given today's circumstances id say NO FUCKING WAY.
Here is an article very well written that I will send to all my buddies contemplating walking away from a bad mortgage:
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It’s the bank’s fault, really.
I generally live my life along the lines of “do unto others as you would have them do unto you.” I’m not perfect, but I try to treat people the right way, show respect for others, and build win-win relationships. I usually encourage others to do the same.
When I’m watching a movie and the bad guy / bully meets with an unfortunate demise, I’m ok with that. And when I meet somebody in real life who’s arrogant, cocky, &/or condescending, I don’t wish bad things for him, but I’m not as torn up if luck turns against him as I am when I hear about something bad happening to a really nice guy.
In today’s economy, the banks (along with Wall Street and other big money investors) are playing the part of the bad guy. Their short-sighted actions helped cause a GLOBAL Great Recession, yet they’ve acted arrogant, indignant, uncaring and unhelpful throughout the problem, all while using public money to help them through a tight spot and then posting huge profits once things loosened up for them.
I don’t wish bad things to happen to the banks, but they’ve lost my moral support along the way. They’ve used and abused their customers, and the system in general, for almost a decade now (2004 – 2010). If one of their customers is able to better his/her own personal situation, and the bank takes a relatively small loss in the process – it’s sort of like the bad guy getting his comeuppance, and it doesn’t bother me at all.
On a side note, somewhat related and a good example of “fair practices” in contract negotiation, let’s take a look at the people I hear more about regarding contracts than anyone else – professional athletes.
It’s sometimes hard for me to pick a side in a world where millionaires negotiate with billionaires – after all, is there really a difference between $80 million over 4 years and $90 million over 5 years? Come on! But here’s where I usually end up:
Football – these contracts are NOT guaranteed, meaning the team is allowed to break the contract and cut the player from the team whenever they want. Consequently, a player signing a 5 year deal with the Arizona Cardinals, for example, isn’t guaranteed a nickel after day 1. This creates an attitude of “get what you can when you can” in the players, and I don’t blame them for holding out or asking to renegotiate their contract after a terrific season.
Basketball and Baseball – these contracts are guaranteed, meaning the team will pay the player regardless of the player’s ability or performance in the future. The teams in these sports are far more likely to overpay their players than the players are to have to “play out” an undervalued contract. (and even when the player is “underpaid”, they’re usually still earning millions of dollars per year!) In fact, there are scores of NBA players you’ve probably never heard of who have earned more than $30 million during their career! For this reason, I get very frustrated with players in these leagues who complain about the terms of their contract.
Do Unto Others as they would do unto you, only Do It First! (or put another way, Actions Speak Louder Than Words.)
The banks (and many other people) believe a strategic default is morally and ethically wrong, tantamount to lying. After all, they argue, the borrower/homeowner signed a contract agreeing to pay the bank back. That sounds fair in principal; but how do the banks act in the real world?
1. I spoke with a friend of mine last week who is in the process of moving; selling his current home & buying another one. He had charged a few expenses related to the two transactions (preparing the house for sale and preparing to move into the next one) on various credit cards, and planned to pay them off with the proceeds from the sale. He received an offer from one bank to transfer balances to their card and pay 0% interest rate, so he wrote out the checks included with the offer & mailed them out. In the meantime, the bank had decided to reduce his credit line to his existing balance, causing the checks to bounce, and then trying to charge him for overdrawing his credit line!
2. I spoke with somebody this spring who bought a house a few years ago. He applied for a Home Equity Credit Line as soon as he moved in, thinking he would one day put a pool in the backyard. Last year he finally felt comfortable enough with his employment being stable that he & his family decided to go ahead with the pool. Trouble is, his bank had closed his credit line without warning. No pool for you!
3. Personally, I had an American Express account with a $30,000+ limit that I used extensively in 2006 and 2007. The account had a great rewards program, so we charged everything we could to that account and paid it off each month. One month something came up and I didn’t pay the balance off in full; the next month American Express lowered my limit to my then-current balance. No warnings, no phone calls, no discussions about it – they simply decided to change the terms of our agreement.
Each of these stories shows an example of the bank unilaterally making changes to the bi-lateral agreement they had with their customers, presumably because times had changed and they no longer believed the agreement was in their best interest. I don’t think the banks are in a position to cry foul if/when their customers make the same decision.
It’s just Contract Law
A good contract clearly shows what each party is getting, what each party is responsible for, and what the penalties are should either party fail to perform.
The banks have stacked the deck in their favor in this arena. They’ve had decades to practice trial and error, they’ve hired hundreds (or thousands) of high-priced attorneys, and they’ve made millions of individual loans over which to hone their contracts. And when John Q Public applies for a mortgage to buy a house, he’s going to use a contract written by the bank – whether it’s a Mortgage or a Promissory Note with a Deed of Trust will depend on state law.
Banks, along with other businesses of all sizes, use these same attorneys to help them get out of contracts they’ve previously agreed to whenever it’s in their best interest to do so. In the 3 examples cited above, the banks were applauded by their shareholders for “reducing their exposure to future risk.”
