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Friday, July 31, 2009

Walking away from your mortgage

Blogger Mish as written a series on the ethics of walking away from underwater homes. I completely agree with Mish's view, that if you owe more than the home is worth, walk away. In any event, I found his most recent post excellent, you can read the full post on Mish's blog by clicking here:

Below is a snippet I found most to the point. The quote below starts off with a reader talking about his own underwater home, and struggle to come to terms with what to do next.

Eh writes
.......I’m now in a position where I’ve cut back on groceries (significantly), eliminated cable tv and eliminated external activities unless they’re free and close to home. I know there are others who are in worse shape. I’ve struggled with a decision to call ‘You Walk Away;’ I accept my role in this mess and that’s what is preventing me from acting.

Quite frankly, I don’t know what I’m going to do with my financial situation just yet. I may decide to walk away knowing that a similar sized unit can be rented for half of what I pay in combined mortgage payments and condo association fees (an opportunity that did not exist when I bought); if you do the math, renting will allow me to pay back my other bills and return to a better financial condition in a much, much shorter time. Then again, I may decide to fight my way through. Perhaps, I could find a part-time job to help make ends meet. Either way, it will be my decision and I will deal with the consequences.

There are so many wrongs in this situation. It was wrong for investors, speculators and buyers to have driven prices so high. It was wrong for Realtors and agents to have advised their clients to proceed with the lofty purchase prices. It was wrong for lenders to approve the values of these properties. It was wrong for the government not to act to help stem the wild ride in the housing market. It was wrong for me to believe that owning property is always to be viewed as an investment. And, it was wrong for me to have followed the bad investment available in the media and not to have been aware of the economic advice that warned of a changing financial climate.

If I stay and struggle through my situation, I will not do so quietly. Overall, we (Americans) still lack accountability. We continue to blame those at the end of the chain instead of those who initiated and contributed the greatest to the demise. If I stay, I will lead the local voice in demanding that those in a position of power and control be held accountable for their actions. I have questions that need to be answered. Why do we continue to allow the likes of Ken Lewis to remain in power at the heart of the financial system? Why do we not demand that the executives and managers at each of the offending financial institutions, investment firms and insurance firms return their pay increases and bonuses from the past 8 years? Why do we not demand that the banks, investment firms and insurance companies not only reimburse the TARP money but all of the profits they made over the past 8 years (along with the pay and bonuses)? Yes, I realize they money is gone, but they need to reimburse us for all the wealth they took. And finally, why do we not demand that the Federal Reserve be abolished or greatly reduced in function? Somebody, please do something other than maintain the status quo and allow the Sheriffs of Nottingham to continue to pillage this country.

Take care,

EH (Earl of Huntingdon)
Thanks for sharing "EH".

My personal advice to "EH" is to run, not simply walk, away from this mess.

That said, my take is that whatever "EH" does is correct. He is the one who has to live with his decision. Clearly "EH" made some bad choices and he and his family are suffering for it. No one should be judging "EH" for what he does in his situation at this point going forward.

History as to how and why "EH" is in this mess does not really matter. Being underwater in a mortgage is a sunken cost, and sunken costs are irrelevant in deciding how to proceed. The term "Don't throw good money after bad applies."

However, if ethics prevent "EH" from walking away, who am I to judge? If "EH" does walk away, who is "HH" to judge? The problem is one of us is judging (on the basis of ethics) and one of us is not judging at all (for the simple reason ethics has no bearing).

At the heart of this issue are two irrefutable facts:

1) "Mortgages are not ethical documents, they are legal contracts." Those contracts stipulate the penalties for breakage. Both parties signed and agreed to the penalties for breakage. If one side did not set the penalty high enough, that party and that party alone is responsible for the consequences.

2) In a free market system, failed institutions should be resolved in bankruptcy court not via taxpayer bailouts mandated by government bureaucrats. Furthermore, there is no legal or moral justification for the Fed, Congress, or the Treasury to be picking winners and losers at taxpayer expense. Repetitive propping up of private institutions is not only a moral hazard that invites more reckless behavior, it is theft perpetrated against US citizens via cheapening of the US dollar (or tax hikes), for the sole benefit of those hand-picked private institutions.

Those like "HH", blaming people like "EH" have their fingers pointed in the wrong direction. The fingers ought to be pointed at the Fed, Congress, the Treasury, President Bush, and President Obama.

Good luck to you "EH", whatever you decide. Just make sure the decision you make is based on how you feel, not how someone else thinks you should feel.

Mike "Mish" Shedlock

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