Sure, Walk Away From Your Loan, Why Not?

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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.

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20 Comments

  1. This whole era of the housing crash began with irresponsible politicians who pushed irresponsible renters to become irresponsible homeowners thanks to irresponsible banks who were so greedy that they were willing to let anyone get a loan. Is it any wonder that those people turn into irresponsible deadbeats? Is it any wonder that those very politicians bail out the bankers? I guess all that remains is to see who bails out the politicians . . . why its the deadbeats, of course!

    Welcome to the era of irresponsibility!

  2. You know, I used to think that people had moral and ethical obligations to repay their mortgages, fulfill their promises to the banks … until now.

    Explain to me why a single homeowner who has lost 25-30% value should keep paying – financially how does it make sense?

    Particularly in light of giants like Morgan Stanley walking away.

    It used to make sense to pay one’s debts. No more when the private citizen plays on a far lesser field than the big ones. Is it class war? Yep. Is it sad? Absolutely. Is it reality? Unfortunately.
    .-= Jim Duncan – Realtor – Nest Realty´s last blog ..Tweets about Charlottesville – Snowpocalypse and more =-.

  3. I have a problem with this lack of both responsibility and accountability. These folk CHOSE to buy a house and issue a mortgage. I doubt anyone held a gun to their head (either literally or figuratively) to make them sign the loan docs. This is NOT a situation where unsuspecting homebuyers purchased “more house than they could afford.” It’s not that they cannot make the payments on the mortgage. They can, but choose not to. I find this disturbing. Should they now be allowed to cry “the devil made me do it?” I think not. But that’s just me. 🙂

  4. Brendan, I agree with the fact that it sucks to have deadbeat borrowers, but seriously….are you really more pissed at them instead of the banks? If so, you got to be kidding me. While writing about irresponsibility it would be nice to highlight the enablers also.

  5. I am in the business of:
    * Buying houses on terms (sub2, CFD, lease purchase, etc) or all cash with 70% or less of appraisal with private money.
    * Selling on Terms with great recourse to repossess quickly if there is default
    * Making damn sure my private lenders get paid.
    * Paying attention to what I net after tax monthly after all costs, mimizing costs, getting referrals.

    Everything else that is happening politically I just dont give a hoot.
    I’m not apathetic. I’m an entrepreneur.
    * People can’t sell so I buy on my terms.
    People can’t buy so I seller finance on my terms.
    People can’t get reliable interest so I pay 8% simple interest, no payments for 60 months.

    The USA is developing an irresponsible attitude on many fronts. Politically and Consumer-ally.
    Just My 2 cents.

    Brian with REISkills

    PS Buffet said:
    “The time to buy is when there’s blood in the streets.”

  6. Remind me not to lend most of you folks any money.

    Let me get this straight if you lend me $100,000 to buy a house then I lost my job, or the value of the property decreased. It would be ok with you if I did not pay you back?

    Or how about this you lend me just $100, I sign in front of a notary that I will pay the money back. Then I don’t are you alright with that, no, why not? What is the difference between $100,000 or $100?
    It isn’t the money it is your ethics, you don’t have any.

    What are you all going to do when in the future the banks go back to the old tried and true method of granting credit. Like you have to have a job for a long time, you will need 20-30% down, then the lender will make you fill out tons of paper work, they will scourer you past and if they see just one negative, you will be rejected.
    I bet you all won’t like that.

    Back in the good old days quite a few folks rented. All you folks walking away from you obligation to pay, will be renting for a while, I don’t think the lenders are going to lend to you again.

  7. Dennis:
    Why should someone be disappointed if bank wont lend them the money? Why not work and SAVE and buy cash? Novel concept huh?
    You mean to say if a bank does not lend money, an individual cannot save delay their gratification and buy cash? or maybe save upto 50% downpayment and have some private party lend them 50% irrespective of the persons credit? Even if the individual defaults the private investors money is protected because he could possibly get back all his money back? The person will probably not default because he put 50% down. Isnt that more responsible than giving people with sub prime credit 100% loans? Who decided these sub prime borrowers are eligible for 100% loans?
    I was a loan officer 5 years ago and i saw how lenders literaly thrust 100% loans down peoples throat. Sure they did not hold a gun to their head, but luring prospective customers with false impressions is worse than that.
    I recall an account executive of a premier bank selling negative amortizing loans speak so eloquently to a group of loan officers encouraging them to sell negative amortizing loans saying things like “Real Estate values will always go up. They will never ever go down. And even if it does, its not your money, its the banks money so why do borrowers have to be worried? Go ahead and sell these neg am loans with no worries. Let the bank do the worrying”

    This by the way was the top producer of this bank pitching incredible sales of negative amortizing loans. No wonder banks got themselves in trouble. All these banks should never have been bailed out.

