Our Daily Bleg: A Real-Estate Dilemma

Mike, a 30-year-old engineer, writes in with a real-estate dilemma in which he’s considering a tricky tradeoff: is it worth sabotaging his own credit rating in order to walk away from a house that’s worth far less than his mortgage?

I am hoping he can glean some good advice from those of you who may work in related fields. (Considering your fervent response to a recent post about homeowner bailouts, he probably won’t be disappointed.) Here are the details:

My question is about my current housing situation and when (if ever) it makes good economic sense to walk away from an underwater home. My new wife and I bought our home in Temecula, Calif., as a place for us to start a family, not as a get-rich-quick investment or because we expected the value to go up in the near term. However, we never expected the value to crash the way it has.

We bought the house in early 2007 for $445,000 and put $50,000 down (the lender encouraged us to put zero down, but even though $50,000 was a huge amount of money for us, we felt more comfortable with some equity in the home and a lower monthly payment). So our mortgages totaled $395,000. Now that the market has crashed in our area, our house is worth about $250,000.

Our home value is now about $140,000 less than we owe on our mortgage and our $50,000 down payment is essentially gone. Although our monthly mortgage payments are high, we can still afford to make them, but should we? If we walk away and buy another house with my parents cosigning on the loan (or even just rented a place), we could save almost $1,000 a month in payments and maybe even have positive equity in the next few years. If we stay in our home, we’ll be stuck for many years, and if the market ever does get back to what we paid, the best option we’ll have will be to break even with a sale and then buy another house with an inflated value.

I’m certainly concerned about the ethical side of it, and know that walking away is not “the right thing to do.” But my question is from a purely economic perspective and I’d be saving a significant amount of money by lowering my monthly payments and erasing $140,000 in debt.

Since California is a “non-recourse” state, all the loan company could do is take the house. And the Mortgage Forgiveness Debt Relief Act of 2007 states that through 2012 the I.R.S. will not count forgiven debt as taxable income. So the only financial downside appears to be a destroyed credit rating. Am I missing anything?

So the big question is: how much is my credit rating worth? Is it worth more than $140,000 plus $1,000 per month?

Now imagine a few hundred thousand Mikes, or maybe a few million, and you can see why real estate will remain a mess in many parts of the country for years to come.

How flexible will his bank be in a renegotiation? There is the chance, of course, that his own home will regain its value in time, but that time frame is a big question mark. Some of you may want Mike to double down and buy another house while values are low, but I doubt that is an appealing option.

Please give Mike the best insights you can.

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COMMENTS: 165


  1. Carl Bunch Credit Repair says:

    Credit repair expert speaking here:

    First of all, if you walk away, you won’t be ABLE to buy another house for at least 2 years (even if your parents offer to co-sign) because you will have a foreclosure on your credit report, not to mention the fact that your credit score will be in the low 500s , which means all of your credit cards will jack up their interest rates on you, reduce your available credit, and maybe cancel the card outright.

    Your best option is to file bankruptcy. You can keep your credit cards, and as long as you don’t make any mistakes after the BK, your score will be in the high 600s-low 700s within a year. You still won’t be able to buy another house for at least 2 years, but with BK you can keep a high credit score.

    Potentially the best option, though risky, is to stop making payments, wait for the Notice Of Default, then have an experienced lawyer demand the lender produce the mortgage. Most mortgages have been chopped up and securitized and if a lender can’t prove they hold the entire mortgage, they don’t have the right to foreclose. You can live in the house for free and have a credit repair expert like myself use the documentation to fix your score.

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  2. jonathan says:

    I doubt a bank will cut the mortgage by enough, but it’s worth waiting a few months to see what the federal government does and how that affects the banking industry. If things continue as is, the only sensible choice is to talk to the bank and tell them you’ll give them the keys.

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  3. Christian says:

    WALK AWAY.

    Ethical issues aside, this is a no-brainer. The only thing I would perhaps try first is to negotiate a write down with the bank that brings your loan value closer to the value of the home.

    If they won’t deal walk away. Your credit rating will be fine in a few years.

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  4. Henrik says:

    You said you didn’t buy the house as an investment, so even from a purely economic perspective you should consider if you actually like living in that house. Having a home you feel at home in has to have at least some value to you, even if it doesn’t reflect in the market price.

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  5. C. Larity says:

    Pay your bills, deadbeat.

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  6. Al Shealy says:

    Since you’re willing to sacrifice integrity for money, why not just rent out your wife for a few years and pay off the whole thing very quickly?

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  7. Jim says:

    omg the same greed that got us into this mess is going to make it worse!

    This guy bought a house, has no problem making the payments but wants to WALK AWAY because of the current market?
    How long was the family planning on living there in the first place?

    Does he do this with a new car as well?
    You buy a new car, drive it off the lot and there is no way you can sell it for what you paid for it. Should you just walk away from that as well?

    The only reason I could see to walk away would be if he had to relocate for work and would not be able to sell the house.
    But that does not appear to be the issue here.

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  8. Peter says:

    Just a comment on the math here…

    The savings of going into foreclosure would be a $140,000 change in net worth OR a $1000 a month in savings (actually less, since you’re payments are tax deductible), depending on how you look at it. You don’t get one on top of the other.

    That being said, the interest rate and terms of the loan may also be relevant here, and $140,000 is nothing to sneeze at if you struggled for years to come up with the $50,000.

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  9. TonyW says:

    If personal ethics matter… and he can make the payments… Mike is asking permission to screw his counter party simple because he has the opportunity.

    If he were a business, such a sentiment would be short sighted at best, and illegal and evil at worst.

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  10. Brenda says:

    Mike’s comments about why he purchased the house (“a place for us to start a family, not as a get-rich-quick investment or because we expected the value to go up in the near term”) holds the answer in my opinion.

    That house STILL meets those criteria. Mike said he is able to make the payments, so it is not a matter of mortgage payment vs. other bills.

    I don’t mean to make light of the gut wrenching fact that the home’s value is less than you owe, but that “value” is only a number that turns into reality at the time one tries to sell.

    Since Mike can make the payments, and the house is meeting its original “reason for being” … to provide shelter and a place to start a family, I see no reason to inflict years worth of damage to your credit score. Remember that your credit rating affects what you pay for car insurance, interest rates charged you, even the ability or not to get a job (credit checks are routine parts of job applications these days).

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  11. Jamie says:

    @ Carl Bunch — Why would he want to file bankruptcy? That doesn’t make any sense at all. A bankruptcy is only useful if you need to discharge unsecured debt that creditors are pursuing. His options here are: (1) keep paying on the house, keep a good credit score, and hope that the home value will eventually go up to a more reasonable value; or (2) work something out with the bank.

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  12. Dober says:

    I have to agree with Jonathan. I’m a banker (on the commercial side though), and I would suggest that you talk to the bank first and see if they can re-negotiate the mortgage. You won’t get the full amount reduced, but you would still save a lot of money, and have the house for when the market eventually rebounds.

    If that’s not possible, then, I would go with Carl’s advice. You won’t be able to buy a house for two years, but that doesn’t mean your parents couldn’t buy it for you and sell it to you two years later when you can qualify for a mortgage again.

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  13. Kit says:

    Though phrased very politely and realistically, Mike’s letter is exactly what’s wrong with the economy and the people that make it up (don’t even get me started on the recommendations of comment #1, that’s just straight up gaming the system). You have to be accountable for your actions, otherwise trust (and the rest of the economy) breaks down.

    Mike, did you sign a contract saying that you’ll pay X amount of dollars for the next Y years? Can you still afford to make those payments and feed/clothe your family? It seems like the answer to both of those questions is yes. So guess what, you need to hold up your end of the bargain and keep on paying that mortgage.

    When you purchase anything whatsoever, you are taking an implicit risk that that thing may not be worth as much in the future as it is right now. You’re basically saying that since you ‘lost’ in this transaction, you shouldn’t have to pay the consequences. If the home went up in value, would the lender have a right to raise your monthly payments because the home is now worth more?

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  14. Jeffrey Trapnell says:

    Perhaps you should ask, what is the ethical thing to do before the economical thing to do. When you bought the house, you agreed to the terms of the loan and in return to you received ownership of the house. How about this question, what is the value of your signature and your word you gave to the bank? Is it only worth $140,000 plus a $1000 per month.

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  15. Chris says:

    The question — what is my good credit worth in economic terms? — is an interesting one but not one that I am qualified to help answer. What I can add is that the cost differential between walking away and staying put may not be $140k plus the present value of $1000 per month. A discussion with your bank, especially if you enlist the help of a real estate attorney, may enable a favorable adjustment to the loan terms or even the principal amount. Many banks in Southern California have been quite willing to play ball when it means that they can avoid taking on another unsellable foreclosed property.

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  16. rdhd says:

    Mike, like many other people, apparently thinks economists only deal with money. If he wants a benefit-cost analysis of paying versus defaulting, he should assign a value to “doing the right thing” and a cost to him giving yet another mortgage lender yet more bad debt and causing his neighbors’ property values to drop (or any other negative effects that will be imposed on others).

    -rdhd

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  17. NM says:

    How hard is it to find a place to rent? How expensive is it? You don’t have to own a place, you know. You could just save the money. Cash in hand those days is worth more than real estate and debt.
    And forget what you call the “ethical side” — your banker would throw you and your family under a bus if he could make a buck off it and get away with it.

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  18. Gary says:

    The credit repair guy offers interesting advice, which blurs the distinctions between the different options a bit.

    Clearly, the optimal situation for Mike, is to default on the loan, and walk away substantially richer (or, less indebted). While you maye be forced out of the housing market for a couple years, over those years, saving $1,000 a month would leave you with somewhere north of $24,000 in the bank (assuming an interest bearing account), and no liabilities on the books. The math narrows considerably if you currently have credit card debt outstanding, since the default could hurt your interest rates. The default will also impact your car loan rates, and possibly your car insurance rates, which is worth considering. Your credit can even impact your eligibility for a job, which is worth considering, depending on your job security.

    Is all of that worth $164,000 and 2 years out of the housing market? That’s much more personal, and in some ways is contingent on your income. For someone making $500,000 a year, I’d think not, especially if they work in an industry where their credit could play a role in their employment. For someone who makes $50,000 a year, its a no-brainer. Anywhere in between, and its all in the details.

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  19. jonathan feldman says:

    Mike,

    If you bought your house to live in, price and investment should be irrelevant for you. That said, I would follow Carl Bunchs advise and get out through bankrupcy, patiularly if you pay off credit cards and bills as soon as you get them.

    To Freakonomics,

    If the choice of people paying off mortgages is walk away and save money or gut it out, why did we not experience housing criseis during any previous economic downdturns since the great depression? Becuase housing prices were severly inflated for the past few years? Before the 1989 recession, housing prices went up more and faster than they did during the new century, yet the housing crisis affected only the lenders.

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  20. Mitch says:

    Contrary to popular belief, loans aren’t as “no recourse” as is commonly believed. If you willingly default on a loan which you have the capacity to pay, the bank can still come after your assets.

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  21. Jeff says:

    It’s not $140K AND $1K/mo. It’s $140K (OR $1K/mo). If you walk away, you don’t get that $140K back. If you stay, you get it back in equity eventually.

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  22. julian says:

    I know you said you didn’t want to focus on the ethical side, but I don’t see what’s wrong with walking away, from that perspective. You have a contract which specifies what happens if you break the contract, so in effect that’s just another option within the contract. This is not a human being that you made a personal pledge to, nor is anyone going to lose their job just because you (individually) walk away. If you don’t deceive anyone, or create a new [false] identity, and you take your hit on the credit score, then you’re playing within the rules of the game.

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  23. Robert D says:

    I don’t get it. You bought the house as a place to start your family. What has changed in that regard? You bought it live in and can still afford the payments — what’s the problem?

    Your car is worth less than you owe on it the minute you drive it off the lot. The difference? Aside from being a huge difference in money, is that with the car you actually believe you bought your car to use and not an investment. With the house, you’re only paying lip service to its utility, when in fact you got caught up in the whole real-estate-as-investment mentality.

    You could get into the morality of paying your debts, but I don’t think it should it even come to that discussion yet. Be honest about why you bought the house first, then figure out what to do next. If you truly bought it to live in, then be happy you have a house. (That doesn’t mean you can’t try to work something out with the bank, of course.)

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  24. David S says:

    There is nothing unethical about handing in your keys and walking away. It is a perfectly legal option available to you in your mortgage contract.

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  25. AaronS says:

    I advise to use your situation as negotiation leverage. Very simply, you are in a no-win situation…which, happily (I think), places the lender in a very poor situation–one that might cause some movement on their part.

    Here’s how I would work it….

    You let your lender know the situation and that you would like to keep your home, but under the present circumstances, you will have to file bankruptcy/allow foreclosure, etc.

    UNLESS, THAT IS….

    Unless, that is, they can work with you to modify your mortgage so that you can see some reason for stayin on.

    Lenders DO NOT want your house. It costs them thousands of dollars in fees to foreclose and dispense with your house.

    So you might have a chance to get them to change their mind…if they think that not changing their minds will cause you to walk away and leave them with a house which, even if they sell, they can’t pay off the debt.

    Think it through.

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  26. Jake says:

    Do unto others as you would have them do to you. It doesn’t matter what has happened in the past. Yes, you got screwed in the market. But how do you want others to treat you in the future? Do you want to harm other people? That is what will be happening if you walk away. Yes, YOU will be better off, but you will be costing other people money. Just remember that, and think about your actions. You know what the right thing to do is – stay in your house, make the payments since you can, and resell in the future.

