Morality aside, there are other factors deterring “strategic defaults,” whether in recourse or nonrecourse states. These include the economic and emotional costs of giving up one’s home and moving, the perceived social stigma of defaulting, and a serious hit to a borrower’s credit rating. Still, if they added up these costs, many households might find them to be far less than the cost of paying off an underwater mortgage.
An important implication is that we could be facing another wave of foreclosures, spurred less by spells of unemployment and more by strategic thinking. Research shows that bankruptcies and foreclosures are “contagious.” People are less likely to think it’s immoral to walk away from their home if they know others who have done so. And if enough people do it, the stigma begins to erode.
A spurt of strategic defaults in a neighborhood might also reduce some other psychic costs. For example, defaulting is more attractive if I can rent a nearby house that is much like mine (whose owner has also defaulted) without taking my children away from their friends and their school.
This is certainly an interesting dilemma that hits home for me. I currently own a home that has turned out to be too expensive for me because of maintenance costs. I did look into the new government refinancing program but did not qualify, I guess because I am not behind on my mortgage payments. So I decided to sell as soon as possible and turn back to renting. I was willing to take a loss. I also prayed about allowing the to go into foreclosure in the event that it did not sell. As far as I can tell, that brought from God one big frown of disapproval! Thanks be to Him I did get an offer on the house that I can accept (taking a loss), with the knowledge that the buyers are in a good, solid position to be able to afford both mortgage, utilities and maintenance. I am SO grateful that this has worked out. But I know that it does not for everyone. I really don’t know what choice they have.
Brothers and sisters in Christ, if you have a moment and feel so inclined, please pray that this sale goes through to closing without a hitch! Also join me in praying for those who are losing their homes due to circumstances beyond their control. Thanks.
I read this
and I can’t help thinking about those who would walk away from a house they can afford (leaving their debt to the bank that loaned them the money and that they promised to pay back) – would those same people give part of their equity to the mortgage company? When prices were going up and up and up, did those people call their mortgage company when they sold and offer them some of their profit? Of course not, but now they have no compunction about leaving a loss to their bank – it’s business decision. How morally bankrupt.
#2 in effect a lot of people did reinvest with the mortgage cos. (not directly of course) by buying a new house with yet another mortgage. It’s difficult for me to have much sympathy for them. In 2006 I qualified for a mortgage yet 18 months later (early 2008), with no change in income, I could not refi the mortgage. So I feel like they should have never given me the mortgage in 2006. And the bank will be OK, the house is still worth the mortgage, but all my equity of $250K is gone.
But over the years, Chris, your equity may return. Buying a house is a risk for all involved. If you stay in your house and in ten years you have recouped that equity plus some, will you offer the bank part of your profit? No, you won’t and you shouldn’t. You took a risk buying just as the bank took a risk giving you a mortgage. Legal contracts were signed with obligations on both sides. I guess I don’t see how someone who can pay their obligation decides just to renege on their legal promises.
actually, yes, as I stated earlier, a bank will indeed profit if I sell at a profit – the $$ is rolled over into another mortgage or some other investment. They get their $$ if they foreclose or less directly if I sell at a profit. Just because I don’t give them a cash payout does not mean they can’t profit from doing business with me (again and again again). In the meantime I am paying them monthly interest payments so they are protected.
I don’t see why we need to be crying over the fate of the banks – the employed poor lending practices, everyone knows that.