an argument for mortgage default

8/2/2019 An Argument for Mortgage Default

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An Argument For Mortgage DefaultI walk my dog every morning and I have noticed more and more closed up

houses. I live in a fairly middle-class, single-family house type of neighborhood.

The mix of people living here seem to be a few retired folks and a smattering ofyoung couples with small children. A number of people have moved here within

the last five or six years.

When I speak to friends or family, frequently the conversation goes around as to

whether buying a home is a good investment any more, and if one has a home,

is it holding its value. And for many of my friends, the consensus seems to be

that a home is no longer the good investment that it was, even just a few years

ago. I do know that it certainly has not been a good investment for me.

So here we are - a bunch of folks who own houses that are "Upside-down;" that

is, more money is owed than the house could sell for. It isn't the first time that this

happened in the history of our country, but it is the first time it has happened in

most of our lifetimes. During the worst of the Great Depression, 1000 people a

day were being foreclosed on.

So what are our options? One option is just to keep living there and keep payingthe mortgage, in hopes that the value will increase. And chances are that the

value will increase but it may be many years before this happens. For older folks,

they will probably never get out of this "under water" situation.

So, the second option is to take a walk on the mortgage. Let the bank take it

over.

For many of us, this is nearly blasphemous. Our government has encouraged usand our parents and grandparents to buy homes for generations. "The American

Dream." In the late 1800s, people didn't have mortgages. If one borrowed to buy

property, he usually did it by making a loan from family or friends. Less than 28

percent of families owned homes. Then came Herbert Hoover and FDR who

formed government agencies to encourage and help people buy homes. By


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1950, 55% of families owned a home. By 1970, 63% owned, and by 2004, 69%

of families owned a home. How did we do that? Because Fannie Mae and

Freddy Mack guaranteed roughly 90 percent of home loans, and made it easy for

us to get the loan This, of course, was a major factor regarding the government

bailouts. And there may be more coming, and some have estimated the bailout to

reach $1 Trillion.

So how about you and me? My father taught me that it was not honorable not to

repay a debt. I taught this to my own daughters. But let's look at a precedent.

Morgan Stanley, a large provider of loans, bought four buildings in San Francisco

a few years ago. Last year, the property had declined in value to half its purchase

price so they decided

to default on the loan and give the property back. Of course. Morgan Stanley has

a financial obligation to its share-holders.

You and I, on the other hand, only have an obligation to ourselves and perhaps

our families.

Treasury Secretary Henry Pulson stated that people who could pay their

mortgage but defaulted were only speculators. The Federal Reserve Chairman

was quoted a few years ago that homes would never depreciate their values. The

most that would happen was the home values would not appreciate as quickly as

they had in the past. He sure missed that one. So why should an individual

continue to pay for an item that has lost its value? Especially when a similar

home down the street is selling for half, or less that what you paid for a

comparable house.

A mortgage loan is a contract but it makes some pretty rash assumptions. For

example it assumes that houses will appreciate for the next 20 or 30 years, it

assumes interest rates and it assumes regular income increases. Well, "wrong,

wrong and wrong."


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So if a home is "Under water," why throw good money after bad. You certainly

wouldn't do it with stocks or other investments. And there is no tax penalty for

bailing out.

This is not to say, there are no penalties: one's credit will take a hit, one won't get

another mortgage for seven years, and it may affect getting a job. More than 45%

of employers these days do a credit check for employees they are considering.

Penalties, to be sure.

However, at the end of it all, I think I'd rather have the realization that I didn't

spend years struggling simply to pay for a bad investment.POSTED BY MIKE JORDAN AT 3:50 PM

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an argument for mortgage default

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