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  27. Philippe says:

    @Kit: If this was stock, instead of a house, should Mike hold the purchase until it was delisted or rebounds (in decade(s))? Or should he pull that money out while some of it still exists and redeploy it towards other stock, which is more reasonably priced (and provides the same shelter capabilities as his original, over-priced purchase)?

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  28. curious says:

    Does asking your bank to adjust the loan effect your credit? Is there any downside to trying that first?

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  29. Michael says:

    From what I have read recently, I think the answer is that before making this decision, Mike ought to try and renegotiate his loan with his current lender or see if he qualifies for any of the recently enacted programs to help with loans like this.

    If both those fail, then he can look to making the harder decision.

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  30. Kent says:

    First off, I think Mike has already made the decision in his head and he’s just looking for some moral support. He’s an engineer and we all know the numbers clearly add up for a walk.

    Secondly, unless you love the house and the area, then walk (I’ll be your moral support).

    Yes, I know this is what’s wrong with our economy, blah, blah, blah. Why does Mike have to sit on the sidelines while everyone else is getting a bailout?

    We shouldn’t do bailouts. No doubt. But since we are, I’d rather help someone like Mike then someone who won’t be able to afford the mortgage even after an adjusted down re-finance.

    Mike has already lost $50,000 in the deal. I’d say that’s punishment enough. And don’t think for a moment that a bank won’t take the opportunity to screw Mike, no matter how “unethical” or “fair” the situation. Why should banks get to follow by the “it’s just business,” rule and Mike can’t?

    Go ahead and walk Mike. Let us know how it turns out.

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  31. charles says:

    I like to look at myself in the mirror and feel okay. Whatever group you are in, you’ll have tainted it (church, Democrat, Republican, professional group) – Folks will say, “See that’s what those types do.” Who want’s to be the sleeze of an organization? Would you do it if you lived in a small town an owed your mortgage to the banker who was your neighbor? Would you want it in the headlines of your local paper? Let that be your guide; nothing is pure economics.

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  32. Roy H says:

    One of the comments suggests Mike is trying to screw a counter party and I can understand this.

    On the other hand, the counter party should have known(assuming reasonable competency) that it was financing a house that was selling for much more than it cost to build or replace including a considerable profit, a situation that could not and did not last.

    So did the counter party screw Mike?

    To me, the lender has the same ethical dilemma as Mike.

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  33. Andrew Laurence says:

    If Mike didn’t care about the house going up in value, he would have rented. By buying a house, he was betting that it would go up in value. If he were to sell or walk away now, he would lose that bet. If he stays in the house and keeps making the payments, the bet hasn’t been decided yet. I say accept the fact that it looks like the house might have been a bad investment, stay in it and keep making the payments. Actions have consequences, and you don’t win every bet you make, but a grownup doesn’t whine about it.

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  34. WholeMealOfFood says:

    For those of you who question Mike’s willingness to follow his economic incentives, perhaps you should review why he has such incentives. Nonrecourse mortgage laws are the reason that borrowers with the ability to pay are prepared to walk away.

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  35. C. Larity says:

    You should walk away from the house. You should also walk away from your car. And you should stop investing in your retirement. All of those things have gone down, which is amazing because there was no indication that could EVER happen!

    Don’t try to make yourself feel better by saying you didn’t buy the house as a get-rich-quick scheme or investment. If that were the case, you wouldn’t consider leaving the place now since it meets your stated need of being “a place to start a family”.

    Seriously: Pay your bills, deadbeat.

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  36. joe says:

    There is a difference between unethical and illegal. Unethical is also in the eye of the beholder.

    Saying that mike is bad by looking at his options options is not right.. The moral hazard created by the bailouts have created options for the financially secure to reasonably consider. Why should he continue to pay more than something is worth just because he can afford it? If his options were illegal then they wouldn’t be available.

    All of the banks/business that are having problems due to investments in real estate had a responsibility to their customers and shareholders to conduct business by making loans to people only after performing due diligence and reasonable business practices. These banks are being bailed out with no accountability, but the well meaning, prudent borrower is brow beaten into following the rules.

    The bailout money should initially be given to people that can afford to make payments on their overvalued property. After all, they are the ones that are being financially responsible, and would put the money to more efficient use than people/business that made poor investing decisions. Those that bought houses they can’t afford, or made loans that they should have must face the consequences. Otherwise people will voluntarily go into BK or foreclosure because they can save money and it will make the economic situation worse.

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  37. Mike says:

    Far too many here are ignoring the economics of the issue, and focusing on ethics, morality, “social conscience,” and other things that have no bearing on the smart *economic* decision at hand. That far upside down and it’s time to walk. I also bought a home in 2006. If I’m underwater, it’s not by much. If the value of the house were suddenly half what I owed on it, I’d be gone in a heartbeat.

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  38. sw says:

    The bank was fully aware of the terms of the contract they entered into. It is fully within your rights to walk away. I don’t see an ethical problem with this at all.

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  39. Xian says:

    I would first negoitate with your mortgage company to see if they would be willing to reduce the negative equity, as well at that point they may also be willing to refinance your mortgage to a lower rate and monthly payment. the current climate makes otherwise impossible situations possible. I was surprised to see the value of similar homes in my neighborhood reduced to just above what I paid for my home in 2001. Buck up, you think it’s bad that your home lost $140,000 over 2 years, I’ve gained nothing over 8 years when prices were considered low, honestly I’m waiting for it to drop further and actually be lower than my orginial sale price, then homes would be more in line with actual value to income, that and I will be able to buy one another one.

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  40. AlmostGlue says:

    This is exactly the scenario that is causing the continued panic in markets. Not just the possibility that someone who bought their house at the peak of the bubble will walk away, but what about the person who may have owned their home for 10 years and all their equity is gone (or almost gone). If they lose a job – they can’t even sell the house without owing money. One person walks away to save money, one is foreclosed – the result is that all our home values continue to slide and nationally trillions of dollars evaporates from the economy. Everyone on their moral high-horse can take that to the bank – but I am not an expert, just an over-educated under-employed fool.

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  41. MikeT says:

    Bank: OK, here’s the deal. You pay us, over the course of 30 years, about twice the value of the house. We’ll pay for the house now.

    Buyer: Uh. That doesn’t sound fair. You’re getting alot of money for nothing.

    Bank: We’re doing something. We’re buying risk from you. You’ll stay in the house but you get to pay us over time. We’re buying the risk that you might walk away.

    Buyer: OK fine. What else do I have to agree to?

    Bank: You have two options in the contract. #1, Pay us on time each month or #2 stop paying and we get the entire house, including any equity you’ve built up.

    Buyer: You mean if I miss payments you can take the whole house and I don’t get anything for it? Even if it’s worth more than when I bought it?

    Bank: Yep, that’s the deal, take it or leave it. OH and it will cost you $10000 on top to buy the lone

    Buyer: Fine. I’ll take it, but I feel like I’m getting ripped off.

    Bank: Heh. Sux to be you.

    <5 years later>

    Buyer: I’ll take option #2

    Bank: Excuse me? Do I know you?

    Buyer: Can’t answer that one. But I’m taking option #2 in my contract. I’ll stop paying and you can take the house.

    Bank: I don’t want your house! It’s not enough to cover the cost of the loan in your contract?

    Buyer: Sux to be you. Here’s the keys.

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  42. Kit says:

    @ Phillipe #27:

    You’re missing the point. I’m not saying that he has to stay in the house for the long run, I’m saying that he has to take the loss. To take your example, someone lent you $600 and you bought a share of Google in 2007, and it subsequently went to $300 today, I don’t expect you to keep on holding it if you don’t believe it will go back up in value. By all means, sell it, and invest your $300 in something else. But you still owe your original lender $600 because he lent you money, not a share of Google. You can’t say, oh well, I thought it would go up, here, have this share back, I was wrong. You need to pony up that $600.

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  43. 'emma says:

    Dear Carl and Jonathan;

    I can see the real benefit of filing bankruptcy i.e., `undone’. That said, I won’t mind giving the banker the keys–

    As far as a credit repair expert like yourself Carl fixing the score — I think- but am not certain as yet–that you already have.in a strange way— so am working on “Title” – and Title Page-

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  44. Tom Woolf says:

    I have to agree with Brenda – the house suits your stated purpose, so keep it.

    That does not keep you from approaching your lender and seeing what can be done. Now, if you happen to use the “I might have to walk away from it for financial reasons” card, as long as you don’t lie during negotiations you should be fine (legally and ethically).

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  45. Sean Dayson says:

    I’m glad that the first comment was the one by the credit repair specialist; I think it puts the best perspective on this. While the borrower does have an obligation (both contractual and ethical) to repay the debt; there was an ethical obligation on the side of the banks to act in good faith as a responsible corporate citizen.

    Considering that the banks sold off loans as securitized assets, it is fair to require the banks to produce the mortgage in accordance with law.

    Banks and all companies have to make amoral (not immoral) decisions about what is best for them and will make them the most profitable. Poeple are allowed to do the same. The law is such that he can take the advice of the credit specialist in good conscience and require that the bank obey the law concurrently to him doing the same.

    This is not an issue of ethical obligations. If this was a binding ethical decision, they would not have forced him to sign a written contract. And if reputation was a matter of ethics, there would not be 3 verification databanks (credit agencies) that are the sole reliability factor for reputation.

    Mike, you need to think about what is best for your family. Don’t waste 140K and another 1000 a month on a misplaced sense of ethics that don’t come into play here. Just honestly do what is best for your family and your future.

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  46. Brad says:

    I agree that Mike should consider whatever value HE places on “doing the right thing,” but it isn’t so clear to me that walking away is so morally repugnant. His house would not have cost so much money if banks had been acting more responsibly in the first place. It seems fair to me that the bank should shoulder some of the burden even for people like Mike, who can still manage to make payments.

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  47. Anne says:

    MikeT, that is a gross misunderstanding of how mortgages work. The foreclosure remedy is just that–a remedy in the event that the mortgagor breaches the contract. It does not give the mortgagor permission to walk away.

    (By the way, a bank that forecloses does not get the equity. After the mortgage debt is satisfied and the bank’s fees and costs are paid, any surplus is returned to the buyer.)

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  48. nancy says:

    You are lucky that you do not have children yet to complicate your decision. But you do wish such, it usually is true

    Teach your children well
    the father’s hell is what they’ll grow by or will slowly go by?

    Whatever the weather, we live through the weather, whether we like it or not.

    well, at least the ones that don’t freeze to death or collapse from heat stroke.

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  49. J. Daniel Smith says:

    Kent (#30) is right: treat this 100% percent as a business transaction. As long as you’re not doing anything illegal, go for whatever you think makes the best financial sense for YOU.

    Companies get to declare bankruptcy and reform a few months later virtually unscathed (K-Mart). And I agree completely with Kent that the other parties in the transaction will have no “ethics” if the shoe were on the other foot.

    Mike also has to consider what *might* happen in the future. He could loose his job, he could incurr large medical bills, etc. Being so underwater in a house could severely limit his future options.

    If you think it is morally wrong for Mike to do something like this, then as a society we need to make the costs match the wrong. For example, getting rid of no-recourse mortgages.

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  50. Mike says:

    Kit, #27

    I believe you are the one missing the point. Laws are just a little bit different when it comes to mortgages as opposed to stock. If Mike had a contract for a house that state he was on the hook for the full amount of the loan no matter what, it might be a little different. In fact, he’d need to let them take the house, AND declare BK.

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  51. Guy says:

    I think the best way to think about it is:

    Pretend you have a low-credit score and a foreclosure on your credit record. Are you willing to pay $140,000 to remove the foreclosure and improve your credit score?

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  52. Ryan says:

    Does the zebra worry about escaping from the lion, causing the lion to possibly starve?

    Does the rape victim worry that by screaming she will be rescued and cause the rapist to be unsatisfied?

    Does the fish worry that by getting off the hook, the fisherman will go home empty handed?

    Mike, you have a legal agreement, specifying what happens if you do not make the payments. Your options are ….
    a) continue to get screwed, hard, for many, many years.
    b) accept that you’ve lost the $50K (ouch) and go find a better deal. Your debt is to yourself, your wife, and your family.

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  53. dan says:

    The economic scenario that is playing itself out on the coasts is exactly the situation that Houston was in during the mid-80′s oil bust. Houses lost value extremely fast, and many people walked away. Many of my friends and neighbors walked away (I did not)

    Very few of those people suffered any “credit rating” fall out. As a matter of fact, some of them went on to buy houses soon after they walked on their under water houses.

    We all survived. I cut the grass in front of the abandoned house to my west, and others did the same thing. The situation we are in is no unique nor unprecedented. It would be nice to see people looking at the history of places where this has happened before.

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  54. L.Benson says:

    These last two articles about housing and the comments that have followed them, have left me incredibly disappointed in the freakonomics readership.

    This everyone for themselves, shortsighted mentality is exactly what will keep our economy on the track it is already on. Yes, bailouts suck, but there is a reason it is called predatory lending, people who have bad mortgages didn’t walk in to them looking forward to the day the bank would foreclose on their homes. You’re right, information was out there to inform consumers that what they were getting into might not have been smart, but for the first time in history, money was chasing borrowers, banks couldn’t wait to lend so they could make all the money on fees, sell the mortgage off, and absolve themselves of any responsibility for the terrible mortgages they allowed to exist.

