I wish I could write a happy post about the Christmas spirit right now, but I’m not in a generous mood. I just read this article in which a professor of law advocates that people who are having trouble with their mortgages just walk away – free as a bird – and to heck with the bank.
Of course, we’ve all met people who are doing just that. One friend of ours walked away from her house and mortgage, skipping payments until the bank took the place back. She did so not only because the house had dropped in value, but because “it’s just too hard to sell a house in this market.” Not only irresponsible, but lazy.
These folks aren’t bankrupt
I’m not talking here about people who literally can’t pay their mortgage. If someone doesn’t have enough income and/or savings to pay his mortgage – even after a refinancing – I have some sympathy. I have even more for people who’ve taken aggressive steps to honor their contracts, which could include selling other personal property or taking any work available, even if it pays less than what they are used to.
The law professor, Brent T. White of the University of Arizona, thinks those people are saps. In fact, he encourages us to load up on high-ticket personal possessions bought on credit before walking away from our homes, since there is little chance the lender will come after us for our other possessions to make good the loss. In 12 states, including California, Arizona, Texas, and Florida, lenders are actually prohibited from doing so. In other states, they often decide it’s not worth the trouble.
Time for some stories
The Wall Street Journal reported on a few of the deadbeats in Palmdale, California.
Shana Richey, for example, bought her house in 2004 with a no-down-payment loan. She gave up the home a few months ago to rent an apartment with her family – the rent is much less than the mortgage was. The extra cash in her pocket bought season tickets to Disneyland. They’ve also got a big cruise to Mexico coming up and an $1,800 dining set. Fun, fun, fun!
Here’s my favorite quote from Richey: “You take a risk for the American dream,” she says. “I don’t have to worry about paying property tax, homeowners’ insurance, the landscaping, cleaning the pool or any repairs.”
Now as hard as I look, I can’t see any evidence of the risk Richey took. The very essence of risk is that you pay a real penalty if things don’t work out. But Richey hasn’t paid any penalty at all – she had a great life before, and she’s got a great life now.
Firefighter Jay Fernandez is another Palmdale deadbeat. Like Richey, he bought a big place, then decided it was too much hassle and walked away. Now he goes to concerts and restaurants much more often. He also got to keep his BMW 6 series coupe.
“But if I give the house back, aren’t we even?”
Some people really do believe that. Of course, when property values have dropped, the answer is no.
I know the BP community recognizes this, but I’m going to explain it anyway so you can repeat this to any clueless people you meet.
When Shana Richey bought her home for $430,000 with no down payment, the bank wrote a check for that amount, more or less, to the developer or previous owner. (I don’t know the exact amounts.) They did this in the reasonable expectation they would be paid back with interest. That’s what banks do, lend money to people they think will pay them back with interest.
Assume that Richey paid down the principal by about $20,000 between 2004 and 2009. She eventually sold the place for $195,000 and told the bank “that’s it.” And the bank accepted this deal. Remember, they have no choice but to accept it, since this is California.
$430,000 – ($20,000 + $195,000) = $215,000. That’s the amount the bank lost. That money is gone. >Since this is happening around the country, and since the government doesn’t want Wells Fargo to go under, the bank now has $25 billion in additional capitalization from Washington. And where’s that money coming from? Us, through our taxes. Or our kids, through the deficits which will eventually have to be paid.
I don’t know if Richey understands this. It’s quite clear that even if she understood it, she wouldn’t care. But just maybe, thirty years from now, when her kids have to pay crippling taxes or all of our national assets have been sold to Chinese and Indian interests, she’ll care then. Of course it’ll be too late.