By Libby
I haven't seen any numbers on how widespread this practice is, but I keep seeing stories about the phenomena. I was wondering how people manage to do this.
Next month, Michelle Augustine plans to walk away from her four-bedroom house in a Sacramento, Calif., subdivision and let the property fall into foreclosure. But before doing so, she hopes to lock in the purchase of another home nearby.
"I can find the same exact house as what I live in right now for half the price," says Ms. Augustine, 44 years old, who runs a child-care service out of her home. She says she soon will be unable to afford her monthly payments, which will jump to $4,000 from $3,300 in August, and she doesn't want to continue to own a home that is now worth $200,000 less than what she paid for it two years ago.
So it's a scheme only available to those with good credit and who have enough resources to have kept up payments to this point. Apparently, it's legal but there's something about it that strikes me as fundmentally immoral. It just feels dishonest and it strikes me that this sort of gaming the system ultimately hurts lower income people. For one thing, if enough people do it, the taxpayer will be bailing out the banks in the end and not only do taxes hit the poor disportionately, but also the billions spent on any bailout will be money not available to fund the social safety net.
Furthermore, it likely will have a negative impact on the bank's willingness and ability to work with troubled homeowners who don't have the kind of credit rating that enables them to pull off this scam, in restructuring existing mortgages. In short, those with the most ability to take the loss for their inopportune speculation, will actually benefit at the expense of those least able to come back from losing their investments.
Not that this dynamic is anything new, but it occurs to me that at least part of the housing meltdown is due to the fact that banks expected homeowners to less willing to cheat the system as a matter of conscience. It seems moral standards really aren't what they used to be.
Businesses do stuff like this all the time.
ReplyDeleteWhat's better, going BK or finding a way out?
Apparently, it's legal but there's something about it that strikes me as fundmentally immoral. It just feels dishonest and it strikes me that this sort of gaming the system ultimately hurts lower income people.
ReplyDeleteFor what it's worth, the system we live in doesn't reward morality; it rewards rational behavior. Businesses do a lot of this sort of thing in their interactions with other businesses and with people. For example, I was recently hit with over $50K of denied insurance claims, obvious mistakes that were eventually reversed after several months. If I'd been interacting with a person, I'd call that immoral behavior--causing me a good deal of stress and uncertainty without making the slightest effort, initially, to address their own mistakes. But insurance companies don't have morals, and they're in the position of power, so what was I to do? Adopt their interpretation of the situation as purely a business transaction. Home owners who walk away are in the same boat, I think.
Libby: I think you missed a key element of this story- the reason the homeowner is able to do this is by claiming that she is going to rent out her first property. But she's not - and that is, as you worry, fraud. I have a whole host of other thoughts here, but no time to write them.
ReplyDeleteI will say this, though- part of me wonders the extent to which declining home prices and the so-called "mortgage crisis" will ultimately have a positive economic effect. I say this because the end result of all this, if left to play out, will be drastically reduced housing costs, not only for home buyers, but also for renters, and, yes, for people who are forced to move because they've defaulted on their mortgages. Since housing costs are far and away the largest expense for just about every family, even a modest decrease in housing costs will free up a ton of resources to keep pace with rising food and fuel costs. Yes, I know that this mostly helps people who are renters and there are some people (myself included, oddly enough) who are really hurt by falling housing prices. But it also mitigates substantially the effects of being forced into foreclosure- yes, you are forced to move, but in the process you wind up having a much easier time getting back on your feet.
I didn't really have time to think it through all that much. I do understand that this is a practical approach to avoiding bankruptcy, and it's not that startling a concept, but it still speaks of the whole, I got mine, screw you if you didn't get yours, it's every man for himself mentality that bothers me.
ReplyDeleteThis was one of those stream of consciousness posts, that I might expand on if I have time, but I think you're right Mark in that the end result may be positive. If you write the post, please leave me a link and I'll update with it. I'm working for a few hours so I may space it out and forget to look for it.
Even as I was reading your post and the "Apparently it's legal..." bit, I was sure that something was omitted. There was no way the person got the new loan without some sort of fraud like, as Mark pointed out, claiming she was converting the original property to an income-producer. Fraud is certainly illegal.
ReplyDeleteI'm with Mark on the benefits of declining home values. I do not want to live in a society where only 10% of people can own their own home, even when I'm one of the 10% because I bought before the bubble.
To add one thought to my earlier comment. Yes, I am "losing equity" in my home every day, and I do not mind that it is happening, because it benefits my society as a whole. Does that make me some kind of saint? No, it merely makes me a decent person.
ReplyDeletePlease, spare me the moralizing. Everyone seems to want her to "jump on that grenade for the team" without even considering the circumstances. The article clearly says the new, adjusted payment will be too much for her, so the inevitable foreclosure is already set. She is $200k upside down so how long does she have to hold on to the property in hopes of finding a bigger fool to sell to just to break even. Maybe she can turn it into a rental but, like all businesses that can't at least break even, liquidation or bankrupcy is inevitable. As for the hints at fraud, the true perpetrators are the crooks in the mortgage/financial industry who discarded due diligence in favor of Ponzi-packages also called "derivatives" and pulled off a world-wide scam. Sadly, as noted, the government will be called in to bail out the crooks rather than prosecute them.
ReplyDeleteA somewhat ironic but entirely predictable outcome of The Bankruptcy Reform Act of 2005 that makes foreclosure a far easier option than bankruptcy. I suppose there are moral failings to be considered here, but the moral failings began when the credit card companies through their cronies in Congress jammed up the traditional escape hatch. How moral was that? The people who walk away, do so with an audacity to hope for a future without debt enslavement...
ReplyDeleteBTW --- The fastest growing real estate ventures today are those who provide assistance to those who choose to walk. There are even a few nifty websites, such as:
http://www.youwalkaway.com/
Thank you all for the thoughtful comments. I agree with most of what everyone is saying here. I understand that this woman is simply responding to circumstances created by corrupt corporations and politicians, who are infinitely more immoral and I'm not judging her specifically, so much as I'm reflecting on a greater trend in society.
ReplyDeleteI'm not sure I agree that this will be a boon for renters. With people losing their homes, there's more demand on the available housing. I've never had a landlord drop my rent. I somehow can't picture it. But I do think it will reset the housing market and widen the opportunity for home ownership in the long term.