There is a huge difference between walking away because you can’t afford the payments and walking away because you find a better deal.

Perhaps in the foreclosure section of the mortgage, banks should put a clause that stipulates a large penalty if the borrower walks away when there is an ability to pay.

YBIC,
Phil Snyder

Phil, if you can’t afford the payments, you will look for a cheaper (and better) deal.  The main reason this is such a problem is that the banks can’t unload the homes for what they loaned on them.  And who is responsible for that?  The bank who granted the loan (using an inflated appraisal) in the first place, not the homeowner.

The bank did not force the person to take the loan.  In the majority of cases, the borrower asked for the loan and was not solicited to get the loan.  I’ve never had a bank come up to me and say:  “Hey!  you need a loan” and then require me to take one.

I was not speaking about those who could not pay.  I was speaking about those, like the person in the video, who had the means to pay (even if it made things a little tight around the home), but decided to walk away from his pledge because there was cheaper alternative.  That is the attitude that should be penalized.

YBIC,
Phil Snyder

NONE of this happens unless the bank authorizes the loan, which they did, for an inflated value.  No one makes the bank do this, it’s their (poor) decision.  If you are spending $3K on a mortgage but renting would be $1500, is it prudent to keep paying the $3K (which may be 100% interest)?  The bank assumed the risk of the borrower defaulting when they issued the loan, plus they can mitigate their losses or even get everything back in foreclosure, while the borrower on the hand loses tens or hundreds of thousands in payments and also has their credit destroyed.  So the banks make out much better.  MUCH.

When the loan was made, the house was “worth” what was borrowed.  Yes, the value was inflated, but the borrower also should face a risk that his home will decrease in value.  Such is the risk of housing bubbles.  The borrower’s credit doesn’t have to be destroyed; he can choose to repay what he borrowed.

The biggest risk a bank should take is the risk that the borrower will be unable to repay a loan - not unwilling.  If the borrower is able, but unwilling, then he should face greater sanctions than someone who is unable.  There a section of the tax code that moneys credited to you are counted as imputed income.  For example, a bank ‘forgives’ you for $100,000.  The IRS would assume that youreceived income of $100,000.  This does not count in personal bankruptcy - to the extent that you are still negative in your net worth.  So, for example if you get a $200,000 debt discharged in bankruptcy and you still have negative net worth, you do not get imputed that income.  However, here it seems that the man is just walking away from a loan.  He is not declaring bankruptcy.  He is not saying that he can’t afford to repay what was borrowed.  The difference between what he borrowed and what the bank recoups on the sale of the house (minus expenses to sell, etc.) should be accounted to the man has imputed income.

There is a system for dealing with people who cannot afford their debts.  What we are seeing here is people making decisions to just walk away from them.  That is just as morally wrong as inducing people to take on more debt than they can afford.

YBIC,
Phil Snyder

Watching this report, I’m confused. My understanding is that if you take out a mortgage - you sign a note which says you owe the money. If the bank can’t sell the house for the amount of the note, you STILL owe the difference. If this guy has bank accounts or other assets, those can be attached unless he declares bankruptcy. Is that what he’s doing?

The solution is simple. In Australia you can walk away if you want but you will still owe all the money you borrowed until the day you die or until the bank recoups their money.  This certainly sobers up the buyer to the obligation he has signed off on.  Americans get a big break on home loans, but the result is the taxpayors get stuck. Not good.

These comments reflect some serious misunderstandings about how our mortgage system actually worked.

Millions of borrowers were solicited to take out loans which judges have found to be inherently fraudulent. Those interested in details may want to visit the CA Atty Gen’l website to read the complaint and settlement in the ten-state suit against Countrywide. In many of the cases the borrowers were given loans with documents that never disclosed actual interest rates.

Borrowers can “walk away” in states that have anti-deficiency laws. But, as a practical matter, so many borrowers are insolvent that even in other states they can walk away.

Today, banks flush with TARP funds or zero interest Fed loans are running roughshod over state foreclosure laws, knowing few borrowers have the will or means to resist. But borrowers who fight back are starting to win, as judges increasingly refuse to tolerate bank abuses, such as the phony modifications designed to lure borrowers into complacency while continuing with the foreclosure. In some cases loan ownership has become so confused that borrowers have subject to multiple foreclosure actions from different parties claiming ownership.

