Real Estate
Should We Walk Out on Our Mortgage?
Surrendering a home in foreclosure should be the last resort for truly desperate homeowners. Plus, how should you handle politics in the workplace?
By Knight Kiplinger, Editor in Chief
From Kiplinger's Personal Finance magazine, August 2008
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The value of our family's home, bought at the peak of housing prices two years ago, has declined so much that we've lost all our equity, and it's now worth less than the mortgage. But the fixed-rate monthly payment hasn't changed, and we can comfortably afford it.
My husband says it would be smart to default on the loan, give the lender our house and buy a similar house for much less. "Everyone's doing it," he says. I think this is unethical. What do you think?
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I agree with you. Your mortgage agreement is a binding contract that you and your husband should honor, especially because you were not tricked by an unscrupulous mortgage broker (as many subprime borrowers were) and you can still afford your monthly payments. Surrendering a home in foreclosure should be the last resort for truly desperate homeowners.
Consider two other things: First, you won't easily get another mortgage if you walk out on this one. Second, the value of your home will eventually resume its ascent.
Politics in the workplace
Our industry has a political action committee that supports candidates who are hospitable to its interests. But I disagree with these politicians on many other issues. My boss is leaning on me and other executives to donate the maximum amount and I'm afraid to turn her down. What do you suggest?
It is unethical for your boss to pressure anyone to contribute to a PAC (or any other of her pet causes, for that matter). Try to put her off with a noncommittal response, such as "I'll give it close consideration," and if she persists, courteously explain your reservations. Or, you might consider making a token contribution to keep the peace.
In any event, tell your company's human-resources staff about the pressure, and they should make it clear to all that PAC donations are totally voluntary.
Reader Comments (23)
Posted by: Las Vegas Homeowner at 07/07/2008 09:54:39 AM
Unethical to walk away from being upside down in a mortgage? It was unethical for the banks to have short saled 60% of the homes in my neighborhood driving the price down almost in half. The result is that even those who bought for the long term now must consider following the banks' lead and do a short sale too. The owners in your article should walk away before the banks further destroy the price of their home.
Posted by: TD at 07/07/2008 12:39:55 PM
Not only is walking away unethical, it should be criminal. Look at it this way ... you didn't buy the house from the bank and they didn't force you to buy it at the height of the market. If the buying decision turned out to be a bad one, it's you the buyer who made it and you need to take responsibility for your decisions. You buy the money from the bank, again, not at the point of a gun. The bank will honor the contract even if the value of the dollar gets eaten up by inflation and devaluation. You need to honor it, too. Failure to do so when you have the means is nothing short of immoral.
Posted by: Arkansas Homeowner at 07/07/2008 12:46:53 PM
If we pay an insurance premium every month, included in monthly payment, approx. $120.00 monthly, in order to qualify for our loan, to guarantee the lender, why should we not take advantage of the insurance that we have been paying for? Late payments already are hurting our credit score & we cannot afford the monthly mortgage. We need a less expensive house & cannot sell our existing house due to the market.
Posted by: Miforeclosure at 07/07/2008 01:02:48 PM
If they Bought the home for $300,000, with $60,000 down, and it's now worth $225,000, the foreclosure price would be at a 25 to 30% discount. The mortgage holding company would come after them for the $60,000 to $70,000 difference, plus legal fees. Walking away from the home would be a bad mistake.
Posted by: Ken Naugle at 07/07/2008 01:05:09 PM
Consider the arguments in favor of walking away. 1. In the article it was "everybody else is doing it!" 2. A recent post suggested that banks are messing things up and deserve what they get. I might point out that in a question of ethical behavior, the actions of others have no bearing on the question. Unethical behavior is wrong no matter how many people engage in it. Another point I might make, which echos the article, is that the price of a home is important in only two circumstances, buying it and selling it. If you are in between these events and comfortably making the payments then the "price" is just a number.
Posted by: s2kreno at 07/07/2008 02:52:52 PM
Neither lenders nor buyers predicted the real estate turndown. And the lenders can't control prices now; they have to sell for what the market will bear (even if it means short sales. When housing prices increased your lender didn't ask for a piece of your profits. Why should they then take on your losses? It's a disgrace that prople want to blame others to make it more comfortable for them to shed their own honor. I wish lawmakers would hurry up and make this illegal so that we don't have to rely on the good intentions or honor of our neighbors -- they don't have it anymore.
