DON'T Strategically Default on your Mortgage

I like Roger Lowenstein; he is a bright guy.  I have reviewed several of his books, and would recommend to readers that they are worth buying.

But, I disagree with Lowenstein in some ways regarding defaulting on home mortgages.  I want to give some credit to my wife here.  My dear wife of 23 years, who I thought about many times while we were attending a wedding today (I could not sit with her because I was leading the singing), and who does not have an economic bone in her body, helped me think about the issues around defaulting on home mortgages.

There is a false notion that because firms default when it is in their economic interest to do so, so should homeowners whose mortgages are greater than the underlying house value.

First, firms can't so easily enter Chapter 11.  How does Chapter 11 work for firms?  Two things must be true - a firm must not be able to raise cash to make a debt payment, and the assets of the firm are worth less than the liabilities.  If a firm can't pass both tests, the bankruptcy court should refuse the filing, forcing the firm to sell assets to make a payment.

To use this analogy for defaulting on a home mortgage, it is one thing to take out a mortgage in buying a home, having reasonable margins for error, and then disaster hits, and the mortgage payment can't be made.  It is quite another thing to have the capacity to make the mortgage payment, and default.  Corporations usually can't get away with that (please ignore KMart); if they can make payments on the debt, they can't go into Chapter 11 bankruptcy.

Bankruptcy primarily exists as a protection for borrowers who have suffered loss, leading to inability to pay their debts.  It does not exist to allow people with the capacity to pay to slip out of contracts, simply because the creditor won't go after them because it is not worth their effort, or, they don't want the negative PR.

Would you borrow from a relative and default, because you know they would never sue you?  Would that be ethical?  Taking advantage of the extreme kindness of others may be legal, but it is never ethical.

If you can pay, you should pay.  That the mortgage lender will not enforce their rights does not mean that the one who can pay but defaults is ethical.

Imagine a society where any can default at their pleasure.  My, but the interest rates should get high to reflect the possibility of loss from borrowers that could pay but won't.

If you can keep your word, and make your payments, do so.  You entered into the mortgage agreement with no assurance of where housing prices would go.  That they turned against you is no reason to default; but if your ability to pay has declined, well, that is another thing - default if you must.

I do not agree with this I do not agree with this article. People walking away from their mortgage does not require bankruptcy. The rules of bankruptcy and ability to pay would not apply in this scenario. When a person signs a contract to buy something with credit it is understood that if they do not pay than the item will ultimately be taken away and credit to buy a similar item would be harder to come by in the future. Not paying could cause the individual to pay higher insurance premiums and could cost them a job they are interviewing for. The cost of money (Interest Rates) in the future for this person is likely to go up as well. Other legal measures could be pursued if appropriate by most lenders The Lender should decide if the item or house in this case is worth lending on and that they would want it back in the case that a scenario played out that the borrower did not pay. If the borrower is willing to face the results of defaulting than that is their choice and certainly morally acceptable in my opinion. Dont loan on something you are not willing to take back. The banks lend money they dont even have using fractionalized banking and people are supposed to care that they are getting the better end of the deal walking away from their mortgage. The banks can rot in hell for all I care. They caused this. Who are the Shareholders of the Federal Reserve? Submitted by Russ Dogg (not verified) on Mon, 2010/01/11 - 3:56pm » reply |

I dont agree I dont agree with this article at all. The Lender shouldnt lend on things they are not willing to take back. The Borrower has to weigh the negatives of walking away from a mortgage. Those negatives are set forth in the original contract. The rules of bankruptcy would not apply in this situation because bankruptcy is not neccesary. The banks caused this problem. The banks have been screwing people for years with credit card scams, closing costs, etc... I always found it funny how the banks never have a problem raising the rates on credit when the prime rate rises but all the excuses start coming out when the fed rates start dropping. I hope the banks rot in hell. They dont even have the money they lend anyway because of the fractionalized reserve system that is in place. When it implodes the taxpayer pays for it. We are still paying for the S/L crisis. We are probably still paying for Continental Illinois who was lending money to emerging and frontier countries. Guess what they did when these countries couldnt pay their loans. The bank lent more money it didnt have to the countries so they could make payment toward the first loan. Who are the shareholders of the Federal Reserve who sets the interest rates? That is the question every person needs an answer. Submitted by Russ Dogg (not verified) on Mon, 2010/01/11 - 4:13pm » reply |