Underwater mortgage : stay or go?

[LCHIEN]

morals and ethics are the fabric of civilization.
We do what is good for society as a whole in the belief that doing so will benefit us more. Doing what's totally selfishly best and violating the rules for you will result in your improvement relative to the people playing by the rules, but if everyone did that the overall society would be worse off.

There's a hypothetical social game called prisoner's dilemma.
http://en.wikipedia.org/wiki/Prisoner's_dilemma
in it prisoners can coperate or defect.
If they all cooperate then they can dig a tunnel and some will escape.
But there's payoff for defecting and becoming a snitch - improved favors from the warden but your fellow prisoners will suffer. If everyone defects everyone will suffer.

[Gator95]

I think the tactic of buying another home, then allowing the first to go into foreclosure is extremely risky and likely to have a significant chance of not working. It is HIGHLY dependent on specific real estate law in his state, and the conditions of the investment loan for the 2nd home. It also is likely to draw legal action from the bank, and his final fate might depend on a likely cranky judge, and be somewhat random.

On the ethics of this... well I know a number of folks in California who are in this situation and are contemplating walking away from their loans. With respect to some of the posters here, they're not all greedy crybabies who got in over their heads trying to get rich. The banks hunger for debt instruments to sell led to an availability of credit that drove the market in the bay area to ridiculous height. Regular, normal, people bought regular modest homes in areas they could afford in order to put a roof over the heads of their family and are now over 200K underwater, and in 'affordable' neighborhoods that were questionable to begin with. Given the choice between walking away and handing the keys back to the bank, or liquidating the kids college education fund to pay off the loan and move... well I can't fault them for at least considering the walkaway.

While comparing the ethics of individual behavior and those of corporate america is not really a valid comparison since individuals have no legal or moral obligation to maximize shareholder equity, I'd say that the action of defaulting on a mortgage and walking away is no worse than some of the standard tax-reduction tactics that are done regularly in M&A activity and incorporation. (ever wonder why so many corporations are incorporated in Delaware?)

[radhak]

Sounds like you'd rather have a irresponsible jerk for a friend then to hang with people that say what you need to hear instead of what you want to hear

wayne

No, I just don't judge others. Not my place to do so. Hence it surprises me when others judge me.

[master53yoda]

you asked about the concept of backing out on a loan. Everyone that has bought a home in the last 5 years is in upside-down, the economy would totally self destruct if everyone did what your friend is suggesting.

No one has mentioned the tax consequences of foreclosure without out a reason.

One of the modes that the government is using to slow down the abuse of the default market is to treat the portion of the loan that is forgiven.( the difference between the mortgage and the sale value of the home as a capital gain and taxable income unless it can be PROVEN that the short sale or foreclosure was due to inability to pay. Your friend if he did this would loss all around in tax deductions that would exceed what he can save. the house payment is reduced by tax deduction by about 20%. so if he rented he would pay 500 per month more taxes then he is now if his house payment is 2000.00. If he reduced is debt load by the $160,000 that he says his property went down by foreclosure or a short sale he would owe the IRS $32000.00 in taxes on the reduced debt. it could also raise his tax bracket and he would pay about another 5% across the board. Add it up, when the gov. put in place a way to help those that really needed it, they also put in place a method to nail those who abused the system.

Ethics is all any of us have. If a person will abuse a contract then they will pay for it in the end. I don't judge people it isn't my place , but what goes around comes around in the end.

[paintandbodtman]

No, I just don't judge others. Not my place to do so. Hence it surprises me when others judge me.

I guess I have lost my ability to comprehend what I read in my old age.
I along with everyone else read your OP asking for our opinion and based on what you presented as the facts in the matter and gave an opinion that you must not like since you think there're judgemental of you friend.You asked a very pointed question and got many very pointed opinions.
I will add however that it makes me fill good knowing that so many of such a diverse group feel that he is so wrong in his thinking maybe we have a chance at turning this country around.

Wayne

[jackellis]

I'd say that the action of defaulting on a mortgage and walking away is no worse than some of the standard tax-reduction tactics that are done regularly in M&A activity and incorporation. (ever wonder why so many corporations are incorporated in Delaware?)

I think the line may be a little finer than your example implies. Tax avoidance is legal. Tax evasion is not. The congressional "earmarks" we're hearing so much about are legal, but their ethical basis is questionable. Appropriations for a museum with a sitting congressman's name on it are legal, ethical and a poor use of taxpayer money.

We typically start out with simple rules. People start looking for loopholes or they attempt to exploit situations that were not considered when the rules were first written. New rules attempt to plug the loopholes and typically create new ones.

The states' rights that form part of the basis for our system of government do not help matters. 50 different sets of rules for corporations invites venue shopping. A coherent set of national rules would be better for consumers and for business, but it's not going to happen.

[radhak]

I guess I have lost my ability to comprehend what I read in my old age.
I along with everyone else read your OP asking for our opinion and based on what you presented as the facts in the matter and gave an opinion that you must not like since you think there're judgemental of you friend.You asked a very pointed question and got many very pointed opinions.
I will add however that it makes me fill good knowing that so many of such a diverse group feel that he is so wrong in his thinking maybe we have a chance at turning this country around.

Wayne

If you go back and read my posts, I tried my best to steer the discussion towards the facts of the issue, whether the laws of the land allow for it, or if there are deeper issues that are not apparent at first look. Whether I drop him as a friend or not was not a discussion that I set out to stir; not that I am saying that was verboten, just that the legalities of the thing interest me more.

