It May Be Financially Irresponsible to Pay Your Mortgage

Sunday, January 10, 2010
Posted in category Economics, housing bubble

This will appear as a published article on tomorrow.

Roger Lowenstein has written one of the best articles I have read on the topic: walking away from your house. The prominent author and journalist published a January 7, 2010 article in the New York Times with the headline, “Walk Away From Your Mortgage!” Lowenstein acknowledges that it may be financially careless for homeowners who are upside down on their mortgage to keep paying it in order to hang onto a fantasy of ownership and avoid the shame of default. In this article, Lowenstein’s subject is the borrower who can afford to pay the mortgage but considers opting out for reasons of financial benefit and survival. This is referred to as a strategic default.

Lowenstein’s thesis is exactly what I have been preaching to family, friends, and acquaintances for some time now. Many Americans are, by nature, very meticulous about paying off their debts and honoring contracts. Nevertheless, when they are stuck with a home that is worth far less than what they owe, the home becomes a noose around their neck, a pecuniary black hole, and a drag on household cash flow. It becomes what I call exorbitant rent. If the difference between the mortgage balance and the current market value is substantial, the homeowner is throwing away money on a home when it may take him years of mortgage payments to recover enough value to revert to a state where equity crops up. Thus the homeowner is essentially throwing money into an unpredictable black hole. If the mortgage payment is higher than a rent payment would be on a similar home, that adds the burden of overpayment for the “privilege” of being a quasi-homeowner paying high rent on a house you may never own, unless you plan to stay put in the house for a long time. If the mortgage is lower than an equivalent rental, there may be some advantage to hanging on for the short term, but that would depend on the condition of the house and various maintenance factors, as well as the additional costs of ownership.

After all, ownership requires payment for taxes, higher insurance (higher than renter’s insurance), and maintenance/replacement costs. I have gone over household budget/cash flow analyses with a few friends and family, and I have shown them the astounding cost differential between ownership of their “underwater” mortgage and renting a similar home. Yet people still aren’t willing to give up the cash-eating arrangement. Though I can spot the financial detriment, as a Certified Public Accountant I am very wary about giving direct professional advice, except to family – they know, perhaps too well, that I am never short of “pointers” for their financial situations. I refrain from telling people they “should” do this or do that because I don’t want to be blamed for someone’s unhappiness or other quality of life issues that may be the result of complex decisions. But I do try to make clear the alternatives to standing on the deck of a sinking financial ship. As Lowenstein remarks:

And given that nearly a quarter of mortgages are underwater, and that 10 percent of mortgages are delinquent, White, of the University of Arizona, is surprised that more people haven’t walked. He thinks the desire to avoid shame is a factor, as are overblown fears of harm to credit ratings. Probably, homeowners also labor under a delusion that their homes will quickly return to value.

I agree on the second point – almost all people are delusional and think the post-bubble housing crash is the aberration, and that the housing market will return to normal one day in the (near) future. They do not understand that the bubble was the aberration, and those days are over and dead. They thought the bubble prices were the new norm. And the strange thing is that they liked it. They delighted in receiving a high price for their home, and never seemed to be able to factor in the reality that they would also pay a higher price for another home. Not understanding the bubble is a principal part of the problem in getting those people to understand the whole of their financial problem. Also, people do indeed desire to avoid default and they fear the effect that a poor credit rating will have on their future. I agree with Lowenstein that most credit rating fears are a bit overblown, and besides, it is far less problematic to absorb the short-term trauma from a shoddy credit rating and radically improve your long-term financial prospects while shedding the iron monkey on your back.

The other snag is that most individuals, no matter how “educated” they may be in the college sense, are financially ignorant and cannot conduct basic analyses of their own financial matters, let alone weigh the costs and benefits of a complicated scenario. There are plenty of talented and smart people who don’t have the skills to sort out budgets, expenses, debt, and investments. That is not a criticism – it is just a fact. Furthermore, add to that the fact that the boom years produced rabid consumerism, and keeping up with the Joneses become a core family value for so many debt-worshipping Americans. The gotta-have mentality destroyed what common sense that would have otherwise emerged.

