Sometimes, the prudent thing to do may not be such a simple decision.
Much of our society is build around trust and the general notion that most people are honest and nice. The refund system, for example, wouldn’t work in some countries because too many people would use the product and then turn around and try to get a full refund. Self service checkout is another brilliant idea that unfortunately wouldn’t work in many places around the world.
As a result of our honesty and our selfishness to play by the rules, everyone benefits.
A mortgage is a great financial tool, allowing potential home owners to realistically buy a house earlier in their lives by borrowing into future income. One can argue that without mortgages, land prices will be drastically lower, allowing everyone to buy anyway. But then how can anyone afford the rest of the house? The nice granite counter top, the stainless steel appliances, and the big screen TV cost money. Without credit, most middle class people cannot really afford anything other than buying the piece of land.
Lately, more and more people are just skipping their mortgage payments. Some cannot afford to pay because of a job loss, but others are just squandering, or as some call it, gaming the system. Many of these people are starting to blame the lenders for their reckless standards during the boom years. Unfortunately, the selfish act of conveniently missing payments doesn’t just hurt the lenders, but every one in the process.
Jason writes:
… I’m now behind [on my mortgage payment]. I felt bad at the beginning, but I eventually got used to it. How long do you think I have until the banks repossesses my property?
How long the foreclosure process takes doesn’t matter. You borrowed money, and you signed the loan documentations at your own will. It’s your responsibility to pay it back. Do something about the missed payments immediately:
- Call your lender and tell him about your situation. Work something out. If you are behind, chances are they’d rather keep you as a customer than to evict you, which is very costly.
- Look to refinance because mortgage rates are at record lows if you have any equity left in your home. Even if you don’t, talk about this as one of the options. How about extending the length of the loan to lower the payment while we are at it too?
- A loan recast might be possible. Have you ever pay more than the minimum required monthly payment? Check to see if you can ask for a loan recast. I know the difference in payment is probably small, but it could still help.
Some people are happy to skip their mortgage payment. Actually, some are even bragging about it, as if it’s financially savvy to borrow money and not pay it back. I bet they have never been in a team environment where one member isn’t pulling his weight. When one person in the team doesn’t do their job, everyone else needs to help out. While the lazy worker may think he is getting off easy, everyone else works harder and have to share the load, working longer, harder and more miserable hours. Would the lazy worker be admired, or hated? Is it appropriate to brag about this? Would you want to suffer due to no fault of your own?
You may not want to pay your mortgage, but everyone else needs to suffer by paying higher fees to compensate for your own convenience.
Mortgages are great, but it’s still a privilege. Sure, the banks make money from it, but if no one profits, we can all kiss the mortgage industry good bye. Next time you hear someone talking about missing mortgage payments when affordability is not an issue, let them know that you are paying for his share.
{ read the comments below or add one }
We’re a single income family that homeschools. We moved to a 4 acre homestead (40-60k in equity ) but have three addtional rentals. One might have 100-150k ( before taxes ) in equity, the other two are probably 30-50k in the red combined. My annual income is 95k. My fear is complete collapse of the dollar and want to unload the rentals before it happens and concentrate on paying off my homestead. I do currently get nice tax deductions but this won’t do us any good when the collapse happens. Debt free isn’t likely before QE2 finishes us off. So, should I sale off the rentals and lose the deductions and 8hundred monthly profit or risk holding an additional 450k in mortgage loans. Thanks and God Bless, Wayne
Moneyning can you clarify something for me regarding US mortgages. I’ve read alot about mortgages being non-recorse, ie it you borrow $450 to but a house the bank reposes it sells it for $400 they can’t come after you for the $50? Is this true?
In Australia you still owe them the $50, which of couse means that people are unlikely to dump their property in market drops. Anyway I just wanted to clarify this.
Whether it’s non-recourse or recourse is actually determined by state laws, so it will depend on where the house is actually located.
Some are, and some aren’t, but it’s best to talk to a lawyer of course to make sure if the decision affects you in any way.
Alright, I’ll be one of those comments. Assigning morality to this situation is silly. There I said it.
A mortgage is an agreement that has one party pay for a house that another party uses as collateral on the debt. That is it. If the buyer chooses to walk out on this obligation, she/he must pay the penalty (lower credit score, loss of any equity built up, bank coming after other assets) according to the agreement. If Jason feel the penalty of breaking the agreement is less sevre than keeping the agreement up, than I don’t see how any of could pass judgement on that. Honestly, if you owned a stock would you think twice about selling on the grounds that the stock market already has had a rough day and doesn’t need anyone else selling? Why drive the system further down to protect your own interest?