Since the banks wrote the contract, and the contract clearly spells out what will happen if the borrower doesn’t pay (the bank gets the house back), then why should I feel bad if the borrower decides not to pay the loan and let the process defined in the contract play itself out? Whether the buyer lives in a “recourse” or “non-recourse” state may effect the decision-making process, but once the borrower makes the decision, that’s that and contract law takes over.
What if Everyone Did It?
This is a question I ask myself when I’m trying to figure out the long-term, mass-market effects of a potential decision.
For example, one family may decide to host Pampered Chef parties – inviting their friends and neighbors over for an evening of fun, food, and buying kitchen wares. One family is able to earn a little extra money “on the side”. But if everybody did it, there wouldn’t be any friends and neighbors to sell to, and the whole process would fail. The Pampered Chef system isn’t scalable to include the whole community.
So what would happen if every homeowner who owes more than his house is worth decided to strategically default? Let’s take a look at some potential dominos..
First of all, it’s not possible that everyone will choose to default. Some people are ethically/morally opposed to the idea. Others will think about it but decide not to ruin their credit rating (which could impact other parts of their financial life). Still others won’t have a choice; they simply won’t be able to continue making the payments.
But what if everybody in the smaller subset of “those who weigh the pros and cons”, and we’ll talk more about the pros and cons in a little bit, decide to go ahead & strategically default, and they all decide to do it this month?
We’d have a large number of homes going back to the banks.
The banks would either foreclose on them all immediately and flood the market with new homes, or take their time foreclosing which would cause a shadow inventory to develop and the banks would be sellers in the market for years to come.
This could cause prices to fall, causing more homeowners to get upside-down and potentially compounding the problem.
In the meantime, these former homeowners would all need a place to live, so the rental market would expand.
This competition in the rental market would help keep rental rates somewhat firm.
Falling prices and stable rental rates would make home-buying more profitable for investors, who would bid against each other until profit margins got too thin. This would cause prices to stabilize.
Many of the former homeowners believe that owning a home is a smart long-term investment, so they would begin entering the market again as their credit is rebuilt.
As these former homeowners enter the market, the rental market would soften, causing investors to leave, but the demand for housing would be stronger, causing prices not to fall when the investors sell.
In the end, if everyone decided to strategically default, it would have a vast impact on the market over the next decade. But it wouldn’t cause a collapse in society – it would just be different, and we’d get through it. Again, I’m ok with that.
Here is an article very well written that I will send to all my buddies contemplating walking away from a bad mortgage:
----------
It’s the bank’s fault, really.
I generally live my life along the lines of “do unto others as you would have them do unto you.” I’m not perfect, but I try to treat people the right way, show respect for others, and build win-win relationships. I usually encourage others to do the same.
When I’m watching a movie and the bad guy / bully meets with an unfortunate demise, I’m ok with that. And when I meet somebody in real life who’s arrogant, cocky, &/or condescending, I don’t wish bad things for him, but I’m not as torn up if luck turns against him as I am when I hear about something bad happening to a really nice guy.
In today’s economy, the banks (along with Wall Street and other big money investors) are playing the part of the bad guy. Their short-sighted actions helped cause a GLOBAL Great Recession, yet they’ve acted arrogant, indignant, uncaring and unhelpful throughout the problem, all while using public money to help them through a tight spot and then posting huge profits once things loosened up for them.
I don’t wish bad things to happen to the banks, but they’ve lost my moral support along the way. They’ve used and abused their customers, and the system in general, for almost a decade now (2004 – 2010). If one of their customers is able to better his/her own personal situation, and the bank takes a relatively small loss in the process – it’s sort of like the bad guy getting his comeuppance, and it doesn’t bother me at all.
On a side note, somewhat related and a good example of “fair practices” in contract negotiation, let’s take a look at the people I hear more about regarding contracts than anyone else – professional athletes.
It’s sometimes hard for me to pick a side in a world where millionaires negotiate with billionaires – after all, is there really a difference between $80 million over 4 years and $90 million over 5 years? Come on! But here’s where I usually end up:
Football – these contracts are NOT guaranteed, meaning the team is allowed to break the contract and cut the player from the team whenever they want. Consequently, a player signing a 5 year deal with the Arizona Cardinals, for example, isn’t guaranteed a nickel after day 1. This creates an attitude of “get what you can when you can” in the players, and I don’t blame them for holding out or asking to renegotiate their contract after a terrific season.
Basketball and Baseball – these contracts are guaranteed, meaning the team will pay the player regardless of the player’s ability or performance in the future. The teams in these sports are far more likely to overpay their players than the players are to have to “play out” an undervalued contract. (and even when the player is “underpaid”, they’re usually still earning millions of dollars per year!) In fact, there are scores of NBA players you’ve probably never heard of who have earned more than $30 million during their career! For this reason, I get very frustrated with players in these leagues who complain about the terms of their contract.
