

Rich more likely to walk away from mortgage - yummyfajitas
http://www.nytimes.com/2010/07/09/business/economy/09rich.html?_r=1&hp=&pagewanted=all

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TylerJewell
Both my girlfriend and I have been pursuing strategic defaults on our primary
residences in the state of California. Her property is underwater by 300K.
Mine is about 250K. Neither of us are wealthy, but the financial upside of
pursuing this route is very compelling.

In California, if the loan on the home is a purchase money loan, which is the
one used to purchase the home, and not refinanced, then in a foreclosure
situation, the banks are not in a position to pursue you for a personal
deficiency. In other words, they cannot sue you for the loss on the home. We
had our lawyers check this out and it's due to laws dating back to the
Depression era.

At the time that a house is sold, there are three parties agreeing to the
price: the buyer, the appraiser, and the mortgage lender. So if a home goes
down in value, all parties share the risk. It's no different than a VC
investing in a small business. If the business fails, the VC cannot sue the
managers of the business to get their money back. The same holds true with
foreclosures in California. In the depression, this same situation happened,
property values fell, people lost their jobs and were sued by the banks to pay
them back. Bad stuff.

We are both pursuing short sales of our homes, but are perfectly OK with a
foreclosure. In both situations, our credit ratings will take a huge hit, but
they recover in 7 years for a foreclosure, and in 2 years if it's a short
sale. So we asked ourselves, is our credit score worth 300K? And with some
simple financial modeling, we figured that it was about 10 years for the
property values to break even. And the trade off was simple.

The short sale does turn into cancelled debt, though, and the IRS will get a
1099-C. Cancelled debt counts as income, which makes it taxable. Except the US
govt passed the 2007 mortgage debt relief act, which makes cancelled debt from
a mortgage tied to your primary residence an exception. You do not have to pay
income tax on it. This is valid through the 2012 calendar year.

At the state tax level, if the home has cancelled debt, it's still seen as a
loss sales against the orginal value of the home. And losses are not taxable.

So this is a great situation financially - no liability to the mortgage
company, no federal or state tax. Really bad credit for a couple years :(. But
as a question of opportunity cost, this seemed to make the most sense.

In order to pursue this, both of us had to stop making all payments on the
mortgages. We both got harrassing debt collection calls for awhile, but once
you get into the foreclosure process, they eventually die down. We each will
get 6-12 months of living in our homes for free, so in some ways that is a
loss recovery.

Hope this helps some of you...

~~~
hugh3
Do you lose any sleep over the ethics of it?

~~~
chengas123
I lose sleep over people suggesting it is unethical. That is buying in hook,
line, and sinker to the propaganda these companies would like you to believe.
Deciding not to service debt is a tactical business decision made every single
day. The same companies suggesting it is immoral in order to increase their
own profits at the expense of struggling homeowners have all done the same
exact thing without anyone ever suggesting it is immoral. You are choosing to
exercise a clause of your contract and have every right to do so.

Also, declaring foreclosure is doing a great public service. It helps still
inflated housing prices reach affordability. Californians spend more on
housing than residents from any other state. If we were able to spend less
money on housing it would have a positive impact on quality of living here.

TL;DR: I would trade my credit score for $250k in a heartbeat.

~~~
patio11
There is a clause in all of my software licenses that offers a refund, no
questions asked. I am able to offer that clause in the faith that people will
use it responsibly. If folks exercised it routinely on the theory "Hey, he
lets me do it and that puts $30 in my pocket", I'd have to snip it or go out
of business.

The extraordinarily lenient treatment of foreclosures, particularly in
California, is also premised on them being rare events caused by black swans
like personal financial catastrophe. If folks use them merely when they're net
beneficial, the generous leniency afforded folks in personal catastrophe will
_not_ be extended next time.

Banks understand this. This is why, when they write contracts between each
other, defaults do not result in "Oh, sure, keep the property for another
twelve months and then mail the keys in and we're even stevens."

~~~
robrenaud
At first, I thought your argument was really compelling. But I think your
analogy fails. You are implicitly equating taking a mortgage, not repaying it
and continually living your home with buying your program, getting the refund,
and continually using the program.

If you could remove the users ability to use the software when you refunded
them $30, like the mortgage lender can when the homeowner stops living in it,
you'd probably still be in business even with your clause.

On the other hand, if all of your users bought your software, thought it
sucked and never used it again, and then got their refund, well, you should
probably be out of business.

The OP's situation is not analogous. He is not free riding.

Edit: On the other hand, the year's worth of free rent before being evicted is
to me a bit morally shady.

~~~
patio11
But he _does_ get to stay in the house (for a year), because of the implicit
assumption that knocking him out on his hindquarters when he stops paying
would be discompassionate in the face of the catastrophe which caused his
default.

As an aside: I do a functional-limited trial rather than a time-limited trial
precisely because 100% of the use of the software for 48 hours satisfies the
need for 95% of my customers. "First year free" would wreck my business pretty
comprehensively if folks took advantage of it.

~~~
istari
Him getting to stay in the house for a year is due to the lengthy foreclosure
process, a legal artifact, not due to any compassion on the bank's part.

I'm confused why you're using the word "compassion" at all, and coaching your
argument in terms of how "compassionate" banks will be in their terms next
time around.

Banks exist to make money, the terms they offer are a balance of how much risk
they are willing to take, how much return they can earn, government
regulation, and competition.

