NY Times: Why Not Walk Away from Your Mortgage?

I see a big distinction between voluntary default in a commercial setting vs. a residential one. Commercial borrowers pay higher interest rates and typically can borrow a smaller percentage of the purchase price, specifically because of their ability to walk away. The cost of default is built into their loan, in effect, and the risk of bankruptcy is factored in as part of the game of business. If an institution loans them the money anyway, it's their problem.
But home ownership is heavily subsidized by the government, which is just another way of saying that people who pay taxes subsidize home owners. In part this is because of tax deductions (mortgage interest and property tax) which, if they didn't exist, would result in higher tax bills for homeowners. But more directly, Fannie Mae and Freddie Mac's debt has been implicitly guaranteed by the federal government. Which is to say, when these borrowers don't pay and walk away, and a portion of the Fannie/Freddie bond that their mortgage was bundled into is starved of expected cash, those of us who pay taxes foot the bill. This is not something we should be very happy about, though on the flip side, the stock market is doing awfully well so maybe it's a wash.
To me the solution would be to create a strong disincentive towards walking away, akin to the penalties of bankruptcy (but stronger). For example, a 10-year prohibition on receiving a Fannie/Freddie mortgage. The borrowing costs of walk-away types would increase as a result, because they couldn't get those taxpayer-subsidized loans. The higher rates would compensate lenders for their proven higher risk of default. But it wouldn't be "for life" recognizing that mistakes do happen.
And maybe pigs will fly, too!
-Tad
Reply to
Tad Borek
We law-abiding Americans pay our debts for the most part, but when things get really bad, like the Stamp Act, then we thumb our noses at authority and don't pay and hold something like the Boston Tea Party.
Reply to
Don
I would call that a small distinction rather than a big distinction. The crux of the matter is that in one case default is regarded as a part of business and in the other case as a moral or ethical failing and dishonorable act on the part of an individual. I see it as sort of "pushing the little guy around" for commercial benefit. Two sayings relevant to making a distinction between the different kinds of default are "What is good for the goose is good for the gander" and "You can't have your cake and eat it too."
Reply to
Don
Why people walk away from their homes and not from their cars, which are underwater immediately upon driving out of the dealer lot, beats me. The author has a point that we all need a roof over our heads, not an investment. But that was the first mistake committed by the homeowner, consciously or not. So, since the homeowner is living in his investment, it gets murky when the investment goes under. Since he also has a responsibility of providing for his family and it takes precedence over the lender's satisfaction, a wash-sale is the best alternative, not defaulting.
Reply to
Augustine
Correction: Elle quoted from the NY Times.
I am curious about how much higher the interest rates tend to be and how much smaller the percentage of purchase price; how it compares to the interest rates lower income folks pay; how much more negotiating room and skill a corporation gets from and applies to a lender compared to Joe and Jane Smith.
? specifically because of their ability to walk away. The cost of
Corporations are not? Especially the recent financial institution bailouts?
Given how high the standard deduction is I am doubtful this is very significant. (Granted today one does not have to itemize to deduct property tax.)
This is a solution mostly in hindsight, it seems to me. The contracts were signed long ago. Can't change them now.
Yes. I for one think more regulation of the financial trading industry will occur first.
I am a little surprised at your position here. Anyway, Don I think captured well the point of the article.
Reply to
Elle
I do think the chances of a violent revolution are higher now than they have been in decades. I also think this is a characteristic of all societies over time, not just the United States. Take away enough people's ability to make a living (that keeps up with others well enough), and then they have nothing to lose and in fact much to gain by revolting. It just takes a critical mass.
Reply to
Elle
Agreed. My guess is the USA will escape violent revolution this time, because even in the Great Depression with the poverty and despair at that time, the elected government survived. On the other hand, with a few more Bush-Cheney administrations in a row and a few more financial meltdowns that even Obama-like saviours couldn't fix, anything could happen.
Reply to
Don
I had in mind riots in the streets and possibly mobs killing at random in parts of the country. I do not expect some kind of coup. I think it is something for which everyone at all levels of community should be vigilant at this point, especially as high unemployment persists. But we are on the same page.
Reply to
Elle

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