Do Unto Others as they would do unto you, only Do It First! (or put another way, Actions Speak Louder Than Words.)
The banks (and many other people) believe a strategic default is morally and ethically wrong, tantamount to lying. After all, they argue, the borrower/homeowner signed a contract agreeing to pay the bank back. That sounds fair in principal; but how do the banks act in the real world?
1. I spoke with a friend of mine last week who is in the process of moving; selling his current home & buying another one. He had charged a few expenses related to the two transactions (preparing the house for sale and preparing to move into the next one) on various credit cards, and planned to pay them off with the proceeds from the sale. He received an offer from one bank to transfer balances to their card and pay 0% interest rate, so he wrote out the checks included with the offer & mailed them out. In the meantime, the bank had decided to reduce his credit line to his existing balance, causing the checks to bounce, and then trying to charge him for overdrawing his credit line!
2. I spoke with somebody this spring who bought a house a few years ago. He applied for a Home Equity Credit Line as soon as he moved in, thinking he would one day put a pool in the backyard. Last year he finally felt comfortable enough with his employment being stable that he & his family decided to go ahead with the pool. Trouble is, his bank had closed his credit line without warning. No pool for you!
3. Personally, I had an American Express account with a $30,000+ limit that I used extensively in 2006 and 2007. The account had a great rewards program, so we charged everything we could to that account and paid it off each month. One month something came up and I didn’t pay the balance off in full; the next month American Express lowered my limit to my then-current balance. No warnings, no phone calls, no discussions about it – they simply decided to change the terms of our agreement.
Each of these stories shows an example of the bank unilaterally making changes to the bi-lateral agreement they had with their customers, presumably because times had changed and they no longer believed the agreement was in their best interest. I don’t think the banks are in a position to cry foul if/when their customers make the same decision.
It’s just Contract Law
A good contract clearly shows what each party is getting, what each party is responsible for, and what the penalties are should either party fail to perform.
The banks have stacked the deck in their favor in this arena. They’ve had decades to practice trial and error, they’ve hired hundreds (or thousands) of high-priced attorneys, and they’ve made millions of individual loans over which to hone their contracts. And when John Q Public applies for a mortgage to buy a house, he’s going to use a contract written by the bank – whether it’s a Mortgage or a Promissory Note with a Deed of Trust will depend on state law.
Banks, along with other businesses of all sizes, use these same attorneys to help them get out of contracts they’ve previously agreed to whenever it’s in their best interest to do so. In the 3 examples cited above, the banks were applauded by their shareholders for “reducing their exposure to future risk.”
Since the banks wrote the contract, and the contract clearly spells out what will happen if the borrower doesn’t pay (the bank gets the house back), then why should I feel bad if the borrower decides not to pay the loan and let the process defined in the contract play itself out? Whether the buyer lives in a “recourse” or “non-recourse” state may effect the decision-making process, but once the borrower makes the decision, that’s that and contract law takes over.
What if Everyone Did It?
This is a question I ask myself when I’m trying to figure out the long-term, mass-market effects of a potential decision.
For example, one family may decide to host Pampered Chef parties – inviting their friends and neighbors over for an evening of fun, food, and buying kitchen wares. One family is able to earn a little extra money “on the side”. But if everybody did it, there wouldn’t be any friends and neighbors to sell to, and the whole process would fail. The Pampered Chef system isn’t scalable to include the whole community.
So what would happen if every homeowner who owes more than his house is worth decided to strategically default? Let’s take a look at some potential dominos..
First of all, it’s not possible that everyone will choose to default. Some people are ethically/morally opposed to the idea. Others will think about it but decide not to ruin their credit rating (which could impact other parts of their financial life). Still others won’t have a choice; they simply won’t be able to continue making the payments.
But what if everybody in the smaller subset of “those who weigh the pros and cons”, and we’ll talk more about the pros and cons in a little bit, decide to go ahead & strategically default, and they all decide to do it this month?
We’d have a large number of homes going back to the banks.
The banks would either foreclose on them all immediately and flood the market with new homes, or take their time foreclosing which would cause a shadow inventory to develop and the banks would be sellers in the market for years to come.
This could cause prices to fall, causing more homeowners to get upside-down and potentially compounding the problem.
In the meantime, these former homeowners would all need a place to live, so the rental market would expand.
This competition in the rental market would help keep rental rates somewhat firm.
Falling prices and stable rental rates would make home-buying more profitable for investors, who would bid against each other until profit margins got too thin. This would cause prices to stabilize.
Many of the former homeowners believe that owning a home is a smart long-term investment, so they would begin entering the market again as their credit is rebuilt.
As these former homeowners enter the market, the rental market would soften, causing investors to leave, but the demand for housing would be stronger, causing prices not to fall when the investors sell.
In the end, if everyone decided to strategically default, it would have a vast impact on the market over the next decade. But it wouldn’t cause a collapse in society – it would just be different, and we’d get through it. Again, I’m ok with that.
).