Posted by: Gwen at 07/07/2008 03:08:49 PM
I wonder what has happened to people being accountable and honoring their commitments. Everyone seems to be out for a buck and greed is the name of the game. Whereas there are some people who were scammed and truly cannot afford their mortgage payments, I have absolutely no sympathy for people who thought they were going to buy a house and flip and make a fortune on it, or walk away from their mortagage just because everyone else is....Prices will eventually come back, perhaps not to the over-inflated 2007 levels but to at least fair values, and they will have a foreclosure in their credit file and find it very hard to get financing for a long time.
Posted by: Find your morals at 07/07/2008 04:00:26 PM
Las Vegas Homeowner...You don't default on a contract you voluntarily agreed to, simply because its not turning out to be the ATM machine you'd thought it'd be. I cannot believe that morals and ethics are now dependent upon how much money is involved. Incredible! ...
Posted by: LHYAAM at 07/07/2008 04:47:41 PM
Excuss me, LV Homeowner, but do you think the banks enjoy short sales? Are you aware of the fact that the banks lose money in a short sale? The homeowners who unload their houses in short sales actually benefit from the fact that they aren't held liable for the loss of equity in their homes, and pending legislation would forgive the income tax burden that comes with this debt forgiveness. If you want to blame someone for the drop in prices in LV, blame the real estate speculators who bid up the prices of homes, and blame the mortgage loan officers who convinced subprime borrowers to take out risky loans.
Posted by: tjintol at 07/07/2008 05:09:37 PM
The bank will sell the house for whatever it can and come after you for the difference. Once you turn the keys over to the bank, you lose control of the sale...
Posted by: gryemann at 07/07/2008 06:35:09 PM
I believe your lender will sue you for the full balance owing...You will be paying it off over time and have a black mark on your credit record.
Posted by: Las Vegas Homeowner at 07/07/2008 10:01:52 PM
Obviously a lot of bankers posting. Kiplinger says that the price of the home will soon resume its ascent. If this were true, the bank who makes 2-3% annually on its money would keep a house at 1/2 price for the long haul. The banks are instead dumping the homes at the lowest prices just to get it off their books and meanwhile damaging every other homeowner in the affected neighborhoods... Where is the legal protections for everyone else who stays with the contract?...
Posted by: Rob at 07/08/2008 11:39:05 AM
My dad tells me there was a time in America, when a person's word was his bond, and a handshake was as good as a written contract. Now we've got people like Las Vegas HomeOwner who figure even a written contract is meaningless...You're supposed to be a mature adult, able to make risky decisions and abide by how they play out - instead of signing yourself into a commitment and then howling...when life deals you a blow. No, LV HO, I'm not a banker.
Posted by: TS at 07/08/2008 03:14:45 PM
Isn't it also true that these people who walk away from mortgages are also going to get hit with a massive unexpected tax hit from the IRS from the ghost income hole? or has that been fixed yet? For the people doing this in the 2007 tax year, if they got a loan for $300,000 and it forclosed at $225,000 using Miforclosuer's numbers it works out like the bank gave them the difference and they owe taxes on that $75,000 of extra income. (from walking away and getting nothing for it) This was in quite a few articles near the end of last year, on the unexpected consequences of doing this.
Posted by: BS at 07/12/2008 08:55:50 PM
Hey, I owe $20,000 on a car loan and am also thinking of walking of away from that too.....I can't believe hardworking Americans who pay their bills on time, save diligently, budget wisely and don't buy things they can't afford aren't more upset about the current housing market. I worked very hard for years to save for a downpayment on my home which I bought in 2003. I would obviously would have loved to purchase the "home of my dreams" but at the time I was a first-time home buyer. I've never been late on any mortgage payments, budget wisely and now the value of my home has depreciated because other greedy Americans bought homes they couldn't afford and are now walking away ?!? What's wrong with this picture and country ? I think people who purchased homes with very little or 0% down, adjustable rate mortgages and are now walking away from mortgages should be criminally charged !!!
Posted by: Carl at 07/30/2008 03:44:50 PM
Well I guess I don't know all the details about walking away from a home, but I can tell you there appears to be almost no ramifications. I live in Michigan. My neighbors walked away from their house and bought a brand new house down south. Now they are in the process of putting in a new inground swimming pool. Yeah their house in Michigan evenutally sold in foreclosure for $97,000 less than originally paid for. Again, I don't know the legal system, but if having this black mark on your credit report allows you to buy a new home, put in a swimming pool, and all the while not having to pay the mortgage company the difference of the original loan and the foreclosed sale price, I think I'd consider going for the bad credit.
