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If I go there will be trouble
An’ if I stay it will be double

-The Clash

A short while ago, John Courson told the Wall Street Journal that underwater homeowners “should not walk away from lawful debts”. He went on to ask “What about the message they will send to their family and their kids and their friends?”

Five Years ago I would have heartily agreed. Fulfilling obligations, I believe, is a mark of one’s character. While I still firmly believe that every person should strive to fulfill their obligations, my definition of what constitutes individual responsibility has changed in the realm of home ownership. The unrelenting greed of mortgage lenders and the abject failure of our government to regulate them has severely harmed the average U.S. homeowner. It is true that a subset of homeowners could have been more aptly described as ‘speculators’ during the run-up to the crash but I still am convinced that the vast majority just wanted a nice place to live and raise their families. These ‘innocents’ were directly harmed by the collateral damage from a war that they did not sign up for.

So who’s John Courson? He is president and C.E.O. of the Mortgage Bankers Association. A group with an enormous vested interest in folks paying their home loans, no matter how big and unwieldy they happen to be. You see, Courson represents the very people who created the meltdown and even profited from the cleanup. The MBA members demolished the value of your home but refuse to reduce your principal balance. He does not want you to default, this would send the property back to bank ownership and they would be forced to sell it for what it is actually worth. Courson also pointed out on a separate occasion that “defaults hurt neighborhoods by lowering property values“. This was before, of course, before the Mortgage Bankers Association stiffed their lender in Washington D.C. to the tune of 25 million. Read the -Wall Street Journal Article

Here is the bottom line: corporations aren’t immoral, people are. The Banks and the MBA were  just doing the job of any corporation, to make as much money as they possibly could. Their perceived responsibility to shareholders was to get as many heartbeats into the funnel as quickly as possible so they could slice the ensuing mortgage up into Mortgage Backed Securities. After all of the qualified home buyers had homes, banks went after people who weren’t qualified to buy. Since these loans were sold almost immediately, the original lenders did not assume the risk of a loan default. That’s how an unemployed person could buy a 4 bedroom, 3 bath house with cash out at settlement. The bank simply did not care if they defaulted. The loan would go into the slicer with thousands of others and be a part of the CDO pool.

The question comes up then. Should the individuals who were not ‘qualified’ have bought these homes in the first place? Probably not. Individuals should know their financial situation but when Real Estate Agents, Appraisers, Lawyers and Banks are all using their professional influence to convince people that buying a home is the best course of action, it would take the strongest of the best of us to resist that kind of pressure.

The crash affected everyone, qualified or not. I would imagine that the first wave of foreclosures happened to those with the least ability to pay their mortgage. Then, as the recession continued, some people lost their jobs and then their homes. Now, those  qualified individuals who still have a job find themselves punished for their responsibility. They kept their jobs, their loan costs more and now their job is less secure. What’s more, the value of their home has dropped so much that they are severely underwater on their mortgage.

No good deed will go unpunished.

So what are the options for these folks? What about “Making Homes Affordable”?

The HAMP program is completely inadequate for a number of reasons. First, It does nothing to address the extreme loss of value homes have suffered because of the banks unrelenting greed. It simply tries to get people to take on a new loan for a house they still cannot afford. The principle is not touched. Secondly, It is aimed at people with financial hardship. How evil can banks get? They want to preserve their earnings by roping in the least capable of protecting themselves. The folks who are still financially solvent pay an egregious penalty. Their good judgement and strong financial discipline are the very values that they are being punished for exhibiting.

Why am I punished for being responsible?

If you bought a house with a reasonable loan, good credit and find yourself 30, 40 even 50% underwater you have every right to be angry. With such a big meltdown and so many bad actors within the circle of responsibility it’s hard to assign blame. Even worse, the President of the United States is out there urging homeowners to take the moral high ground and continue paying their mortgages. Now, even your sense of civic duty comes into question. I understand the dilemma from a macroeconomic perspective. Are home values too high? In a word, yes! The only reason home values shot up so far and so fast was because the law of supply and demand was so hideously tampered with by these influential financiers.

Strategic Foreclosure

Some homeowners are making the decision to walk away from their loans. Good people. Hard working, morally upright people. How could they do this? It’s simple really. They found themselves $100,000 underwater on their home with no help from the Feds and no help from the banks, they made the decision to walk away from their mortgage. They know their credit score will be devastated but are not overly concerned. They can stock up on things they would ordinarily use credit to purchase (For instance, They could get an auto loan before default at a low interest rate and have a reliable car for the next 7-10 years). They know that even when the economy fully recovers, home prices will not reach the astronomical levels we saw from those artificially inflated prices.

Should I cool it or should I blow?

Brent T. White, a University of Arizona law school professor wrote a 55 page academic article called “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis”. He said that a shame and social control agenda that extends all the way to the White House has been underway to keep people paying the mortgage on their underwater properties.

Laws differ from state to state on what you are responsible for after a default. Check your situation. If you remove the social manipulation coming from Wall Street and the White House and make the decision to strategically default a rational one, short term pain may result in a much more sustainable situation for you and your family.
Donald Bisenius, a Freddie Mac VP said on May 3rd “Knowing the costs and factoring in the time horizon, some borrowers have made the calculation that it is better to purposely default on the mortgage. While I understand how that might well be a good decision for certain borrowers, that doesn’t make it good social policy. That’s because strategic defaults affect many other families and communities. And these costs – or as they are known in economic jargon, externalities – are not factored into the individual borrower’s calculations.”

Allowing Wall Street to profit by manipulating home prices, converting mortgages into worthless strips of paper and even betting on the failure of this entire system is perhaps the worst social policy of all.

This indecision’s bugging me
If you don’t want me, set me free

Are you underwater on your mortgage?

What are the moral or ethical issues that would prevent you from strategically defaulting?

Should people who can pay their underwater mortgage be obligated to?

Please post your comments.

EDIT: I noticed that The Simple Dollar just posted an article which has developed into an excellent discussion on the same topic

-WR

( lyrics are from the song“Should I stay or should I go” copyright 1991 The Clash)

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