Enter the typical, boom-period mortgage representative, a guy who also knows nothing about business, finances, or accounting. He was most likely hired as a short-termer, with no experience in the business – he was hired for his sales ability and arm-twisting skills. Or he may have a college degree in finance, accounting, or economics, but washed out trying to make it those competitive fields. He was hired to help the mortgage company keep up with the demand generated by the housing bubble, and he knows nothing more than what he was taught in his introductory training that focused mostly on seduction skills and reaching sales goals.  Those people sense the gotta-have desperation and they pounce on the vulnerable would-be borrower.  ARMs and interest-only loans became a new middle-class norm, which amounted to certain disaster for the person who became a homeowner during the bubble. The natural human instinct for handling undesirable affliction is to get rid of the offending parasite and make things right as quickly as possible. This is your moral duty to yourself, your family, and your future. Moreover, Lowenstein makes this point:

Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

Federal officials like Paulson, along with others who have in interest in keeping you hogtied to the sinking housing market, are trying to depict struggling Americans as irresponsible scoundrels who are rashly walking away from their commitments. Various political special interest promoters and academics that pontificate from outside of the real world that the rest of us live in are reflecting that view. George Brenkert, a business ethics Professor at Georgetown on the Potomac, was quoted in the Wall Street Journal as saying “borrowers who can pay — and weren’t deceived by the lender about the nature of the loan — have a moral responsibility to keep paying.” A follow-up quote from the article states this:

A standard mortgage-loan document reads, “I promise to pay” the amount borrowed plus interest, and some people say that promise should remain good even if it is no longer convenient.

But, like Lowenstein says, the borrower signs a promissory note and “the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.” Lowenstein also places some blame, as he should, on those folks in the mortgage industry who took full advantage when government-created bubbles made their businesses bloom, and now they are on the defensive when debtors are looking to escape the wrath of the bloody aftermath.

But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth.

In the same Wall Street Journal article noted above, John Courson, Chief Executive of the Mortgage Banker’s Association, lowers the boom on the bogged-down buyer and asserts the guilt game:

But it isn’t just a matter of the borrower’s personal interest, says John Courson, chief executive of the Mortgage Bankers Association, a trade group. Defaults hurt neighborhoods by lowering property values, he says, adding: “What about the message they will send to their family and their kids and their friends?”

This is the same corporate state-special interest slimebag who lobbies feverishly for favors from the feds so his mortgage industry clientele can profit handsomely and the taxpayers can foot the bill by bailing out companies that fund his industry, such as Fannie Mae and Freddie Mac.

Then there’s Megan McArdle over at The Atlantic – someone who has the financial wherewithal of a lobotomized cadaver. Megan rants about deadbeats who don’t pay their debts and instead choose bankruptcy as an easy way out of an accumulation of bad decisions. Indeed, my article and blog archives are loaded with invectives on this very same topic – few people have written as much criticism as I have about how hare-brained, high time preference Americans have gone wild on consumer spending and debt, thanks to the Federal Reserve’s funding of the credit bubble and other economic factors that all trace back to Big Government and its corporate state compadres. I have never absolved these impetuous debtors from their role in perpetuating their own problems because they could have chosen to abstain from the spending frenzy mentality.

However, Megan cites the same Wall Street Journal article, and she is confused because she doesn’t draw the distinction between those who go on a reckless debt-o-rama spree and walk away from the financial carnage, and mortgage debtors who are underwater due to the breakdown of a completely unsustainable economic system. If McArdle had any business sense, she would understand that strategic defaults are a conventional business practice. Throwing good money after bad just isn’t an option, either for a corporation trying to maintain a brisk bottom line or an individual who needs to keep his financial house in order. Daniel Gross recently wrote an article in Newsweek titled “Default Nation,” where he discusses this very fact, including the mention of recent strategic defaults by Stanley Morgan, KKR, and Six Flags, a company where Bill Gates has 11% ownership. Mr. Gross writes that it is surprising that, given market conditions, there aren’t more consumer defaults.

