Dallas foreclosures are up 30% from a year ago, breaking the record for the region. Homeowners trying to renegotiate their mortgages to get a lower monthly payment will likely encounter a puzzle: the mortgage company has no interest in making a deal. Why? Because the company that services the mortgage doesn’t own it and actually makes more money if the homeowner is delinquent. The system is rigged, says one law professor, and that leaves the homeowner with only one option: walk away.
6 comments
Nobody Walks in L.A.
I’ve heard that a large number of high end ($1Million+) homeowners have/are walking away for financially strategic reasons. I’m an idiot when it comes to fancy financing but it generally makes sense to me. If you have little cash flow and you own 2 or more homes then why not cut one of them loose and free up that monthly cash?
Do it. When I get married in March I want to be able to buy a sweet McMansion for 30 bucks and a six pack.
Dearest Jeff:
What Brent White only obliquely addresses in his article is that a home mortgage is a personal obligation — and the bank has every right to pursue you for any deficiency after it sells the foreclosed house for a loss. Whereas it has the right, in the case of a small-potatoes mortgagee, it might not have the incentive.
However, in the case of a $1+ million homeowner, you can bet the current price of gold that the bank won’t just look the other way if the homeowner walks out on the debt. Also, if hordes of small potato homeowners start welshing on their debts, banks will have to take action just to avoid the perception that mortgages are voluntary.
Morality and one’s own personal ethics aside (which, regrettably, seem in short supply these days), it makes financial sense to walk out on your mortgage only if you have no non-exempt assets in an eventual bankruptcy (i.e., your only assets consist of an IRA/401(k) and less than $60,000 in personal property).
In Dallas, there’s absolutely no reason to walk away from your mortgage unless you signed up for a ridiculous mortgage that you couldn’t have afforded in the first place. Unlike other markets where people are in homes now valued 50% less then when they bought them, Dallas did not have a housing bubble. So only if you took an incredibly stupid risk should you be in a house with a mortgage you can never get out of.
I’m sick and tired of people who took a risk (with ARM, no money down/cash back, liar’s note, and other fancy mortgages) instead of buying a house they could afford at an interest rate they could afford for a fixed term, whining on and on about how they are losing their house. They shouldn’t have bought it in the first place!
For every person with a legitimate (health, death, job) reason, there’s 50 who are just pissed that their house hasn’t gained any value and they can’t sell for a profit.
Marty,
First, it is an honor and a privilege to be addressed by you.
Second, you certainly know way more about finances than I do and you make a great point. However, are you assuming that a bank has sufficient incentive to go after a $1M loan only if that home sells at a significant loss? If the loan amount is $1M and the home sells for $800K is that significant enough for a bank to chase after a “runaway homeowner”?
Also, if a person has been financially savvy enough in their life in order to buy a $1M+ home, is it safe for one to assume a walkway homeowner would most likely be aware of the strategic caveats of which you point out?
Finally, I think it is quite ironic that in Mr. Harney’s article Lewis Ranieri, CEO of several major mortgage-related companies blah-blah-blah, called White’s entire argument ‘incredibly irresponsible and misinformed.’
So let me get this straight, lenders are now calling homeowners irresponsible when a large portion of the real estate mess was caused by irresponsible lending practices?
White’s arguments may be irresponsible. But I don’t think he is misinformed in the slightest. The bank’s egos are just bruised.