Posted by: HI at 07/31/2008 05:14:52 AM
Yes, like BS, I'm mad as hell about the whole sub-prime loan mess. It's a national crime and like sex offenders, they should publicize the names of all those borrowers, loan officers and mortgage brokers for everyone to see. I mention both parties because it take two to enter into any kind of contract agreement. Shame on the borrower who over extended themselves and for that, they should never live on credit again. They can live paycheck to paycheck. If they don't have the cash they can't buy it. Since we all know, they're not going to make payments. The loan offier / mortgage company who approved the loan just to make a commission should be banned or have their license permanatly revoked from doing any kind of financial business. They obviously lack ethical business practices which proved costly not just here in the U.S. but world wide. Both parties are not responsible and we cannot and should not bank on them in the future. I think it's a fair way for them to repay the rest of us hard working and responsible Americans for bailing them out.
Posted by: ethics please at 08/17/2008 09:47:37 PM
The sub-prime evil lenders and people like these are the reason for the whole mess (in) the real estate market is a mess. I decided about 4 years i decided i wanted (kind of needed) a bigger house to start a family. I made a plan...I worked hard and was promoted twice at my job..I cut spending and havent taken a vaction anywhere in 5 years. I use my vactions to spend that week to work at the small home i am in. and now that i am able to move i can't, my whole neighborhood is for sale. 75% of the house on the list are foreclosures and the other % are people wanting to leave the hood before it gets worse... i am a man of pride (and) somewhat good ethics, i realize i made a choice and it didnt work out. now i live in a bad neighborhood that is getting worse and home price keeps falling...and i have to pay for it? my 4 year plan is now a 10 year plan. my dream of a bigger home is gone for now...yes i can walk away like these people, buy bigger home and install a pool, but i have pride and cant live with the feeling that some hardworking person living within his means, like me, will have to pay for my greed and ignorance.
Posted by: Kerry at 01/25/2009 03:14:29 PM
Shame on you HI! Do you own your house out right?? Hmmm I think history shows that most people carry a 30 year mortgage. Did I know that my house three years later would be 50% less than I paid for it? No I had hoped that I was buying a investment for myself and my children. Now i am stuck in a house that I owe a 100,000 more than its worth. The economy has slowed that it affects my sales job and having issues making ends meat. But I am not giving up just trying to stay above water. WE are all not the bad guys here. WE all wanted to live the dream of home ownership and well its not that simple is it. The bank owns the home we just rent from them and pay them interest to do it. LOL WOW sometimes it amazes me that some people think its that easy. Or maybe it is for them if they have so much money they forget those of us that work our butts off every day to make ends meet.
Posted by: W. Turnbull at 05/01/2009 06:57:10 AM
Let's dig a little deeper. Many of the people having thier homes foreclosed bought a few years back with 0% down or 5% down. As the property appreciated they either refinanced or took 2nd loans, as though the house were a piggy bank. Where did that money go? If not into the house in improvements then they profited and either pocketed that money or in some way spent it. So, zero down and an equity loan. What did these people lose? Sounds like a net gain to me.
Posted by: rusunk at 06/08/2009 03:36:58 AM
I think the heart of matter is more psychological than economical or ethical. There was a research study done on people's happiness vs income. The conclusion was that people's happiness wasn't necessarily tied to how much they made, but rather how much MORE they made compared to others. Isn't that the issue here? Yes I acknowledge there are many people who are caught in tough times and really struggle to make payments on their homes. But there is also a group of people who CAN still afford to pay, but just doesn't make sense to keep on doing that with their house underwater. When somebody purchased at the peak of the housing bubble, even with a fixed rate 30yr loan, probably is paying twice as much on monthly mortgage as someone who just recently purchased via a shortsale next door. Why not walk away, and save up to buy a bigger home in 3-5 years for same or less money, and result in less monthly payments? The real-estate value will not reach what it was 2-3 years ago by then....It has never been that high in 100yrs, and probably won't be in the next 10 yrs at the least. It would be foolish to think otherwise. You might ask if it's ethical to do so. I would ask is it ethical not to do so, to provide the best for your family moving forward? Think about it -- 30yrs of making high over-inflated monthly payments.
Posted by: Gijsihzk at 06/27/2009 11:36:25 AM
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Posted by: Wolf Consultants Inc at 07/29/2009 12:44:06 AM
One point that seems left out of the discussion is the community. When homes are abandoned - whether a walk away or other cause for foreclosure - they become a hazard. People we've seen in foreclosure want to maintain their property when they live in it. But once the bank gets it they "secure" it by boarding up and leaving it to rot. In many cases we see banks not securing it, and sometimes not even transferring title. Walk-away or otherwise foreclosed, homeowners need to be sure a dangerous property is not left in their names for future liability.