Let’s return to Roger Lowenstein, where he reveals, “We are all economic pinballs, insensibly colliding for better or worse.” What Lowenstein doesn’t say is that individual mortgagers are not responsible for the credit bubble, the housing bubble, or the unsustainable and corrupt federal policies that encouraged and fueled the speculative boom and bubbles. The economic meltdown and ensuing fallout in housing values has been a recipe for financial disaster for many households, and each individual or family must commence a course of action that is sensible, sustainable, and provides for long-term financial security and growth. It is not unethical or immoral to relinquish a strangling and injurious debt load on a house that ties you down in favor of mobility and a healthier household financial plan. In fact, it is state worship and economic ignorance that fuels the notion that you, as a victim of the state and its corporate state special interests, have some obligation to ruin your life and bend over to “take one for the team.”

If all factors point to your best option being a default, then walk away guilt-free and boost your cash flow and future prospects, because ultimately, you are responsible for you, and none of these babbling naysayers are going to bail you out or come by to help clean up the mess. Walk away, free yourself from unnecessary bondage, and let the giant banks sort out the mess that they helped to perpetuate and swell.

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18 Responses to It May Be Financially Irresponsible to Pay Your Mortgage

  1. Kristin Addison says:

    January 10th, 2010 at 9:35 pm

    Our house is obviously (as most everyone else’s in this area) no longer anywhere near what we owe on it. I fear defaulting because working in accounting/finance, prospective employers ALWAYS run a credit check and I’ve been told “as long as you have no repossessions or foreclosures you should be okay.” So I keep our mortgage in good standing for fear that a foreclosure would put a halt to my accounting/finance career. Thoughts on this? I’m definitely not keen on the idea of staying in this home long-term.

  2. Owen says:

    January 11th, 2010 at 3:11 am

    This is a wonderful, illuminating article from which I have learned a great deal.
    Thank you.


  3. Jacob says:

    January 11th, 2010 at 9:08 am

    great information, but I have a question.  most Austrians are saying the same thing regarding homes: do not buy one! they are going to continue falling in value.  

    i don’t doubt that, but they are also predicting high inflation, if not hyper inflation.   if this is the case, would this not then be a good time to take on the debt associated with purchasing a new home, even if there is going to be additional devaluation?  and wouldn’t it be wiser to hang on to a home that is currently being payed off, and make the minimal payments, even if it is upside-down?  

    it seems to me that when wages/salaries eventually catch up to inflation, those people who still have a significant principle balance on their homes will have had a large portion of the real debt wiped out by inflation.   I would also think that avoiding a huge dent in your credit would be a concern.  

  4. Darrel says:

    January 11th, 2010 at 10:53 am

    Shame on you! This advise is immoral – you obviously lack a moral compass. Homeowners who sign a contract (without force or fraud) commits them to honor the contract. Without the rule of law (contract law), capitalism is finished.

    PS – I also detest all central banks who are the main reason for our economic problems.

  5. Kendra says:

    January 11th, 2010 at 12:02 pm

    I linked to this article through a conversation post on LinkedIn. How wonderful to finally have a term for an act I’ve been considering for over a year now!! I had been referring to it as “jingle-mail”…but I like “strategic default” even better!

    My home was just devalued another 9% by our County Auditor’s office and I now officially owe more than the home is worth. I am in a community that may never see values increase again…and if we do see an increase – it will be FAR behind the rest of the state/country.

    I’ll be doing some serious homework now to see if this is truly a viable solution….but how is this managed if there are two (2) mortgages?

  6. Keith says:

    January 11th, 2010 at 6:20 pm

    To add to Kristin’s concerns, I’d also suggest walking away may not be such a good idea. Yes your house isn’t worth the note you owe on it. But, by defaulting, you destroy your credit rating; and thus you may not be able to rent an apartment or house, plus you will see your auto insurance rates increase and possibly ruin future employment opportunities.
    Also, depending on if a second mortgage or equity loan is involved, you may still be liable for some of your debt. The sad fact is, your credit score is everything and they got ya by the shorts either way you go. Be very careful here.

  7. Karen De Coster says:

    January 11th, 2010 at 7:06 pm

    You didn’t read my article, Keith, Your credit score is not “everything.” In fact, it has no value unless you want to be in perpetual debt. If you don’t like what I have to say, that’s perfectly fine, but as a long-time financial professional and CPA, please don’t preach “being careful” to me.