BTW, I own a house and wouldn’t dream of letting it get foreclosed on because the reasons I bought it are valid regardless of what the market does. I also understand I pay a higher interest rate because of people like Jason, which only bothers me because the banks were bailed out after they made very poor decisions. They made the wrong assumption house prices would never go down and were wrong. By bailing them out, they were absolved of the negative consequences to their actions. That is a topic for another time, though.
The problem is that people are not trying to short sell their houses, like they are the stocks you give in your example, Spencer. They are packing up in the middle of the night and moving out leaving a vacant property to be foreclosed on. The bank will sell the home for pennies on the dollar just to get rid of it. Each foreclosed home in my neighborhood (SE Phoenix, AZ not the best of locations) is averaging about a 40k sale price. These properties are sitting vacant for a while because I don’t live in the most desirable neighborhood. When they do sell, they are being bought by investors to rent, having a high rental concentration also effects property values. I bought my home at 150… i cannot refinance to take advantage of the interest rates because i am about 110k underwater. I, thankfully, was conserative with my mortgage and didn’t get sucked into a home i could not afford to be paying for and not renting from the bank on an interest only or an ARM. Those people that are saying it is the banks fault that they cannot afford to make their payments now, are the one’s that piss me off. They bought the interest only deal, the risky arms, all because they saw that their monthly payment was affordable at the time and thought that the market would not fail. And now they want to blame the bank for making the loan and not make their payments???? that is just the most irresponsible piece of rubbish I have heard. At least try to shortsale, don’t just whine in the corner about it and sneak off thinking you are getting away with something. I won’t be surprised if we start hearing more about the banks being able to go after the remaining principal balance on foreclosures in the future, which will really screw those that legitimately are struggling to do everything they can to save their homes but they can’t because of income loss, not just sticker shock.
Your post does an excellent job sheddding light on one of the hidden reasons that the housing crash has been so destructive and its impact will continue to be felt for a long time to come.
People have relied for too long on lenders to tell them what they can afford. Just because you can qualify for a loan doesn’t mean you should take it. The cavalier attitude toward repaying one’s mortgage is a direct corrolary to the “hands off” attitude people had when deciding whether to take it on in the first place.
great post, and im so glad im not the only that thinks strategically defaulting on a mortgage is not only morally wrong but also hurts every other borrower. I know the recent trend indicates this is becoming more and more common, but i hope this will change as people get back to work and wages go up (hopefully). however, its sad that we even got to this point where people dont honor contracts and think its no big deal. You chose to take on the loan and you knew the terms, so now you have a responsibility to pay it back.
Remember it’s not just banks that carry mortgages – there are a lot of owner financed mortgages out there.
The papers I carried all had a 30 day notice in them. If you are 30 days late, the process starts, and one could theoretically be out in 60 days…. if that’s the contract they signed, it’s legal. However…. I never enforced it. My buyers had good track records, and if laid off or under major financial strain, they came to me and said, this is what happened and we don’t want to loose the house – how can we make it work for all of us?……
It’s a small town here – I knew they were laid off or had a huge medical bill, etc… Sometimes letting them skip a month’s payment was all they needed to work things out…. I just explained that skipping the month meant that the interest was added on to the length of the loan, but it worked out for them and for me – I didn’t really want the house back.
Basically, it seems like now days it is “cool” to see how long one can ‘get by without paying’…. rip off the system etc….. forgetting that all of us ARE the system and affected by it too. Seems rather dishonest to do it intentionally. And if they see it done on TV, well then, it MUST be alright 🙁
It will be interesting to see what kind of comments you get. But I am with you. I seriously doubt a gun was held to these people’s heads as they signed the loan docs. If property prices had continued to rise and they had a ton of equity, I’m sure they wouldn’t be complaining. But when you buy a house, there is no guarantee of a rise in value.
For most people, the home should be thought of as a home first and foremost. Keeping in mind, short-term or even medium-term drops in value shouldn’t matter.
Second though is it may provide some income in the retirement years with a reverse mortgage or selling high and buying in a lower priced area.
For people that purchased homes as an investment, they have even less excuse. With investments, you win some, you lose some. Never invest what you can’t afford to lose.
Bottom line, you signed a contract and made an agreement to buy the home for the given price with the given loan details. It is your obligation to make good on it. I realize there are many that have lost jobs and are unable to pay, that is a lot different than choosing not to pay just because your home value has dropped.