rssWall Street Journal: Be as Amoral as Banks, Walk Away From Your Mortgage
Monday, March 01, 2010 at 5:10 pm
- 18 Comments
Of all the interesting tidbits in Brett Arends’ article in The Wall Street Journal about how to decide whether to walk away from your mortgage, his admission that the middle class is the only part of America adhering to standards of personal financial responsibility might be the most shocking.
Still, when it comes to the idea of walking away from debts, many people are held back by a sense of morality. They feel it’s wrong to abandon their obligations. They don’t want to be a deadbeat. Your instincts, while honorable, are leading you astray.
The economy is fundamentally amoral.
Sometimes I think middle-class Americans are the only people who haven’t worked this out yet. They’re operating with a gallant but completely out-of-date plan of attack—like an old-fashioned cavalry with plumed hats and shining swords charging against machine guns.
Arends goes on to point out that when a business’s debt exceeds its ability to pay, that business declares bankruptcy. He adds that “walking away from debts is as American as apple pie,” unless you’re a homeowner.
Why is Arends so profoundly down on Americans sticking out the tough housing times? He counts the ways:
- 11 million families current owe mortgages for more than their houses are worth — a full 25 percent of families that have mortgages.
- 5 million of those homeowners owe at least 25 percent more than their houses are worth.
- More than half of mortgage holders in Nevada owe at least 25 percent more than their homes are worth, as well as one-third of Florida mortgage holders and twenty percent of California mortgage holders.
- To regain even a 25 percent loss of value, a home would have to increase in value by one-third — and even if housing prices went up by 5 percent a year, it would take more than 5 and a half years to increase in value by one-third.
- Housing prices aren’t rising at 5 percent a year now.
Arends also notes that in many states, lenders cannot come after homeowners for the money they fail to make on a foreclosure or, when they do, they face significant hurdles in getting that money. With the foreclosure rate so high, many lenders don’t bother. Better yet, from Arends’ perspective, if one’s liquidity is in retirement accounts, lenders who do choose to pursue the remainder of the loan will find themselves unable to access that money at all.
Of course, from a larger perspective, if too many mortgage holders — the 50 percent of Nevadans, for instance — took Arends’ advice, they would contribute to continued depreciation of housing stocks and lenders’ unwillingness to offer mortgages to any but the least risky buyers. The one positive part of Obama’s struggling mortgage modification program, in the minds of most analysts, is the fact that it is helping to spread out the number of foreclosures over a longer period of time, thus keeping home values from going into yet another freefall. A spreading willingness among the American middle class to treat their relationship to debt (and particularly housing debt) as a business transaction instead of the fulfillment of the American Dream (whether that phrase has been trademarked yet by the National Association of RealtorsTM or not) would indeed lead many people to walk away from their often-failed investments.
Luckily for the economy, few Americans are going to stop buying into the idea that home ownership is fundamentally part of the American experience — and many people will continue to pay their underwater mortgages as long as they possibly can.
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18 Comments
Comment posted March 1, 2010 @ 6:00 pm
What is the point of this piece Megan? How have you correlated being as amoral as banks to walking away from a mortgage? Walking away from a mortgage (which is an investment), especially for those homeowners who have children, is a difficult if not heart wrenching decision. Obamas mortgage modification program is simply being used by the government as a tool to assuage middle america so they will not figure out they HAVE the option of walking away. Businesses do it all the time, and like Arend's said in his article, the banking industry has no trouble squeezing you for more money.
The mortgage companies are the ones who made bad loans in an attempt to reap as much profit as possible. The problem is they got caught with their hands in the cookie jar and are looking for anyone to bail them out. Well it appears the American taxpayer is and will continue to be squeezed for their mistakes. Be that through the TARP program, which simply made banks and investment houses richer by injecting billions into their balance sheets that they invested and handed out as bonuses. Or through Obamas mortgage modification program, which funded a mis-managed Fannie and Freddie to the tune of a few billion dollars and is now being tooled for the largest government land grab in history. Or finally by playing on the sensibilities of those middle American home owners who would like to have that 'American Dream' and would like to keep they morality intact.
This is the first time I've run across the Washington Independent and if this is any indication of the quality of the reporting perhaps you should change “National News in Context” to “National News in Non-text”. Next time find a better argument or leave the rehashing to the bloggers.
Comment posted March 1, 2010 @ 6:22 pm
> Arends goes on to point out that when a business’s debt exceeds its
> ability to pay, that business declares bankruptcy.
A homeowner “under water” in his mortgage is not really equivalent to a business unable to pay its debt; “under water” is not equivalent to “unable to pay”. Indeed, questions of morality are only raised when the homeowner is able to pay, and ignoring the impact of refusing to fulfill the mortgage contract is the central moral issue. If the lender(s) in questions had a substantial community presence, the result might be tangible, e.g., a bank employee losing his job. But when large, impersonal businesses themselves disregard moral concerns when extending mortgages (think sub-prime lenders), I can understand homeowners walking away.
The problem, to me, is if homeowners really are making a generic emotional decision, as Ms. Carpenter puts it, “buying into the idea that home ownership is fundamentally part of the American experience” and continuing to pay their mortgages. The moral concern, as I represent above, is a more legitimate reason to stay put; as are practical ones, such as the costs of moving (social and financial) and impact upon credit scores.
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Comment posted March 1, 2010 @ 8:56 pm
You make an excellent point Brian. Morality aside, what I find interesting is the relationship any bank has toward those it may lend to. It is impersonal, based strictly on actuary tables regarding ability to repay, nothing more, nothing less. When those pre-determined standards were deviated from, discontinuity presented itself and banks accepted more risk. Conversely the average consumer of a home mortgage, regardless if it was in pursuit of the American Dream or not, likely did everything to insure a successful transaction with the bank.