  8. Karen De Coster says:

    January 11th, 2010 at 7:22 pm

    Darrel – you are a clueless dip job. You are a simpleton and financially illiterate, like most people. From my article:

    But, like Lowenstein says, the borrower signs a promissory note and “the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.”

    Meaning….the contract provides provisions in the event of default on the terms – for either party – should that occur. Turning over the asset in the case of a mortgage default IS honoring what is in the contract. There is no moral commitment in the contract. When are you people going to critically THINK without resorting to hyper-emotionalism and immediate effect?

  9. Lisa says:

    January 11th, 2010 at 8:07 pm

    Your article was very informative. Do you have any thoughts on states that have deficiency judgments? My understanding is that if you default and the bank repossesses your home, they then sell it at whatever they can get for it and you can still be responsible for the difference between what they sell it at and what you owe.

  10. Keith says:

    January 11th, 2010 at 10:05 pm

    Karen, I did read your article. Twice, in fact. Never said I didn’t like what you wrote. Just trying to add a couple thoughts to it.
    I like Lowenstein too, and have for years at S.M.
    But the issue of second mortgages and/or home equity loans on those same houses needed to be mentioned. That could play a huge role in someone’s decision to walk away or stay.
    As for your opinion on credit scores, you can’t pull the CPA card when talking about employers hiring based partially on your credit score. A bad driving record can cost you too. It’s absolutely true.
    BTW, I own my home, have zero debt, and a 900 credit score. I read Rockwell. You too, obviously. I’m in the choir. Lighten up, girl.

  11. Jeannie Queenie says:

    January 12th, 2010 at 12:31 am

    Thank you Karen for your clear, informative response to Darrell above. You have made my day with this advice for I have been suggesting it to one of my sons for over a year. I don’t have the legal knowledge that you have on this topic, but it only makes sense to me that it’s better that he lose the $75,000 he put down on this house he bought for 375,000, rather than be stuck for umpteen years with payments/taxes/insurance, and worse, devaluation which WILL continue at least for another couple years even here in New England.. He was married a few months back and his wife has free housing/utilites at the academy where she teaches, not to mention that son’s small house isn’t large enough for their blended family of three growing boys. With an outlay now of over 2,500 a month for mortgage and taxes.I see it as a plus to kiss that original 75 G goodbye..I do not see that the price he paid will ever go back. Values will continue to fall across the country settling at around a 75% drop in value. Realtytrac says defaults and repossessions have been running at over 300,000 a month since February. One million American families lost their homes in the fourth quarter. Moody’s expects another 2.4mil homes to go this year double the number for 2009. Sounds like Steinbeck’s Grapes of Wrath revisited. Then this latest on commercial properties…The Wall St Journal says that more than $160 billion of commercial properties in the US are now in default, and this from the UK Telegraph…”The fuse has yet to detonate on the next mortgage bomb, $134bn (£83bn) of “option ARM” contracts due to reset violently upwards this year 2010 and next. The ax comes down on home foreclosures about a year after losing one’s job and savings have been exhausted, so I sure wouldn’t hold my breath on 2010 bringing tidings of joy or a happy new year for those who lose jobs, or their homes.

  12. Karen De Coster says:

    January 12th, 2010 at 7:43 am

    Dear Keith, as to “lighten up,” let me say this: when some one like me writes a 2,200-word article (!!), stop writing the writer to tell them they “should have said this, added that, mentioned yo, and done yo yo.” Please quit telling me I have some responsibility to say everything that matters to you. I get at least 20 letters, like that, after every single thing I write. If you ever wrote, you’d understand that any piece has to end at some point, must be concise and not an endless run-on, can’t be all-inclusive on the topic and all related side topics, and the writer may not think things to be a priority because you deem them a priority. Especially if you are not paying me. Once you (and others) understand that, you won’t get under peoples’ skin with your comments. (Lowenstein’s, piece, btw, was less than half as informative as mine.)

