From the beginning of the mortgage crisis Mish Shedlock has been writing clear-eyed posts on the matter of walking away from a mortgage. He has repeatedly emphasized that the ethical issues involved in walking away do not extend beyond the terms of the contract—and all such contracts recognize the possibility of default and spell out the procedures for dealing with it. Meaning that default is not an ethical lapse, no matter how much the lender might try to persuade you otherwise.
Yesterday Mish added two more posts on the topic. The first discusses how shame and fear have been explicitly adopted by the government and by lenders as tools to manage the crisis:
Government, lenders, and various lender-sponsored "help" agencies have acted in unison, using fear mongering tactics and shame to manage the housing crisis for the sole benefit of lenders.
Thanks to Brent T. White at the James E. Rogers College of Law and the Sacramento Bee and for a fascinating called Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.
Note: The PDF is 54 pages long and worth reading in entirety but I have condensed the discussion down to a very readable 3-4 pages of so.
Mish’s summary of the report is long and detailed, but worth reading.
In response to this post, Mish received an email from a mortgage consultant that not only confirms the truth of the above-mentioned report, but it explains how reality contrasts with most people’s baseless fears.
I wanted to let you know that I deeply appreciate your post on strategic defaults. I get people calling me all of the time looking to refinance and when I find out how underwater they are I tell them it might be wise to walk away from the property.
I also tell them the consequences of walking away. Like the article said, a foreclosure will stay on your credit report for 10 years. However, if you walk away it will only be 3 years before you can buy a home again. (It used to be 2 years but Fannie, Freddie, and the FHA made it longer to discourage people from walking away.)
I tell them if they choose to walk away they need to make sure they have a decent car, and at least one credit card. The reason for the car is that it may be hard to get a decent rate on a car loan for a while if they have a recent foreclosure, and the credit card is needed to help you re-establish your credit after the foreclosure. One of the biggest mistakes people make after a bankruptcy or foreclosure is not re-establishing their credit.
I do believe that in the future the guidelines will be changed to allow people who have re-established their credit to purchase a home 2 years after a foreclosure. This because there will be thousands such potential borrowers and it would be stupid to prevent them from re-entering the market.
The other night I meet some friends for dinner. When a got there a lady I used to work with came up to me and told me her situation. In 2007 she bought a condo in Arlington, Va. for $300,000 and its value had dropped to $200,000. She still owed $295,000 on it. She told me she could afford the payment, but was considering walking away. I asked her what was her mortgage payment and condo fees were. It came to $2,300/month. Then I asked how much would it cost to rent a similar apartment. Her answer was $1,200-1,300.
I said the answer was easy, walk away. In fact, I told her I would stop paying the mortgage and see how long it took them to foreclose. She might be able to live there 6 months or more rent free.
Her fiancé was there and he didn’t agree with my answer. He said that her credit would be ruined for ten years and that the value would come back. I responded that a foreclosure would stay on a credit report for 10 years, but if you work hard at re-establishing your credit, the score can come back in a year or two.
I have seen people plenty of people with credit scores over 700 within one year of a bankruptcy or foreclosure. As far as the value coming back, I told him that it would take 10 years or more before that value comes back.
More people need to know that foreclosure is not the end of the world and that their credit can come back in a couple of years or sooner, especially if they take the right steps prior to the foreclosure.
The mortgage crisis does raise many ethical issues, but I think they involve our ability and willingness to enter into such contracts in the first place, not in how they are executed.