In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.
“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”
After three years of plunging real estate values, after the bailouts of the bankers and the revival of their million-dollar bonuses, after the Obama administration’s loan modification plan raised the expectations of many but satisfied only a few, a large group of distressed homeowners is wondering the same thing.
New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.
Let’s not forget that property taxes were assessed at the height of the housing bubble as well. I don’t see any particular concern that folks are paying an inflated tax on an unrealized capital gain.
Besides, weren’t these folks required to pay PMI? Surely that was not some sort of fraudulent scheme to bilk the home owner. Surely the underwriters did due diligence and validated the value of what they insured [b]and kept the legally required reserves to cover payouts[/b]. So the banks have little to fear. PMI should give them what…80 cents on the dollar? The bank pockets the loan initiation fees, document fees, points paid, P & I paid, and the remaining equity. Meanwhile, both bank and insurer write off the loss on their taxes.
Maybe these home owners could borrow a line from the bank’s own credit card division when they raise interest rates without cause…sorry, it “is our policy” to not pay 25% more for a property than what it is worth.
You can get your property taxes lowered by getting it reassessed, so anyone who thinks their house is worth less than before should do that. There have been numerous articles in our paper telling folks how to do that.
And if you put 20% down, you are not required to pay PMI. That’s what we did. I guess the mortgage company figures if you have 20% in the house, you’re much less likely to walk away.
Most of the folks that put 20% down are not walking away from their equity, I think. But, let’s suppose that they did put down 20% equity and the house they walk away from is valued at 25% below what the home owner paid for it. The bank still has 75% of the remaining equity, plus the 20% inflated equity that was put down, plus all the fees, points, and P&I that was paid over the years since purchase. Since these people do not “qualify” for modifications to their mortgages (a decision made by the banks that just sucked up nearly a Trillion Dollars of taxpayer money), why would they feel any remorse for the bank if they walk away from what turned out to be a bad business decision? They can cut their losses and start fresh, and the bank retains the assets mentioned above.
“cut their losses and walk away..” but if you have otherwise good credit, the bank will likely come after you and stay after you for the money it loses after selling the foreclosure property at a loss.
It’s a nasty situation for countless folks.
Prices in California have fallen more than 20%, so if you bought recently and put 20% down, you still won’t have any equity. But to answer your point, no one MADE you buy a house. You signed an agreement to repay. If you didn’t like the deal the bank offered, then don’t sign, don’t buy, or find a deal you do like. You made a pledge, a promise, a contractual commitment. Don’t blame that banks if you took on more than you should have. Real estate goes up and down all the time. If someone can’t pay (job loss, disability, etc.) then the bank should help or maybe it is best if they walk away. If someone can pay and they promised that they would, then they need to honor that commitment, ethically and morally if not legally. They can always sell the house and go rent someplace less expensive.
Yes, and banks should not charge usury rates ethically and morally if not legally…but they do. If they want sympathy on the one hand, they shouldn’t be loan sharking with their other hand.
Is it theft to steal from a thief?
Some of these banks offer teaser credit card rates of 6.99% and then, for NO CAUSE other than greed, they have nearly doubled the interest rate to 11.99% or higher. They also unilaterally changed the repayment schedule. So, pardon me if I don’t cry them a river for their predicament. Let’s talk about interstate lenders conforming with state usury laws and the morality and ethics of these financial institutions if we are going to go that route. Otherwise, no one made the bank lend money on the house. They signed an agreement acknowledging that in the event the owners failed to pay, they would forclose and take possession of the house. The bank took the risk knowing full well that “real estate goes up and down all the time” and that if the appraised value of the house that they accepted was subject to change. As you say, it was a legally binding contract that the bank entered into…with eyes wide open. So don’t appeal to ethics and morality on the part of the buyers until you make the same appeal for the banks to demonstrate ethics and morality too.
I’m talking mortgages, not credit cards. And I do think it’s theft to steal something that doesn’t belong to you, even if it is from a thief.
As for no one making the bank lend money on the house, I beg to differ slightly. Not on all loans, but Congress certainly made it clear to many banks that they were to loan to those with less than adequate credit, so don’t put all the onus on the banks – look at congressional policy for some of the blame. I agree that banks should deal ethically as well, but just because a bank doesn’t behave that way doesn’t mean I shouldn’t. Not to be trite, but two wrongs don’t make a right.
Damn I hate this subject: It’s greed folks, I want it and I want it now. You owe this to me. It sounds too good to be true so I have to sign today.
Does any of this sound familiar to anyone? Hello!!!!!
Ok, what do the Scriptures say about lending money at interest?
Is there anywhere that God says it’s OK?
