These are strange times in the mortgage business.
Bankers have long assumed that a mortgage borrower would do virtually anything necessary to stay in their home and avoid the stigma of foreclosure, including opting to withhold payment on other bills in order to stay current on their mortgage payments. And for decades, this assumption has been correct.
Not any more.
Two big trends have emerged recently, both of which were completely unexpected by mortgage lenders:
- “Strategic Defaults”: Faced with declining equity, home owners – many of whom are financially able to make their payments – are walking away from the properties to “start over” in a different home that has lower financial commitments and/or more potential for price appreciation
- “Credit Card Prioritization”: TransUnion says that there’s been a 58%+ jump in the number of consumers who are current on their credit card payments but delinquent on their home mortgages. Consumers appear to be prioritizing ready access to cash over [negative] home equity
It totally makes sense to me why a person would prioritize their credit card payments over their mortgage when the value of their home is likely far “below water”. After all, you have to eat, and a home can’t buy food.
The question of “strategic default” is stickier. My gut-level reaction is to condemn those who are financially able yet still choose to walk away from their obligations. But is that reasonable? I’m not so sure – if there are agreed-upon penalties for default (such as foreclosure and the damage it causes to one’s credit rating), and that person consciously choose to accept those penalties, then has that person violated any ethical or moral requirement?
I think a good argument could be made in either direction. What do you think? Your comments are welcomed, and encouraged, below – and thank you for reading http://realestate.BryanEllis.com!
I find it distasteful and irresponsible for a person who CAN pay their bills to refuse to do so. It’s certainly not ethical behavior.
Good Morning everyone. I agree with Carmen it really is distasteful. I first heard of this behavior a couple months back. Now when it was mentioned about the credit card prioritization and the Trans Union fact (58%+jump) along with the “strategic default” a light went on, I’m not saying I would do this, but what if I cranked up my credit card standing and used some of that cash to purchase a couple of distressed properties to wholesale and get me and my hurt’in family into a decent home at an affordable price, I’m just saying.
I see no moral imperative to pay twice what a property is worth. A mortgage is a contract like any other, with penalties clearly described for non-payment. If a homeowner decides he would be better served by defaulting and paying the penalty, he would be doing his family a disservice by NOT defaulting. I can see that the banks, which created this crisis by their own actions, want us to believe we have a moral obligation to pay them because there is no other motivation. While I am in no position to default myself, if I were, I would not hesitate to make the distasteful but necessary decision to default. My family comes first.
Although think it’s unfortunate for someone to stop paying even if s/he can afford to continue paying, I disagree with the (forming) consensus. It’s simply a business decision.
Most likely, those borrowers made several attempts to modify the terms of their loans, their lenders made a business decision to reject their loan modification requests, and those borrowers each made a business decision to unload their properties. I believe it’s hypocritical to label the loan-modification request denials as good business and the bailing as bad ethics. Both parties made calculated decisions in their own best interests. Unfortunately, both parties’ actions have helped to wreck havoc on the current market value in various real-estate markets nationwide, but that’s sometimes just how life goes.
Well if everyone played by the same rules it would make sense to be moral and ethical in RE or in any other circumstance.
We have a condo paid 177k got stuck with a neg am loan that brought it to 195K. Modifide it to 105K. Sound good? Wait. Got a second on it for 25k to keep us going thur the increased payment period when I had cancer and my disability was cut off. Do the math. 105k plus 25k = 130k
These condos today are selling for 45,000 – 55,000.
I’m still unside down even after the loan mod!
Now lets talk about morals and ethics. The hubby has been on the job for 32Years. Yes the same job. Has A1 credit. Never missed a payment. Borrowed to kept the payments on time every month. Did they cut us a fair deal? No. They got a bonified appraisal for 70K at the time the mod was done and still modified the loan based on his income or his ability to pay. I have come to the conclusion this entire country does not operate on morales, ethics or based on what seems fair or logical. It is every man for himself and the bottom line. So why not? Its a throw your hands in the air kinda thing. Can’t win, all bets are off.
Interesting comments, interesting problem!
Morales, ethics have little to nothing to do with this problem, even though most people are going to be offended by this concept I am putting out.
We have become a country with politicians that are excessively powerful and hungry for even more power. They are also disdainful of the common people, which form this country.
