Is it unethical walk away from a home you are underwater on?

[Chavez]

Come to North Carolina. Paid 200, owe 150, worth 250. Whats the problem

The problem? You have to live in the South.

 

A timeline would be nice as well - I could say "paid 103, owe 100 (with a new bathroom), worth 150" but that doesn't say anything, really. Especially that the "worth" is a worthless number unless you just sold. By various sources, my house is "worth" anywhere from 130-165k, but as long as I'm not upside down at sale, I'm fine.

[whoopazz]

The problem? You have to live in the South.

 

A timeline would be nice as well - I could say "paid 103, owe 100 (with a new bathroom), worth 150" but that doesn't say anything, really. Especially that the "worth" is a worthless number unless you just sold. By various sources, my house is "worth" anywhere from 130-165k, but as long as I'm not upside down at sale, I'm fine.

 

Oh, the South is nice. After living in Syracuse for 20 years I can understand why prices are somewhat (but not greatly) steady here. Jobs and I don't need to brush the frickin snow off my car 3 times a day. 9 years on the house, no major improvements, and "worth" based on recent sales in the area (very conservative I might add). By the way, the house I sold in Syracuse was worth 100, and I paid 3600 in property taxes on that bad boy. My house here is assessed at over 250, and I pay 1300. You do the math.

[alexgaddis]

I don't understand this. It's not a pact of honor, it's a contract:

I'll pay you this amount every month... and if I don't, you will take my house.

 

People are opting for the "you take my house" end of the deal, and that's not a breach of contract or unethical in any way. This is the risk the bank assumes as a lender.

very well said...

[wiegie]

By the way, the house I sold in Syracuse was worth 100, and I paid 3600 in property taxes on that bad boy. My house here is assessed at over 250, and I pay 1300. You do the math.

Is the correct answer to the math question?: You've got sh|tty services and bad schools in the south.

[whoopazz]

Is the correct answer to the math question?: You've got sh|tty services and bad schools in the south.

poopyty services yes. The public schools are OK, but its really a function of parent involvement. Lots of folks complain but my kids kick ass and have their choice of colleges. But to answer your question, yes the municipal services are kind of Andy and Opie. Lack of snow removal and winter degradation to infrastructure also makes a big difference. Finally, I was about six beers deep when I posted...ya'll .

[Azazello1313]

I don't understand this. It's not a pact of honor, it's a contract:

I'll pay you this amount every month... and if I don't, you will take my house.

 

People are opting for the "you take my house" end of the deal, and that's not a breach of contract or unethical in any way. This is the risk the bank assumes as a lender.

 

the house is collateral for a debt. it's not some sort of alternative contract where the borrower has the right of choice between paying the debt and walking away. if he walks away from the house and the bank takes it, they can (hopefully) sell it and recoup some of the loss, but you still owe them any difference. walking away doesn't somehow absolve you of your obligation (legal or ethical) to pay back money you borrowed.

Edited November 17, 2008 by Azazello1313

[wiegie]

From today's WSJ:

 

More than 12 million homeowners now have mortgage debt that exceeds the value of their homes. These negative-equity homeowners have an incentive to default because mortgages are generally "no recourse" loans. That means creditors can take the property if the individual defaults, but cannot take other assets or income to make up the difference between the unpaid loan balance and the lower value of the house. As a result, mortgage default rates are now rising rapidly and are expected to go much higher.

 

The no-recourse mortgage is virtually unique to the United States. That's why falling house prices in Europe do not trigger defaults. The creditors' ability to go beyond the house to other assets or even future salary is a deterrent.

This seems to go against what many people have been arguing here. Who is right?

 

It's sort of interesting that some people are starting to view having a mortgage on their home as being equivalent to having a put option on their home.

[Azazello1313]

From today's WSJ:

More than 12 million homeowners now have mortgage debt that exceeds the value of their homes. These negative-equity homeowners have an incentive to default because mortgages are generally "no recourse" loans. That means creditors can take the property if the individual defaults, but cannot take other assets or income to make up the difference between the unpaid loan balance and the lower value of the house.

 

This seems to go against what many people have been arguing here. Who is right?

 

It's sort of interesting that some people are starting to view having a mortgage on their home as being equivalent to having a put option on their home.

 

 

some quick research says there are different rules on that in different states. I would assume there is also some significant difference here between "first" mortgages (which are limited to 80% of appraised value) and "second" mortgages.

 

pretty good read I found on this here:

 

the naive view is simple: the bank pays for your house, which means that the bank owns your house, unless or until you pay it off. Legally, however, that's not the case at all. The owner of the home is the homeowner, and the bank is just a (secured) lender to the homeowner.

 

That's why I've been so concerned with the whole issue of recourse vs non-recourse mortgages. People seem to think that they can just walk away from their house - and their mortgage - if they find themselves stuck in a negative-equity situation. In theory, that's not true: the bank gets back whatever it can from the sale of the house, and then the borrower still owes the bank the balance.

 

In practice, however, as my commenters have pointed out - thanks especially to James Moore, P Jackson, and Uncle Festus - things can be very different, and it turns out that most mortgages are de facto non-recourse no matter what the letter of the contract says, even if the borrower does not declare bankruptcy. In order to chase its borrower for the remainder of what is owed, a lender has to go to court and get something known as a deficiency judgment. And it turns out that lenders, for many reasons*, are decidedly loathe to do that.

 

How this will affect the ongoing housing slump no one knows. It's possible that it could exacerbate things quite nastily. Many borrowers can go from insolvency to solvency by simply mailing in their house keys to their bank: their assets would decrease by the value of their house, but their liabilities would decrease by the value of their mortgage, which could be substantially greater. People who bought speculatively, hoping to flip at a profit, might find such a course of action especially attractive: they not only have negative financial equity in their house, but they also have very little emotional equity in it. They were playing a game of "heads I win, tails the bank loses", and now Plan B is coming to pass.

 

The downside to such an action - bad credit - is relatively low, especially if the borrower lines up a nice rental before defaulting on his mortgage. After all, we live in a country where even bankrupts are bombarded with offers of secured and unsecured credit.

 

The other big downside to "jingle mail" is the tax bill which arrives when a lender forgives a large chunk of your loan. But guess what - the government has now decided to waive those taxes, at least for 2008. So if you think you might find yourself losing your negative-equity home at some point, it really makes quite a bit of sense to walk away from it this year, just as soon as you've found somewhere else to live.

 

in any case, I stand by the statement that a mortgage is a debt you are both legally and ethically obliged to pay back when possible. the non-recourse thing just limits what the lender can do to recover.

[yo mama]

I am pretty sure you are wrong here Yo. Recourse refers to personal liability. Secured and non-secured refers to whether property is pledged as collateral.

 

A nonrecourse debt or non-recourse debt or nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. With a mortgage (as opposed to some Home Equity Loans) you are pretty much always personally liable (at least to what I have seen). Home Equity Loans in Texas are non-recourse, in that only the property and not the individual stand behind the loan IIRC.

 

Therefore, I miss how one can walk away from their mortgage (at least without realizing they will be subject to a big ole deficiency judgment).

I stand corrected.

[AtomicCEO]

the non-recourse thing just limits what the lender can do to recover.

 

So... it's almost as if they are in a "contract" to take your "house" if you don't "pay" them.

 

Huh.

[muck]

Relevant info here

[Azazello1313]

So... it's almost as if they are in a "contract" to take your "house" if you don't "pay" them the money you "borrowed" and "promised" to "pay back".

 

Huh.

 

more or less.