Scott Dickensheets writes in the Las Vegas Sun of his tossing-and-turning over whether to walk away from his underwater Las Vegas home. The voice of his departed father still convinces him to honor his obligations no matter how bad an economic decision it might be.
However, what troubles the Sun writer most seems to be that he has to make a decision about this at all. “I don’t like the way homeownership, cornerstone of the American dream, kindles this kind of moral quandary,” writes Dickensheets. “This kind of self-re-evaluation.” For many people it is much easier mentally to keep paying, even if it doesn’t make financial sense. “People tend to experience losses even more acutely when they feel responsible for the decision that led to the loss; this sense of responsibility
leads to regret,” explains Hersh Shefrin in Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing. Regret is a powerful emotion that steers many people’s financial decisions. As I write in Walk Away,
Underwater homeowners aren’t walking away because they feel a duty to satisfy their lenders. It’s because they don’t wish to feel the regret of buying at the top of the housing market using too much debt. And instead of doing the financially rational thing and walking away, some keep paying, rationalizing that they are duty-bound to pay the note until the bitter end, but secretly hoping their financial acumen will be resurrected by a rally in home prices. A prospect that in many cities is hopeless.
In a follow-up article, Dickensheets included some responses he had received to his “To Walk or Not” article. With somewhere around eighty percent of the homes in Las Vegas underwater, the worry, discussions, and arguments over whether to walk or pay are going on all over Sin City.
“Thanksgiving dinner this year turned very ugly,” one reader wrote. The explanation: Friends in various stages of home-owning agony — some mired in deep debt, one in Chapter 7, another who wants to short sell — gathered for the holiday meal and started talking about their housing situations. Tensions grew. Some were angry that others wanted to shuck their debts and obligations; others got riled at the thought that this could be anything but a cold, hard business decision.
“As I worked in the kitchen, I saw and heard friends who have been close for almost 30 years attack each other,” she wrote. “The morality of ‘stiffing a bank because you can’ or ‘you thought it was a good deal when you signed’ went on and on.” Some of them still aren’t talking to each other, the reader adds.
These arguments will likely go on for years while government furiously attempts to prop up the market with low mortgage rates and tax breaks for home purchases, serving only to delay the cleansing process. According to a Nevada Association of Realtors study, 23 percent of Nevadans who lost their homes to foreclosure strategically defaulted.
“I believe the current trend upward. It could get worse,” said Joel Searby, SGS’s director of marketing and business development, addressing trends in strategic defaults. “The cultural stigma is dropping, and it’s becoming more acceptable.”
And the home price numbers continue to drop along with the stigma. The November S&P/Case-Shiller Home Price Index fell in all but four metro areas.
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Is your bank a TARP recipient? Or did your bank sell the note to Fannie or Freddie (Frenron)?
If so, you have no moral obligation to pay them a penny. Walk away or not depending on what makes you better off.
Agreed. Stiff ‘em. There’s no moral dilemma. The astronomic home values were not real, a bubble cause by the Fed, Freddie, Fannie, and the incompetent banking and mortgage industries. The banks reaped immense benefits from the bubble and should suffer the losses when it bursts.
It’s best for the markets. The repossessions are a necessary correction. The sooner it’s behind us, the better.
Except “stiff ‘em” means that “bail ‘em out” government will rob those who were smart enough not to waste money on the recent RE bubble. That’s the moral dilemma.
After a point, if you are paying a mortgage on an underwater house then you are pouring money down a hole rather than being a good steward. It becomes a question of who you have to stiff: the bank or your family.
The Big Shakeout is still happening, and I don’t care what statistics government/industry are waving around.
Also, the comments at the Sun are pretty venomous–lots of people still in firm denial. I love that sanctimonious realtor weighing in about “morality.”
This one was good though:
I don’t understand the fear of being under-water in a mortgage. If you are needing to sell right away then I understand the problem. If you keep on paying and can afford it, you will eventually pay down the principal and be back in the black. We buy new cars with the understanding that you are under water on the note as soon as you drive it off the lot, and it will never appreciate or maintain its value for the rest of the useful life. There maybe too much emotional attachment to a house, but I don’t think it has to do with the morality of paying it off.
Except cars, in most situations, count as investments of some sort: getting you to and from work. Where you live, not so much.
A car is not an investment, unless it is collectible, it is a consumable good. We pay for miles and perhaps status and after 10 years or whatever, the car is of no value.
A house does not wear out like a car and retains its value.
Your analogy underscores the problem: houses, like cars, are durable consumer goods. When you net out depreciation, maintenance, taxes and interest, the average homeowner will will never come out ahead. If the house devalues below the principal it’s a double whammy; you’re like GM, using current cash flow to pay non-producing retirees. The decision is easy at that point: every dollar toward your underwater mortgage is money down the sewer instead of money toward retirement, kids, business startup, booze and strippers, etc.
