonstration of where it fails -- and the commenter here who points out that rational-agent theory would destroy civilizations is completely correct. (Mental exercise: apply "the tragedy of the commons" to a defensive war.)
[+] [-] argv_empty|16 years ago|reply
[+] [-] petercooper|16 years ago|reply
Because some of us have pride and morals.
[+] [-] pyre|16 years ago|reply
It's not like these 'underwater' people are going to immediately move to some island in the Caribbean with bags full of money and sit on the beach in the sun living the good life until the end of their days while the poor, sickly bank dies alone and impoverished in a gutter somewhere.
[+] [-] prat|16 years ago|reply
[+] [-] unknown|16 years ago|reply
[deleted]
[+] [-] lucifer|16 years ago|reply
Every time these GoldmanSachs critters open their mouth is yet another oblique reminder that the masses are brain dead.
[+] [-] chrisgoodrich|16 years ago|reply
[+] [-] GabrielBen|16 years ago|reply
I think that this situation happens in part for the "moral"restrictions, in part for the credit rating, but also because of the effect that once that you invested a certain ammount of money in something, you keep pouring money on it even when its not good for you.( the famous throwing good money after bad money)
"i have already commited to buying this house, and pay this much already, so i might as well put more".
Im sure many of the readers here have put money into fixing their computer several times before acknowledging that to buy a new one would be cheaper :).
[+] [-] johnrob|16 years ago|reply
[+] [-] axod|16 years ago|reply
Also a slightly less inflammatory hyperbolic linkbait title would be good.