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Homeowners Weigh Morality of Walking-Out on Mortgages

posted by mconsoli

ORLANDO, Fla. (RNS) Lynn Thompson quit paying the mortgage on her investment property — not because she couldn’t afford the payments, but because she thinks walking away is better for her long-term financial health.
Thompson bought the property here for $175,000 in January 2007, just as the housing market began its slow downward slide. At the time, she planned to rent the house and eventually sell it for a profit.
Today, she estimates the house is worth $85,000, maybe less.
Unable to find renters to help cover the mortgage, she tried to convince her lender to allow a “short sale” — selling below the loan amount, with the lender forgiving the balance. When the lender declined, Thompson decided to walk away.
“I would have basically no money left every month if I made the payments,” said Thompson, a single 39-year-old pharmacist. “If I tried to sell the house in, say, 10 years from now, I still would have to come up probably with, say, $75,000.”
Desperate homeowners like Thompson have raised an ethical debate: Is it ever OK to walk away?
Nationwide, up to 25 million homeowners — about one in four — are
“underwater”: like Thompson, their mortgages are worth more than their homes. Those who do walk away face an array of financial consequences, from damaged credit to the prospect of a lender suing to recover the balance. Yet for many, the question fundamentally is a moral one. Is it the right thing to do?
It’s unclear how many homeowners, like Thompson, are opting for strategic defaults — allowing their homes to go into foreclosure even when they can make the payments. Many feel their homes are decades away from regaining value and they see no other options.
But especially in hard-hit places such as greater Orlando, where 55 percent of homeowners are underwater, the question is nagging at more homeowners, and the number of strategic defaults appears to be rising.
Strategic defaults accounted for 31 percent of all defaults in March, up from 22 percent the year before, according to an April report by Paola Sapienza of Northwestern University and Luigi Zingales of the University of Chicago.
That doesn’t mean, however, that homeowners are walking away without feeling like they violated some ethical or moral code about not buying something they can’t afford. Some are left with a deep sense of debtor’s shame.
Brent White, a law professor at the University of Arizona whose writings include “The Morality of Strategic Default,” said more than 80 percent of homeowners still think defaulting on a mortgage is immoral, and those who do it usually make the decision not for financial reasons but emotional ones, he said.
In other words, it takes more than a dismal financial reality to push homeowners to default. Often underwater homeowners feel angry, depressed or hopeless, he said.
“People walk away because they’re angry at their lenders,” he said.
“They have been unable to work with them, and the government hasn’t done anything to help underwater homeowners who are trying to make their mortgage payments. If people were acting purely on a rational basis, they would walk away much sooner than they do.”
At the heart of the question are biblical concepts of promise-keeping and neighborliness, said James Childs, theologian and ethicist at Trinity Lutheran Seminary in Columbus, Ohio, who noted that one neighbor’s default can sink another neighbor’s property values.
“The simple answer is we make certain promises when we move into a neighborhood that we’re going to be good neighbors,” said Childs, author of “Greed: Economics and Ethics in Conflict.”
“If my greed … is realized at the expense of my neighbors and I say I’m free to do that, then I’ve missed an ethical point entirely.”
Yet in an economy that rose and fell on the backs of unaffordable mortgages, homeowners aren’t the only ones to blame, ethicists say.
White, from the University of Arizona, believes the housing market and economy could recover more quickly if homeowners could rid themselves of negative equity, allowing housing prices to hit bottom faster. The longer homeowners remain underwater, the longer they feel poor and spend less money. What’s more, a job loss or medical illness could be even more devastating.
For now, Mike Booth will remain in his home. He and his wife bought their first home in 2008, two years after they married, for $205,000 — a bargain since the house was appraised at $240,000.
Today, he estimates the house would sell for $165,000, but the 30-year-old engineer is taking the long view on what he and his wife call “our little castle.”
“We’ve entered into a binding moral contract,” said Booth, who lives in suburban Orlando. “… Really we don’t think about it being underwater. It’s kind of like being in a long-term investment, and tracking it daily doesn’t make sense.”
By AMY GREEN
Copyright 2010 Religion News Service. All rights reserved. No part of
this transmission may be distributed or reproduced without written
permission.



