Walking Away Revisited - Reader Mailbag - Moral Dilemma

Tonight I received a request from "SS" asking to revisit the subject of walking away.

SS Writes:

Mish,

Over a year ago you wrote this article: Walking Away: The Next Mortgage Crisis

A lot has changed since the publication and most - if not all - changed for the worse economically since that time. I was wondering if you would/could write a post to address the topic once again.

I am a condo owner who has done nothing wrong. I put money down, I did not buy over my means, and I did not attempt to use my house as a credit card. As a matter of fact, I am still employed and I still continue to make payments on my mortgage. All that said, I am at a loss of over 100K and the banks are unwilling to work with me because of the loss of equity.

I've actually had one loan officer laugh at me when I called to discuss the refi. So while others simply there are those who get help from the banks/government because of their mismanagement, I am being penalized for "doing the right thing".

To add insult to injury, the city will not lower taxes despite contesting.

In my building there are 43 units, of which 34 are occupied, and no units have sold in the last year and a half. In the last two months we've witnessed two foreclosures in the building and I believe things will only continue as layoffs in the area have begun to take effect and the general economy of the area is starting to really take a hit.

If one were to make the assumption that the economy was going to turn around tomorrow morning, and real estate began to pick up, it would take almost 8 years for the value to come close to a breakeven point - not even make a profit.

I simply - simply - cannot see a good business reason to continue paying on my mortgage. I try to rationalize the situation, but there is *NO* good business reason. Please understand I say this as a person who has NEVER missed a bill in my life. My credit rating is 780 (averaged between all three agencies). I've always taken pride in paying and making my own way... but I've reached my breaking point.

I am not asking for guidance, nor and I asking for legal advice, I simply think this is a topic that has not really been discussed in the press and really should be.

Please understand that I know I am not the only one facing this question or situation. A number of people are worse off, and I am not trying to say "poor me" but no one is really talking about the obvious. The "dream" of home ownership is a myth and a prison sentence for a large group of American that played by the rules, and as I have a great amount of respect for your writing, I figured you would be a good place to provide updated thoughts to everyone.

Thank you for the time, and if this is not a topic you wish to once again address I can understand.

Best,

SS

SS, admittedly your situation is in contrast to what Karl Denninger described in Ok, I'm Done With Being Nice.

The woman Karl wrote about bought a two-bedroom home in 1997 for $77,500 then used it as an ATM machine to live extravagantly, running the mortgage balance up to a clean double to $143,000. The woman was complaining Countrywide Financial, now part of Bank of America would not offer to alter her mortgage.

Had the woman taken out a 15 year mortgage an made one extra payment a year, instead of owing $143,000, she would now be a proud homeowner with zero mortgage! The woman believes she did nothing wrong.

Karl ripped her to shreds, and deservingly so.

While you did not make the serious error Karl lambasted, the first thing you must realize is that you are in a dilemma of your own making. You claim you did nothing wrong, but actually you did. You made one critical mistake: You bought a piece of property at a very poor price. That is your fault, not the man in the moon's.

People are seldom willing to point the finger where it needs to be pointed, at themselves. You need to point the finger at yourself. That said, the lender also made a mistake: giving you a loan. I am not sure what your down payment was, but the smaller the down payment the bigger the lender's mistake.

I believe you are correct when you state "It would take almost 8 years for the value to come close to a break even point - not even make a profit" and that is assuming the economy quickly turns around. Heck, it could take more than that on a condo. 20 years is not out of the question depending on the bubbliness of the area you invested in.

The question is what to do about it. The law provides a penalty for walking away. That penalty is ruined credit for five years. That is it. Lest people get all bent up over how easy you can get off, the lender knew those risks in advance and took them anyway.

There are no debtors prisons anymore, and the stigma (if any) of bankruptcy or walking away decreases every day. Although some people will resent you walking away, still others will be envious if you can shed that debt and they can't because of second mortgages or because their conscious will not allow them to walk away.

As you say, "there is no good business reason" to keep paying your mortgage.

Should you decide to walk away, I would advise you to consult an attorney specializing in these matters, such as the ones at YouWalkAway.Com. For the record, I get nothing for this referral.

And although I am not a lawyer, given that you can easily afford the payments, I would strongly advise not buying a new house before you walk away. That may constitute fraud.

The moral hazard here is that if you walk away, the property may be dumped on a bank and taxpayers may end up footing the bill. Alternatively, the quicker all this malinvestment debt is wiped out, the quicker housing will bottom and the economy will recover. It's easy to rationalize any position you want to take.

The fact that you wrote indicates you are in a moral dilemma. And as stated above, you need to put the blame on yourself even if other parties aided and abetted. Having done that, please review Walking Away: The Next Mortgage Crisis the Moral Obligations Of Walking Away and Businesses Advised To Walk Away to see if you can resolve your conflict.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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