The OP does not owe the banks anything other than the terms of his contract,
and the terms say that if he doesn't pay his mortgage he'll lose his house.

------
josephruscio
There is absolutely no moral or ethical dilemma in "jingle-mail". These banks
handed out huge no-money down loans like candy to people who bought way more
house (and in some case multiple houses) than they could legitimately afford.
Both parties were complicit in a transaction that should never have occurred.
Now that the inevitable has occurred and the music has stopped, the only thing
that matters is the letter of the law regarding the contract. If the bank
proposed/agreed to a no-recourse loan, just walk away.

Morality aside, jingle-mail is also the healthiest solution from a market
perspective. The faster banks are forced to take their lumps, move these
foreclosures through the market, and return lending standards to their
historical norms (e.g. 20% down), the sooner the housing market can return to
normalcy.

------
wheaties
Banks and businesses have been doing this for years. They weigh the economic
impact of supporting an unprofitable entity versus the impact of letting it
go. I don't see why people insist that other people are "morally" obliged to
continue to pay a mortgage.

A mortgage is a business contract. The banks evaluate you in terms of risk of
not paying and you evaluate the prospects of the mortgage contract they write
for you. There's no blood oath or secret brotherhood you join.

------
RiderOfGiraffes
Here are some earlier submissions on this and similar topics:

<http://news.ycombinator.com/item?id=1491252>

<http://news.ycombinator.com/item?id=1175576>

<http://news.ycombinator.com/item?id=1011716>

<http://news.ycombinator.com/item?id=726110> <\- This has lots of comments

------
rada
There is a big difference between regular debt and _collateral_ -backed debt.
The whole point of a loan backed by a collateral (in this case, the house) is
that the lender gets said collateral upon default. Mortgage lenders are not
"screwed" by foreclosures - they would love a foreclosure on a house whose
value is up.

Banks do not count on your paying off the house - if they did, they would not
explicitly demand your house as a collateral upfront. They are exactly like
the pawn shop owner who takes your wedding ring in exchange for some cash.
It's not a moral obligation on the part of the owner to buy the ring back if
the price of gold goes down to the point where it's cheaper to buy a new ring
- so why is it a moral obligation on the part of the home owner to buy the
house back from the bank?

Perhaps those rich people are not "ruthless" - perhaps they are rich _because_
they understand things like that.

------
bsnss-mn-cdr
Quote of the day: "The rich are different: they are more ruthless"

~~~
crpatino
Not necessarily ruthless, but money literate.

I'd rather reserve my kindness and good manners for actual people. Banks are,
in a way, abstract machines made of policies, rules and procedures. You do not
gently talk to your computer; you type the command as outlined in the _fine_
manual.

------
motters
It makes sense if you took out an overblown mortgage and are in a big negative
equity situation. If that's the case then getting rid of the property as soon
as possible is really just about cutting your losses to the minimum.

------
bosch
It's fucking pathetic that both banks and homeowners look for a bail out from
the tax payers who were fiscally responsible. Why is there no punishment for
people being stupid and why should responsible citizens help you keep the
house that's bigger and better than theirs with a government bailout? Does
anyone have any integrity or pride in themselves anymore?

Walking away from a mortgage you signed is about as responsible as the banks
asking for bail outs!

------
moonpolysoft
I'm currently in the process of walking away from a home out of state. I moved
from Delaware to California close to 3 years ago due to a really good job
opportunity. I couldn't take the hit in selling our house at the time since it
was underwater, so I wound up renting it out. Through that time I have had 2
renters on the property, both of whom wound up walking away from their leases.
The last renters trashed the place and I could not afford to get it fixed up
enough to rent it out again.

So I was stuck with an unrentable home out of state that I could not afford to
fix up and could barely afford the mortgage payments on. Therefore I just
decided to simply walk away from it.

Given that context, I simply cannot understand how people can say it's either
immoral or unethical to walk away from a house. The loan modifications that
banks try to shove down your throat are generally shitty deals, they simply
want recapitalize all of your late fees and missed payments back into the
principle, putting you further underwater. Working out a more equitable deal
with the home retention folks is damn near impossible. Not to mention all of
the collections calls and come ons from unscrupulous firms that want thousands
of dollars to try and work out a deal for you. Walking away is an act of last
resort and the financial and credit penalties are there to mitigate it.

~~~
TGJ
"I simply cannot understand how people can say it's either immoral or
unethical to walk away from a house"

You signed a contract. That's what makes it unethical to walk away. You put
yourself in the position that you are in. You may think you took a better job
offer, but actually if you had considered your circumstances, the job offer
was not that great because of the obligation to the mortgage company where you
lived for the house that you bought.

You say that you could "barely" afford the mortgage payments which implies
that you could afford them. The last paragraph of your response is just a list
of excuses to make yourself feel better about the course of action that you
have taken. Your part of the problem, not the solution.

~~~
crpatino
The contract carefully outlines what is it to happen in case the borrower
finds himself unable to make payments. It is not as if he's stolen the money;
he's loosing the property AND the percentage of mortgage payed so far.

The lender is to keep all the cash received so far, and the ownership of the
house as well. If the property happens to have been so overpriced that he's
loosing money anyway... so bad. They are supposed to be professionals
asserting the risk. If they chose to ignore those risk in order to push a deal
more attractive to the customer/borrower, guess what, they gambled and they
loose!

