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Oh, People Need an Incentive to Keep Paying Their Mortgages
By JLP | October 22, 2008
From the front page ($) of today’s Wall Street Journal:
LOS BANOS, Calif. — In this California city, one of the hardest hit in the national housing crash, there’s good news: Homes are starting to sell again.
Investors and first-time home buyers are snapping up foreclosed houses here, with the number of local sales up almost fivefold from this time last year. While the volume of existing-home sales across the U.S. fell 10.7% in August from the previous year, according to the National Association of Realtors, there are signs that the most damaged of markets are starting to heal themselves. Across hard-hit California, sales volumes rose 65% in September compared with a year ago, said MDA DataQuick, a San Diego-based real-estate information service.
Now the part of the article that ticks me off (emphasis mine):
The bad news is that the latest round of sales is unleashing another round of pain in cities such as Los Banos, a commuter community in California’s Central Valley. With home prices already down 66% from their peak here, most homeowners owe more on their mortgages than their houses are worth. Successive deals bring new low prices, leaving remaining owners with little incentive to keep current on outsized mortgages.
Some stop paying, pocketing the money while they wait for their lenders to kick them out. A few lose their homes only to stay on as renters, paying hundreds of dollars less a month. Every fifth house in this onetime real-estate boomtown is in some state of the foreclosure process.
What about the incentive of keeping a good name and taking care of your responsibilities even when the times get tough? If the homeowner can afford the payment on the house and it hasn’t changed, then what difference does it make if the homeowner is upside down on the mortgage? The only time the amount of the mortgage should come into play is if the homeowner has to move.
I say bring back debtor’s prison—then maybe people will have an INCENTIVE to keep current.
Topics: Housing Market | 23 Comments »
October 22nd, 2008 at 4:57 pm
These deadbeats are reading and believing stuff from politicians like John McCain who yesterday said that homeowners are innocent drive-by victims of Wall Street and Washington. When they are told by politicians that they have no responsibilty for their predicament, they act like it.
October 22nd, 2008 at 5:00 pm
ToughMoney,
Barack’s no better.
October 22nd, 2008 at 5:04 pm
Keep in mind that those who walk away from their home will have ruined their credit for a good long time. So, when the economy does pick up, they will be left behind, unable to get credit. The credit card and financing companies will learn from this current economic experience to be extra dilligent on who to extend credit to in the future.
October 22nd, 2008 at 5:13 pm
Do you see bank CEO’s and Presidents, their board members, and other of these types of people going to a debtor’s prison? Of course not. So why would you expect these people to go to a debtors prison? These people are doing what investors throughout all time have done. Making a very sound business decision to cut and run ranther then destory themselves for life. They are going to be impacted in the form of a lower credit score but it’s better than being taken out permanently from a bad mortgage and keep trying to pay it off. Do you think any of the banks in business today would think twice about running from a bad investment deal they did? Of course not. They run from poor business deals every day of the year. Why is there this stigma about home lenders shouldn’t do the same? It’s just mind boggling.
October 22nd, 2008 at 5:40 pm
Sometimes I’m just infuriated at what I read. My husband and I are waiting to buy a home. Why? We’re paying down debt (credit cards are through and in a couple of months, no car payments!) and we’re setting aside for a 15-20% down payment.
I would love to own a home, but we’re not ready yet.
Some people did get conned by shady practices, but the majority bought more than they could afford. I can’t believe people are acting as if they are victims. They signed the papers themselves. They should’ve done the math. Sorry about the rant.
October 22nd, 2008 at 11:06 pm
What drives me crazy are the statements like “he refinanced his home … and now can’t make the payments” Why not? Because he bought all those toys? Or because he just doesn’t want to? Every time I read a story about someone who refinanced their home and can’t pay, I want to shoot these people. Sure, times are tough for some folks who lose their jobs. But what makes them any more deserving than people in the past?
And what does it mean that people refinanced their houses because of rising values? If you can’t afford the mortgage, it makes no difference how much your house is worth! What were they planning on doing? Selling the house at some point, hoping to make more money from the rising house price? They still would have to find a place to live that was much cheaper than had. But would they be able to if all the house are appreciating to some unworldly value?
October 22nd, 2008 at 11:30 pm
MJR,
That’s the problem with society: a person’s word means nothing. Companies are being run by the same no-principled people who bought houses and now can’t or won’t honor their contract because there’s no longer an incentive to do so.
I’m not excusing the lenders from their share of the blame. BUT, as I have said numerous times on this blog, the ULTIMATE responsibility has to rest with the person who signed on the dotted line and said, “Yes, I will pay $x for x years to purchase this house for $X.” There’s no clause in the contract that says the buyer can back out if the value of the house drops.
