The realities of walking away from a mortgage

Today Mish published an email from a reader who ended up walking away from his mortgage. The email is long but straightforward and detailed.

I bought a house back in 2004, having moved halfway across the country for a new job. It was a house I could comfortably afford – I made a little over $70,000 as a senior manager for a newspaper, and my mortgage was a little under $900 a month (including taxes and insurance), fixed at 5.25% for 30 years with Wells Fargo. In spite of the pressure put on me by a broker when I was buying, I avoided the no money down variable option because I wanted to do what I thought was the responsible thing to lock in my payments at a decent rate I knew I could afford and avoid the reset lotto.

In April of 2008, I was notified that the job I had moved across the country for was set to be eliminated, along with the entire staff of my department. The company I worked for was highly levered in an environment where revenues were shrinking, and ‘consolidations’ were being made across the company. The day I found out that I was going to be out of work, I called Wells Fargo to see if it would be possible to make some alternate payment arrangements until I found work, and was told precisely what the article you reference noted – that they couldn’t even discuss the matter with me until I was 30 days in arrears. I was mortified, knowing that being 30 days in arrears would leave me with the dreaded ‘mortgage late’ on what had been a pristine 800 credit score. I had been prudent and saved a fair sum of money, so I decided to try and keep the plates spinning while I looked for work.

I applied myself to the job hunt, but with nearly 50 positions eliminate from my company and a few hundred at other domestic newspapers who shared my area of specialty, it was a tough task finding work.

Then in August, Gannett, the biggest newspaper company in the world, announced that they would be laying off 1000 workers, and my sources inside Gannett told me that they were going the ‘consolidation’ route, meaning that in the course of 3 months nearly a third of the total positions in my field had gone *poof*. My prospects for finding work in the industry where I had experience had just gone from tough to Quixotic.

I again called Wells Fargo to see if there was anything they could help me with that didn’t involve damaging my credit – I still had a sizable amount of savings to negotiate with – but the answer was the same: 30 days late or no discussion. I decided I’d have to take them up on the offer.

When 30 days had elapsed, I contacted them once again, only to now be told that they couldn’t work out any arrangements until I had found work. I was angry, as one might imagine. I decided that they had received the last payment they were going to receive from me. Fourteen months later, I have kept the vow.

I’m not proud of walking away from my ‘responsibility’, but in light of the situation – nearly 18 months without finding work – it seems that it was the best thing that could have happened. If I had kept paying all along, I’d have depleted a good deal of my savings, and I’d still be facing losing the unemployment benefits that are keeping the other bills paid. As it stands, I’ve still got that nest egg to see my family through the rough days that lie ahead.

I’ve been to the housing counselors the state has set up, and the best they were able to do for me was that I could pay off the back payments, penalties and interest, and resume making payments.

My house is set to be sold at auction next week, and due to the rules in the state, the minimum price will be well in excess of what I suppose the market price would be. I expect that the bank will be the buyer by default.

If my experience is representative, walking away might be the best option.

From Wells Fargo’s perspective, this was an avoidable situation. I called them when I found out about my joblessness, and I did everything I could to avoid a default. All I wanted was some recognition that I was willing to work with them if they would work with me – maybe only paying interest until I was able to find something.

However, once I felt double-crossed, having been told to let it go into arrears so that they could work with me, and then to be told they still couldn’t work with me, I did what I thought was prudent. I decided to see how long I could live rent free. As of today, it’s been almost 14 months.

Assuming that the house sells next week and I get an order to vacate the next, I’ll be here through the end of January (it takes a minimum of 60 days to affect an eviction here). More likely, I won’t get the order to vacate until the bank sells my house as part of a package foreclosure deal for about 20 cents on the dollar. I might get to live here rent-free for a good spell longer. I could have, and probably would have, paid them nearly 50% of the house’s value as a cash settlement 14 months ago if they’d been willing to have a conversation.

The question I have is this: given that the borrower would have been forced to default on his loan in any case, having lost a job and having only limited savings, what things would an honorable person have done differently?

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13 thoughts on “The realities of walking away from a mortgage

  1. It has made me burning mad that these banks are getting all this money from the government and not doing a thing to pass it on to their struggling home owners. I absolutely had the same thoughts as this man as we went through an almost identical situation. I would never have let my family get so depleted trying to keep up my mortgage honorably if I had known how the banks would handle the situation. I often wonder if we should have just stopped paying long before we were depleted of savings.

