There was a time when couples held mortgage burning parties. The yoke that was a mortgage, on what was purely shelter from the weather, and a place to sleep and store your stuff, could finally be cast aside.
Before the decades-long run up in housing prices, fueled by government policies and government supported finance that engrained the American belief that housing values would never drop, mortgage was a dirty word: A deal with the lending devil that a reasonable person would only do as a last result to own a home. And to put a second mortgage on one’s home was a sign of fiscal imprudence in the extreme.
Now, as Robert Powell explains for MarketWatch, retirees are not only carrying mortgages, but many, may in fact owe more to their mortgage lenders than their homes are worth. And given the huge over-hang of foreclosures that will over time reach the market, the punk economy, and lingering high unemployment, prices will likely continue to sink.
Fiserv Inc., which produces the Case-Shiller Housing Index, for instance, predicts home prices in retiree-rich Las Vegas to fall 14.2% this year and another 6.7% next year, despite the Sin City housing market already suffering a 56.7% drop from Q4 2005 through 2010.
When Powell asked Robert Webb at the Center for Retirement Research at Boston College what underwater retirees should do, Webb suggests a reasonable choice may be, “Namely, to mail the keys to the lender.”
The advantages are an immediate increase in net worth, however, “In some states, the lender can pursue the former owner, and the household will take a serious hit to its credit score,” said Webb.
Neither Powell or Webb engages in the usual moralizing. There is no discussion of setting a bad example by walking away or decreasing the value of your neighbors’ property if you mail the keys to your lender.
The decision is treated as a financial one: What is best for the retiree to survive until death. Why should an elderly person keep making payments on a home that for them will always be a liability and never an asset, just to prop up financial entities that are only operating today because the government keeps these too-big-to-fail entities in business?
The default moralizers will cry that retirees should do the right thing and honor their contracts. What kind of example are they setting for their children and grandchildren?
Meanwhile, what was the lender thinking making a 30-year mortgage to someone who surely would not live to make the 360 required payments?
The fact is lenders were playing the housing market. Market values go up and go down. How can these lenders plead to the courts that the loans they were making to Baby Boomers on the verge of retirement (or anyone else for that matter) were not just pure transactions to generate up front fees, using the assumption that the ultimate form of repayment was not a reliance on the income and cash flow of borrowers, but the sale of the assets that were the collateral for the loans?