Of course there were plenty of irresponsible borrowers, too. But the root of the problem was that lenders discovered that they could sell unlimited amounts of garbage to Wall Street without recourse. That caused loan quality standards to go out the window, as lenders reaped huge profits with no (apparent) risk.

I very seldom comment on this blog, but cannot resist here.  So, it was “evil banks” that caused all this to happen?  Not by a long shot.
1. How about Federal policy (Janet Reno, et al) that basically proclaimed “housing as a right”?
2. How about banks bullied by ACORN to make loans to people who had no hope of buying them back (visit Cleveland, Detroit)?
3. How about Fannie and Freddie buying every piece of paper shoved under their noses so top F&F execs could claim multi-million dollar bonuses?
4.  How about CDO’s that everyone knew were garbage, but went along wth the game?
5. And finally, how about basic human greed?
We were told we could have it all and have it now.  And we believed it.  Everytime we go down this path believing that, there is a day of reckoning.  Some will learn and turn to a new path.  Others will continue to point the finger of blame everywhere else.
http://neverkeepquiet.blogspot.com/

CDW,
If you re-read my post, you will see that we agree on key points. You have just added in some other factors:
1. Policy was a factor. All politicians were quite happy to encourage and take credit for rising homeownership rates.
2. ACORN is a corrupt organization, agreed. But its influence was limited, although it played more of a role in the expansion of usb-prime.
3. This is mostly false. FNMA/FHLMC had the most conservative loan standards. Loans that could not go F/F would try Alt-A, portfolio, or subprime. F/F did not do subprime, although it did an intermediate category called “Expanded Criteria”. This is confirmed by the F/F loans being the last category to get into trouble and having the lowest default rates. Basically, F/F was just swept in in the tsunami that engulfed the entire mortgage sector. There were indeed management/accounting problems, and reform was needed. But to state that F/F was “buying every piece of paper” is simply false.
4. We agree, mostly. The ultimate buyers, including many public pensions, did not know and were lulled in by the AAA ratings. Also, the borrowers knew little or nothing of how the loans would be collateralized post-closing.
5. Of course, as i stated greed was the huge factor. But the banks/Wall Street greed dwarfs that of the borrowers.

The critical element was lender ability to bundle mortgages and sell them without recourse. Once the incentive for responsible underwriting was removed, lenders went on a binge of misrepresentation and lowered standards in order to drag in loans of any quality as fast as possible. (Competent underwriters tell horror stories of being reversed or even fired for responsibly declining some loans.) So while there were many players in the mortgage crisis, clearly the critical link was the lender-Wall Street connection.

re: # 5. Philip Snyder wrote: “When the loan was made, the house was “worth” what was borrowed.”

I’ve had an argument with more people than I can count over many years about “just price” and speculation. Nobody I’ve discussed this with has ever been convinced unfortunately. I will not be hurt if nobody here is convinced either.

I think there is a just price for almost anything, and this price can be located within some reasonable range. Buying or selling outside of this range is wrong. So I don’t think a house is necessarily worth what is borrowed. Now, what to do about two people who both knowingly enter into a contract way over the just price? (as happens so often in speculative real-estate deals). Well, both parties have already been so ethically compromised that they should start over.  But that’s only my opinion and I know the world doesn’t operate by these rules.

If one buys or sells something above or below the just price,
1. The amount below the just price properly belongs to the seller and not to the buyer, and should be returned,
2. and the amount above the just price belongs to neither the buyer or the seller.

Accepting that the concept of the just price in modernity needs to allow for the value of money over time (something not considered in the 13th century), I still think a mortgage can be structured within the range of a just price.

If someone would be greatly helped by something belonging to someone else, and the seller not similarly harmed by losing it, the seller must not sell for a higher price: because the usefulness that goes to the buyer comes not from the seller, but from the buyer’s needy condition: no one ought to sell something that doesn’t belong to him.
TAquinas in Summa Theologiae, 2-2, q. 77
 
On the contrary, It is written (Exodus 22:25): “If thou lend money to any of thy people that is poor, that dwelleth with thee, thou shalt not be hard upon them as an extortioner, nor oppress them with usuries.”

I don’t know if people have seen this article or not:

http://www.fool.com/investing/general/2010/01/26/why-are-homeowners-idiots.aspx

I ran across it today working on something else, but it has direct relevance to this thread.