    We admit that we were not prepared for a catastrophic loss of work and a move. We are to blame for that but honestly, I am not sure how we could have been prepared for a non-existent housing market. We hung in there for a year, to the utter harm of our family.

    It looks to me like the banks have been sheltered from the worst of the housing bubble which they created by the government bailouts. They seem to be collecting money and sitting on it.
    The victims of the bubble are the homeowners, many of whom still don’t get it.

    A house is a place to live. I will never, ever look at a house as an investment again….NEVER.

    Yeah, you touched a nerve :)

    But, I really would like to hear how others think they would handle this situation honorably.

  2. From what this man has written, it sounds as though he did what he did in an honorable fashion. He didn’t want to lose his job, or his home and chose to save what money he could to provide for his family after this tragedy happened. The bank however, was anything but honorable in its dealings with him. Why on earth does any banking institution want a home to go into arrears before offering help? It makes NO sense whatsoever. I can’t lay blame on this man, he did what he had to do to care for his family and provide for his future. The bank surely wasn’t going to do that.

    We have had two homes on our street go into foreclosure in the past 1 1/2 years. The owners, knowing they were losing the house, trashed them before moving out. It sounds as though this man is taking care of the place even though he knows he has to leave it. Many don’t do that. In one of the homes the owner attempted to set fire to it. In the other, they left water running in the upstairs bathroom and it flooded the entire house.

    Thankfully these homes have been purchased and re-done and we’re hoping the folks who live there now will continue to care for their homes and will be able to afford to stay there.

  3. I’d be grateful if folks would point me to any Christian teachers they know to have said things on this topic. I think this is precisely the sort of practical issue that elders ought to be pondering and then speaking about—how to proceed righteously in complex and difficult circumstances. But I can’t think offhand of having read anyone who has discussed what constitutes righteousness in this context.

  4. I think Martin Luther covered these types of situations by saying (paraphrase) that the lender has a responsibility to forgive the debt, and the borrower has a responsibility to pay it. Which might not sound like much of an answer, but I think that this email shows the irresponsibility of both sides.

    Like most of the rest of us, this man took debt lightly, not as a bondage of last resort. He still speaks in terms of it being something he “could afford”, when the very fact that he had to borrow money to buy the house declares that he could not afford it. (And I speak as someone who has done the same thing).

    And on the other hand, I can’t muster any righteous indignation on behalf of bankers that exact usury upon money that they created out of thin air and won’t forgive debts as they should.

    As for the honorable thing to do, one has to consider a hierarchy of responsibilities, and providing for your family is above paying back the banker. There is no moral wrong in not paying a debt you can’t afford to pay, and taking the most prudent course of action in utilizing your dwindling resources to provide for your family as best you can.

    At least, that’s how the situation appears to me.

  5. Rick,
    The only reason I even think of discussing our situation openly is that no one is and I think they should be. I never expected to lose my house. I didn’t even owe that much on it. Obviously never having the debt at all would have prevented the problem and it certainly will prevent a future problem. Dave Ramsey is the only Christian person I know addressing any of this. The few times I have ventured out to mention it, it just makes people uncomfortable. Most people would rather not even know about it. Most people don’t want to think that their house might not sell on the market.

  6. I, unfortunately, speak about this subject with a great deal of experience. We chose the other route. We tried just like the original emailer to negotiate with the bank so that we could work something out. That all fell on deaf ears and don’t get me started on these government homeowner help programs (hope Now, etc). They are a bad joke that at best can only offer false hope.

    It didn’t make sense to me why a bank wouldn’t want a piece of something rather than all of nothing. I have figured out that because the ‘lender’ that the homeowner actually deals with is only servicing the loan and doesn’t actually own the property and they can’t really try to work anything out. The real owners are the 1000’s of people who have bought mortgage backed securities.

    Anyway after much prayer and many sleepless nights I decided that for my families benefit I had to seek protection, yes the dreaded bankruptcy. It has been a very very long road with many potholes. We have been under the court’s protection now for 19 months and have a little over 3 years to go. I must stress that this is not something that should be entered into lightly. The courts are serious and have all the cards and are not afraid to use them. In the mean time our creditors are getting paid and we still have a roof over our heads. I feel that if we can make it till spring that we will indeed make it. We all have made extreme sacrifices and have taken jobs that we hated, but we are getting it done by the grace of God and I thank him for this each day many times.

    I can say this though with a great deal of confidence. No matter what the outcome I will do whatever I can in the future to never borrow money again.