    People did get into mortgages they couldn’t afford, yes, but they were only able to do so because of incredibly, stupidly lax requirements put out by banks.

    Bailouts for individual consumers aren’t about “weepy sympathy” they are about preventing further collapse of banks and our economy, while also protecting the people that got tricked into bum mortgages.

    As for Mike, keep your house, and think of it as a…home…instead of an investment. The ethics of it isn’t just about what he owes as a single person to a single bank. It about thousands of people facing this same dilemma, and our economy standing on the brink. If every person walks away form a home that isn’t worth what they bought it for, more banks will fail and our government will have to decide weather we should bail them out too.

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  55. Just Another Reader says:

    Are you going to walk away from your car too when you realize that it is worth less than you owe?

    What about your house hold belongings? I know my plasma TV isn’t worth what it used to be worth.

    You agreed to buy the house, it isn’t the bank’s fault that you paid that much. The bank gave that money to the seller, they aren’t profitting. Why should it be their loss because you made a poor decision to buy a house and now want out?

    Pay your bills, don’t become more of a problem to honest citizens.

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  56. Kit says:

    @MikeT #39:

    No, no, no, and no again. Let’s try again:

    Buyer: Wow, a $250,000 house looks perfect for me. But I only have $25,000.

    Bank: No problem, I have $230,000 lying around that you can borrow to buy the house.

    Buyer: Sounds great! What’s the catch?

    Bank: No catch, but you do have to pay us a fee for the use of our money. It’s called interest and is an integral part of any loan. But since the federal government wants to encourage home ownership, you can use your mortgage payments as a tax deduction.

    Buyer: But what if I can’t afford the payments?

    (At this point, both buyer and bank make unreasonable assumptions about payments in the future. Let’s assume that both are wildly optimistic and make promises that they really shouldn’t have.)

    Bank: Oh, and one more thing. If you find yourself unable to make payments in the future, we get your house. But to keep you out of debt forever, we can only recover the value of your house, whether it goes up or down.

    Buyer: Really? So I can just walk away if the house goes down in value and I don’t owe you more money?

    Bank: No, that’s not what I said. If you, for some reason, can no longer afford to make payments, then we get your house. It’s not a choice, it’s the outcome of an undesirable situation in which we both lose. We have no options either; we can’t simply decide that we made a bad loan and immediately ask for the entire amount back. You stick to your payment schedule and we’ll stick to our collection schedule, like we agreed.

    Buyer (with stars in his eyes): Whatever, the housing market never goes down anyway.

    Bank (with dollar signs in his eyes): Exactly.

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  57. Tucker says:

    I think the best answer might be- sell it to your parents/siblings/in-laws for the lowest price between the mortgage value and the market value that your bank is willing to take. Then you can collect $15,000 from the gov’t and get a lower interest rate for a 30 fixed rate. You can split the $15k with the buyer or use it to offset the down payment and pay a lower monthly. Everybody wins. The bank gets better than what the writedown would be on the foreclosure (or realistically the value of a security that includes your price depressed neighborhood), your family gets lower payments and $15k.

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  58. Brent says:

    A couple of things. The person recommending bankruptcy seems off the mark, this wouldn’t even need to be a foreclosure it would more than likely be a negotiated short sale. And given that CA is non-recourse, it would be an easy short-sale negotiation. I won’t go into things I don’t know about, but I believe a short-sale, particularly if you have no delinquent payments, has only a small affect on your credit score (less than a 200 point drop) and I think a short-sale, unlike foreclosure, does not stop you from buying a new house, but the credit score might (hence your co-signor suggestion).

    Now, on the things I do know, the people that are criticizing him for his ethics seem out of touch with how lending works in most circumstances. As a corporate lender (which I am), when I make a loan, if it defaults I can’ t go after the equity holders and make them feel bad for abandoning a company once the value drops. I have recourse to the assets (in my case the company’s assets). It appears that it is the same for these residential mortgage lenders in CA, they have recourse to the house. The equity owner loses his equity, the debt holder gets the assets. Mortgage lenders need to do the same thing corporate lenders do, make sure the equity person has skin in the game, and be conservative valuing your assets. That is the business deal. If you disagree, let me know what companies you hold stock in. At some point one of those companies will face trouble, maybe through no fault of yours, but it won’t be able to pay me back and I’ll come make you feel bad that your a “dead beat”. Or just realize that we own equity in many things and just because we do, if the debts aren’t recourse we aren’t obligated to keep them going just for the sake of the lender.

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  59. Alex says:

    When you run the numbers, there is little chance of seeing the $50,000 in equity ever again. If prices start appreciating today at over 5% annually, it will be ten years before you break even.

    Just remember the lender is in just as poor of a position as you. Based on the broker pushing zero down on you, it isn’t likely the loan is held at a local bank or credit union. It may be difficult to get principal relief at this point, but an interest rate reduction is often feasible (in the meantime). You may want to wait it out for another year or so until some of the issues with MBS servicers are worked out. It is in lender’s best interest to lop of $100k or so in principal, but servicer’s hands are tied right now. I expect that to change over the next 12 months, to some degree.

    If you can’t get the loan renegotiated or it looks like some stringent/punitive legislation is forthcoming, then you may decide to walk.

    Finally, there is no moral duty to continue your mortgage as is. You signed a contract, as did the lender, agreeing to a variety of terms. One of those terms was what happens when payments are not made.

    The irony of this is that the loans were written and MBS was structured to protect the lender (including ultimate bond holder) from borrowers who refinanced (i.e. paid off the loan early. The thought was that a default resulting in foreclosure would not be an issue as prices would continue to rise.

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  60. Carl Bunch Credit Repair says:

    Jamie:

    He’s talking about his options if he DOESN”T want to keep the house.

    And the lender will NOT write down $140k, sorry, it just doesn’t happen.

    Christian:

    If he walks away, his credit score will NOT be fine “in a couple of years”. Trust me, this is my business, I see this stuff every day.

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  61. Toothy says:

    Folks chill out. Nothing unethical here.

    He signed a contract that stipulates that if he does not pay the mortgage he loses the house. That’s it. He will also take a hit to his credit rating.

    Stop with the righteous stuff about ethics etc. This is a purely business transaction on reason to read too much into it.

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  62. Kenneth says:

    I don’t get the ethical issues.

    The bank made this loan. They had to understand that should things go badly, their only recourse is against the house (i.e. non-recourse). They were part of the bargain and certainly aware of this fact. A massive devaluation of the real estate market, and this house specifically would fall under the umbrella of things going badly. We all know that real estate is very important when it comes to investing for our future. If it makes more financial sense, walk away. Doing the ‘right thing’ doesn’t pay for retirement or college for the kids. Especially when the right thing is completely made up.

    If he wants to walk away, he accepts the consequences of a foreclosure. He loses the house, loses his credit rating. The bank gets the house and forecloses on the borrower. That’s the way it works. Both sides entered the bargain knowing this.

    No where does it say you can only default because you’re destitute. If they put that in the contract, then I’d say they could enforce it. Otherwise, he walks away when the cost overall outweighs the benefit.

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  63. TIMB says:

    David S. – Big difference between what is legal and what is ethical. Yes, it is perfectly legal to hand in the keys and leave the bank with the property and your $50,000.

    Ethics are definitely in question for me, if you can actually still get by. You are harming the bank, the rest of your neighbors home values and really yourself.

    From a purely financial point of view, a foreclosure also makes you a risk not only to lenders but for an employer, especially if you ever plan to get any sort of security clearance. So, aside from higher rates for future debt, you may do harm your earning potential. If you can’t be trusted to fulfill your debt obligations, you can’t be trusted to fulfill your obligations to anything else. Higher paying jobs come from employers who run a police and credit check. They are not going hire you if you have delinquent credit. Period. In fact, your current employer may do periodic re-investigations which could get you fired or harm your potential to move up.

    It’s truly a mark on you to walk away, whether you can or can’t make ends meet.

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  64. econobiker says:

    #9 Tony@

    “If he were a business, such a sentiment would be short sighted at best, and illegal and evil at worst.”

    Actually if he were a business, he would be able to walk away without a problem- just break a contract. And then it is for the other party to decide if it is worth going after him for the amount owed…

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  65. Jamie says:

    Carl:

    He’s in a no-recourse state. The lender can’t go after him personally, so it has no choice but to write down the $140K. The lender gets the house and that’s it. So there’s no WAY he would want to file bankruptcy over this. (It would be a different story if he had racked up significant debt on his credit cards.) If he came to me (I’m an attorney) and said, I want to file bankruptcy, I would tell him NOT to do it.

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  66. Kirilius says:

    I am not sure I can give Mike an advice but I have something to say about the moral issues discussed by many under this post: I don’t think there is a moral issue at all. Some say that Mike is trying to screw the bank (and the people behind the bank) but the bank would gladly screw Mike (and all of us) if it made business sense. Plus I think we forget the meaning of the interest that banks charge. Interests are adjusted according to the existing risks, one of which is customers walking away form their overpriced homes. Isn’t that risk already covered by the interest that the bank offered? And why should we assume that the banks are always entitled to profit?

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  67. RZ says:

    Mike, if you and your wife bought the house to live in and you can afford it, why are you even considering walking away? Maybe the value won’t go up in the near-term, but it certainly will in the long-term. Unless you believe that you will need to leave Temecula within the next 5 to 10 years, I say keep the house.

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  68. RZ says:

    One more thing…more and more jobs are looking at credit history as a way to do a reference check. How would a foreclosure look to a future employer? I’m betting not good. Plus some rental agencies also do credit checks. You’re much better off paying since you can.

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  69. Amy says:

    I believe that the majority of the economic problems in our country were created by people not taking the logical steps needed to make an educated and well thought out decision. Corporate greed and a desire to finally own a home, or have a bigger/better home, took priority over common sense and responsibility.

    Banks and lenders ignored sound business practices in the hopes of raking in huge profits. Reckless lending practices became the normal. Some of their tactics were down-right criminal.

    Home buyers neglected to use common sense when making their purchases. Millions of people spent more than they could afford and ignored the ominous signs of what was to come. Anyone with access to a newspaper, television or the internet had heard chatter about the housing bubble and looming burst for years. People just didn’t do their homework. They mindlessly believed what the banks told them… “Sure, you can afford that house. That house is in a great area.”

    Since when did we become a society of lemmings? It’s as if people want us to believe that they have lost the ability to make a decision for themselves.

    I think the opposite is true. Plenty of decisions were made. People just don’t want to deal with the consequences of those choices.

    If I buy stock in a company that falters, I have two choices. Hold the stock with the hope that it will rebound; or sell the stock for a loss. That’s it.

    My best defense against slumping stock values is to do my homework on the front end. A little research into a company can save a lot of cash in the long run.

    The same is true for the housing market. A little research could have prevented a lot of this mess.

    As far as Mike is concerned, he needs to tough it out. I have no problem with him approaching the bank to see if they can help him out. That is his due diligence.

    But by no means should Mike walk away. That right should be reserved for those who are suffering under extreme circumstances. The fact that his home has dropped in value completely sucks, but that is part of life.

    Face it Mike, you made a bad investment. Deal with it. That’s what a real man does. You bear up under it. Don’t abandon your responsibilities just because things are no longer going like you planned. Stay put, start your family, live your life and pray that your home value rebounds.

    Everyone keeps saying that Mike’s decision shouldn’t be an ethical one. I find that ironic. The majority of the people who made those comments were quick to point out the unethical practices of the banking industry.

    You want Mike to abandon all of his ethics/morals. At the same time you want banks to be held responsible for their lack of ethics/morals. You argue that Mike should have the choice to walk away if he feels like it. On the flip side, you grumble that the banks rear ended people into making bad choices. Which is it? You can’t have it both ways.

    From where I sit, a little ethics/morals is what this country needs. We need banks/lenders, and all of corporate America, to take responsibility for their irresponsible business practices. If that means that companies go under, then so be it.

    Homeowners, likewise, need to take some responsibility too. Unless there are circumstances which prevent them from making their payments, they need to fulfill their end of the bargain. Walking away shouldn’t be an option.

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  70. Milton Recht says:

    Be Careful! There are also federal income tax consequences. Talk to a tax professional first.

    In a foreclosure, the total remaining principal plus accrued interest in excess of the property’s value is forgiven. Forgiven debt is taxable income. In 2007, Bush signed the “Mortgage Forgiveness Debt Relief Act of 2007,” which prevents forgiven mortgage debt, up to $2 million, from treatment as income. This law ends at the end of 2009, so the foreclosure must take place this year and there is no guarantee the bank will foreclose this year. It also must be your primary residence, so you need to determine if you move into a new home whether you will still be qualified for the income exclusion. The law does not apply to some home equity loans or second mortgages.

    Again, talk to a tax professional or the IRS may come after you with a huge tax bill.

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  71. Todd says:

    It’s just glaring, the irony that we’re in this mess in the first place because people like Mike don’t find it a no-brainer to keep with both the spirit and the letter of the law and avoid the actions that would not be sustainable if everyone chose them.

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  72. Sanns says:

    WOW @ all the people that think it’s morally reprehensible for invoking a perfectly valid legal option. I fully support everyone who is saying that there are no ethics at play here–this is a classic Plight of the Commons scenario, and it’s extremely foolish to weigh the impact on the community so heavily over your own personal needs. J Daniel Smith (#50) hit it right: “If you think it is morally wrong for Mike to do something like this, then as a society we need to make the costs match the wrong. For example, getting rid of no-recourse mortgages.”

