Mortgage contracts and moral obligation

[30ashopper]

Government propping up bubbles by paying off mortgages is a separate issue - we institute that policy when we vote. In a perfect world, someone walking away from a ballooning option arm only impacts two entities, the borrower, and the lender.

 

[Here4Good]

Some banks are getting judgments against short-sellers for the difference between the mortgage amount and sales price - why would they not do the same thing if you walk away?

What IS the effect of walking away? It's not "nothing"; I assume it will blow up your credit rating and prevent you from buying a house again for the next 7 years. Is this not true?

Won't it effectively prevent you from even renting a home, if there's a credit check?

 

[Lynnie]

Some banks are getting judgments against short-sellers for the difference between the mortgage amount and sales price - why would they not do the same thing if you walk away?

What IS the effect of walking away? It's not "nothing"; I assume it will blow up your credit rating and prevent you from buying a house again for the next 7 years. Is this not true?

Won't it effectively prevent you from even renting a home, if there's a credit check?

Yes, that's true. A Deficiency Judgment is what you are talking about on a short sale. Before this bubble, if someone experienced a true hardship and their home went into foreclosure, it annihilated their credit and with older underwriting guidelines did prevent them from buying another home for several years. The guidelines had been loosened and if someone defaulted and their home ultimately was foreclosed, they could buy another home in 13 mos. With some subprime lenders, they could buy a home prior to being discharged in bankruptcy!

We look at trends and rarely is there a full recovery in 13 mos. US Bankruptcy Court was designed to protect debtors in true harship. I think if there is a hardship, a foreclosure and bankruptcy can help the person get back on their feet. Keep in mind, we are talking the basic foreclosure, not one in an environment where the gov't just propped up the largest corporations in the nation due to an economic dowturn.

For true hardship, should the laws be changed? Not everyone in this environment is in foreclosure due to greed. I see walking away much different than a hardship.

And, through all of this mess, I hope our lenders and borrowers have learned a lesson. ;-)

 

[momof2kids]

I know people who are walking away from their mortgage just because the government bailed out banks and other businesses and they want their bail out; and since the bank is the one that gave them the loan when they couldn't afford it then it's the banks fault.

When they applied for the loan they knew it would be a stretch to afford the home but they were greedy & wanted to keep up with "the Jones".

They are the same people who have decided to not pay credit cards because they want a bailout. Even though they knowingly charged the items with intent to pay, but decided they deserved to not pay...

Kind of sad...

 

[scooterbug44]

Government propping up bubbles by paying off mortgages is a separate issue - we institute that policy when we vote. In a perfect world, someone walking away from a ballooning option arm only impacts two entities, the borrower, and the lender.

I think we all know that this isn't a perfect world and that walking away impacts many more than just those 2 parties.

And SO WHAT if your house is worth less - it is a HOUSE! It is supposed to provide you with shelter, not bars of gold.

 

[Bob]

Are we really asking this question??? Legally, I guess it is "o.k.". What sickens me is the thought that everyone gets to walk away from this pretty much scott free and we as the tax payers have to suffer. There are unfortunate consequences to risky decisions for all parties involved. Sometimes it pays off big... other times it doesn't. I've been on both ends of those risks. That is capitalism is it not??? NO.... IT IS NOT O.K. to walk away from your obligations. Doesn't mean it's not the only choice, but we all will suffer from it. There should at least be a sense of moral obligation that goes beyond looking to see if those words are in a contract. Am I morally obligated to raise my kids? feed my family?? clothe them?? Well hell, I can't find it in a contract... must not be important. Take the medicine people. It's gonna taste bad. And p.s., no I'm not sitting pretty over here on my soap box. My medicine tastes bad too.

it is illogical to keep feeding a losing transaction if there are legal alternatives. i believe you are morally obligated to navigate your family out of financial stupidity.

 

[30ashopper]

Some banks are getting judgments against short-sellers for the difference between the mortgage amount and sales price - why would they not do the same thing if you walk away?

What IS the effect of walking away? It's not "nothing"; I assume it will blow up your credit rating and prevent you from buying a house again for the next 7 years. Is this not true?

Won't it effectively prevent you from even renting a home, if there's a credit check?

From what I've read, it'll knock about 250 points off your FICO. From there you'll have to start a rebuild process. They remain on your report for seven years, just like tax liens. This doesn't prevent you from buying in that seven year period, but you'll likely be discouraged from doing so due to they types of loans / interest rates you'll be restricted too.

 

[melscuba]

it is illogical to keep feeding a losing transaction if there are legal alternatives. i believe you are morally obligated to navigate your family out of financial stupidity.

I think a fellow poster stated something to effect of "So what if your house is worth less?" It is still providing shelter. That is my point. It may not be the house of your dreams (or maybe it is). At best it is failing to appreciate, at worst, it's worth less than when you bought it. It doesn't mean it's o.k. to walk and leave the bank hanging, which our government has decided leaves me hanging, not only with my house, but now with this one. I did state it doesn't mean it's not the only choice, but it is one with consequences... or at least it should be for more than just Joe Taxpayer. The "financial stupidity" took over when the house was purchased to begin with (from both bank and buyer). Outside of just saying these people were "stupid", let's just say they gambled and lost. There is moral obligation there.

 

[Here4Good]

Let's start with the assumption that both buyer and lender made errors in judgment.

What is the moral obligation of the lender? I understand that there is an obligation to the shareholders to minimize the loss, but remember, all of these organizations operate under a federal or state charter that grants them special privileges, and that, after all, the buyer is a customer of theirs (even if it is a fifth- or sixth-hand transaction).

Does the lender have a moral obligation in any way?

Discuss.

 

[Lynnie]

Wow! Two hundred and fifty points is a lot! It does take a while to recover from that. Currently, with only vanilla loan programs, no loans for 36 mos. post foreclosure AND bankruptcy. No questions, no exceptions.

I know two people are in this situation due to the economy. They weren't greedy and didn't overbuy, but had to make financial decisions and leave one home to move to an area with better pay, etc. They haven't missed any payments, but both are chattering about 'walking away.' Both have the same philosophy, "I won't need any credit for at least five years and I have to look out for my retirement."

I do believe this will be the next wave of foreclosures, which are those in the higher income brackets who are just tired of the situation and in this due to no fault of their own. They are more concerned about recovery and what makes financial sense, thinking of their own retirement so they won't be a burden on tax payers in 20-30 years.

There are many sides to this coin. Definitely not a one size fits all.