    The best business should thrive and grow in a free marketplace. Irresponsible banks should have run out of business if nature would have had its way. Worst case people would have had to come to their senses and realized they cannot borrow their way out of debt.

    People in more prosperous nations have a higher savings rate and work harder and save more money. SAVINGS seems to be a novel concept today. But its a principle that has stood the test of time. Refer to “The Richest man in Babylon”. The key to wealth starts with saving 10% of ones income no matter what.

    Instead of saving people have become whiners, whining no one will lend businesses or individuals money. So what if there is no one to lend money? Cant an individual or business do a days productive work and earn their daily bread / business? Do they always need revolving credit to earn bread or do business?

    Banks screwed up and they are unable to fulfill their promises other banks that lent them money and they have Big brother government to bail them out. Who does the average Joe who got suckered into 100% loans have to bail them out?

    NATURE. Walk away from your loan.

    People are people and they will do whats in their best interest. They need to. Nature will make sure justice is done to ALL.

    I am fired up about FREE ENTERPRISE IN AMERICA!!!

  8. Sure, it is immoral and unethical for someone who overpaid for a house they could never afford to just walk away, but when Morgan Stanley did the same thing with over $2Billion of commercial property in CA in 2007, they were just “meeting the obligations of their loans” by giving properties back. http://market-ticker.denninger.net/archives/1749-The-Last-Word-On-Strategic-Defaults.html
    An individual makes a sensible decision, they’re a deadbeat. Big biz does it, they’re just being smart, and doing right by their investors.

  9. Its a business decision not a moral or ethical one, don’t be confused. If it makes more sense, financially, to walk then the borrower should walk. The bank took a risk just like the borrower took a risk and now they both stand to lose something, that’s it, no more, no less. Statistically borrowers with higher credit scores are more likely to strategically default. Is this because they’re immoral or stupid? Nope, its because they are financially smarter (that’s how they got the high scores to begin with). If you’re going to point to defaulting homeowners as the culprit in this disaster you clearly misunderstand how we got here.

  10. I know people that have walked away after buying things they didnt really need by taking all of the money out of there house. Why should the bank pay for these items? But on the other hand it is impossible to have Excellent Credit on your report. My husband and I owned our home outright and our credit wasnt excellent. No CC bills either. Then the more you try and improve it the worse everything gets.

  11. Why is it reasonable for banks to expect a profit in excess of investing in Treasury Bonds? Because they take a risk in excess of the risk inherent in investing in Treasury Bonds. Banks have been in complete control of the contract signed when extending the loan; any terms or recourse in those contracts were defined by the Banks and their legal department not by the individuals accepting the loan. The banks limited their recourse to the foreclosure of the collateral specified in the contract; and they themselves chose to limit it to the home being mortgaged.

    Banks had control over the following:
    * Who got loans
    * When they got them
    * What percentage rate, points, closing costs, etc. were agreed to
    * What the terms of recourse were

    Banks got greedy, plain and simple. They ignored so much in the way of good practices and risk mitigation in order to keep pushing outsize returns. Then they rewarded, and keep rewarding, those who made those risky choices with absolutely incredible bonuses and salaries; and at the first whiff of profits after being one tax-payer bailout short of bankruptcy they are back to doing the same things.

    Why can the banks get my money at 0% interest to loan back to me at 4, 5, 6, or 7% interest? What apparent “right” do they have to this method of existence? Why can’t I get that 0% loan?

    I have one answer and it involves the corporate shepherd, sheep, and shearing.

    (disclosure: I have 7 personally guaranteed mortgages, all current and never late.)

  12. The personal choice and decision to walk away from a losing Investment, is in many cases a prudent and wise decision. Like so many speculative Investors did when the market collapsed. On the other hand, walking away from a personal residence-a Home simply because it’s value has declined (Like mine), makes absolutely no sense whatsoever. With that said, however, strategic defaults have increased dramatically and are rising exponentially.
    .-= matt mathews´s last blog ..A LOOMING DOUBLE BUBBLE! =-.