The home ownership equation requires that one include the fair market value of the renting of their house as part of the income they receive from home ownership. And aside from the recent housing bubble, homeowners have always come out ahead.
If you have a thirty-year mortgage you will buy the house 2+ times. Then start netting out taxes, depreciation, insurance and maintenance. Thirty years later (assuming you’ve lived in the same place 30 years) any gains are nominal dollars.
Obviously, you gotta live somewhere and there is a boost from the mortgage interest deduction–a government subsidy that may or may not be retained. For most people making the minimal down payment, home ownership is a financial wash with more psychic value than anything else. I’m not saying people who take out mortgages are necessarily mistaken (though many are), but the folks who choose to rent aren’t wrong either. And the guy paying on an underwater mortgage just needs to stop the bleeding. He is literally pissing money away.
The phantom rental income only kicks in when you acquire clear title. You don’t “pay rent to yourself” so long as you’re sending a check to the bank.
John,
I believe Doug hits your point in his book, Walk Away. Typically, car loans are structured in a way that the payment and term follow in line (as close as possible) to the devaluation of the car. This limits the incentive for someone to walk away from paying off their car. In a market where home loans are being made, without the support and backing of GSEs, you would probably see a similar loan structure for mortgages, because the private institution extending the loan is bearing the risk.
Apparently honesty takes a back seat to economic expediency.
If you buy a house to live in then you should never even consider whether you are underwater or not. You entered into a contract with the seller to buy a commodity to live in.
I wonder how many actually believe that if you enter into a contract to buy something on time that after you take delivery if you change your mind it is okay to just abandon it in place and not pay the contractual commitment? If our society is built on this kind of morality, God help us. Use a credit card to buy a new shampoo. If it doesn’t please you just refuse to pay the bill. Order a dinner in a restaurant. If you change your mind after it is delivered just refuse to pay and walk away.
How willing would you be to sit on the other side of the table when a home owner walks away from your contract leaving you holding a loss of thousands of dollars? Who do you think is morally obligated to take the loss?
Um…You are aware that you can already do that with a credit card right? If you buy something and then decide that you didn’t get what you paid for, you are free to return the item and request that the bank *not* pay the bill – regardless of the “returns policy” of the seller. In some cases, you can do this even *after* you’ve used the item in question.
As for the restaurant, if I order Filet Mignon and they try to bring me a petite sirloin, I will walk away without guilt as I’m not going to pay for one and be given the other.
As for the house – non-recourse contracts state that the buyer may walk away in exchange for the house, and a bad credit mark. The banks *should* have priced this into the rate they were charging for the loan.
Maybe this will help someone make up their mind.
And the walk away advocates, were their house to increase in value they no doubt would return that money as well? A house is an investment and a contract is a promise. If people don’t want to keep their word, no shortage of rationalization. A society built on private property requires adherence to contracts by the majority of participants. Walk away talk is simply self-help bailouts.
The contract says if you don’t pay the mortgage the bank gets the house. There is no moral dilemma here.
Exactly! This is my thinking – since both the mortgage holder and the bank signed a contract, it is moral to adhere to the terms of the contract, and immoral not to adhere to them. If the discussion were about whether to stop paying off the mortgage and continuing to live in the house, this would be a very different story, but if a certain choice is available in the contract (in this case, cease paying and forfeit ownership of the house), then there is no issue if the home “owner” wishes to exercise that choice.
As eloquently set forth by writers like Rothbard and Rand, one of the most heart wrenching problems with an inflationary Alice in Wonderland fascist regime is that being virtuous suddenly becomes un-virtuous. If I loaned you a gold piece in exchange for, say, two gold pieces one year later, your failure to pay seems a pretty clear property right violation to me. But what if I just print a dollar bill and loan it to you for a gold piece one year later? What then?
All the “real” investors have already written down the value of the notes on the houses. The banks and mortgage servicers who should have gone under have been propped up by Uncle Ben and his buds. In a rational market the adjustment would have been swift and efficient. But there’s nothing rational about the market. Losers are winners and winners are losers.
Walk away.
The voice of his departed father still convinces him to honor his obligations no matter how bad an economic decision it might be.
I’m really puzzled. A bad economic decision for the ordinary citizen belies the fact that those with a strong financial understanding of money…look very differently upon this dilemma.
It’s called opportunity cost…in other words if I leave money in a bad investment…how much do I lose if I moved my money down the road. When that paradigm is applied…strong financially educated people…don’t hesitate to move their money elsewhere.
Opportunity cost is the reason…major companies outsource middle class American jobs with impunity…and tell you…now you have a chance to develop your potential…at McDonald’s or Starbucks.
People are in shock because they never thought this economic reality would hit so close to home.
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