When to walk away from a mortgage by Liz Pulliam Weston as seen on www.msn.com
It’s a moral issue only if you have a choice — and many people don’t. Ask yourself 3 key questions to decide whether it’s worthwhile to keep trying to hang on to your house.
Some people believe that walking away from a mortgage is immoral.
They believe you should do everything in your power to repay your loan, including draining your retirement funds, racking up credit card debt and selling your firstborn. In their view, the lender should have to pry the house keys from your cold, dead — or at least bankrupt — fingers.
Others insist that reneging on a mortgage obligation is no big deal. It’s a business decision, they say, and nothing more.
As usual, both extremes are wrong.
Most of us know money is more than a matter of numbers. There are ethics involved. Most people feel, or should feel, an obligation to pay their debts. (So should business people, by the way. When ethics depart business, the result is Enron.)
But sometimes, despite valiant efforts, people fall short. In those cases walking away from a mortgage can become, like bankruptcy, the best of bad options. We cross the ethical line only when we choose not to pay, and many of the folks facing foreclosure these days really don’t have much of a choice.
The ‘walkaway’ myth
Oh, sure, we hear anecdotes about folks who stopped paying their mortgages simply because their homes were worth less than they had paid, or less than they owed, even though they could still afford the payments. I even fielded an e-mail from a reader who wanted to commit what I saw as fraud: buying another home at its new, lower price and then mailing in the keys to his current home.
But there’s little hard evidence that this is happening on a large scale, as Los Angeles Times writer Michael Hiltzik recently reported in “‘Walkaway’ borrowers might be an urban myth.” Although lenders warn about the moral hazard posed by solvent walkaways, and Treasury Secretary Henry Paulson has branded any borrower who would do so a “speculator” who is “not honoring his obligations,” others say mortgage bankers are trying to shift the blame for the foreclosure crisis onto borrowers’ shoulders.
Instead of focusing on homeowners burdened with debt, lenders are spinning the story of homeowners unburdened by conscience
As Hiltzik reported: “‘So many of the loans made were irresponsible — for the borrowers and for the lenders,’ said Kurt Eggert, an expert on predatory lending at Chapman University Law School in Orange County, Calif. ‘Lenders have an interest in painting themselves as responsible, even caring entities. They want to cast blame for the subprime meltdown as much as possible on their borrowers.’”
David Wessel of The Wall Street Journal discusses how the federal government could help Americans whose houses are worth less than their mortgages.
Blaming the foreclosure crisis on those who can pay but choose not to is certainly one way to do that. Another is to point to evidence that some borrowers are staying current on their credit cards and car loans while defaulting on their house payments. This, lenders say, is an erosion of the long-standing assumption that borrowers would sacrifice other obligations before falling behind on their mortgages.
But again, there’s no evidence these borrowers are merrily skipping away from their biggest debts. What’s far more likely is that they’re facing huge increases in their monthly payments that they simply can’t manage. Rather than continue to throw good money after bad, they’re giving up.
And that’s not necessarily immoral. It may just be realistic.
When to walk away
Understand that most borrowers didn’t commit fraud to get their loans. They didn’t have to. Lenders were falling over themselves to make mortgages that made no sense, mortgages that would become unaffordable with the first or second payment adjustment.
The lenders assumed, as did many borrowers, that these loans would be refinanced or the homes sold before the mortgages became unaffordable. Lenders and borrowers alike discounted the possibility that home prices could fall, wiping out homeowners’ equity and making refinancing or a break-even sale impossible. Now we’re reaping the fallout.
But all the finger-wagging in the world won’t change the fact that many people can no longer manage their mortgages. Help, if it comes, won’t be quick enough or substantial enough to save millions from losing their homes.
If you’re wondering whether to walk away from your mortgage, these are the questions you need to ask yourself:
Can you make your mortgage payments while meeting your other obligations? Those obligations include feeding your family, paying your other bills and saving for retirement. If you can trim your expenses and reduce your bills to make your mortgage more manageable, clearly you should.
But if your payment already gobbles up half or more of your gross income and more increases are on the horizon, your situation may be untenable.