October 23rd, 2008 at 8:15 am
Another telling quote from this article that I read last night goes something like this from a stretched homeowner “Do I deserve a bailout? No way. Will I take one. Absolutely.”
A very telling commentary from a guy facing the facts. There is plenty of blame to go around. Personally, I find it hard to believe that more than a precious few were 100% victims here. People believed what they wanted to believe (lenders and borrowers). The market will restore equilibrium and reasonably pricing. Intervention in the meantime may dull the pain for some, but at the long-term expense of the others, particularly those who responsibly said “this is ridiculous, I’m not playing by these insane rules.”
October 23rd, 2008 at 8:54 am
Hey Laura, when you’re ready to buy, I have a great house in IL waiting for a wonderful new owner!
October 23rd, 2008 at 8:55 am
I guess I felt the same way about a stimulus check. Do I deserve a stimulous check? No. Do I think the stimulus plan is a good idea? No. Will I take my check? You betcha. I even did the patriotic thing and spent part of it.
October 23rd, 2008 at 9:55 am
What’s up with all the emotion?
Why does anyone care what others are or are not doing with their homes or home loans.
And then the “taking care of your responsibilities” Who says that not paying your mortgage is not taking care of your responsibilities. Maybe that is exactly what it is. Taking care of you and your family.
Take your emotions and toss them out the window. they do no good. A mortgage is a legal contract, not a love letter or marriage.
You think the other party, the bank, is emotionally invested. This is a business transaction, both the origination and the forclosure. Every mortgagee in this counrty has the right or option to not pay, and have their home foreclosed. It is not immorral or unethical or good or bad. It is what is spelled out in the contract. No emotion, no being mad. Business.
Both parties took on a specific amount of risk when entering into the agreement. That is why the interest rate is no zero. To compensate for the risk.
That is also the reason why the bank wanted the house as collateral. So if you stop paying, they have some way to get some of their money back.
You ask what difference does it make. Exactly. What difference does it make to you what someone else does.
October 23rd, 2008 at 10:03 am
Bob,
So you’re saying NOT taking care of your responsibilities (honoring the contract that you signed) is taking responsibility? Then what’s the purpose of a contract if one party can just decide not to honor it if things don’t work our right?
This sort of behavior affects us all so it DOES make a difference!
October 23rd, 2008 at 10:35 am
Hey dude, chill out. Debtor’s prison? Are you really that lacking in compassion? Yes, our nation has a problem that it needs to deal with, but as a fellow Believer, let me confront your lack of mercy. People believed a lie, whether they told it to themselves or were sold one. This is wrong, and it’s their fault, but society doesn’t need debtor’s prisons and prisons aren’t even justified in the Bible. No where in the Old Testament does God command the building of prisons. Restitution? Yes, but not prison.
October 23rd, 2008 at 10:36 am
Joe,
I wasn’t being totally serious when I said that tidbit about debtor’s prison but the fact of the matter is people NEED to start taking their responsibilities seriously.
October 23rd, 2008 at 10:38 am
Joe wrote:
“No where in the Old Testament does God command the building of prisons.”
No, He just made people servants (or slaves) when they did stupid things.
October 23rd, 2008 at 10:46 am
Bob,
I completely agree with JLP. If you sign a contract and don’t honor it then what are you doing? To me you are telling a lie. You are saying that you are not worthy of anyone’s trust, that you are not responsible for your actions and you don’t care how affects others. If you don’t follow through on what you have agreed to do (such as pay back your loan) then you have no business making the contract in the first place. Through out time a man’s word was supposed to be golden and if he entered into a contract somehow then he was expexted to pay it back, but now people act as if it doesn’t matter what they do as long as they get what they want. Personally, I think that if you borrow money and can’t pay it back you should either be in debtors prison or you become an indentured servant like in the past, until your debt is payed.
October 23rd, 2008 at 12:30 pm
If the govt makes the unwise decision to send another stimulus check, I will be using mine to pay down debt this time.
I fell for it last time and used the money to help the economy. The truth is most of our products are made over seas and shipped here. So we are really only helping the mega retailer and a foreign countries economy. If you want to help the US economy, take your stimulus check and pay down your debt.
October 23rd, 2008 at 4:52 pm
@ #11 Bob, yes for an individual family, perhaps it may be best to walk away from a mortgage/house. However, how can it not have ripple effects throughout the community/nation: the bank gets stuck w/a house it will probably have to sell at a loss, which affects profit sharing of the bank, which affects employees’ raises or the number of new positions won’t be as high as it could have been, or God forbid, some folks may be laid off. Then they file for unemployment, become behind on their bills, don’t consume the level of goods they usually do, etc. Because of lower income, the bank pays less in corporate income tax, the state gets less in tax which will affect all aspects of a state’s budget, etc., the bank has less money to lend to others to build new buildings, cover inventory purchases, etc.