At the same time, we have a class of people, which are very much in to the idea of entitlement. This has combined to form a situation where we have horrible regulations over the last 70 years being piled on top of horrible regulations. Leading us to become a country where everything is done abroad and we just consume. That only last for so long and the time is close to up!
What this has lead us to is the current crisis, just one of many and certainly not the last. We have a crisis of value and values underlying everything currently happening. I will outline this as I see it as follows.
We have a crisis of wealth, and many people saying there is a lot of wealth in real estate and much wealth can be made from real estate. The people, the brokers, the banks, the gurus, the government, everyone and everything sees real estate as wealth. Fundamentally there is nothing wrong with this, we all desire wealth or power that is human nature and why we have grown out of the cave and become the changer of worlds. It is why we can discuss this all around the world in a few seconds, with devices most of us do not understand.
Now the crisis is one of unrealized wealth versus the desire. The banks are not a person; they are thousands, millions of people all around the world. A bank or any other large corporation is a collection of shareholders with a few people placed in charge by the shareholders to make them wealth also. They are charged with making wealth for the people who own stock in that company. To say the evil bank or any other company is true idiocy! It is all of the people with a pension, stock, insurance policy that make up the company and they cannot all be evil, bad, greedy people.
What we are faced with is a change of ideas, both in the private and in the public sector. The public sector once again needs to be put back into its original position of serving the people and not controlling the people and constantly attempting to reengineer our country to something that bows to the politician’s whim.
The private sector needs to understand the concept of you win some and you lose some, and in this case, the loosing is in people walking away. There is not one company in this country or any other country that does not walk away from a bad deal. Not just a forming deal but also one that turns sour on them. Yes, they lose some money, just like the people walking away from an underwater mortgage! Is it how we want things to go, no! Is it immoral to walk away, that is for each to decide! Is it a sensible thing to do? Every businessperson would do it to cut their losses to stay in business or to keep the shareholders happy. What is different about an individual doing the same thing, absolutely nothing!
Therefore, should people walk away and reinvest that money somewhere else, possibly. Is this a moral or ethical decision, not at all, this is a common sense decision and it is about time we start to get some common sense back into our society if we want to survive as a country. Common sense is what made us into a powerhouse around the world and common sense is what is going to save us, not some idiot politician, and certainly not some idiot regulation to protect us. None of they have and none of them will!
I would just like advice. Kyle Bass made a fortune last time there was a crash like there is coming soon. There are as Bryan has identified( I saw the same Oversite Committee video) are over US$3 Trillion in loans for commercial real estate outstanding over the enxt 10 years.The value and the ethics are the same as private real estate. There was huge bubble and money was given to projects without real hope. Their value has dropped and the money is not there. They cannot be refinanced.
Bryan what do you do to capitalise on this please? Are there swaps out there that people withoutb huge hedge fund levels of cash can buy and make money please? Do you just short the stock indices please? I am not into moral judgement. I just see that there will be a crash and even country defaults. What is the best strategy please to safeguard yourself and make money please?
What does the picture look like if you take the “walk-away” strategy to its extreme? What if everyone who’s upside down just walked away? Where would they go? What impact would that have on the price of houses considering supply and demand? It’s like a TV game show, “Let’s Make A Deal.” You’re upside down, I’m upside down, so let’s each walk away from our houses, let the bank take them, and while we’re waiting for the paperwork we’ll live in a tent. Then when it’s all done, I’ll buy yours and you buy mine for pennies on the dollar. Sweet huh, until you multiply it by several million transactions. Talk about a clusterfreak! I don’t think that’ll happen. I think enough homeowners have a sense of ethics to “honor” their contracts that they’ll stay, soak up the loss and keep making the payments.
morals? Since when does a piece of paper have morals? Ethics? Same thing! Remember folks, we’re not dealing with human beingings here (the banks) we’re dealing with Corporations. And I know, I know, the Corporations are made up of people. BUT, the decisions of Corporations are divided amongst many to circumvent the problem of one’s moral or ethical dilemma affecting the bottom line of the corporation, ergo, the very structure of the Corporation negotiates past any moral or ethical considerations UNLESS they are also identifiably profitable.
Whereas we are all used to dealing with humans, these corporations are not human. moral and ethical issues, to them, do not readily apply.
John R.