    James1:2-3 says “Consider it pure joy,my brothers, whenever you face trails of many kinds, because you know that the testing of your faith develops perseverance.”

    So it appears that this experience was not unfortunate at all. Thanks for listening I feel better.

  7. I know a Christian investment advisor who was telling people to stop paying if you were underwater back before TARP. Everyone lambasted him. The reasoning is that he believed it was not immoral or wrong in any sense to exercise that option in your contract (giving the keys back when you can no longer pay or it is no longer in your interest to pay, as the case when you owe more than your house is worth). It is a contract and that is an option in the contract.

    I advised a few people to do the same, and I was met with moral indignation. I am silent on the issue now, as my spiritual morings seem to be at stake in the opinion of many on this issue. Why is it OK for banks to benefit on the backs of the people all these yearas but it is now wrong for the people to benefit at cost to the bank (bailouts notwithstanding) when both parties entered the contract without fraudulant information?

  8. Everyone,

    Thanks for helping to break the conspiracy of silence about this matter. It still astonishes me that the conservative evangelical church, so quick to mouth off about just about every social and cultural matter under the sun, finds itself helplessly tongue-tied when it comes to this. We have pat answers for everyone else’s problems, and not even the glimmer of one for our own. The comforts of the gospel seemed to be reserved for others, while we go about handling our own troubles ourselves, with a combination of pluck and gritted teeth and platitudes and false fronts. And silence, lots of silence.

    Cindy,

    I would never have let my family get so depleted trying to keep up my mortgage honorably if I had known how the banks would handle the situation. I often wonder if we should have just stopped paying long before we were depleted of savings.

    I think there is probably a clear, generally applicable answer to this question, but it is exactly the kind of quandary that the church seems to deliberately skate past: thanks for telling me what I should have done, but I am well aware of that; what I need to know is what should I do now. The fact that the institutional church has nothing helpful to say in this relatively novel case makes me wonder if they are able to think biblically in any circumstance.

    Louise,

    Why on earth does any banking institution want a home to go into arrears before offering help? It makes NO sense whatsoever.

    I think that Christians, and people in general, tend to mistakenly think that they should deal with a business or government entity in roughly the same way they should deal with another person. This is wrong thinking, and always to the disadvantage of the human.

    I don’t think we are forced into behaving as reprehensibly as they do, but I do think we need to handle them differently, e.g. put aside human notions such as honor, shame, loyalty, or compassion. We need to be wise as serpents while remaining innocent as doves, learning why businesses and governments behave as they do and then figuring out how to deal with them without endangering ourselves spiritually.

    Chad,

    I think Martin Luther covered these types of situations by saying (paraphrase) that the lender has a responsibility to forgive the debt, and the borrower has a responsibility to pay it.

    This is true wisdom—but only when both the borrower and the lender are people, the only possibility that Martin Luther knew. I wish a wise man would take up the baton and apply such thinking to the world we live in now, where we grant inhuman entities all the privileges and none of the responsibilities of personhood, and allow them to prowl the landscape devouring the unwary.

    Like most of the rest of us, this man took debt lightly, not as a bondage of last resort. He still speaks in terms of it being something he “could afford”, when the very fact that he had to borrow money to buy the house declares that he could not afford it. (And I speak as someone who has done the same thing).

    Exactly right. But could you imagine receiving such counsel from the elders of any modern-day church, much less teaching aimed at guiding the flock through and beyond their unwisely incurred obligations?

    Cindy,

    Dave Ramsey is the only Christian person I know addressing any of this.

    I’ve looked at Dave Ramsey’s website and haven’t yet found anything distinctively Christian in his advice about defaulting on a debt. Which may be a blessing to his listeners; I recall many years ago hearing Larry Burkett tell someone considering bankruptcy that although it would void their legal obligations, they would still be morally obliged to pay those voided debts. Back then I thought it was advice with some backbone; now I think it is pious foolishness.

    The few times I have ventured out to mention it, it just makes people uncomfortable. Most people would rather not even know about it. Most people don’t want to think that their house might not sell on the market.

    Again, I think the conservative evangelical church has long occupied itself solely with solving other people’s problems—getting them saved and eradicating their ungodly behavior. Comes a middle-class crisis (economic collapse, foreign enemies) and the last place we look for answers is the word of God.

    I can’t help but think that small groups of Christians, equipped with their Bibles and love for one another, could respond to this and other crises much more effectively than the tradtionally structured church.