    As for the original question: if you are serious about thinking of this only as a home to raise a family, I personally think the temporary $250K price should be irrelevant. You need to factor in what it will be worth in 10-20 years when you are trying to sell it, not what it’s worth today. Is this home still worth the $X/month you pay in mortgage? And do keep in mind that if you do default, your next best alternative (for at least a few years) will need to be rented.

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  73. Henrik says:

    Any ethical question there is is not towards the bank, it’s towards the economy of the local community and of the country, and his own future quality of life in that economy.

    Being a home owner with a mortgage in Europe, I’m really happy that neither me nor any of the other borrowers have the option to walk away. In a situation like this, it’s just dangerous.

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  74. Carl Bunch Credit Repair says:

    Jamie:

    If he walks away he wrecks his credit score for at least 2 years, and it will take years to increase it.

    If he files BK his score will still be very good within a year (assuming he makes no new mistakes).

    So you’re advising him to wreck his credit score.

    Just curious, why would you advise someone to wreck their credit score and eliminate their access to credit for 2-5 years ? How is that good advice ?

    What type of law do you practice ?

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  75. TMcG says:

    Suppose your home went up in value by the same amount it went down. Now suppose your bank comes to you and offers you exactly what you paid for it because it wants to sell the house and gain the profit. Wouldn’t make you very happy would it? Kind of unethical, no? Then pay your mortage, you like your house, and the same reasons you liked it are still there. You’re young, the market will bounce back long before you retire. For God’s sake, this is how we got into this mess. Walking away means you’re a deadbeat, part of the problem, and have the ethics of an Illinois politician.

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  76. adrienne says:

    Mike asks “when (if ever) it makes good economic sense to walk away from…”

    Similarly, he could ask when it makes good economic sense to:
    - walking out of a restaurant after eating, but before paying or
    - shoplift rather than buying goods.

    It always makes more economic sense (in the manner that Mike limits this sheer fiscal economics) to freeload and/or default on commitments.

    Granted, these are inflammatory examples, but when we limit our perspective to bottom-line financial calculations (and not social and ethical considerations- which would be included in real economics), we’re usually pretty selfish and anti-social.

    Almost everyone in the nation lost value on their homes. Should retirees’ stock accounts be further depleted because people no longer like mortgage terms they readily agreed to?

    This will injure the values of neighbors’ homes and the community. It does damage to a national and global banking system in trauma. His default lowers everyone’s savings interest rates, so he’s hurting the banks’ investors (which includes small investors like people with savings accounts) rather than the bankers.

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  77. Geoff says:

    We’re in a similar situation. Our house was purchased for $400k and is worth aobut $200K now. The big difference between our situation and the original question is that we have to move. My wife lost her job and got a new one 6 hours away, close to family. Our options are rent the house out and pay money every month to meet the mortgage, or let the bank have it back.

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  78. Smitty says:

    What I think is missing here is a discussion of the consequence of Mike’s actions. No doubt, he can break the contract, and leave the house with the bank. No doubt, this is the right choice from a financial point-of-view. But what if everyone decided to do this? Inevitably, if regular folks decided to break contract like businesses do, the business may decide that they can’t loan these amounts of money. It used to be that people would have to save for many years to afford a home, before banks were willing to lend. Many could not buy a home at all. Mike is perfectly legally able to walk away, but consider the collateral damage from thousands of Mikes, all defaulting on their mortgages. What reputable financial institution will be willing to lend for thirty years then?

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  79. Rob says:

    There is nothing unethical about walking away. The loan company agreed to the terms of the contract. Walking away is an option they agreed upon. You have to do what is best for your family, and you shouldn’t feel guilty. They are on the hook for making a bad loan just as much as you are on the hook for taking a bad loan.

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  80. Hugo says:

    Has anyone who chastises Mike for considering “not doing the right thing” considered the nature of “the right thing” under the circumstances of the contract he and his lendered used to define the terms of their relationship?
    Simply put, all parties understood the risk. The lender agreed to provide the money in exchange for interest payments, other fees, and the house as collateral.
    If Mike walks, the bank excercises its rights under the contract.
    This seems, frankly, quite fair to me.

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  81. Mike says:

    Mike, talk to a credit specialist familiar with the CA laws; not sure if the 1st poster was one, but sounds like he knows his stuff.

    As for ethics — don’t bust a gut laughing about the posters trotting this out. Treat this as a business decision. How many stories have we read about someone falling behind in their mortgage after an illness or loss of a job, even in the so-called “good” times, being foreclosed on and losing all the equity they’d built up? When times are bad you see companies with billions in cash on hand laying people off to keep the analysts on Wall Street happy they are “containing their costs”. Work for Circuit City, do a good job and work your way into a higher salary bracket and 2 years ago the CEO fired you and all your other higher-paid coworkers because he proclaimed the way to success was thru lower labor costs. He got a huge salary and bonus for his bold moves, all of which he gets to keep even though Circuit City has now closed its doors.

    Ethics have nothing to do with the decisions businesses make. They are done by people acting for their own interest, often their personal best interest even if it is at the expense of the business itself (witness Lehman Bros).

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  82. TIMB says:

    Beside wrecking your own credit and having indelible marks on your background that can prevent you from getting a good job, you’ll help contribute to the end of these sorts of borrower-slanted arrangements. The market will eventual work that risk into all future mortgages. Eventually, we won’t have legal recourse to ‘walk away.’ Want to have laws that allow garnishment of wages, liens or worse case you could have civil penalties that could result in prison time and/or a criminal record? Sounds crazy doesn’t it. If enough folks make this call, you’ll have it. The lenders aren’t going to make these type of loans if the borrowers have no emotional or ethical attachment to actually paying back debts. It’s may be logical, but it is selfish.

    On higher note, home ownership should be a point of pride. You should feel shame and embarrassment if you are foreclosed. Even if it is not entirely your fault, it should not be treated as some sort of Mr. Spock, logical decision. It’s a bad thing to lose your home.

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  83. RM says:

    My problem with bringing ethics into the mix is that the mortgage company undoubtedly doesn’t feel bound to act beyond the ethics mandated by law– i.e., it’s illegal to lie and misrepresent material aspects of the transaction. It’s a contractual arrangement, a secured debt pure and simple. If it were two businesses in the role of mortgagor and mortgagee, the ethics of the borrower not paying wouldn’t be relevant– only the consequences of not paying. That’s why there’s a spectrum of tools available to the lender in the event of default.

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  84. ktb says:

    For those saying that walking away is unethical as long as he can afford to make his payments- does that mean it’s ok to make a bad investment as long as you also made an investment that was more than you could afford? After all, if only people like Mike had bought these houses (people who could keep up with their payments and weren’t gambling on the market), he probably wouldn’t be in this predicament right now. For anyone who thinks it’s clear he must stay in his home but people who can afford a home need relief, it seems like you have a double ethical standard.

    The assertion that the market will “bounce right back” makes a lot of assumptions. As someone mentioned earlier, there was a huge housing bust in the 80′s in Houston. In some cases those who stayed found that their neighborhood changed drastically after prices dropped, and prices never fully recovered.

    For Mark, I agree with those saying you should consult some professionals to get a good understanding of what the implications of walking away truly are, and then you can weight your own personal considerations in as well (how attached are you to the house, how do you feel about it personally, does the benefity to you outweigh your personal weighted estimation of the consequences). For sure, you want to try negotiation with the bank first. You might not be able to recover all of the lost value, but you very well might get into a range that makes it not worthwhile to ruin your credit and lose your equity.

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  85. jonathand says:

    I don’t blame him for considering this.

    Think about it this way – he can’t refinance, because the banks would require him to a) make up the difference in what he owes and the value of the home and/or b) take out PMI.

    Both of those options suck.

    Many homeowners are left paying debt on value that doesn’t exist. How f’d up is that?

    The economic stimulus package needs to address the loss of value in existing homes and incent banks to readjust principle owed on homes to more accurately reflect real value – they helped jack up the prices – now they should take the hit for it being all BS.

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  86. Kevin says:

    To all of you commenting on the “ethics of walking away”, I think comment #22 hits the nail on the head – Defaulting on the mortgage is just another option in the contract. These mortgage contracts are written with the possibility of default in mind.

    By walking away you’re not committing some reprehensible act, you’re exercising your right to default on the agreement, and fully accepting the subsequent consequences. Whether or not those consequences are economically justified, or appropriate, may be a different question, but there is nothing “evil” about walking away and accepting the consequences.

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  87. Ruth says:

    To all the people who are appalled that the homeowner could seriously think of dropping his obligation to pay off the house and thus contribute to the economic problems of the country, I’d like to ask this question: Since when do all parts of the economy work based on ethics rather than law?

    Here’s a case in point — the Tribune company has declared bankruptcy and Sam Zell is trying to get out from under debt. I believe I read somewhere that some employees promised certain severance payments may not receive them because now that the company has declared bankruptcy, the company doesn’t have to keep its promises to employees.

    Or my former employer, which decided about six years ago that it didn’t have enough cash flow to pay rank-and-file employees more than a 2 percent wage. Then 2 years after that decision, the CEO got a multimillion-dollar bonus, but, umm, really there was not enough profit to increase raises to more than 2 percent (in a business with a margin over 15 percent at the time). Once they dropped the 401(k) match I bailed. When I was hired, they promised employees bigger raises when the company was more profitable and they made other promises to employees about working conditions and benfits. They kept their word to the CEO, but not to the rank-and-file worker. This kind of behavior is why people have no compunction about screwing corporations who hold their mortgages.

    I don’t see anyone here asking if the bank that issued the mortgage used the money to benefit the economy. What if the lender just redecorated the CEO’s office for $1.2 million with the profit from those home loans? Would people who are saying each borrower has to do his or her part to shore the economy up agree that redecorating the office is a good thing, or would they say that profits should be reinvested to make more money for shareholders in order to shore the economy up?

    There is plenty of ethical misbehavior to go around. Pointing fingers at one person who asks about the economics of a (possibly) unethical financial decision is easy.

    Finding a way to make every player in the entire system act ethically is harder.

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  88. KW says:

    As others have stated, there are penalties for no paying your mortgage. These penalties have been agreed upon by the lender and borrower.

    This being the case, I don’t see any ethical issue here. You either abide by the contract or you break the contract and agree to the penalties. Contracts are broken in the corporate world when it serves the corporation’s best interest.

    This situation is not akin to eating a meal and then walking out without paying (there was no contract involved), nor is it akin to the bank taking your house, selling it, and reaping the profits in an up market (that would obviously be not abiding by a written contract.

    Economics is the study of incentives. If the incentive is greater to break a contract than agree to it, it should be broken. This is a economic question, not an ethical one.

    Finally, to all of those who say that it is “unethical…” What is your incentive to say so? Do you own a house yourself and are concerned about the value of your home should more people follow Mike’s contemplated path? Is there not some self interest involved in saying that he has a “moral” obligation to stay in the home even if it is financially damaging to his family?

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  89. Susan says:

    The legacy of the Obama era is that no one should be forced to take risk. Thus I’m guessing I should cash out my investments (thus locking in my losses) and wait for the government to take care of me when I’m not longer able to work.

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  90. MG says:

    I was in a similar situation in the mid-80′s and my husband and I held on to our condo and leased it out for 14 years, outgrew it because of kids and rented larger homes because we were “upside down on the loan.” Not only did the value of our condo go well below what we paid, our interest rate was 13.5%, which was good when we bought our place. But the value finally came back and we were able to sell. You made a bad decision to buy a home when the bubble was about to burst…so did a lot of other folks and they are walking away from their loans because it’s easier. We, the taxpayers, will be picking up their tabs and potentially yours. Doing things the easiest way is not always the best, but you made a financial commitment knowing there were risks. The value of your home will come back, but not soon. If you can afford it, stay put…if you get to where you can’t afford it, then weigh the consequences. Today, my husband and I can tell our kids that we fulfilled our commitment and teach them to do the same…the question is, will you?

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  91. Sarah says:

    I think it’s interesting that so many people argue that Mike would be ‘breaking’ his contract by walking away–breaking the contract would occur if he stopped making payments AND refused to give back the house. If he leaves the house, he’s upheld the terms of the contract. To claim that opting for foreclosure breaks a contract is false; it would be like signing a contract to buy either red or blue tennis shoes, receiving red shoes, and claiming the contract was broken because you would have preferred to receive blue! The banks would prefer that Mike make his payments rather than opting for foreclosure, but as long as that’s a legit option they can’t cry because he takes it.
    Further, claiming that Mike has some sort of a moral obligation to maintain the value of other properties in his area is completely anathema to the US system of property. Property is defined by classic liberal thought (Locke, etc–the philosophers whose ideas form the basis of the US system of law) as an individual right, not a community right. If Mike was in state where all property is held in common, then his property decisions might have moral weight vis a vis the effect on others property values. However, Mike has no obligations to the property values of other homeowners or other bankers. Mike’s decision to walk away from his property does not have a direct impact on anyone else’s property–it is only when a third party devalues a neighborhood based on the presence of foreclosed property that those other properties lose value. So if anyone has an obligation to the property values of other homeowners, it’s the party whose actions directly affect them–whoever devalues their property based on Mike’s foreclosure. I doubt anyone on this site would argue that a property owner has a moral obligation to avoid anything else that would lower the neighborhood’s overall value–ex renting it out, making it hideously ugly, replacing the home with a commercial business. So why does walking away have any more moral weight than these decisions?

