Do The Right Thing: Walk Away

Since I am based in California, much of the past season’s holiday conversation covered an unfortunate topic: the housing market. More specifically, we had more than a few family and friends in various stages of mortgage distress, from being underwater to walking away.

Some people were slightly embarrassed about their situation but in an era where banks, automakers and other corporations eagerly lobby for and accept government handouts, why should the average person be subject to a stigma simply for making an economically logical and prudent decision (walking away from their mortgage)? Most of these folks had no choice due to financial hardship but even if they had the means to hang on, I recommended they walk away.

Today’s Wall Street Journal carries details on a Pennsylvania mortgage relief plan that is gaining  notice in Washington. Living in a post-Bush, Orwellian era where up means down, this plan in actuality provides no relief but merely  postpones the day of reckoning for homeowners/mortgage-slaves. Instead of writing off mortgage principal, the plan provides short-term, low-cost loans to those struggling with their payments. This is akin to someone using their credit card (but with lower interest) to pay the mortgage — it provides no relief at all and actually adds more pressure as now there is both a mortgage and a new loan to repay.

If the financial crisis has shown us anything, it is that banks, Wall Street, et al care only about their bottom line, even to the detriment of the nation’s long-term future. It is high time that consumers approach these financial situations with the same cold, calculating consideration that Wall Street uses when denying mortgage modifications, small business loans, etc. Social stigmas for doing the right thing financially are a relic of a bygone era.

[disclaimer on] Please note that I am not advising any readers to take any course of action. Each state has different laws and each person’s situation is unique. Here in California, mortgages are non-recourse so lenders can only take back the house, which makes walking away a viable option. If you are in a distressed situation, please consult a trusted advisor for help.  [/disclaimer off]

3 Responses to “Do The Right Thing: Walk Away”

  1. HelicalZz Says:

    While I don’t favor walking away, negotiation with your lender should be on the table. Lower rate, lower total. It can routinely take 2 years to remove someone from their home after payments stop. So, no, don’t walk away, threaten to squat.

    Zz

  2. Davy Bui Says:

    Hey Zz,

    As I mentioned in the post, every state has different laws and people should consult with a trusted professional before making any decisions. Here’s a Bloomberg article that illustrates this point:

    http://www.bloomberg.com/apps/news?pid=20603037&sid=aIf_vUQZFt.s

    CA has non-recourse mortgages but many states do not so in those situations, walking away may not be an economically sound decision.

    My point is that people should begin behaving like corporate America and start making economically beneficial decisions without any fear of social stigma. And yes, if walking away does benefit you, I would definitely squat as long as possible before leaving!

  3. Tim Says:

    I also agree that people should consult a professional before acting

    But if Wall street firms do it why should individuals not.

    Take a look at
    http://www.ritholtz.com/blog/2009/12/morgan-stanleys-commercial-jingle-mail/

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