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Comments read comments(9)
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nnmns

posted June 22, 2010 at 7:29 pm


It seems to me the lenders failed the mortgage holders by letting them take on debts they were unlikely to be able to afford and then, of course, cutting their exposure by bundling these loans and selling them off to third parties.
And of course there are the appraisers who overvalued the houses so much while the professionals involved in all those sales surely knew that and said nothing while the money rolled in.
And some time back congress failed us by allowing rules that let those things happen.
So if the homeowner acts “honorably” he or she may be just about the only person in the transaction doing so.



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Glenn

posted June 22, 2010 at 11:21 pm


No problem,honey! Obama will make sure that you and others like you will be just fine. Don’t fret even for a minute!Us responsible tax payers will make sure that it ALL gets funded and paid for. Barry will just use the treasury as his personal bank acct to fund All of his pet liberal projects. Hey, it’s only money,right?? ha ha suckers!



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nnmns

posted June 22, 2010 at 11:52 pm


I have no idea what you’re talking about Glenn. Do you?



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california

posted June 23, 2010 at 12:02 am


Glenn, Know your facts. Since Lynn is walking away from an investment property, there is no bailout for her. Obama’s programs are only for homeowners.



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danieljeff

posted June 23, 2010 at 7:03 am


Mortgage Loan Modification is the only solution to save your home and stop foreclosure. Some 650,000 troubled borrowers have been put into trial loan modifications under the president’s foreclosure rescue plan, the Treasury Department said Tuesday. That number represents only 20% of eligible homeowners. Mortgage Home Modification Program is the solution to save your house and stop foreclosure process Use this free tool to see if you qualify for loan modification http://bit.ly/b8C0iS



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pagansister

posted June 23, 2010 at 10:05 pm


Interesting, Thompson is a single pharmacist….39, so she probably has been one for awhile. Pharmcists make very good salaries. My nephew graduated 5 years ago as a pharmacist, and was offered several jobs, before he graduated, all with 6 figure salaries. He accepted one and is doing very well. I wonder if perhaps Thompson owns another house she is paying for and just goofed trying to make money with this investment. If not, I can’t figure out why she can’t pay the mortgage, and/or live in the place. Also, I think the company that denied the short sale deal may wish they had taken it. That would have given them some money…now? nothing. Florida has no personal income tax…one reason so many folks move there. More take home pay under those circumstances. I used to live in Orlando…24 years ago. It has changed a lot. Wonder what neighborhood the property is in.
Many folks were sold homes who had no business buying, because there was no way they could pay the mortgage. I blame some of this on the greedy mortgage companies, and banks. They should have screened much better, and not given those people the mortgages. However there were some like the one case I read about, with 2 doctors, (husband and wife) who “upgraded” to a much larger, more expensive house, counting on the sale of the one they were living in. OOPS! Couldn’t sell the first house, and were stuck with 2 very high mortgages. Don’t feel sorry for those folks.
Morality of backing out on a deal? Depends. More a legal problem than a moral one, IMO.



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pagansister

posted June 24, 2010 at 12:33 pm


Having reread the above, a day late, it says that Thompson CAN afford the payments, she just isn’t going to do them. I would think the bank could go after her for the payments, as she has the money. The above post proves I didn’t read very well. This is not a situation involving a person who hasn’t got the money!



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HomeOwner Loans

posted July 1, 2010 at 2:17 am


Just read the article and the meaning is cleared for me:)



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Mortgage-Mod-Monster.com

posted July 29, 2010 at 1:45 pm


The practice now has a title. “Strategic default” and if it fits, do it without guilt.
However, there is one other option worth considering: “Principal Reduction.” Basically, short sell the house back to yourself.
Refinance at lower monthly payments for a couple of years, rebuild your credit, give this stoopid economy a chance to catch up, and refinance again in a couple of years at a lower interest rate.
Call me



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