    Phildirt,

    Thank you for sharing your hard-earned wisdom. I know there are people who would be both edified and heartened by it. I hope you get the opportunity to come alongside others who are just encountering these difficulties and strengthen them.

    Amy,

    I know a Christian investment advisor who was telling people to stop paying if you were underwater back before TARP. Everyone lambasted him. […]

    I advised a few people to do the same, and I was met with moral indignation. I am silent on the issue now, as my spiritual morings seem to be at stake in the opinion of many on this issue.

    What dismays me about this is that the indignant ones almost certainly haven’t spent any time thinking through this matter. It could very well be that their conclusions are right, or partly right, but because they haven’t thought their way to those conclusions anything they say on the matter is worthless and quite possibly dangerous to fellow believers.

  9. I would like to make two additional comments. First of all I filed Chapter 13 which means our debts were restructured and we agreed to a new schedule of repayment. If in 5 years we have made all of our payments then the only debt we will have is our home mortgage. It differs for each case. Chapter 7 is the walk away. They sell most of your assets to satisfy debt and you walk away with no liabilities.
    The second thing is, and I am sure this varies from state to state, be careful about just handing over the keys. In our state if you do that and they sell your house for less than you owe on it you become responsible for the balance. It sounds like a never ending bad dream.

  10. I agree with Amy. I mean, if I walked over to my neighbor and he loaned me money and I said I’d pay it, then it’s different. But with my mortgage we laid out all the options. If I cannot or will not pay, they have remedies. In most cases people don’t exercise the option of not paying because it is more beneficial to try to keep the house. But if it isn’t, what is immoral about not paying? For those that would answer that question with “You gave your word to pay”, I’d answer “No, I gave my word that I would pay, or I’d give back the house. I’m going with the latter.”

    -Mike

  11. I do think we need to handle them differently, e.g. put aside human notions such as honor, shame, loyalty, or compassion. We need to be wise as serpents while remaining innocent as doves, learning why businesses and governments behave as they do and then figuring out how to deal with them without endangering ourselves spiritually.

    Get a copy of Jack the Giant Killer and read it regularly for ideas about handling these non-human persons.

  12. When dealing corporations realize that you are dealing with a person (the corporation) that has only profit motives, no more…no less. Watch movies like IOUSA and especially Maxed Out (Part 1: http://www.youtube.com/watch?v=GsrA6AfS8UE) and anyone’s reservations for taking the highest moral road will be quickly dashed.

    IMO The person in your original post could have only done two things differently based on the limited information:
    1. Only take 7 year notes or 30 years notes and pay them off in 7 per biblical guidelines. Do you think the 7 years is only there for window dressing?
    2. Take any job that came along instead of holding out for something in his industry. If your family was not eating would you wait for a job in your career field or would you be working the dozer at a waste management company?

    I have worked 2+ years with 2 full-time and 2 part-time jobs skipping sleep on Friday -> Saturday to fight back debt which eventually failed but we did not go quietly. My wife and I made it through that time with our marriage intact but many do not. Ultimately which is more important, paying your debt or keeping your family. However when you get out of that situation NEVER do it again. Learn and grow and structure your finances differently and in a way the honors God, not man.

  13. I would never have dreamed of walking away before. (I have no choice) I love this home and had it paid for once but due to extreme medical bill, had to borrow against it.
    When we borrowed ‘both’ of us were working, then my spouse was struck with cancer and a full year of zero income before he died.
    I was going to go back to work and try to keep up the payments, but a car accident disabled me!
    I only have SS and my yearly income is under poverty wages. I tried so hard for 5 years taking from our retirement (now its almost gone) I can’t take any more of it.
    I have explained to the bank that ‘NOW’ the income is less than 1/5th of what we had for income when we took the loan. (A six month extension will not help me) Now just in September I was diagnosed with cancer and treatment will be more than a year. (The bank did not care)
    Nothing has hurt me more than all this.
    The government while trying to help home-owners need to investigate more. Not all hard-ships are the same.
    A mere $70,000.00 is all that is needed but I no longer have it.
    In the five years, only $7000.00 in principle paid and $37000.00 in Interest, plus a $13000.00 to catch up in 06 all on Interest too.
    It breaks my heart. I was/am a loyal and moral as I could be, but being left each month with only around $400.00 to live is impossible.
    To this very time the bank will not take my deceased spouses’ name off the loan?
    They have known all along how hard this has been for me yet don’t care.
    I have to walk away I have no choice. Everyone can’t be judged the same.

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