[radhak]

...

No one has mentioned the tax consequences of foreclosure without out a reason.

One of the modes that the government is using to slow down the abuse of the default market is to treat the portion of the loan that is forgiven.( the difference between the mortgage and the sale value of the home as a capital gain and taxable income unless it can be PROVEN that the short sale or foreclosure was due to inability to pay. Your friend if he did this would loss all around in tax deductions that would exceed what he can save. the house payment is reduced by tax deduction by about 20%. so if he rented he would pay 500 per month more taxes then he is now if his house payment is 2000.00. If he reduced is debt load by the $160,000 that he says his property went down by foreclosure or a short sale he would owe the IRS $32000.00 in taxes on the reduced debt. it could also raise his tax bracket and he would pay about another 5% across the board. Add it up, when the gov. put in place a way to help those that really needed it, they also put in place a method to nail those who abused the system.
...

Beautiful... a hidden gotcha that I am sure he might not have factored in ...!

[Ed62]

I just came in on this thread. Is he legally allowed to get out of what he owes? I don't have the answer to that. But I know if I could legally do what he is proposing (and I did), I'd have a hard time looking at myself in the mirror.
Sure, there are all kinds of people who wouldn't care what their actions meant to others. I just wouldn't want to be one of them.

Ed

[paintandbodtman]

If you go back and read my posts, I tried my best to steer the discussion towards the facts of the issue, whether the laws of the land allow for it, or if there are deeper issues that are not apparent at first look. Whether I drop him as a friend or not was not a discussion that I set out to stir; not that I am saying that was verboten, just that the legalities of the thing interest me more.

And the deeper issue that is not apparent at first once you get past whether it's legal of or not is it's "WRONG" thats the issue everyone is alluding to.Personally I could care less who you or anyone else chooses to call a friend.I however taught my daughters to be careful who they chose as friends because if they blatently treated someone else wrong then eventually they would treat them the same way.I realize there are a lot of people today that have trouble dealing with that simple of a concept but sooner or later they will suffer the consequences of that bad judgement.

wayne

[Kristofor]

morals and ethics are the fabric of civilization.
We do what is good for society as a whole in the belief that doing so will benefit us more. Doing what's totally selfishly best and violating the rules for you will result in your improvement relative to the people playing by the rules, but if everyone did that the overall society would be worse off.

You mean like a bijillion companies outside of the housing industry laying people off because they see a downturn in demand, thus helping their bottom line in the short term while hurting the economy, workers, other companies, and themselves in the long run?

That sounds a lot like the banks, and most other corporations in the last year... and it's exactly my point.

Those are the rules in play today. The drive for quarterly results, perpetually rising productivity, and maximized utilization of capital requires the system to be gamed in such a fashion. You, me, and the guy down the street are equally likely to take those lumps whether or not we play by the same rules (companies have been behaving like this since well before the housing crisis). Like it or not, that's the world we're in.

Staying in a mortgage that's $100K's underwater is no more rational than buying said house when it was $100K's overpriced, and arguably less so. More ethical sure (and I wholeheartedly approve), but if you apply the same financial logic business/banks would you would have to walk away.

[jackellis]

The drive for quarterly results, perpetually rising productivity, and maximized utilization of capital requires the system to be gamed in such a fashion.

A couple of points in rebuttal.

First, some firms are not being quite so short-sighted when it comes to layoffs. They understand that the bad times will pass and laying off people now hurts their ability to capitalize on the inevitable business rebound. The only rub is that these firms are typically knowledge-based and cannot quickly or easily replace talented people. Folks who take jobs that don't require a lot of education or that can be filled by just about anyone won't be so lucky.

Second, attempts to separate the health and profitability of publicly owned corporations from our individual financial well-being are equally short-sighted. If you have a retirement plan, whether its a defined contribution plan like a 401-k or a defined benefit plan like a pension, your retirement income is wedded to the health of the firms that the plan administrator invests money in, all of which are public. If you don't have a retirement plan, you may not care, and then again you'll be depending on taxes paid by individuals and corporations to support you in your old age.

I'd have to say that the developed world is still trying to figure out how to structure business and social systems so they provide the proper mix of incentives and a safety net. So far, the results are imperfect, especially, it seems, for countries that have vast quantities of in-demand natural resources like oil.

[Gator95]

morals and ethics are the fabric of civilization.
We do what is good for society as a whole in the belief that doing so will benefit us more. Doing what's totally selfishly best and violating the rules for you will result in your improvement relative to the people playing by the rules, but if everyone did that the overall society would be worse off.

Yes, I agree. Pure cutthroat capitalism where everyone is out for themselves is no way to run a society.
We need to have rules and regulations to prevent perverse outcomes.

[Gator95]

I'd have to say that the developed world is still trying to figure out how to structure business and social systems so they provide the proper mix of incentives and a safety net.

Well put. There is a conversation that we all need to have about how to structure this system so we avoid perverse outcomes... like what we had over the last two years in the banking system.

[woodturner]

that's a good one !



I was reading up a bit - seems mortgage in the US are "a non-recourse debt", which means the lender may not go after any of the borrower's other assets to recoup his losses.

Not sure what you have been reading, but that is NOT correct. Lenders can and will go after other assets to satisfy unpaid mortgages.