So when you stated “why does anyone care what others are or are not doing with their homes or home loans” We care because it affects ALL of us as noted above. It has nothing to do with emotions but basic Econ 101
October 24th, 2008 at 2:58 pm
To my detractors.
Quit this nonsense about “not honoring your contract.”
When you stop making payments, you are still honoring the contract. The contract states if you stop, you will be foreclosed on and you must leave. The contract, called the deed of trust, states alot of things including the default remedies of either party.
Not honoring the contract would be not moving out, or somehow not allowing the lender to forclose. THAT is unethical. THAT is immoral.
Actually following all the terms of the contract, including the default remedies is not unethical, immoral, or dishonorable. That is why they are in there.
There is this common misconception that people who walk away from their homes and home loans are not honorable. The fact they are leaving is part of the contractual requirement. Not paying, but staying -that is not honorable.
These homeowners are simply playing by the rules that were agreed on long ago. Those same rules apply to all of you with home loans. If you don’t like the rules, then don’t play, but don’t get mad at those who are.
Do you see the difference?
Also, you can’t be hypocritical when it comes to the effect of general homeownership trends on YOUR personal situation.
When everyone was buying and driving prices up, did that affect your homes value? Sure it did. Did that make you happy? sure it did.
But when that same population (home buyers) then decided to stop buying for whatever reason and the average home price went down and your followed suit, you get to feel the exact same inertia.
The problem is, now you are not happy about it. Well no one is, but you have to take the bad with the good.
You can’t support the market forces price movements when they benefit you and then oppose the opposite movements of the exact same market forces when they cost.
That is essentially saying you only like the market when it goes up. Then it is fair. When it goes down, it’s not fair.
The market sets the value, not your emotions. Your house is worth what someone else is willing to pay for it, just like most everything else in our society. If the market is telling you your house is not worth what you think, or not worth what you paid for it, then take a guess on whose view is skewed
October 24th, 2008 at 3:23 pm
Bob,
Being foreclosed upon is a CONSEQUENCE of NOT HONORING your contract.
October 24th, 2008 at 4:58 pm
JLP:
I disagree.
The contract does not solely state pay your payment every month. If it did, you would be correct.
The contract says pay your payment every month AND if you don’t we will take your house.
Contracts have two parts. Agreement (promise) and remedy.
You agree to the entire protion of the contract, including the remedy when you sign.
You are saying a borrower is not honoring the contract when they default. Wrong. They are not honoring the agreement (promise) portion of the contract, but by doing that then by default they honor the other portion, the remedy.
Borrowers who walk away are honoring the remedy, therfore they are honoring the entire portion of the contract.
Since foreclosure allows eviction by force, everyone who defaults on the payment portion of their loan contract automatically honors the remedy portion.
Everyone has different responsibilities. Some people are doing just that when they walk.
Also, forecosures some times result in the lender being fully repaid. If the lender gets fully repaid, is it still not honoring the contract?
Offnote: I like your blog. Good work
October 26th, 2008 at 10:54 am
Bob,
You’re missing one key point here. This article is not talking about people who CAN’T pay their mortgage. It’s talking about people who are disappointed that the value of the house they bought is going down and therefore don’t WANT to continue to pay their mortgage. The “investment” (better stated as speculation) isn’t working out the way they wanted it to, so now they want to walk away.
That displays a real lack of integrity and is also symptomatic of the problem that comes from very little down payment requirements.
So don’t lecture us about contractual language, etc. Integrity counts.
October 27th, 2008 at 4:19 pm
Nathan:
I don’t think I am missing anything. I understand that borrowers can exercise free will in deciding whether or not to make their payments. Walking away is an exit strategy.
Their reasoning doesn’t matter. Their rights are what matter. I agree integrity counts, but playing by the rules is a measure of integrity.
Playing by the rules, which is what these “walkers” are doing does not show a lack of integrity, because they are following the rules agreed upon at contract signing time.
Besides, are you implying that breaking a contract is a measure of integrity. A marriage is a contract. Is divorce a sign of poor integrity? Cellphones have contracts. Is changing plans and paying an early termination fee showing lack of integrity?
You cannot force your own dissapointment on people who are well withing their rights to exercise their choice.
It is a legal choice to stop making a house payment. It is that simple. People’s reasons vary widely. Some you may agree with, Some you may not. Regardless my point was and is, don’t judge. These people are using the options available to them, and making the best decision for themselves and their families, whether out of compassion, need, or greed.
If you don’t like the way their decisions affect you, don’t blame them. Take steps to minimize outside forces on your own life. In other words…Mow your own lawn.