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December 11th, 2009

Walking Away from Your Mortgage: Emotion or Logic?

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Yesterday’s post, titled “Is Renting the New American Dream?,” showcased the story of several borrowers who walked away from their mortgages and found greater financial freedom in doing so. While we advocated that walking away is morally wrong, it seems to be a growing consensus that the strategy may not be all that bad.

University of Arizona law professor Brent T. White wrote a  paper titled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.” It explains that emotions (feelings of guilt or immorality) tend to cloud a homeowner’s decision to walk away from their mortgage debt.

Liz Pulliam Weston of MSN.com, who disagrees with some of White’s opinions, does acknowledge that the professor is correct in some respects. Even if you think walking away is wrong, you can’t ignore the facts.

It makes financial sense for some. Take one of the couples from yesterday’s story: according to the Wall Street Journal, they saved about $1,500 a month when they walked away from their mortgage for a rental property instead.

Your credit will come around. Foreclosures can blow a hole in your credit score, and remain on your credit report for years. However, according to Pulliam:

You won’t be able to get another mortgage right away, but under current rules people with foreclosures on their records can qualify for Federal Housing Administration loans after three years, and most other lenders will consider you after five years.

Could walking away increase modifications? White says many lenders offered exotic and risky loans, so the moral argument goes right out the window. He goes on to argue that lenders will begin to take modifying more seriously if more homeowners walk away:

White believes that the playing field won’t be truly leveled and that lenders won’t get serious about modifying mortgages until homeowners are willing in large numbers to simply walk away. But to do that, he writes, homeowners have to shed the pesky notion that they have some kind of moral or ethical obligation to pay what they owe.

We thought the point was to avoid foreclosures. By now we all know the negative impact foreclosures have on home prices, neighborhood value, and the financial strain they put on banks. Yet, White points out that permanent modifications could increase if the threat of borrowers walking away is serious enough. While we’ve proven that the modification effort has seriously lagged, is the proper way to speed things up? If we’ve criticized that “shaming lenders” into modifying more loans is not the way to increase the number or outcome for loan mods, how can we possibly advocate the notion that threatening lenders with walking away is the way to go either?

We want to know what you think about walking away. Do borrowers have a moral (emotional) obligation to stay in their home, or does walking away makes the most sense for borrowers under tremendous debt?

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13 Responses to “Walking Away from Your Mortgage: Emotion or Logic?”

  1. realestatewonk (Jamie Smith Hopkins) Says: December 11th, 2009 at 6:47 pm

    RT @HSHassociates: Walking Away from Ur Mortgage: Emotion or Logic? http://bit.ly/6ZqLCG Emotional barriers keep some from walking away, …

  2. Scott Says: December 13th, 2009 at 3:05 am

    Excellent article. I know from dealing with the homeowners that it is quite a moral dilemma.

    It’s a question of do you go down with the sinking ship or know when you are over your head and save yourself. For the good, honest, hard-working people out there, it can be an extremely tough decision.

    I had not really though about using this as a broad strategy to get the lenders to do more modifications. I guess we can take a wait and see attitude and look at it again in a couple months to see if it had that effect.

  3. Should You Swim Away From An Underwater Mortgage? | NW Indiana Loan Guy Blog Says: December 13th, 2009 at 3:51 am

    [...] just read a very good blog post titled “Walking Away from Your Mortgage: Emotion or Logic?” that highlights the moral responsibilities of a homeowner walking away from their home and [...]

  4. Tim Manni Says: December 14th, 2009 at 10:38 am

    Hey Scott,

    Good to hear from you — glad you were able to take something from this article. I’m at least glad that morality is anchoring some people to their responsibilities. Yet again, as you posed, “are you going down with a sinking ship?” People want to do what’s best for them and their families…and often that means walking away. It will be hard to document via statistics and numbers (how walking away impacts mods), but it will be really interesting to see if walking away puts the pressure on lenders even more.

