Walking Away From Your Upside Down Home: The 75% Solution

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There has been much debate of late about whether or not it is morally acceptable for homeowners who currently own more for their mortgages than what their homes are actually worth to just walk away from their property, using their “new found” money to pay for a cheaper rental unit, perhaps.

Today’s New York Times even has a page one story about how more homeowners are doing just that—walking away.

Some interesting statistics emerge: The paper sites “new research” that would seem to suggest “when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away…

Apparently, says the paper, some 4.5 million homeowners have now reached this watermark!

Complicating matters is this: Certainly many homeowners understand that walking away from their homes will seriously damage their credit ratings; more important, most appear to also understand the moral consequences of their impending actions.

Unfortunately, just like “too-big-to-fail” banks seemingly get away with financial murder, “too-big-to-play-by-the-rules” real estate giants are setting a bad example; or, I should say, an example lesser folk may just follow.

As the paper points out, real estate giant Tishman Speyer and a group of investors essentially just walked away from their property–the giant Stuyvesant Town and Peter Cooper Village apartment complexes in Manhattan, defaulting on a staggering $4.4 billion in debt!

Of course two wrongs do not make a right. We all recall that lesson from grammar school. But in the real, rough and tumble world of real estate investment, those old lessons have apparently been replaced by the one that is titled, “Survival of the fittest!”

I am not making the argument that those who find themselves underwater on their properties ought to just mail back the keys to their lenders; at least not at first impulse. But I am saying that, for better or worse, what is good for the big guys should be just as good for the little dudes!

Photo: stevendpolo

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About Author

Charles is currently reporting for KNX Radio in Los Angeles, is the co-author of the book No Time To Think, and can be found commenting about the news on his blog, The Feldman Blog, as well as on The Huffington Post.

8 Comments

  1. Hi Charles,

    It is amazing to read that 4.5 million people have reached this mark.
    Incredible!

    I am curious to hear from others what opportunities this presents for real estate investors, other than the obvious.

    Since there are so many people walking away from their homes, does this not create a tremendous opportunity for Rent To Own, or Lease Options. I know that Canada and the US differ with the terminology here. We call this Rent to Own.

    I am interested to hear if others are capitalizing on this opportunity by offering Rent To Own as an option to these people walking away from their homes.

    Sine they are entering a situation where they are renting again, Rent To Own would be a great option for them.

    Regards,
    Neil.
    .-= Neil Uttamsingh´s last blog ..The Eight Most Common Questions Joint Venture Partners Ask – Part One =-.

  2. Waling away from an underwater property sends out the wrong signal, in my opinion. Buying property is an investment after all. Last time I checked Wikipedia for the definition, “Investment comes with the risk of the loss of the principal sum”. Every adult should be held responsible for their actions. Do you have a different opinion on that matter?

  3. Clearly, the more people who walk away the easier it becomes morally acceptable for the next person to do it… And the more damage that will be done to those who either refuse to accept that as their fate or who aren’t faced with the dire situation.

  4. Eric in Silicon Valley on

    As one of the original articles that kicked off this topic a few months ago pointed out, it seems that the big boys have a different set of rules than those that Harry and Louise are supposed to abide by. While I do understand the moral hazard of it becoming acceptable to walk away, it would seem only fair to apply the same standards to the big guy and the little guy.

    I don’t think that anybody is giving Tishman Speyer the “shame on you” hand gesture; rather everyone just acknowledges the loss of all the capital they’ve put in so far, and the loss perhaps of business savvy reputation, as the “punishment” they will receive. If it comes down to a business decision for the big guy (with consequences that are understood for each choice taken), I don’t see why it couldn’t for the little guy, too.

    “Walking away” perhaps as a phrase takes it too lightly. I imagine these people are consciously making a trade-off in which they know their credit will be trashed for years to come (plus whatever other consequences come from the mortgages being recourse loans), and since this economy runs on credit, that is a really big hit they are accepting to take. As is commonly pointed out, debt is not a crime, only not living up to your side of a contract – a contract which says, if you don’t pay, we’ll take your house.