  13. We have become a society where it seems “ok” to operate in the gray area. What was once considered a non negotiable principle is now accepted and considered ok, and perhaps popular. There are many angles to look at this from. I can see if a hard working family hits some rough patches in life, and is left without much of a choice, but to default on the loan, thats one thing. However, were talking about people that are simply walking away from a moral and legal obligation and responsibility to pay back a debt. And that is another thing! These are the same people that would never back you up in a fight, but say they would!! History will repeat itself if lenders and borrowers do not operate with integrity.
    Underwriting guidelines will only get tighter making it that much harder for others that are qualified.
    If you are going to lose your home, you better be going down swinging, scratching, and clawing to keep what you have…not walk away like a wimp just because your broke professor said so. Your property is upside down now? Suck it up! Stick with it, in the long run you will end up on top, and the walkers will be lifetime renters

    • “History will repeat itself if lenders and borrowers do not operate with integrity.”
      A key point here LENNDERS AND Borrowers need to operate with integrity. Lenders are the leaders. Borrowers are the followers.
      If lenders go to Washington standing in line for bailouts, where do borrowers go for bailouts? Lenders made a mistake and go bankrupt – So what? Business moves on. No reason to get bail outs. Anyone going out and willingly seeking bail outs is a wimp. They are basically saying I shot myself in my foot. I cant support myself. I am handicapped. I need life support.
      Treasury Secretary and NY Fed Resever Chairman coaxed Uncle Ben and Uncle Bush to bail out AIG with 85 Billion Dollars so Goldman Sachs can get their 10 Billion of that 180 Billion dollars because then treasury secretary and then NY Fed Reservve Chairman had a vested interest in Goldman Sachs. NOT because AIG was TOO BIG to FAIL.
      And after AIG get bailed out, AIG throws a big lavish party for their top performers. What top performance? These top performers could not see the crisis arising out of carefree lending policies resulting in mortgage defaults and went out and sold insurance for billions of dollars of mortgage defaults. Later mortgage defaults surfaces, they cant fulfill their obligations, they get bailed out, Goldman and other speculators get their moeny and AIG throws a party to celebrate.
      If the leaders of the nation are coaxed into bailing out too big to fail organizations, then indirectly the leaders are saying the citizens are small and they dont matter and ONLY the large corporations are important to the nation. They fail to realize that the nation will be nothing without its citizens.
      Borrowers are not defaulting because some broke professor said so. They are doing so because it is in the best interest of their family’s finances. Clearly the leaders of the nation do not have the best interest of the citizens at heart rather the best interest of the TOO BIG TO FAIL lenders.
      I have seen people get emotional with the go down swinging and scratching and clawing feeling and end up penniless and have no choice but to default and then willing to work for anybody that will feed them.
      I have seen smarter people realize their finances heading south and come to their senses earlier and set aside some savings for their family and smartly start defaulting before they end up penniless and manage their finances better.
      Some people are people. Some people are smarter. Neither better than the other. Ultimately all are human beings with talents and abilities.

  14. Man, I’m sorry, but…

    If you mail in the house keys cuz you do not like your current situation, well, you signed a mortgage and a promise to pay?

    Geez….what does that say to the youth of the USA?

    I think many on this forum believe that honoring your word is an important principal in life.

    I rent to own – lease option properties and depend on my tenant buyers paying me so I can pay my private lender payments.

    What big Wall Street Banks do is out of my control.

    What Obama is doing and WILL DO to “stop the ARMs resetting to unaffordable payments” is unclear. I would like him to make practical sense.

    The loan servicers make more money by foreclosing. Not in loan modifications.

    Loan modification is full of FRAUD. The FBI is too busy with them. They take 3K for people and do nothing.

    650,000 modifications is not a good track record.

    If Obama could outlaw ARMs and have BK judges rewrite the mortgage at 6% 40 yr fixed rate mortgages at new (today’s) appraisal, would that be a solution to all the “shadow inventory tsunami?”

    And, God forbid, if you can’t afford THAT NEW RE-WRITE PITI payment, then maybe you need to move out.

    And rent.

    God, do I sound like a real SOCIALIST or what!

    Best wishes to all BiggerPockets Community in 2010,

    Brian Gibbons, REISkills.com

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