The New Mortgage Revolution: Walk Away
Underwater on your McMansion? Dump the Mortgage!
Big real estate developers do it all the time – like yesterday, when the owner of New York City’s Stuyvesant Town complex decided to stop paying its $3 billion mortgage. So why are you still writing a check every month on that mortgage that’s much bigger than your home is actually worth?
Good question, University of Chicago economist Richard Thaler says. Thaler tells New York Times readers that it’s not just alright to walk away from one’s over-sized mortgage — it may actually be a moral imperative. (An earlier Times article, by Roger Lowenstein, said much the same thing.) After all, lenders had no second thoughts about lending more than many borrowers could afford or than the homes might actually be worth. It’s just not fair to expect borrowers to follow rules that the lenders don’t.
But why stop there? Some commentators are now calling on borrowers to start a mass mortgage strike.
“Remember burning draft cards? Burn your mortgage,” the blog DailyKos told readers recently:“The real risk to the banks and investors is that the people in those homes might just decide to walk away. And that’s what we must do. Doesn’t have to be everybody, of course; but anyone who finds themselves seriously underwater with no hope of ever recouping their investment….just walk away Renee. Morality has nothing to do with it. You are a cog in the wheel of a machine that is killing this country and if you remain a cog you enable it. Remove your cog and the machine will not keep running. Remove millions of cogs and the machine gets replaced.”Now the call for a borrowers’ revolt is being joined by folks who know an opportunity when they see it: real estate agents. Over the past month, agents have been rushing to declare 2010 “the year of the strategic default.” Here’s Connecticut Realtor Minna Reid
Loan modifications do not address the real problem of heavy negative equity and are sure to fail most of the time. Even if the homeowner lowers their current payment they are left more trapped than ever. There will be no quick recovery this time. Years later when there is a need to HAVE TO move, the original problem of being upside down remains and the modified homeowner is left to short sell or foreclose once again.Isn’t it better to just cut the losses upfront ?
I know many will consider strategic default wrong or immoral, but as for me, I stopped passing judgment long ago.
Reid is far from the only real estate agent using mass revolt against the banks as a sales strategy. San Diego broker Bob Schwartz asks, “How many homeowners will suddenly wake up to the fact that their home is now worth tens of thousands of dollars less than their mortgage balance? Only the naive will believe that their San Diego home’s value will bounce back anytime soon…. Defaulting “strategically” can entice more walk-aways by buying all the major items they may need in the near future, such as a car or even a house, right before they take a hike. As long as you stay current with other mortgage lenders, one could potentially have a good credit standing in 2 years after the walk-away.”
Ouch for the banks! But strategically not a bad move.
Btx3's Blog 
t-shirts101
January 26, 2010 at 10:38 PM
Between strategic defaulting and the Daily Kos’s Move Your Money campaign, the big banks may be feeling some pain in the not to distant future. I may be incorrect, but I think B of A posted a loss recently.
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btx3
January 27, 2010 at 9:16 AM
But they are still paying the $10 million bonuses.
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brotherbrown
January 27, 2010 at 1:13 AM
That’s a dangerous game to play, though. You need someplace to “walk to” as you walk away from the old place.
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btx3
January 27, 2010 at 9:14 AM
Apparently, one of my neighbors just did that, moving his family to a rental from a McMansion. The trick to this is to keep all other bills current for 2 years – which most people can’t in situations where one or both of the wage earners loses their job. The other key is to be able to raise enough money for a down payment – since in a short sale, you are going to get zilch.
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brotherbrown
January 28, 2010 at 12:49 AM
This is the mentality that sunk america. The thought of a home as a way to wealth has trumped the thought of a home as shelter and a piece of the rock you can call your own.
What ever happened to paying off your mortgage and owning your home outright? Being upside down is only a problem if you are selling, but if you are holding and can afford the mortgage, pay it off. Once paid off you will not be upside down.
That economist ought to be ashamed of himself for his foolishness. Hyper-consumerism has accelerated the downward spiral of the country.
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btx3
January 28, 2010 at 9:56 AM
Yeah – being upside down is a problem – in terms of the amount of money you are spending each month to make the payment. If that extra $200 or $2,000 a month is flying out of your pocket instead of going into savings. It’s not serving anything but the greed of the bank, who was a willing accomplice in driving up the purchase price in the first place.
Now – you are correct that homes became investment instruments instead of part of our American identity. But a home is the major investment that many Americans make which plays a significant role in passing that wealth down to the next generation for middle class families. One of the vestiges of Jim Crow is the fact that black families have far fewer resources than white families starting out due to lack of generational wealth – as a direct result of Jim Crow. That extra money flying out of the homeowner’s hands is money that cannot be invested in either human capital (education), or generational capital in terms of passing some of that money down to the next generation so that they can get a start in life. That further traps black middle class families into another generation of not being able to close that asset gap with white families. Black families are also more likely to slide out of middle class (downward mobility) because of this lack of resources, whenever some event causes the need for major extra spending such as an illness or a job loss.
So yeah, walking away may – depending on circumstance, be a very good strategy not only for the black homeowner – but the homeowner’s children.
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