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  92. Malcolm says:

    I am a small businessman, I think that bankruptcy is a terrible thing to do. I had a person to file, listing me as one of his creditors. We went to court and the judge forgave him with the sound of a gavel of what he owed me. It hurt me financially. I had to go to court to get them out of rental property, which some of these people know how to play the system, took months. When they were out they trashed the property. I had no recourse against them. Yes I could have sued them, but where & how are you going to get them to pay. The courts are working against the ones who are trying to make, have an honest business. These type people should be made to pay for their own stupidity..
    Yes there are some who get in trouble financially for no reason of their own. There should be a plan instead of removing their debt, be able to pay for it over over time making sure that it is paid in FULL……
    Prices we pay for goods today have a % figured in to cover the no good debt skipping &%$#&(. bumbs.
    Forgive me for feeling the way I do. Some of us try to be honest and do the right & honest thing.
    Which side are you ON?
    Believe me, there are people that use the system, using their time and energy just to figure out how to beat you out of something.
    Now we know it as INCOME REDISTRIBUTION.
    Being in the real estate business, I saw people buying house that they knew they could not afford, them going out and purchasing furniture to fill it with money they did not have. Some of the financing was adjustable rate; when the rate increased the house payment, they move out, leaving it in the hands of the mortgage company. Some told me it was cheaper than paying rent, feeling no personal responsibility of theirs, saying the mortgage company makes a lot of money, they can afford it.
    Where does this type mentality come from. I believe this kind of mentality is responsible for Obama being elected president.
    I was in the doctors office the other day. A person was telling how they beat the system, getting most everything free, not having to pay. The other person ask how they did it. She gave her her phone number saying call me and I will tell you how to do it. This is not right!
    Do you know how much the bailout is going to cost us? Who is going to pay for it? I can tell you right now, it won’t be the ones getting the money.
    Excuse my ranting & ravings, but I have seen it personally. Believe me, “you ain’t seen nothing yet”…………….
    God bless the honest, hard working person and may they succeed in their undertakings.

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  93. Michelle says:

    Is there information on how many people are in this situation (upside down on their mortgages)? If they all walked away, what would the impact on the economy be?

    Some comments about this not being a “personal” issue but rather an issue with the “big bad bank” make me wonder how much each of us would feel it personally if everyone behaved the way Mike is contemplating.

    Mike bought this house in an inflated market, as anyone with a bit of familiarity in market trends (or a few hours to do internet research) could have recognized. I don’t understand why he or anyone else should get bailed out for decisions that fall somewhere in between stupid and greedy.

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  94. Peter says:

    The great thing about all economical discussions of real estate is that people forget that the “best investment you can ever make” has a lot more to do with having a place to live. Walking away doesn’t mean you’ll save $1,000 a month on house payments. It means you’ll be spending $1,000 a month to rent a place that you won’t get to keep when it’s over with (if rents there are anything like where they are where I am, and possibly even more depending on how well you want your family to live). No, right now you’re not gaining any property, and are basically just renting, so like so many said, work out a deal with the bank as best you can. Otherwise you’ll be fundamentally homeless (credit checks are run by a lot of renters now too), and you’re going to have a much more complicated issue to deal with than the one you’re in.

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  95. Al Shealy says:

    Just in case your wife is ugly. Don’t forget. Laws are just contracts also. If you do x, then y will happen. I suggest embezzling large amounts of money from your employer. You probably won’t get caught. Your employer has been profiting off of your labor anyway. They are probably insured against such losses. So the possible gain compared with the likely consequences if caught produce an obvious positive expected value. I would have suggested bank robbery, but 60% of those get caught and the average haul is only about $8000. White collar crime is clearly the way to go here.

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  96. David says:

    Susan–

    “The legacy of the Obama era is that no one should be forced to take risk. ”

    The Obama Era? The man’s been in office three weeks.

    What on God’s green earth are you talking about? I suppose you blame him for Madoff and the Iraq War debt, too.

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  97. David says:

    Your agreement is with a company that is legally bound to act amorally within the law – if a US company acted “ethically” rather than to maximize profits for shareholders then the shareholders could sue. If *you* were a company your shareholders could sue you for *not* abandoning the loan. Ethics in your interactions with the company are as meaningful as ethics in your interactions with a rock.

    Ignore the consequences of your actions on the mortgage holders. This was part of the deal you made.

    However, it is reasonable to consider the consequences of your actions on yourself, your family, and your local community (e.g., local house prices). How you weigh those is up to you.

    The underlying problem is the way the financial laws are set. The solution is not to just let the bankers write more laws giving them more powers over borrowers. That would give them less reason to consider how likely a loan is to go bad and less incentive to make sure borrowers can afford their loans.

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  98. RZ says:

    Mike,
    The $50K you put as a downpayment isn’t “gone.” It, plus the mortgage payments, are all part of owning your home. Now if you walk away, then those costs are truly sunk. But you’d need to come up with another downpayment to buy another house. Or if you chose to rent instead, you wouldn’t get to keep the place you are renting. Seems to me that you should stick to what you have and be glad that you don’t *need* to foreclose.

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  99. Paul Scott says:

    As a lawyer, after your home is foreclosed upon, I am going to get a deficiency judgment against you and garnish your wages for ever. Oh yeah, in my state, a judgment does not go away unless discharged in bankruptcy or released by the plaintiff!

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  100. Greg says:

    Surely the bank assessed the property relative to the mortgage and said “yeah, this place is worth $445,00″. Should all the risk be carried by one party in an agreement?

    renegotiate. The bank would prefer your money over time to all the loss right now.

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  101. Hydra says:

    “So guess what, you need to hold up your end of the bargain and keep on paying that mortgage.”

    Yes, but the mortgage company also signd up, knowing that this was a no-recourse state and knowing what their risk was.

    Why must one side of the deal be enforced over the other?

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  102. John M. says:

    Speaking for the shareholders of the bank that holds your mortgage, yes, you should pay us the money we loaned you. I need that money too, Jack. To send my kids to college and make sure my wife and I aren’t eating Alpo in retirement. You signed a contract with us and you should keep it.

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  103. Soviet Capitalist says:

    Mate, I am no credit expert, but I really like the fact that you are looking to determine the economic value of the deterioration in your credit score.
    Here is my view:
    1) Determine how much credit do you use? Do you have multiple credit cards that you need to draw on, or do you, like me pay you credit card bills in full every month? You don’t a credit rating if you don’t use a credit card.
    2) Do you already have a car and everything else that requires a mortgage? If you have already drawn on your credit lines and frozen your rates, you don’t need a good credit score.
    3) Do you already have a new house to live in? If not, can you get one before you kill your credit rating? If you already have a house mortgage and frozen your rates, you don’t need a good credit score.
    So, in short, the response depends on your particular situation…good luck, and may the Fed be with you….

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  104. amy says:

    Rents out all the extra bedrooms in your McMansion to the others who walked out on their mortgages!

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  105. Steve T. says:

    C’mon people. Just because a woman has the right to dump her boyfriend for breaking a promise to be faithful doesn’t mean the boyfriend isn’t slime, and just because a bank can repossess the house if the buyer breaks his promise to pay his mortgage doesn’t give the buyer an ethical free ride. A man who doesn’t keep his promise because he can’t is unfortunate; a man who doesn’t keep his promise because he doesn’t choose to has squandered his good name and marked himself as someone to avoid in friendship or employment!

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  106. DB says:

    Mike tries to find cover by asking us to set aside the ethical concerns and focus instead on the financial calculations, as if financial calculations or math problems if you prefer are somehow above such squishy considerations.

    It strikes me that his situation is frighteningly similar to that of a student loan (I have no doubt that a student loan default crisis is fast on the way to a newstand near you). Let’s say I take out $100k in loans to earn a PhD in Philosophy – the kind of degree that might allow me to earn a living wage but not really an economic investment in any sense of the term – only to discover that a sudden and unexpected market downturn now leaves me with no professional job prospects. Now that my $100k degree no longer holds any economic value am I justified in defaulting on the debt?

    John Locke once said that there would be no need for government were it not for the acts of degenerate men. What he should have added is that the demand for government increases in proportion to the quantity of degenerate acts.

    When you sign a loan document you enter – voluntarily – into a contract for which you receive an immediate benefit and the lender receives their benefit stretched out over time. Sure, fancy mathematical calculations can make this contract seem abstract but the fundamental contractual principle persists.

    In essence, what you are asking is if you should ground your calculations on short-term or long-term interests. Over the short-term, barring some of the problems mentioned by others, you will likely make out just fine. But over the long-term the math is decidedly not in your favor. It doesn’t require a Philosophy PhD to understand that this whole financial artifice fundamentally rests upon the willingness of a people to abide by their agreements. What your potential stand to lose over the long-term is much more critical than your McMansion; you stand to sever the tenuous bonds that make up this delicate fabric we call a political community.

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  107. Davey says:

    ILLUSTRATION OF A BROKEN SYSTEM.

    Mike’s case illustrates exactly why our real estate market (and as a result the entire economy) is messed up. Whether purchased as a means to turn a profit or a place to live, a home is a financial investment, but one that has odd laws providing too much protection to homeowners.

    Think about it. If you buy $10,000 in GM shares (don’t you feel dumb for doing that), and they drop in value to $2,000, you can’t reverse the payment you used to buy the stock and get your $10k back. But that’s exactly what millions of homeowners are doing when they make the ‘financially sensible’ decision to walk away from their home loans. They are weighing the costs of the decision (bad credit for 7-10 years) with the benefits (illegally pocketing a HUGE chunk of cash by forfeiting legitimate debts) and coming to the conclusion that walking away is worth it.

    The answer here isn’t in high-minded ethics or wordy discussions of financial management. What we need here is reform of the entire foreclosure process. If a homeowner can’t or won’t make their payments, there should be a process in place similar to bankruptcy whereby they appear before a judge and the issue is examined by the courts. Like bankruptcy, if the late home loan payments are legitimate, the court should work out a solution in the best interests of everyone. If that solution be that the home owner needs to give up a $600 per month car payment so they can afford their home, the court should be able to order that. And the courts should be able to work out a long-term repayment plan where the homeowner is liable for the difference in value of the property at foreclosure and amount owed to the bank. We no longer allow individuals to walk away from credit card debt scott free, why should we allow this on home loans?

    A better system would protect both banks, investors, shareholders and home owners. Like any commodities market, home prices only work when everyone plays by the rules. When 10% of the nation decides it wants to change the rules, the entire market collapses, as we’ve seen to everyone’s detriment.

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  108. David says:

    It seems that many people are focusing on the ethical aspect of the proposed action, when clearer the question now is how much is a credit rating really worth (in terms of increased interest rates, difficulty in securing loans etc).

    From a purely economical perspective it is certainly interesting when you weigh up $140,000 against a credit rating, which is essentially what is at stake here.

    Put a value on that credit rating, instead of attaching a cost to a supposedly unethical action.

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  109. Kirilius says:

    Asking Mike not to default because that would hurt the economy is like asking a stock-holder to keep the stocks that lost value because that will drive the economy down.

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  110. Kimota94 says:

    I sympathize with Mike as that sounds like a horribly frustrating situation.

    However, if the economy were reversed right now (booming, instead of bust), and his house value had just gone through the roof, would he be asking Freakonomics readers whether he should walk away from that house? Of course not, because in that case the financial risk associated with buying a house (which is that it’s value may go up, down or stay the same) worked out in his favour. Why, when it goes the other way, is it someone else’s problem to deal with?

    Isn’t this like the financial companies that made record profits moving around “mortgage backed assets” (or whatever they were called) but expect to be bailed out now that they’re losing money at it?

    And shouldn’t we have seen this mentality coming when it became commonplace for people to “return” products they’d bought at Place A simply because, a week later, they saw them for a lower price at Place B? That’s what we are as a people nowadays: happy to bend or break any rules when it benefits us, and yet suddenly we’re all victims when the dice come up snake eyes. I’m embarrassed for us all, personally.

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  111. mannyv says:

    This exact situation has been discussed on FatWallet, with all these responses.

    The only one that would be applicable would be: first buy a new, cheaper house, then default on your old one.

    Unethical? It’s nothing that Wall Street hasn’t been doing for the last few years. $100k is $100k.

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  112. CaptainBooshi says:

    I doubt anybody will read this, but I just thought I’d chip in. I really don’t see the situation as nearly as black-and-white as most of the people here are representing it.

    To say that ethical considerations don’t enter into this and that this is just a business decision is, quite frankly, ridiculous. Yes, businesses are generally amoral, but the individual people involved all have to deal with their own consciences. You can choose to ignore the morals involved, and all too often people do, but they still exist, and each individual person has to decide how much they are worth to him.

    However, I cannot see that this is as morally certain as both sides are arguing. To employ an overly-simplified metaphorical situation, it’s like he walked into a restaurant and asked for something, anything, to eat, and they proceeded to make a vomit-and-lettuce sandwich to serve to him. He asked for anything, and if he ate it, it would nourish him, so by the same logic that some people here seem to be employing, he is obligated to pay for it. On the other hand, maybe he should have noticed the buckets of vomit next to the chef before ordering, and so this really is his fault. You know what, I’m just going to abandon this metaphor now and talk about the real situation

    Basically, I agree that the only completely pure choice for this man would be stay in his house and continue paying, but I don’t see that the other option as morally bankrupt, either.