Banks understand risk, while the average consumer depends on banks to explain to them the terms of acceptance. The consumer anticipates the banks will perform a modest amount of due diligence in regard to the transaction. The consumer had no expectation other than acceptance.
On the other hand banks have an intimate knowledge of a humans relationship with money. They know we have linked financial success with emotional and this clouds our judgement. As an example do you believe a credit score is only a simple rating system based on credit worthiness? Think of the word 'score' for a moment. By our nature (humans) we are very competitive and like to achieve at every given moment, some more than others. I submit to you a credit 'score' is nothing less than a bankers way of tying our emotions and behavior of achievement to money. Ergo, we feel good when we have a higher 'score', and we're made to feel inferior when our 'score' is low. From there we project our worthiness as a person to how we handle our financial transactions. Brett Arends is simply pointing out, morals aside, if bankers accepted most of the risk in making these transactions, then consumers should also have the ability to break those bonds and realize the benefits of walking away from nothing more than whats amounts to a business transaction.
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[...] regain even a 25 percent loss of value, a home would have…Source: The Washington Independent posted on March 1, 2010, and filed under Mortgage Headlines and tagged Banks, Mortgage, Wall [...]
Comment posted March 1, 2010 @ 11:00 pm
What is the point of this piece Megan? How have you correlated being as amoral as banks to walking away from a mortgage? Walking away from a mortgage (which is an investment), especially for those homeowners who have children, is a difficult if not heart wrenching decision. Obamas mortgage modification program is simply being used by the government as a tool to assuage middle america so they will not figure out they HAVE the option of walking away. Businesses do it all the time, and like Arend's said in his article, the banking industry has no trouble squeezing you for more money.
The mortgage companies are the ones who made bad loans in an attempt to reap as much profit as possible. The problem is they got caught with their hands in the cookie jar and are looking for anyone to bail them out. Well it appears the American taxpayer is and will continue to be squeezed for their mistakes. Be that through the TARP program, which simply made banks and investment houses richer by injecting billions into their balance sheets that they invested and handed out as bonuses. Or through Obamas mortgage modification program, which funded a mis-managed Fannie and Freddie to the tune of a few billion dollars and is now being tooled for the largest government land grab in history. Or finally by playing on the sensibilities of those middle American home owners who would like to have that 'American Dream' and would like to keep they morality intact.
This is the first time I've run across the Washington Independent and if this is any indication of the quality of the reporting perhaps you should change “National News in Context” to “National News in Non-text”. Next time find a better argument or leave the rehashing to the bloggers.
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Comment posted March 1, 2010 @ 11:22 pm
> Arends goes on to point out that when a business’s debt exceeds its
> ability to pay, that business declares bankruptcy.
A homeowner “under water” in his mortgage is not really equivalent to a business unable to pay its debt; “under water” is not equivalent to “unable to pay”. Indeed, questions of morality are only raised when the homeowner is able to pay, and ignoring the impact of refusing to fulfill the mortgage contract is the central moral issue. If the lender(s) in questions had a substantial community presence, the result might be tangible, e.g., a bank employee losing his job. But when large, impersonal businesses themselves disregard moral concerns when extending mortgages (think sub-prime lenders), I can understand homeowners walking away.
The problem, to me, is if homeowners really are making a generic emotional decision, as Ms. Carpenter puts it, “buying into the idea that home ownership is fundamentally part of the American experience” and continuing to pay their mortgages. The moral concern, as I represent above, is a more legitimate reason to stay put; as are practical ones, such as the costs of moving (social and financial) and impact upon credit scores.
Pingback posted March 2, 2010 @ 1:22 am
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Comment posted March 2, 2010 @ 1:56 am
You make an excellent point Brian. Morality aside, what I find interesting is the relationship any bank has toward those it may lend to. It is impersonal, based strictly on actuary tables regarding ability to repay, nothing more, nothing less. When those pre-determined standards were deviated from, discontinuity presented itself and banks accepted more risk. Conversely the average consumer of a home mortgage, regardless if it was in pursuit of the American Dream or not, likely did everything to insure a successful transaction with the bank.
Banks understand risk, while the average consumer depends on banks to explain to them the terms of acceptance. The consumer anticipates the banks will perform a modest amount of due diligence in regard to the transaction. The consumer had no expectation other than acceptance.
On the other hand banks have an intimate knowledge of a humans relationship with money. They know we have linked financial success with emotional and this clouds our judgement. As an example do you believe a credit score is only a simple rating system based on credit worthiness? Think of the word 'score' for a moment. By our nature (humans) we are very competitive and like to achieve at every given moment, some more than others. I submit to you a credit 'score' is nothing less than a bankers way of tying our emotions and behavior of achievement to money. Ergo, we feel good when we have a higher 'score', and we're made to feel inferior when our 'score' is low. From there we project our worthiness as a person to how we handle our financial transactions. Brett Arends is simply pointing out, morals aside, if bankers accepted most of the risk in making these transactions, then consumers should also have the ability to break those bonds and realize the benefits of walking away from nothing more than whats amounts to a business transaction.
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Comment posted September 14, 2010 @ 6:39 pm
Think of the word 'score' for a moment. By our nature (humans) we are very competitive and like to achieve at every given moment, some more than others. I submit to you a credit 'score' is nothing less than a bankers way of tying our emotions and behavior of achievement to money. Ergo, we feel good when we have a higher 'score', and we're made to feel inferior when our 'score' is low. From there we project our worthiness as a person to how we handle our financial transactions.
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