Homeowners who were underwater on their homes but who took advantage of mortgage relief programs face the prospect of the IRS calculating the amount by which a portion of their loan was forgiven as income. [Read more…]
Lots and lots of homeowners are “underwater.” That is, they owe more on their houses than they are worth. Brett Arends, writing in the Wall Street Journal, says that it’s okay to walk away from loans like that. Here is his argument:
Millions of Americans are now deeply underwater on their mortgage. If you”re among them, you need to stop living in a dream world and give serious thought to walking away from the debt.
No, you shouldn’t feel bad about it, and you shouldn’t feel guilty. The lenders would do the same to you—in a heartbeat. You need to put yourself and your family’s finances first.
How widespread is this? More than 11 million families are in “negative equity”—that is, they owe more on their home than it is worth—according to a report out this week by FirstAmerican Core Logic, a real-estate data firm. That’s a quarter of all families with mortgages. And for more than five million of those borrowers, the crisis is extreme: They are more than 25% underwater—the equivalent of having a $100,000 loan on a property now worth just $75,000 or less. That’s true for a fifth of mortgage holders in California, nearly a third in Florida and an incredible 50% in Nevada.
Are you in this situation? Are you still battling to pay the bills each month, even when it may make little financial sense to do so?
It’s time for some tough talk.
Stop trying to chase your lost equity. That money is gone. Don’t think like the gambler who blows more and more cash trying to win back his losses. That’s how a lot of people turn a small loss into a big one. . . .
If you are reluctant to give up on “your” home, realize that it isn’t “yours.” If you are in negative equity, it’s the bank’s home. You’re just renting it. And right now you may be paying way above market rates. You need to be ruthless about your cash flow.
Are you worried about the legal consequences of walking away? Certainly, you should check with a lawyer before doing anything, but the consequences will probably be more limited than you think. . . .
Sure, a strategic foreclosure may hurt your credit score. But if you’re in financial difficulties, it's probably already suffered. And your credit score is not the only thing in life that matters.
Still, when it comes to the idea of walking away from debts, many people are held back by a sense of morality. They feel it’s wrong to abandon their obligations. They don’t want to be a deadbeat.
Your instincts, while honorable, are leading you astray.
The economy is fundamentally amoral.
Sometimes I think middle-class Americans are the only people who haven’t worked this out yet. They’re operating with a gallant but completely out-of-date plan of attack—like an old-fashioned cavalry with plumed hats and shining swords charging against machine guns.
Do you think your lenders would be shy about squeezing you for an extra nickel if they thought they could get away with it?
They knew what they were doing when they wrote your loan. Many were guilty of malpractice, but they pocketed good money and they’ve gotten away with it. And if they thought your loan was “risk free,” how come they were charging you so much more than the interest on Treasury bonds? . . .
Whether we like it or not, walking away from debts is as American as apple pie. Companies file for bankruptcy all the time, and their lenders eat the losses. Executives and investors pocketed millions from the likes of Washington Mutual, Lehman Brothers and Bear Stearns when the going was good. They didn’t have to give back one cent of that money when the companies went into bankruptcy.
Limited liability, after all, is one of the main reasons every business from your local dry-cleaner to a major multinational gets incorporated in the first place. They’re not shy about protecting themselves if things go wrong. You shouldn’t be either.
So because lenders would squeeze you, it’s all right not to pay them what you owe? That makes no moral sense. What about the contract you signed? Keeping your word is apparently not as morally compelling as it used to be. Also–to get both Kantian and very practical–if everyone who is underwater did as this article suggests, if the dilemma is as widespread as the author says it is, then the whole economy would come crashing down. And who would that help?
I’m not saying that defaulting on a loan may not be a tragic necessity sometimes. Those who can’t pay their mortgages and so lose their homes are not morally to blame. Neither are those who must sell their homes at a loss that they are unable to make up. I’m just saying that there is surely a moral problem when someone who can keep up the payments just walks away from the obligation. After all, he was prepared to make those payments when he signed the mortgage papers. The loss isn’t real unless he has to sell.
Also, if he walks away from his home, where is he going to live now? His credit will be ruined so he can’t just buy another house. He can rent. But how is that an improvement over what he had before?
That we could consider our housing costs to be something we will get all back and then some, to the point of that our house becomes not an expense but our major money-making investment is surely an anomaly in human history. Still, it’s hard to be in this predicament. Any suggestions, wise advice, or consolations?