To Pay off the Mortgage or Not

[nmap]

When it comes to walking away from a mortgage, we might consider the environment in which it occurs.

Over the years, large corporations, wealthy individuals, and even governments have defaulted on obligations. The business news is full of corporate bankruptcies, "workouts", and other behavior that boils down to a simple reality - the leadership of an organization promised to do something, and then didn't do it.

More recently, we see that GM, AIG, CountryWide Mortgage, and a host of other companies have defaulted. In some cases - CountryWide comes to mind - there appears to be an element of calculated, planned, intentional fraud. I note that there is a dearth of prosecution for actions that have cost uncounted billions.

Together, these actions have been called "Moral Hazard". When the economic elites demonstrate that one's word doesn't mean anything, then its only a matter of time until the rest of the society follows the same model. And now, its starting to.

TR points out that this may break the system with severe consequences - and I agree. My only small quibble regards timing - I think we crossed the event horizon years ago. Believing that, I suspect that ZD's scenario is a certainty, with the timing of the event remaining an open question.

I can respect, and even admire, those who say that their word is their bond and mean it. Its one of the values (and behaviors) that made America great. With regret, I question whether that value - and many others - still predominate. I fear they do not.

The business decisions made by the CEOs and other policy makers cast a shadow. If one can do a corporate raid, loot the pension fund, cheat the creditors and the shareholders - and get lionized as a sharp businessperson - I find it impossible to criticize the individual who believed that houses would always go up and that refinancing would always be available. If a "quant" can design notional securities according to complex, proprietary statistical models, then sell those securities with a prospectus that runs to 100,000 pages (yes, one hundred thousand pages) to unsophisticated pension fund managers around the world, all under a AAA rating assigned by a rating agency without any independent oversight - then I cannot see how it is so wrong for a couple to avoid some of the negative consequences of a wrong move. That couple lacks the information, the training, and the resources available to the folks who have created the present crisis - yet we are supposed to hold them to a higher standard?

No offense meant, but this path was chosen decades ago. Take a look at Chainsaw Al - LINK

And we can look higher still. For decade after decade, we have been told that Social Security was safe - even though the numbers showed it was not.

Consequences? Yes, indeed. There will be nasty consequences. But the fight to prevent those was lost long ago.

[akv]

I have a great deal of respect for the members of this board, particularly those who by their oath and blood defend the Constitution, which is the basis for our freedoms. I also agree adversity reveals character, the AIG's of the world are crooks, and there are tough economic times ahead.

The question I have, and which the politicians of both parties dodge constantly is when did the American Dream become the American Entitlement? Money is simply a tool and not the measure of a man. What is the shame in owning a home within your means or just renting? However, specifically when has a bank ever held a gun to someone's head to buy a house they couldn't afford? If someone makes $50k a year, they know they can't afford a $600k house, they are equally culpable as the unscrupulous lender for their greed. Central California is a ghost town of houses from this scenario.

I understand only a fool plays straight when everyone else at the poker table is cheating, but we are not at that point, it might get rough, economies expand and contract, we had a credit bubble where money was too cheap, it will likely be too rich for a while which slows growth. Take US GDP as the scale, in the Great Depression it was down 50%, through the recent crisis it was net down 5-6%, still a tough period , it might still get worse, but lets keep things in perspective. If the S&P needs to go back to test the March 2009 lows to reflect correct valuations, it will be painful, but we survived, and thats just part of an efficient market.

It's like a county lowering the highway speed limit from 55 to 35 after a big accident, an overreaction but will correct in time.

If it gets to the point as a nation beyond Depression levels (which America survived) where it's every man for himself, whether or not you paid your mortgage will be moot, (though enough folks shirking doesn't help) what will matter is luck and preparation in terms of exfil/survival threads folks here have been kind enough to share.

[nmap]

Originally Posted by akv

If someone makes $50k a year, they know they can't afford a $600k house

Do they? Seriously, do they?

Let's suppose...just for discussion...that we believe that houses will appreciate at around 8% per year. We see that it has happened for years, and the real estate agent tells us it will continue. The loan officer nods and agrees. Our neighbors do, too.

The loan? We get a NINJA loan (No Income, No Job, No Assets) - they don't even ask for such things. We get a negative amortization loan - so we pay a mere 1% interest, and add the difference (4% or so) to the mortgage balance. Of course we put nothing down!

The payments? At 1%, it's only about $500 per month. Our $50K buyer can make those payments easily enough. Better still, we're assured by the real estate agent and the loan broker (who got paid nice commissions on the transaction) that we can always refinance later.

Now if - a very big if - our underlying assumption is valid, then the house will increase by 8% per year, but our mortgage balance will increase by 4%. We have a net gain of 4% per year - we make $24,000 per year, all on borrowed money. What could possibly go wrong?

Now we're smart. We understand that exponential growth is inherently unsustainable, and that distortions of prices - even in housing - must revert to the mean. But - half the population is, by definition, below average intelligence. Will they understand? I doubt it.

So long as we're speaking of responsibility, what of the various professionals - often very well paid - who facilitated all this? Who profited from it?

[akv]

Originally Posted by NMAP

Do they? Seriously, do they?

Let's suppose...just for discussion...that we believe that houses will appreciate at around 8% per year. We see that it has happened for years, and the real estate agent tells us it will continue. The loan officer nods and agrees. Our neighbors do, too

.

NMAP,

As you know belief in guaranteed profits is a ticket to the big house, ( unless you are the Chinese government.) Your point reminds me of a crude joke I think most average Americans would get.

" A handsome but poor young man comes across a gnarled old lady who informs him she is a witch, and will grant him a wish if he takes her to bed. Afterwords when he wishes for fortune, she replies, young fellow aren't you a bit too old to still believe in witches?"

Respectfully, we all know ignorance is not a defense.

[Richard]

If I chose to do what some in this forum have suggested, my father would come back from the grave to kick my a** and disinherit me. I would do the same if any of my 3 sons told me they were considering such a course of action.

Call me old fashioned but "I yam whut I yam and thas all that I yam"...however, YMMV...and so it goes...

Richard's $.02

[dac]

Integrity issues aside, there is one other consequence of walking away from debt that I haven't seen mentioned.

Not every debt holder is just going to shrug their shoulders and let you off, "reduce your principal", or scar your credit. Many will take you through the proper court channels and get a judgment against you. How would you like explaining to your employer why your wages are being garnished? How would you like it when a LEO shows up at your moms house to server her papers and all the neighbors see?

afchic, according to the Fair Debt Collection Practices Act, if you tell a collector not to call and they continue then you can report them.

http://www.privacyrights.org/fs/fs27-debtcoll.htm