We economists are indoctrinated into thinking first in positive rather than normative terms. That is, how DO people and markets behave, not how SHOULD they behave.
So. Should you walk away from your underwater mortgage?
I don't know. All I know is that if you're a rational economic agent you WILL walk away from your mortgage if the benefits outweigh the costs.
Or maybe not...
You see, the mortgage business seems to be counting hard on the idea that maybe you won't walk away from your mortgage even if you're hundreds of thousands underwater and it is in your material self interest to walk away. Not walking away saves the investment banks tons of money if you valiantly pay you mortgage even though it serves their profits over your economic interest. These are the same banks (and mortgage-backed securities holders, including the Fed) that took huge risks in lending to you in the first place, and had assumed you would walk away if things got as ugly as they currently are. Oh, did I mention those guys are still making gazillions?
It's kinda funny how the financial business plays the morality card when it suits their pocketbooks, no?
Anyway. I think it is true that many people go on paying their mortgage even when it is not in their material self interest. People do this mainly because they feel it is morally correct to do so. It's a little like taxes: cheating on taxes would pay for many people but they don't, just because they think it's the wrong thing to do.
What I'm really wondering is whether this phenomenon of people sticking it out with an underwater mortgage is is a good thing or a bad thing for broader economic recovery. You see, I think many banks are reticent to workout mortgages for people who are underwater and struggling because they feel if they lower the principal for some it will weaken the moral suasion they currently have over underwater mortgage holders who can go on paying, but probably shouldn't. This general reticence then keeps lots of people underwater and, more importantly, stuck in homes that are suboptimal for their particular circumstances. And this helps to keep the economy generally stuck in a rut. People simply cannot move to the locations, living situations and jobs that align best with their current circumstances.
Without attaching any morality to the situation, it seems to me that the general situation where people are unwilling to walk away from mortgages is slowing general economic recovery. It is adding a lot of nominal rigidity that we really could do without.
Like always, if I'm wrong about this someone please tell me why I'm wrong.
Update: Roger Lowenstein beat me to this storyline.
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ReplyDeleteIt is not exactly rare within certain parts of the corporate world to strategically default on loans and let a company go bankrupt, etc. Now consumers are starting to shed their inhibitions and do the same.
ReplyDeleteIt's NOT like cheating on taxes. Cheating on taxes is illegal and morally repugnant. Walking away from your mortgage is generally not illegal and is not (to me, at least) morally repugnant.
ReplyDeleteWalking away from a mortgage can be seen as simply invoking one of the “fine print” clauses in the contract. The law (under which the mortgage was written) specifies exactly what the terms are.
ReplyDeleteAlthough key provisions vary by state, the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” (BAPCPA) is especially relevant and interesting. This law was written after Congress accepted the intensive lobbying of the financial services industry and rejected the alarm of several consumer protection groups. There is no way in which we can interpret that the current bankruptcy terms are gotchas or otherwise trickily contrived to screw the financial industry— if anything, the opposite.
In other words, sauce for the gander. The tighter restrictions on consumer bankruptcy may have contributed to banks' thinking that they had mortgagers by the short hairs and so didn't have to exercise their normal risk reviews. Hoist on their own petards.
I won't express any opinion about whether/when individuals should throw in the towel, but simply note that the option to do so was anticipated when their mortgage.
Having overcome the inherited notion that I would be doing something naughty, I have about decided to walk away. My house has been on the market for a year, with no nibbles after two price reductions and being now about 20% underwater. Early on I tried to negotiate, but my lender--Countrywide--said no dice, if the house is on the market, seemingly a Catch 22. I plan to cease mortgage payments as of Feb. 1. Most say I have 5 or 6 months before foreclosure would kick in, which will allow me to accumulate enough of a kitty to move into a rental. I've written the lender about my intentions, to be as up front as possibl. Does anyone have any experience to shed on walkaways in New York State, which I understand is not a non-recourse state? How likely is it they will come after me later, despite having minimal resources?
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