I mean, that’s the bottom line. What does God say about lending money at interest? Is it allowed? Is it a sin?
If he has exacted usury Or taken increase — Shall he then live? He shall not live! If he has done any of these abominations, He shall surely die; His blood shall be upon him. (Ezekiel 18:13)
We’re in the New Testament now, Sick & Tired of Nuance, with the “old law” passed away 😉
Yes, quite true, yet the morality behind the law remains. Last time I checked my moral compass, murder, adultry, bearing false witness, etc. were all still wrong. Those commandments were issued in the Old Testament, were they not? Jesus did not do away with moral law, he fulfilled the law of sin and death, based on that Old Testament promise found in Jerimiah 31 and repeated in Hebrews twice.
No, the moral law still applies and usury is still immoral.
Even though Wikipedia isn’t an authority, the following from its definition of [i]mortgage[/i] should give some insight:
[blockquote]This [mortgage] comes from the Old French “dead pledge,” apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure.[/blockquote]
As far as I can tell, you aren’t breaking the contract, but merely using one of the less desirable pathways to fulfill the contract. Note also that there is a difference between so-called [i]recourse[/i] and [i]non-recourse[/i] states. In the former, the lender can dun you for the amount of their loss; in the latter, they can’t. This means that in recourse states, anyone giving up the house is probably going to have to declare bankruptcy to escape the debt. [b]That’s[/b] where it makes sense to talk about the morality of fulfilling your promises.
As for the OT quotes, the proper one to consider is not the one on usury, but the one on Jubilee (Leviticus 25:23), which states:
[blockquote]
The land must not be sold permanently,
because the land is mine
and you are but aliens and my tenants.
[/blockquote]
For a NT quote, look ar John 19:30, where Jesus said “τετελεσται”, which is usually translated “It is finished”. The word was also used in relation to the discharge of debts as “Paid in Full”. Not to presume on His mercy, but our failure to honor our financial promises is covered there as well.
In our current economic situation, there is another set of factors to consider. Sometimes the homeowner has to move to follow the jobs. When the house is underwater there is no way to sell without the lender’s cooperation (via a [i]short sale[/i]). Right now, the lenders are very slow to process these sales – either they’re overwhelmed or don’t care (since the mortgages have been bundled, packaged, sliced, diced, and sold off as securities). At what point do you say, “I have to move to take this job so I can support my family – you are either blocking the short sale or no one is buying here.”? Is it immoral to remain in debt peonage or have to go on welfare when you have a chance to earn an honest living?
Doug
P.S.: My wife and I both work, but we chose to buy a house that requires only one of us to support, took a 15 year mortgage, and have been accelerating repayment. I do *not* like debt and am looking forward to discharging it. In March 2015 we’re done with the mortgage!
P.P.S.: In every cloud there’s a silver lining. Folks are going to recognize that the “American Dream” with its debt-fueled lifestyle doesn’t fill the hole in the heart. Expect, pray for, and work to share the Good News. More folks than you expect are ready to hear.
Hmmm…good post #14. For the record (so that my motives will not be misread), We are about 8 years into a 30 year fixed mortgage at 5.75%, we over pay on principle, and we have a plan to pay it off within 6 years. Also, we bought the house below market and it is currently worth $80K more than we owe, so we are quite “right side up” on the loan.
Hi S&TofN;,
Thanks for the encouragement. I never thought you were doing anything than shedding light on the subject – and the “you aren’t breaking the contract…” in my post was really the generic “one isn’t breaking the contract…”. Unfortuately, unlike Greek, English doesn’t have a clean concise way to express the “optative” mood – and comboxes aren’t a good environment for thoughtful editing of one’s writing. If only it were so :-).
Doug
Whatever happened to purchasing a home as a residence, not as a commodity?
Perhaps it was when real estate taxes became so high that we end up renting our homes from the town rather than owning them.
Perhaps it was when mortgages ended up [i]increasing[/i] the cost of housing so much that it takes most folks 30 years to pay for a basic house.
Perhaps it was when people figured out that the interest on the mortgage was going to nearly triple the cost of their modest home.
Perhaps it was when the working man was betrayed by his alleged representatives in Washington and the NAFTA and GATT treaties made their jobs go away.
Perhaps it was when white collar workers started losing their jobs to “right sizing” and overseas tele-labor.
It’s hard to pinpoint the exact moment when people finally realized that the power elites consider them cattle that live in the fly-over country mockingly named Jesus Land. Maybe it was a month or two after the first [i]Matrix[/i] movie. Yes, I think it’s hard to pinpoint the exact moment, but no doubt the moment has come.