    The bank did indeed know that the risk that he could walk away existed, and that has certainly been included in calculating the interest. Moreover, you have to remember that the likelihood is that the bank is the one responsible for artificially inflating the price and then proceeding to crash the market with incredibly crappy loans to make a short-term profit. Mike has already been royally screwed by them, so I don’t see a problem with taking the option in the contract that would leave them with the short end of the stick now (foreclosure), especially since he would be punished for it by losing the money he’s already invested and ruining his credit score. As long as he accepts his punishment, this seems perfectly moral to me.

    The only real moral problem I see here is the overall responsibility to the community. Walking away now is dropping the ball there, I agree. Doing this will not hurt the economy, hurt the neighborhood, and enough of this increases the chance that no-recourse laws would be repealed. However, it is not necessarily true that the good of the community should be more important than the good of the individual. This is where the actual ethical concern is, and I think this decision is up to Mike.

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  113. htb says:

    As a California resident, I believe that the “non-recourse” aspect is quite limited. It only applies to first mortgages, and importantly, it only applies up to a certain dollar limit — a dollar limit that is about 25% of the typical *current* sales price for a three-bedroom single family home in my town.

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  114. MJC says:

    I think Mike’s math wasn’t too far off, in some respects he keeps both the 140k and the 1,000 a month.

    Although he lost the equity in his own home, he essentially recaptures it if he buys another home right afterwards in his parents name. The depressed price of the new home will likely regain value as quickly as the current home would, but would produce a higher return on income since the basis is substantially lower.

    At the same time, the lower price of the new house would translate to lower monthly payments, perhaps even to the tune of $1,000/mo.

    As for ethics, the law encourages efficient breach (this is why you can’t get puni-damages in a contract action… we don’t want to discourage savvy financial behavior).

    The suggestion that the average homeowner should feel some sort of moral compulsion to ride out a losing bargain simply because his counterparty is preempted from doing so is ridiculous. Absent any regulation on point, there’s no question he’d be on the streets if it meant higher returns for the lender.

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  115. Matt says:

    If you walk away from this mortgage, you are not only screwing the bank (that’s easy for some people to justify), you are hurting others who may not be in as comfortable an economic position as yourself. Every time someone someone does this, home values fall further and you cause others to become even more underwater in their own mortgage. The only way this cycle will stop is for people like yourself, individuals who have the means to stay in their home, to do the honorable thing and uphold the terms of the contract that they signed (unless you signed your mortgage with a gun pointed at your head-if you did you have justification for walking away).

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  116. Amin says:

    Being from India, and having worked traveled across the western world, one thing that always stuck me as a differentiator between the two worlds was the sense of social responsibility of the general populace towards their country, environment, cities and even neighborhood. I always believe that it was this awareness and conscience that made the western world what we see it as today, amongst the other factors. But Mike here really shatters that stereotype.
    Having read and seen many such stories and instances in the past, I always dismissed them as exceptions, but now have started to wonder where the western world is headed to. Are they headed to being like us, always thinking about ourselves, no matter the impact to anyone else? Is this just human to think of self ahead of all others when you reach a dire financial situation. If so, considering the poverty and financial distress in my part of the underdeveloped world, are we then justified in doing what we are doing. And so was it just a facade that the western world was putting up, disciplining us about our ethic and social responsibilities, just because they could then afford to do it financially!!!
    What happens if the neighbors around the new house which you intend to buy, do a repeat of your act and the value of the new house drops by another 10-15% again. Will you walk out again

    I ask for pardon if that sounded very patronizing, though it was not intended. Answering marks Dilemma, since the house is still meeting all the requirements for which it was initially purchased, and financially it is still affordable (depreciation in value aside), and since you committed to the bank that you were happy to pay x amount over A years, I don’t see why ‘Ethically’ you should walk away. Financially, too, I see it making ‘No Sense’. Let’s take the following simple assumption.
    1> The house market revs up and you reach original value in 4 years
    2> A rented house would cost you around $600
    3> A New house at current market value costs you $13000 + a few thousand dollars for overhears (Loan admin charges and shipping costs etc)
    4> A definite financial impact (due to higher credit interest on credit cards and insurance etc) which i assume will come upto $200/month if you default on your house and the impact will last atleast 4 years. Ideally any bankruptcy will remain on your report for 7 years.
    In such a situation lets consider 2 scenarios financially after 4 years
    a> You retain the house and pay $1000/month over 4 years you pay $50000 as mortgage and have a house with atleast $65000 as equity and value of house at $240000. Net worth=240000(value of house after 4 years)-50000 (payments made)-175000 (still owed on house)= $15000
    b> You buy a new house at $130000 with a down of $30000 considering it will be tougher with the current mortgage market to get a loan at anything less that that. Also at $600/month over 4 years you will pay around $28000 over 4 years and raising your equity to around $35000. Also the home value appreciates to 240000. Also since the credit rating will make you pay extra on your credit cards and insurances etc you will pay $200/moth extra which will turn out to be around $10000 in 4 years. Net worth = 240000(Value of house)-95000 (Still owed on the house)-28000 (Payment made)-2000 (new mortgage admin fees+ shipping etc)-$10000 (extra interest paid on credit cards and insurance premiums etc) = 10,5000. Difference in net worh is 105000-15000=90000 (Over 4 years which comes to around $2000/month). Hence the cost of credit will be $2000 a month and not $1000 a month and $140000.

    Now lets assume in the 4 years, the job market worsens and you have to lookout for a new job. With a better credit rating you are only securing your future. Can you put a financial value to it?

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  117. Johan says:

    The payments you make for your morgage are payments you are making to the bank for the money they lent you to buy your house… that is very obviouse, you might say, and indeed it is. So, if anybody lends you some money, for whatever reason, and you agree to pay them back within X years, then you better do it. Granted, if you can no longer afford to pay the morgage a bank might be willing to renegociate… esspecially given the current economic situation. BUT, it would not be right to renegociate the morgage simply because you think you can. I will describe what you are thinking of doing in two other ways…i think they should help you make the correct decision. 1. The value of your house increases and the bank wants to raise your morgage 2. You lend somebody money to buy whatever, and they come back to you say they can no longer pay you the agreed amount because the value of what they bought dropped….

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  118. Johan says:

    Ok, i just read a post this is very silly indeed and can’t help but respond.

    Post #27
    How can you compare a house to stock? First of all, the value of a house will never be 0 because a house cannot be liquidated. As in, the value of a house does not depend on it’s financial performance. Second, let us say a house can be equated to a stock… Mike doesn’t want to sell his house and buy a new one… he wants to not pay his morgage!

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  119. MRB says:

    KEEP THE HOUSE

    Your losses are purely on paper. You are still paying the same monthly installment on your mortgage. Maybe you bought the house on market terms, but that value was (theoretically) based upon implicit value; ie the value of the quality of the home and it’s location. None of that has changed. In fact, if you’d been in a coma since you bought the house, you wouldn’t be considering walking away at all.

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  120. Kenneth says:

    People keep talking about the law.

    This is a contract. The law is in the terms of the mortgage and trust instruments.

    There is no ‘greater’ law in force here. Both parties had an equal opportunity to bargain. If anything the mortgage company had the initial leverage.

    Its completely asinine to tell someone to make a bad decision for himself because of the ‘law’ which really isn’t the law. His lender agreed to accept this house as collateral. In terms of THE LAW of California, they can take his house as satisfaction of that debt.

    That’s the law. Whatever you other people are talking about is just stuff you made up based on what you think is ‘moral.’ Those two things are very separate.

    Paying your mortgage is not a religious experience. Its just something we do to help put ourselves in a better life situation. It does not exist for its own sake. You don’t pay it because its the right thing to do. You pay it because it provides the service of a home which is both a place to live, and a life investment. Whenever its no longer viable. Walk away quickly.

    Which one of you is going to explain to his kids that he didn’t walk away from a bad decision back in the 2010′s, so Billy can’t go to college.

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  121. my point says:

    Dear Kenneth;

    You missed the point- the terms of the agreement- I contracted for something and the reality was something else- so did my mortgage company- so we both are losers- the refinance should in some way rebuild the bridge in all fairness to the fact that we both incurred great loss and unfair situation.

    As far as walking away- I full appreciate the possibility or reality (perhaps in your case)– I may have to myself unless a renegotiated social order on real grounds of no unfair advantage that is beneficial to all is negotiated soooooooon—like by July-August the latest- heh- losing a home, is serious stuff- especially when you have kids— Obama- you’re on- gotta do it sooon or else. My suggestion- talk to Mortgage lenders about keeping us on old terms til new terms are sorted out/ renegotiated or people find jobs—-. that is faire and they don’t lose their shirt- hopefully you won’t either.

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  122. Al Marsh says:

    I really don’t get why some people are calling this guy “greedy” and “immoral”. Both the lender and the purchaser are taking a risk when a mortgage is offered. The bank is aware that the house MAY fall into negative equity and that the buyer may just end up walking away. They factor these things into the price of the mortgage. If they think there is a significant risk, or if they think the house is overpriced, they don’t offer a mortgage. But the bank lent to this guy, so it’s his decision to walk away. It’s an amoral scenario.

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  123. cal says:

    To all you sanctimonious posters bashing Mike for potentially walking away……….Hogwash! Many parties are responsible for this mess, but the burden is not being shared equally so the moral dilemma is overblown. Mike is actually being punished more for being responsible. His ability to pay his loan on time means (a) it is extremely unlikely a bank will negotiate with him and (b) he will not be eligible for any proposed government programs to help ‘at risk’ homeowners or lenders. However, Mike’s tax money will be used to support those programs, which will help other families/individuals who actually made far worse decisions and put no money down, and to bail out slime bag companies who were equally – if not more – at fault in perpetuating this national fiasco (and…..like Carl said, probably they probably don’t even own the entire note anymore anyway……and don’t even know who does for that matter…….). If we assign equal blame for these problems, we must assign equal responsibility.

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  124. Mike says:

    Dump the house and don’t look back! You were a dupe of the system in buying the house (I’ll explain in a moment), don’t be a dupe again for people throwing so-called “ethics” arguments. As for their claim “how is this different from walking out from a restaurant w/o paying?” and similar arguments, if that’s the best they have you can rest easy. It’s against the law to get a meal and then defraud the seller by leaving. Bankruptcy is a perfectly legal stratagem when your debts exceed your assets; many of our “finest” corporations are using it to discharge their debts, why is it wrong when you do so?

    So how were you a dupe? Prices are not set in a vacuum, or by the seller — otherwise my condo is worth $10 million. Prices are set by what buyers and sellers agree to exchange the property for. And here’s how you got snookered by the financial system: prices were bid up by those indulged and encouraged by the system to bid against you. You probably bought your house without a lot of reflection; these are today’s range of prices, this is what I can afford to pay, I’ll shop for a house I can afford. But you didn’t consider that the prices were propped up by plenty of buyers with no business in the market; and when they left you saw the price of your house drop from $450K to $250K.

    Think about it — the local real estate agents were out drumming the streets looking for buyers. The mortgage brokers made it their business to get the loan funded, no questions asked (apparently) on the “stated-income” loans where any number you wrote down was ok with them. The loan officer at the bank put the loan thru, because the more they sold the more the bank paid them in bonuses. The bank didn’t care about the loan because they didn’t plan on holding it any longer than it took one of the Wall Street investment houses to package and sell it. The Wall Street firms were paying hundreds of millions to the rating firms, who knew continued business depended on rating the bonds AAA and weren’t about to bite the hand that fed them so well. And so on. All of this funded the flippers, speculators, and non-qualified buyers who bid up the prices by almost 2X against you. Now ask yourself: is anyone asking the real-estate agent to give back some of those juicy 6% commissions, the mortgage broker to return their fee, the loan officer to return their bonuses, the bank executives to return the money they made cashing out bank stock they got thru options, the Wall Street firrms to withhold bonuses this year? No, no, no, no, and no.

    They got theirs. And get to keep it. Apparently the only party that is supposed to lose, and keep on losing month after month because the financial industry conspired to send prices thru the roof, is YOU.

    In fact you could make a strong argument that if you, and thousands like you, walk away then you’re making the system STRONGER in the long run. Institutions buying bonds won’t be so quick to assume house prices only go one way when they have to bear the consequences of what happens when they don’t.

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  125. RUBBA says:

    What’s with all the talk about being ethical to your bank!They’re not your friend. Tell them to adjust the terms and go from there.

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  126. Jean Naimard says:

    What is good for the goose is good for the gander.

    Buy another home, at the lowered values. Once the mortgage and all is settles, move and tell the bank you’re giving them the keys.

    That’s gaming the system just as the subprime lenders gamed it.

    Why can’t the little guy do like the big guys?

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  127. specter says:

    Although I personally would hope I’d honor the agreement I’d signed up for, there’s certainly a reason to consider your options.

    1) No one else, from the brokers, to the lenders, to the investment banks, to the government itself is playing by the rules anymore (if they ever were). They’re all self-dealing and looking to be sitting down when the music stops. In this scenario, are you being the chump for voluntarily standing up and taking the hit?

    2) Your first duty, in finance as well as all other respects, is to your family. You’ve got to weigh the financial impact to your family above the other parties in this scenario. Don’t forget to figure in the example you’re setting for your kids though. (Believe me, they are watching.)

    Everyone likes to talk in abstract about the bailout and moral hazard, but here’s a great example of where the rubber meets the road. Washington is clearly signaling, and has been since their sorry response to this incident started, that it really is all about who you know and that contracts (provided you know the right person) don’t really mean anything. Everything’s negotiable if you’ve got the right kind of connections. There have been no penalties, only rewards, for the failures at the top of this pyramid and no consequences except for tax payers. This _IS_ moral hazard in action. Why should anyone expect that the people at the bottom of the pyramid behave any differently than those at the top?

