Housing Market: Foreclosures and Defaults

We have a long way to go folks.

If you need further proof, just check out this story:

Strategic default — opting to walk away from a mortgage you can afford — isn’t a new phenomenon in the housing crisis. But with home values continuing to decline, more owners are finding themselves in a position where they may see it as a savvy business decision to destroy their credit rather than wait years for prices to recover.

Likier put almost 20 percent down to purchase a $312,000 townhouse in Westmont in 2006 and lived there until two years ago, when he remarried and bought a home in Chicago Ridge.

He listed the townhouse for $249,000, figuring he would bring $20,000 to the closing table to facilitate a deal. The listing has since dropped to $179,000, which is lower than the unit sold for when it was built in 1999. He stopped paying the mortgage in January and recently was served with foreclosure papers.

And the real killer?

Despite the fact that he and his wife are employed and have an annual household income near $150,000, he’s comfortable with his decision.

Yowza.  A tough decision.  And one I agree with.

See, when working with contracts and finances, the deal is what the deal is.  The bank is no more willing to do the right thing” than you should be.

So this makes sense:

“I did a lot of soul-searching about whether it was morally the right thing to do,” he said. “I felt there was no moral obligation to make a payment. The contract says it’s a financial obligation, not a moral obligation.

“I was in a boat with a slow leak. It was manageable, but I know I was slowly sinking.”

Until we stop that sinking, we’re going to see more and more of this.

8 responses to “Housing Market: Foreclosures and Defaults

  1. I agree that the economically sound decision for this individual is to walk.

    That said, there are negative externalities to every decision. From my point of view this guy is a dirtbag. When he forecloses on his house, he drives down the property values of everyone’s home around him. If everyone took the same action, the system would literally collapse.

    A contract is a contract is a contract.

    • Well, you can view the contract as saying “I will pay you $X back until the loan is repayed, and if I don’t you get my house.” In that view, the guy is just choosing one of his contract options. I mean, when the bank forecloses they don’t sue you for breach, they just act on the lien they already have in place, so I don’t see it as breaking a contract.

      I get the emotional reaction to it, but the prices were all inflated anyway. Should we require the one home-owner to give a bank far more than his home is actually worth in order to prop up his neighbor’s property values? That seems very pseudo-socialist of you 🙂 It is unfortunate that the neighbors take a hit, and I have plenty of rage against the stupid homeowner just as much as the manipulative banks, but there’s no good, easy answers.

      • Nick,

        Your point about the contract is fair and correct.

        You are right in that there are no easy answers on this problem. I think the only fix would be to make penalties for defaulting on a mortgage much stiffer. That said, others were just plain stupid and bought houses they could never reasonably afford. So defaulting is their only option.

        Maybe a fair solution is affixing some sort of identifier to your credit rating that indicates you could have afforded your mortgage, but you decided to walk away anyway. Obviously, declaring bankruptcy will hurt this guy’s credit rating, but I don’t think it’s enough.

        You are right though in the sense that folks like this chump really drive me crazy. 😉

    • Hi Sean,

      I think he did what everyone else did. Took advantage of an opportunity that was created by the greed of Wall Street. So they are all playing in the same mess that was created. It will sort it self out. The true victims are the Tax payers that never did a refinance or traded up. These are the true hard working, moral individuals who will suffer from the Fall Out or should I say Bail out. History repeats it self Read: Creature from Jekyll Island. This is the platform for everything that is happening.


  2. Your point about the contract is fair and correct.

    More important, if we let corrections like this take place, banks will react by preventing such nonsense in the future. Or at least try to prevent this nonsense. I don’t like it that he walked away knowing he could afford the payments, but then again, business is business.

  3. Hi All,
    It’s crazy how the Banking Industry has diverted the obvious attention as it not being their fault to begin with. Deregulation came in. It played itself out and now the Banks are crying “foul”? The Banks don’t like what is happening and the investors are taking a hit on the chin……But wait, there’s more…..more on The Obama Money Bag…..which a lot of the big banks took….and have and continue to make themselves out to be a victim by making it almost impossible to get a home loan…..I read that they would consider a 30% down payment! Wow…. Who has 30% now that the middle class economy has been stripped. Oh, and let us not forget who will be footing the bill for the large bail outs…..US!
    People are walking away because they can. And with a 30% down payment needed to purchase a home, if you have 30% you can most certainly buy another home. So if you are under-water with your property why not seek relief.. I would sleep a lot better knowing I am not paying on a losing proposition.

  4. Sometimes I can be very high minded. I know people that have turned and walked away from their house and mortgage. I also know people that have turned and walked away from a spouse by getting a divorce. BOTH are wrong; both show lack of character. I would hate to do either.

    I have a hypothetical question.
    Imagine Mr. and Mrs. Jones are a couple about 70 years old. Their house is valued at $450,000. The mortgage has been paid off. The couple decide to get a reverse mortgage on the house. This will allow them to continue to live in the house, but they will get a monthly payment from the bank. After 2 years the bottom falls out of the housing market and their house in only worth $210,000. The bank still “owes” $310,000. What does the bank do? The bank clearly has the funds to continue to pay Mr. and Mrs. Jones, but they may see it as a poor “investment”. Is it okay for the bank to turn and walk away from a reverse mortgage?

  5. Great scenario.

    Contractually, I think the answer is yes. However, my view of that bank would be just as low as that of someone who walked away from their home.

    That said, were I a shareholder, I would want the bank to take whatever value maximized its NPV.

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