    Thanks, great comment,

    Tim

  5. Wes Says: December 14th, 2009 at 6:58 pm

    Hi Tim,

    Great article and something we haven’t really considered as an option as we are underwater ourselves. We are honest hard working people that feel obligated to pay the debt that we in fact took on ourselves as you stated above. We are in the middle of the loan modification process, but finding it difficult and finding the odds stacked against us as we try to work within the banks guidelines.

    It has been more then frustrating, but appreciate the perspective.

  6. Tim Manni Says: December 15th, 2009 at 10:33 am

    Hey Wes,

    Thanks for weighing in. You know, your situation is precisely what is prompting many borrowers to change their minds about walking away. The loan mod process has been a long and frustrating one for many, and too often borrowers aren’t getting the results they hoped for.

    We admire your willingness to stick it out, and we hope your loan mod goes through. Please keep us posted on how things are going, we’re glad you enjoyed our article. We’d love for you to comment again soon!

    Thanks,
    Tim

  7. Esko Says: December 16th, 2009 at 8:32 pm

    Tim,

    Brent White makes some strong arguments in favor of walking away from your home. Using logic, or I’d like to call it business sense, in a major financial decision like a mortgage is should be on everyone’s mind. If you can find another place to live for much less than your current mortgage payment, then why not go for it. Walkaways are increasingly common in the hard-hit areas like Las Vegas, much of California and Florida and Arizona. Property values have taken serious beating in them, putting homeowners way underwater and making the walkaway decision much easier.

  8. Tim Manni Says: December 17th, 2009 at 10:27 am

    Hey Esko,

    There’s doubt that these moves make financial sense for the borrower in most cases, and as White said, many times it’s only emotion that keeps borrowers from making these “wise” financial decisions. But you brought up declining homes values…the more foreclosures, the more property values drop, the more borrowers fall underwater, the more homeowners may be prompted to walk away — merely adding to this viscous cycle, keeping areas of Cali and Vegas from climbing out of the real estate hole that they are in.

    Always good to hear from you,

    Tim

  9. Craig Says: December 17th, 2009 at 11:42 pm

    Yes it is absolutely morally wrong for a person to walk away from their mortgage. It is only morally okay if the entity doing it is a major bank like Morgan Stanley…

    http://blogs.wsj.com/developments/2009/12/17/walk-away-news-morgan-stanley-gives-properties-back-to-the-lender/

    Individuals have an obligation to honesty and forthrightness, integrity etc. and must be a serf to the big banks. The banks however may play by different rules so long as it benefits them. I’m sure this exception is on a stone tablet somewhere ;)

  10. Tim Manni Says: December 18th, 2009 at 10:11 am

    Hey Craig,

    Thanks for the insight and thanks for the link!

    “The banks however may play by different rules so long as it benefits them. I’m sure this exception is on a stone tablet somewhere”: I’m sure you’re right about that, haha!

    Thanks,
    please visit us again soon,
    Tim

  11. Mitch Says: December 31st, 2009 at 11:20 pm

    I think everyone has to take their best shot at getting some kind of deal with their lender before thinking about walking away. Some experts have said that it could be in your best interest to stick it out because the foreclosure process takes a long time to work through, and your financial position could change, then you’d still be allowed to pay what you owe to stay there. That’s probably the road I’d take myself.

  12. Tim Manni Says: January 4th, 2010 at 1:35 pm

    Hey Mitch,

    I think that’s a fair enough assessment. The chance that you’re financial situation will change for the better seems like a slim option to me, but I agree that “everyone has to take their best shot at getting some kind of deal with their lender before thinking about walking away.”

    Good hearing from you Mitch, thanks for commenting,
    Tim

  13. Gopal Raj Kumar Says: July 19th, 2010 at 1:27 am

    There are two companies who re purchase homes under water from banks and re sell these to defaulters at affordable prices.

    Its the way to home ownership of the future. No PECS no FDIC and no declarations or bad credit to worry about.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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