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  128. Kim says:

    To sum up the best of what I’ve read here:
    1. It’s your home now the same as it was the day you bought it–and you are not about to lose it.
    2. Negotiate with the bank. Offer to split the loss in some way (bank 70, you 30?).
    3. Make sure your real estate taxes are adjusted.
    4. Learn.

    I did not buy a house in Michigan ten years ago when I easily could have done so. Why? The housing market was strong, but there were warning signs in the state’s economy.

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  129. David says:

    That isn’t quite right. Lets say he walks away today and save 1k a month (it is unclear if that is post tax breaks or whatever. Really doesn’t matter). In 5 years(look how long it took the last housing decline to start increasing in value) he buys a house for 250k. In another 10 years the house is back to 400k.

    If he did nothing he would have
    400k-10*12*1000+equityFromMortagePayments-395k
    which is a big negative number

    With the 250k house
    400k+10*12*1000+equityFrom 5 years of mortgage payments-25000

    Which is over 250k. That is a lot of money.

    Obviously there are a lot of assumptions here (house prices could be lower in 5 years or they could bounce back quicker than 5 years, he might not be able to get a loan, rents in the area might change,..) but when you have lost 50% of the initial price and another company will take 75% of that loss you have to consider it.

    As far as ethics, the bank made a deal where if you don’t pay your mortgage they get your down payment, the ability to lower your credit, and the house. The problem is that the banks didn’t get the risk premium right (they should have charged higher interest rates and required 10% down from everyone).

    And as far as rent being throwing money way, it isn’t. It is paying for housing. It is the same as paying interest except that you don’t end up with ownership. And as this crisis has demonstrated ownership is not advantage if the asset is declining in value.


    It’s not $140K AND $1K/mo. It’s $140K (OR $1K/mo). If you walk away, you don’t get that $140K back. If you stay, you get it back in equity eventually.

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  130. Argusx says:

    I agree with Kenneth. The bank accepted the house as collateral. It was probably appraised and the Bank decided it was worth that much and took on the risk. That’s why they set Mike’s interest rate at some percentage. It was a joint venture. Now the house is worth less. Mike stops paying. The bank takes the house. That was the agreement. If Mike keeps paying, the Bank takes in way more than the house is worth over the years. They also take their cut early and actually have Mike pay off most of the principal later in the loan. That’s their way of getting their profit and if he defaults later, still getting the house. Both make decisions on what’s best for them. This is business. Buy another house while you still have this one. Then walk away from the other.

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  131. Bill says:

    All contracts are subject to the laws that supercede or preempt them. If CA law says a mortgage lender cannot go after the borrower’s assets, and is limited to the proceeds of the foreclosure sale, than that is an option/risk that the lender knew or should have known at the time the contract was made.

    I think it would be foolish not to use that reality in an effort to bargain down the remaining balance, the current interest rate, and/or the monthly payments. It is not Mike’s job to protect the lender’s poor decision to secure a loan with a house that was worth hundreds of thousands less than the amount of the loan.

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  132. econobiker says:

    #126 Mike,

    You have put down the arguement which I NEVER EVER see in the media and had often thought of myself- none of the people who got paid to facilitate the real estate market ever will pay back their profits. The only downside is that some of those folks lost their jobs. Perhaps those were positions which should not have been created in the first place..but for the rest of the scammy system.

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  133. Mike, too says:

    Such is the volatile nature of California real estate. I lived near Temecula in the mid-90s and lost $25K on my home. The area is built on geologic and economic faults, both of which tend to shake and rattle once in a while. There is nothing immoral about walking away from an earthquake-damaged home … or from one that’s been hit by an economic tsunami.

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  134. Snidely says:

    Mike should offer his bank a deal – renegotiate the loan to the current market value and when Mike finally sells the house, he will give the bank 50% of the net proceeds.

    This will lower Mike’s monthly payments substantially and reset the value of the house to $250K. In the long term, the bank will also realize some value from the $140K investment they lost through the 50% of the sale profits.

    Not sure the bank would be able to handle that kind of deal, but it does give the bank a bit of upside and an incentive to bring the mortgage all the way down to $250K.

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  135. John G says:

    If you can no longer afford the payment. Contact lender for try for a loan mod, or contact an agent familiar with short sales. Your credit will be wrecked either way.

    If you walk away and your current mortgage was purchase money for an owner occupied home, the lender cannot seek a defiency judgement. Credit wrecked!

    Tough pill to swallow, but you are not alone 20% of homeowners owe more than current market value.

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  136. DG says:

    I live in Lake Elsinore about 15 min away from Temecula. I’m in almost the same situation though I am not going to lose $50,000. I put 0 money down and purchased a place for $372,000. I’m on a fixed rate 40 year loan 1st and a 30 year 2nd with a balloon payment after 15 years. At this point I doubt my place will recover by the time the balloon comes due in 12 years. The same model next to mine just resold for $175,000 this past week. I pay about $3000 a month when you factor in HOA dues/taxes, and insurance on a $4000 take home salary. This leaves me $1000 for car/car insurance, phone, gas, food, emergencies, savings and misc. I could rent for $1500 a month. I stopped paying on Jan. 1st of last month. By the time I get foreclosed on I should be able to save around $20,000.

    Everyone is expecting the market in this area to drop another 25% this year alone and possibly 5-10% next year. This essentially means in 2 years these houses will likely sell for $125,000-$140,000. I see no reason to be a mortgage slave for the rest of my life so I will walk. I find it insane that in my opinion it is cheaper to buy homes in this area than to rent and will get more so this year. I realize that what I am doing is questionable morally, but this will hurt my financially my entire life if I stay. I just don’t care enough about some big shot bankers who sold us on this bubble to try riding it out.

    I will highly recommend that you walk. The more of us that do it, the less damaging it will be to each individual. Banks will want to lend again no matter what people try to say. They may require larger down payments but clearly this is something they always should have kept doing.

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  137. Jason Goodman says:

    Forgive me for coming in on this late. There’s been a lot of talk about how this guy and his ethics are “a symptom of what’s wrong with the economy”. But my gripe is not with the homeowner. It’s right here:

    “[We ]put $50,000 down (the lender encouraged us to put zero down)”

    The problem with the housing market was that lenders like this courted disaster by not demanding down payments.

    The purpose of a down payment is to make sure that the homeowner’s net equity is always positive — that house value minus loan value is always greater than zero, despite any likely shifts in house price in the first few years, so the homeowner always has something of positive value to lose.

    For most homeowners, the traditional 20% down will keep them tied to the front door like obedient sheep, which is what the lender wants. So why would a lender *encourage* Mike to put no money down?

    Simple. Bigger loan = more valuable loan = more cash when you sell it off. The extra risk is no problem for the lender: in six months he plans to sell of his stake and have nothing to do with Mike. Also, I believe Mike’s $395K loan is “conforming”, while a 0% down loan would be a “jumbo” loan, with a higher interest rate.

    In short, the lender’s making an utterly stupid loan because he knows he won’t have to pay for it.

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  138. Jason Goodman says:

    Oh, one more thing: everyone who posted here that Mike shouldn’t pay back the loan is wrong. Why? Simple self-interest.

    Mike, your mortgage is a troubled asset. You may have heard that We the People are buying those. Two months from now, I, along with every American citizen reading this, may very well own your mortgage, and that $140,000 debt you’re planning to walk away from is *our money*.

    So pay up, or else.

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  139. True Homeowner says:

    Here’s a wacky change of pace. 13 years ago we bought a nice 4-bedroom house in the midwest for $197K, and started a family. Over the years, it appreciated to about $320K in early 2007.

    In November 2007, we owed $135K on the mortgage. Guess what? We paid it off. We own it. No mortgage payments. Only property taxes and maintenance. When we paid off the house, it was worth about $300K. Since then its value has dropped to about $270K.

    Why did we pay it off? First, the stock market was scary and volatile. Second, we wanted to answer to nobody in the uncertain times we all saw coming as 2008 was approaching. We could have put the money in the stock market and lost 30+% (hindsight says the decision paid off).

    More importantly, we will never lose our house. No bank can call the note. There is no note. Now we can look for bargains in move-up houses, lost by people who bought way over their heads, while people like us bought what we could afford, and lived somewhat beneath our means. Buy low and sell high, right? We’re ready to buy low right now, and scan for the right deal, as prices continue to drop. We remain patient. Things could still get worse before they get better.

    We have an outstanding credit rating, so we can get a very low interest 30-year fixed loan on a bigger, better house that is in foreclosure. We can rent out our current house and wait until the market climbs back up in a few years or so and then sell, and enjoy a good profit, or continue renting.

    We didn’t plan for it to happen this way. We couldn’t see a collapse of this magnitude coming. We just took the responsible approach and didn’t get caught up in buying over our heads. Did we second guess our decisions several years ago when everyone was upgrading to McMansions with ARMs with no money down? Sure. But we stayed the course.

    Let the lessons be learned by those who put greed over responsibility and financial fundamentals.

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  140. Chris says:

    While the numbers were smaller, 25 years ago I was in your situation. We owned a house whose value was less than the loan balance, much less.

    Here’s what I did… After exploring alternatives, I decided that I had made a promise and that keeping personal commitments was more important than money. It hurt. It took time to work through the challenges. And everything eventually worked out just fine.

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  141. DG says:

    This was nothing more than an elaborate pyramid scheme that was somehow made legal. How can anyone expect individual homeowners to be responsible when the government comes in and bails out the banks. Lets not forget the people that stay will also have to pay for the bailout. So not only do they get in at the bottom of the biggest pyramid scheme in the history of mankind, but they also pay everyone elses bailout. Well I’m sorry I won’t do it.

    I hate that the government is using taxpayer money to bail out banks, but they should have given that money to homeowners who would be able to stay in their houses with a little help. It would have stopped the whole thing from crashing down so hard, saved banks, and kept a lot of people who can pay in their homes. Instead they gave the banks money who gave huge bonuses to their employees and didn’t give a dime to homeowners in trouble.

    I still say how can you expect homeowners to be responsible in this country with the precedent that is being set by the government with banks?

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  142. whoanellie says:

    The only obvious thing in all of these posts is that the pentality for walking away from a debt when it is clear payments can be made are not nearly strong enough.

    For those who feel that it’s crazy that he’s paying down a debt for value that “doesn’t exist” (obviously market value, not personal value) – take a good look at the debt Americans pay back every day. Student loans, but no job? Still paying. Gambling debts or failed investments? Still paying. Not paying on mortage because your house lost value is as silly to me as not paying your student loans because you have no job. Does your house keep you dry when it rains? Does it keep you warm when it’s cold? Then it’s doing its job. When will people learn that a principal residence is NOT an “investment”? It’s a home, a necessity like a car. You can buy a car, or you can lease it. You could have rented, but you chose to buy at the worst time. And those that support him giving it back to the bank shouldn’t complain when their grandchildren are still paying for the bank bailouts.

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  143. DG says:

    Paying $3000 a month for something when you could pay $1500 is silly. Yes it provides a roof over your head, but when you are 200k underwater you are essentially a renter for a very long time only without the option to move. I agree the penalties should be stronger, but so should the penalties on the banks for giving moronic loans and causing all this madness. No one is being held accountable, why should homeowners be subjected to higher standards?

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  144. Jeff says:

    Like I said way back in August 2007 in my blog, since you are underwater substantially and with home prices not expected to go right up back to the level at which you bought your property for quite some time, I’d advise – just let it go and save the monthly mortgages. You go work it out – your monthly mortgage amounts over the next 5 years (say) will result in ……?

    Besides, with what the government, Fed and the bankers had done, you shouldn’t feel any guilt over it: it’s everyone for himself or herself! The banks already have their taxpayers’ money (that’s your money too!), so, if enough of you are doing likewise, maybe, just maybe you guys can form a lobby group (after defaulting) to even get the credit bureau to “erase” the defaulters – because it’s really not your fault but the greedy banks right?

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  145. Paul Lightfoot says:

    You cut a deal with another party. You need to live up to that deal. Cannot walk away. Forget credit scores. Do you want to be a cheat and a liar?

    That shouldn’t preclude you, by the way, approaching the bank and asking for better terms considering the way the world has fallen apart.

    - Paul

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  146. Amy says:

    Based on the plan outlined above, there has been very little thought to the additional losses you may suffer in living place #2. You say “If we walk away and buy another house with my parents cosigning on the loan (or even just rented a place), we could save almost $1,000 a month in payments and maybe even have positive equity in the next few years.”
    Have you factored in the interest rate that will be avaliable to you with foreclosure credit? Granted, you’ll have co-signers (who I hope have ridiculously stellar credit and the motivation to support this plan after you dumped house #1), but the interest rates will still be calculated using your credit, provided they finance you at all. If you have to mortgage a substantially smaller principal at a substantially higher rate, you lose even more opportunity to build that positive equity because all the more is going to interest, settlement costs, moving costs etc. Let’s also not forget the power of compounding interest – especially now at a significantly higher rate.

    So if you ditch house #1 in order to buy another house, you’ve chased your tail and ended up worse off, not to mention your time and stress level to your family. If you want to own California real estate, stay where you are.