  13. Shannon says:

    January 12th, 2010 at 12:14 pm

    Of course it is responsible to pay the bills on time, that is a no-brainer but with a long-term commitment such as a mortgage, people need to think twice before taking one out in an economy with an unstable housing market. Well, maybe my insights aren’t worth a hill of beans, given that I am in my thirties and have never owned a home, so what do I know, right? Yet, I have watched the housing boom with all its participants and am really tired of how everyone seems to still push the “american dream.” (especially on those who cannot afford it). Despite the thousands who are living in tent cities, homeownership continues being heavily promoted, in the way of do-gooder government programs. Lets not forget the $8000 homeownership tax credit, cash for caulkers, and the rest of it. Others have pushed it on me too, telling me how much freedom owning a home will provide me, to think of my future, etc. I have checked into it, to see what all the hoopla is about. It seems to be a wonderful plant, but with nothing that will grow from it. To sum up my experience as a single person inquiring about homeownership, I took this introductory seminar offered by a community housing commission course and got several strange looks from other participants, mostly single mothers with several children from previous relationships. Apparently, I don’t qualify for most of the programs because I’m single, with no dependents. I guess I thought it would be more responsible to acquire a home, a place to share with a spouse, then have children but doing things backwards is a way of life here in america.

    I guess I don’t see a problem with renting. Even if people want to compare it to throwing money out the window. The money isn’t worth the paper it is printed on anyways, it is all fiat. If your maintenance, insurances, etc. are more affordable and predictable as a renter, then can’t you budget more accurately? I have rented for some time and I know several people who do. They are wise for doing so, because all it takes is missing time off work due to an illness, and you default on a mortgage. Out of the streets you go. I guess the american dream means more to me than seemingly endless $1500 mortgage payments (the average here in the US), high repair costs, utility expenses, and chores. Do the relationships that people hold, their standards of how they treat each other, how they live spiritually, emotionally, physically, etc. preside over the elevated status of homeownership?

    In many cases, one is better off walking away. Also, for those on the credit bandwagon, one would want to secure a place to live before walking away, so if ones credit goes downhill, they have a place to go to. It is not worth being enslaved for 20-30 years so that you can own a place “free and clear” but still be paying taxes on it. Then there is getting older and not being able to deal with the upkeep, and dying before you can even enjoy it.

  14. Keith says:

    January 12th, 2010 at 12:58 pm

    That was the first time I’ve written you or commented on an article of yours. I have corresponded with many opinion writers over the years. I’ve had many letters printed by the Oakland Press, and have had threatening voice mails left on my home phone because of some of them (especially concerning my support of the 2nd amendment). If I choose to engage my opinion in a public forum, I have also come to expect the usual nutbags to retaliate with their usual vitriol. It comes with the territory. And it rolls right off my back. Sorry that you seem to take my comments personally, but I suppose I expected you to comment more on the specifics of my comments rather than play to your audience. You are probably very engaging in person, but in print you appear very thin skinned when even a 1% variation in your opinion is suggested. But I won’t bug you again, have a great day.

  15. Vincent says:

    January 12th, 2010 at 5:51 pm

    To Darrel,

    Actually, not paying your mortgage does not breach the contract. The contract states that if you don’t pay, return the house.

    It would be a breach of contract if they don’t pay AND keep the house. Which is not the case.

    I am a CPA and I support this article 100%. Continue paying a negative equity property makes Americans poor and the banks rich. You have the right to legally return the house and lose 100% of your down payment. Just walk away, save the cash, let the banks worry about their own bad deals.

    It would be un-American to continue paying.

  16. Karen De Coster says:

    January 12th, 2010 at 6:09 pm

    Vince, I wrote that in the article (and quoted Lowenstein saying the same), and I also got your email. But most all readers don’t get that. They are CLUELESS. Sad, but remember that most people are financially illiterate, and that is a fact. (Like I am sewing ignorant! But sewing is not essential to life and liberty and one’s future/survival. So I can call on the division of labor for that one…..)

  17. Karen De Coster says:

    January 12th, 2010 at 6:14 pm

    Sorry Keith, it’s not “thin skin.” It’s called getting 300 emails that say ……. “great article, but you should have said this, that, those, and all else……” My response was rational and makes perfect sense.

  18. Karen De Coster says:

    January 12th, 2010 at 6:16 pm

    Shannon, only the financially ignorant compare renting to “throwing money out the window.” That thought is based on the HOPE that housing values always rise! And what did we just find out? be a renter and be proud. I almost wish I was a renter (though my mortgage payment, and house, is small).

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