Walking Away from Your Mortgage: Emotion or Logic?by Tim Manni
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?