    If you want to ditch house #1 and then RENT, I can see the -savings- in terms of your monthly expenditure, but that’s an even swifter dive into -paying an equityless hole-, which is what I thought is your original objection? If you ruined your credit to just pay rent (let’s say you’ll pay $38K a year for a comparable space in rent) – you’ll have spent $140k in less than 5 years. Now you’ll have no credit AND no assets AND more money down the drain. You’re so upset over your lost $50K in down payment (fair enough) but you’d “lose” the same amount in a very short time leasing. So you could just pretend you are renting your house, stop thinking of the valuation and when you wake up in 5 years, you’ll be ahead of the game.

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  147. DG says:

    You are deluding yourself if you think someone will be ahead in 5 years. All experts expect real estate to bottom out by the end of this year best case scenario after which it will return to a 3-4% year over year rate of return. So if you are in a house that lost 65-70% At best in 5 years it will recover 15%. I think banks will be very willing to lend to people with foreclosures with a large down payment and the interest rate will be higher. It certainly won’t be doubled the interest rate.

    I figure in 5 years I’ll be able to put 60-80k down on 180k house potentially at 8-9% interest. So I’ll have 120k financed at a few percent higher than I currently pay. If I stay I’ll stil owe 350k on a house worth 180k but be paying my 7% interest rate. The math is HEAVILY in favor of walking away. I don’t plan on buying a vehicle any time soon and I haven’t carried credit card balances in years. I don’t see how anyone can possible make an argument that it makes financial sense to stay in this house.

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  148. JC says:

    What you can do is a short sale. Hire a lawyer to do your negotiation and insist on waiving the deficiency so there is no judgment for the difference. You can at least try. These banks are NOT being very helpful in modifying the mortgages. Only by stopping to pay your mortgage and finding a buyer do you seem to get their attention. However, if you have a good job and other assets, they might play hardball with you.

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  149. PBS says:

    To the poster #90. I am sorry to say that you did not add any value. It is people like you who push house value to bubble and not let it fall to reasonable level so that other deserving people can buy it.
    -PB

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  150. Marie says:

    I completely understand your dilemma Mike. I too own a house in Southern California that is currently taking a huge hit. I paid $356,000 for my house placing $90,000 down and putting about $45,000 into the back yard and inside of the house. The house right next door that is 700 square feet bigger was just sold by the builder for $160,000 in December. I don’t think I could give my house away in this market now. I have a 7 year interest only loan that will be adjustable in another 4 years. When we purchased the home my husband and I thought we would be able to refinance before the loan was due and then get into a fixed mortgage at that time, but now that is not even an option without putting another $70,000 down on the house. I have tried several times to negotiate with my lender, while continuing to make my payments, and the only response that I received was that they would take the deed in lieu of foreclosure. I even talked to my mortgage broker and together we came up with a plan. I could get a friend to sign a phony rental agreement on my house, purchase a new/used home and then after I get in I could really rent either one of the two houses or let my first home go. I would have a bigger better house in a better area, a much smaller and 30 year fixed loan and potentially end up with two houses that would both earn equity when the market turns around. Worst case I would lose one home and mess my credit up for about 7 years. Since my mortgage could double I could lose my house when it goes adjustable anyways. In the end my husband and I decided that our little scheme was just not worth it. Being a huge believer in what comes around goes around, we just couldn’t bring ourselves to add to the huge financial decline of our country, even if it meant ending up with more money in the end. We are holding on for dear life and hope that the ride will be over soon. My best advice is lead by example. If integrity and pride are important to you, don’t sell out for $140,000, or any amount of money.

    Food for thought. My sister-in-law practically lost her home and has been renting for the last three years. They have had to uproot their family twice now because the people they are renting from have lost the houses that they are living in. Just because you are giving someone the rent check doesn’t mean that they are paying the mortgage with your money. Bouncing from home to home and school to school is no way for kids to live.

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  151. Chris Pommier says:

    1. Don’t just walk away from the house.
    2. Read Nolo’s Foreclosure guide. It speaks directly to your situation.
    3. If you decide to let it go to foreclosure, stay in it as long as possible and put the money you would pay for mortgage payments into savings.

    Some things to think about: once you’re out will you save that 1,000 per month difference, or spend it? Do you love where you’re living and continue to live there for the term of the mortgage? Are you currently paying the minimum on your cards, or are you paying more? Will the increase in their APRs become too burdensome?

    Just some thoughts. Do what makes the most sense for your family and yourself. Definitely read the Nolo books [they also have a couple on bankruptcy]

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  152. Mike S. says:

    Get couple of gallons of gas and a Bic lighter.

    This $20 investment will save you $140K. But its about as ethical as walking away.

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  153. eleven says:

    Normally I would agree w/everyone who says you signed on the dotted line, now pay up. And to a certain extent I still agree with that. But the money loaned to you is funny money…we have a fiat money system. Read up on the Federal Reserve and understand that if they get $10 they’ll loan $20, it’s just paper and not backed by anything. The problem with you walking away though is that because we all follow this system we’re all screwed if you and others do this. So in the end, I’d say that you saw the candy in the candy store and now you have to pay for it because you popped it in your mouth. If you want an answer based simply on economics, if you walk away then you are enabling the further collapse of this economy and will screw yourself because you’ll eventually find yourself w/o a job and unable to pay ANY mortgage. You will be living in your parent’s basement WITHOUT your new wifey-poo because she will leave your sorry ass when mommy insists on doing your laundry and bailing you out of any situation you don’t want to be in.

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  154. S. U. West says:

    That’s an easy one: don’t just walk away from your mortgage, but run, Lola, run!

    It will take another 10-20 years for the housing prices to return to their high, and during this time, one thousand a month will save you up to $250,000 in cash.

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  155. Barbara Saunders says:

    I’ll leave aside the morality issues here. Who am I to judge? If the point in having the house is having a place to live, then what make sense is to ride out the ups and downs – ignore them – while continuing to pay the mortgage. You still need a place to live! Any money you would save by walking away would likely be eaten up in additional interest payments the next time you get credit.

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  156. r.smith says:

    When people sign a contract that means they agree to its terms and will abide by it. So before they sign anything, they should a lot of thinking and due diligence. Not paying is not right. There’s nothing guaranteed in this world. By the way, a house is a consumption good like a car or your snowboard. It is only more expensive. There is no law forcing you to buy something you cannot afford. It is not a given also that “investments” will increase value in the future.

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  157. Lloyd says:

    Mike – drop the house like a radiated contaminated ” hot zone” – if you feel bad – just treat yourself and your wife to a vacation with all the money you will be saving. A spa session with massage in the tropics, followed by an incredibly mouth-watering dinner, in a 5 star hotel with a breath taking view. Feel better?

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    • Steve J says:

      Lloyd — I have to laugh at you. I hope you are joking, since your line of thinking is EXACTLY what caused the crash in the first place: “Do whatever you want, there are no repercussions, enjoy yourself”.

      I’m guessing “Lloyd” is not a homeowner, probably has no good credit to protect, and a list of other things that would naturally come of his views on money, obligation, and debt.

      So when Mike’s family is living in a crap apartment with ever-increasing rent, with no mortgage deduction, and can’t get a loan for a new home, how good will that “mouth-watering” dinner taste?

      Everyone reaps what they sow. Stop telling Mike to reap the wind.

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  158. AnnJo says:

    What, exactly, is the point of figuring out the economic consequences of a decision before you figure out the moral implications? Will your moral judgment be different depending on how much it costs you? Are you saying to yourself, “I’m wiling to pay X to do what’s right but Y is too much”? If so, as one of the earlier commenters suggested, why not calculate what you could make by pimping out your wife or one of your kids?

    There are two pretty good measures of whether what you are contemplating is right:

    1. The Golden Rule – do unto others as you would have them do unto you – and ignore the specious arguments of those who say that your lender, being a corporation, can be shafted where you wouldn’t shaft an individual. Corporations are nothing more than collections of individuals, including the bank depositors who will endure months of delays and lose all interest on their deposits when their banks close, and maybe lose their deposits if the FDIC becomes insolvent, and also the fund investors who were depending on their investments for their retirement.

    2. To paraphrase Kant’s categorical imperative – act in such a way that, if everyone else acted the same way, you would still want to live in that society and raise your children in it. If everyone acted as you are considering, what would become of our neighborhoods, what’s left of our banking system, and our communities? What moral lessons are you teaching your children about integrity in the face of (as you describe it very mild) adversity? Was your house bought as a bet or as a home?

    Figure out those issues, before you waste time on how the numbers play out. Unless you ascribe a monetary value to your integrity, the numbers mean very little.

    Granted it is becoming harder and less profitable every day to act in a responsible and ethical manner, while our government heaps more and more rewards on the irresponsible, but ultimately, so what?

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  159. concernedcitizen says:

    Many homeowners who owe more than their house is worth have no difficulty walking away from debts they are supposed to pay and can pay.

    In actuality, approximately 5% of the homeowners nationwide are “upside down” because approximately 50% of the homeowners have no mortgages.

    The mortgage walkers fully realize that the mortgage documents were sold to other financial and insurance businesses and investors who purchased the then current mortgage for the remaining balance less a very small discount fee to provide a current income stream for future payments. Purchasers included property insurance companies to pay claims, annuity insurance companies to provide retirement funds, and commercial banks loaning to individuals and businesses.

    Unfortunately, this same group of people who walk away from a mortgage they can pay because it puts more money in their pockets would not be willing to accept reduced pay checks, pension payments, insurance claim payments, or denied personal or business loans from the various financial organizations that are being stuck with defaulted short sale or foreclosure mortgage-based assets in the name of saving the economy (and bailing out the debt skippers).

    There is no shortage of people with good credit who actually repay debts that they contract. In addition, many upside-down homeowners continue to pay their mortgages because they assume responsibility for their personal actions and pay their debts and have faith in the American economy and most Americans.

    Do you really think I, or anyone else, would leave my savings or other financial accounts with any bank or credit union that extends credit in any form to the same borrowers that set off this debacle?

    Many Americans have decided to safely park their money in U.S. Treasury securities at low rates to keep them away from banks that make bad loans and individuals who don’t pay back bank (mortgage) loans.

    The puffery in this and other articles and commentaries, that not paying contracted debts will be just fine because so many are walking away from mortgage and credit debt is nonsense. It is a safe assumption that any reasonable lender will place serious restrictions, including down payments, interest rates, and limit the number of “risky” loans in their portfolio, before they extend credit to the segment of the population that does not believe in paying their debts.

    Those who walk away from committed loans they can in fact pay will find themselves in the “junk bond” category for any possible credit until they have established 5-10 year period of actually paying financial obligations and debts in full and in a timely manner.

    I pay my bills and I expect you to pay yours. In closing I remind you that “What’s mine is mine, and what’s yours is yours (and that includes your debts).

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  160. Mark says:

    I agree with a few people here – you bought a home, as well as an investment. The property is still operating as a home – so I ask what value do you put on a home? What value do you put on the memories there?

    Ok, so yes, it does appear to make economic sense to just walk away – BUT that is not all there is too it. Think of how many other contracts there are in your life, should you be able to break them as simply as this if the return on the investment is not what you thought it would be? Life is a risk – sometimes you win, sometimes you lose.

    I wonder what your response would be if your wife walked away from your “marriage contract” because the “moral capital” of the man she married isn’t quite what she thought it would be. After all – it’s just a contract – one person’s promise to another…..

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  161. Matt says:

    If Mike bought the house as a ‘starter’ home in hopes of upgrading later as his earning power grew, then he may have to wait a little longer for that next house. If housing prices grow from this point forward at an average 2% each year (below inflation), and Mike’s got a 30 year fixed mortgage, then he’ll be back in positive equity after 12 years and have his $50K equity back in about 15 years. If he likes the house and can stay, he will eventually get back out from under.

    And over the next 15 years he will have saved about $68K on taxes over renting.

    When the loan is done, Mike will have an asset worth about $430K, that’s a 7.5% CAGR over 30 years. Not bad at all!

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  162. Richard says:

    The interest rates on a recourse loan and a non-recourse loan are different. If one is charged with the non-recourse interest rate (which is higher), why should he/she feel guilty about opting for one of the options under the non-recourse contract?

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  163. Steve J says:

    To Mike — remember why you bought the house to begin with. It is first and foremost, a place to live. You get value from the house as a place to live. You haven’t lost any money yet (you don’t lose money until you sell, remember?). Everyone is running scared now, and panicking. You didn’t mention if you have a job or not. If you have a job and want to continue living in Temecula, then do so, in that house.

    Also, time is on your side. As you live in the house, you are paying down principal. The home prices (being SoCal, especially) will also go up. Maybe not like before, but up. At some point you will hit the break even point, where what you owe is what it’s worth.

    Also see if your parents can help you with a refinance. Now is a great time to do so. Find a mortgage lender who is willing to work with you and your parents. You can probably save several hundred dollars a month. It will be hard, but easier than buying another house after you wreck your credit.

    I lived though the last SoCal housing crash in ’91, everyone panicked, sold, and lost money. Now everyone looks back at that time and says “Boy houses were cheap then, wish I had bought!”.

    Just stay cool. If you lose your job, that’s a game changer. However, If you can still afford the mortgage, wait it out.

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  164. Betty-Jo says:

    Just want some advice about whether we should walk away from our house or not. We bought our house just before the economy went south ! We have lived in our house for almost ten years we haven’t any equity all we are paying now is the interest. We still owe 400,ooo and our loan is conventional is there anything we can do.What would you suggest? Thanks, Betty-Jo

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