  5. Not in a million years did I ever think I would be taking this stance that I do now. We have to ask ourselves what was the root cause of the housing crisis. At a closer examination we find that it was the lending industry (induced by the government) giving away mortgages to people who had no right holding a mortgage. Stated income loans are the biggest culprit. This created what I call, “illegitimate demand”. This illegitimate demand drove up prices (supply and demand), only to end in a crash because all of the illegitimate buyers were destined to fail with their loans. Had the lending industry followed solid lending practices, like they have for many many years prior, then the illegitimate demand never would have occured, and housing prices would have remained somewhat stable. Sure we may have experienced some ups and downs, but not 50+ % decreases in values. I am a legitmate buyer. I produced full documentation DEMONSTRATING that I would be able to pay back my loans. I gave the bank w-2’s, income statments, paystubs, and tax returns to DEMONSTRATE that I would be capable of paying back my loan. Millions didn’t. Millions signed ‘stated income’ papers. They werent’ required to DEMONSTRATE they could pay back their loans. This wreckless lending on behalf of the lending industry is the root cause. Of course many wall street companies also invested in credit default swaps (insurance betting the loans would fail), and of course they made billions once all of these illegitmate loans inevitably defaulted. Now with that said, we are supposed to feel ‘responsible’ and pay back our grossly upside down homes? Sorry folks, we were sold a steak but they gave us a hamburger. A house is not just brick and mortar. Owning a house is also buying into a sound collateralized market whereby the lenders follow the law when conducting business. These giant banks failed to disclose to their investors that they were buying insurance (credit default swaps) against these mortgage backed securities. That is illegal. They are in violation of SEC rules. They were also in bed with the ratings companies who rated these securities as AAA when in reality they were CCC and lower (junk). This was another SEC violation. These large banks are criminals. Walking away in ‘today’s’ market is not immoral. If they delivered a steak when I ordered a steak, then I would be obliged to pay them back, but I’ll be damned if I am going to pay for them for a steak when they delivered a hamburger.

  6. One more comment.
    Let me give you an analogy. Those people who say that when we make an investment, we know the risks and we should be willing to accept the possibility of failure. There’s always risk in investing. On the surface that sounds fair. It is fair given that the risks are disclosed to us, and there is no illegal activity. If on the other hand, there is non-disclosure to the investor, and laws are broken by the entity offering the investment, then it’s not so simple. In this case it is fraud, and losing money makes the entity offering the investment a liable party. Here’s an example. We’ve all been to Las Vegas right? Let’s say we go to Las Vegas and play blackjack. After 2 days of playing blackjack, we end up losing 100 bucks. Are we going to blame the casino? Of course not. We knew the risks involved, and simply had a bad run of luck and lost our money. We knew that the odds were against us, because the house has the house edge. OK, I can buy that arguement. So we go home and just realize that we lost the 100 bucks fair and square. Now, what if we find out later that the casino didn’t disclose to you that they had removed all of the 10’s from the deck of cards that you were playing with during your blackjack sessions? Now are you going to feel the same about losing your 100 bucks? Now you are most likely going to feel cheated, because had you known (if they disclosed the removal of the 10’s) this, you most likely wouldn’t have played (invested) in the game. This is what happened in the housing industry. We were dupped. We were led to believe that we were playing with an honest deck of cards, but in reality we weren’t. We as home owners were led to believe that we were buying into a fair and legal (no law breaking) collateralized market, but in reality the large banks were engaged in activities behind the scenes and not disclosing these activities to us. In Las Vegas, if a casino is found to be removing the 10’s from a deck of cards on a blackjack game, the casino is fined, held accountable, and may even result in jail time. What about our banks? We bailed them out! What a country, huh!

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