Professor advises underwater homeowners to walk away from mortgages

Brent T. White, a University of Arizona law school professor, says that it's in the homeowners' best financial interest to stiff their lenders and that it's not immoral to do so.
By Kenneth R. Harney

November 29, 2009
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Reporting from Washington - Go ahead. Break the chains. Stop paying on your mortgage if you owe more than the house is worth. And most important: Don't feel guilty about it. Don't think you're doing something morally wrong.

That's the incendiary core message of a new academic paper by Brent T. White, a University of Arizona law school professor, titled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."

White contends that far more of the estimated 15 million U.S. homeowners who are underwater on their mortgages should stiff their lenders and take a hike.

Doing so, he suggests, could save some of them hundreds of thousands of dollars that they "have no reasonable prospect of recouping" in the years ahead. Plus the penalties are nowhere near as painful or long-lasting as they might assume, he says.

"Homeowners should be walking away in droves," White said. "But they aren't. And it's not because the financial costs of foreclosure outweigh the benefits."

Sure, credit scores get whacked when you walk away, he acknowledges. But as long as you stay current with other creditors, "one can have a good credit rating again -- meaning above 660 -- within two years after a foreclosure."

Better yet, homeowners can default "strategically": Buy all the major items they'll need for the next couple of years -- a new car, even a new house -- just before they pull the plug on their current mortgage lender.

"Most individuals should be able to plan in advance for a few years of limited credit," White said, with minimal disruptions to their lifestyles.

What kind of law school professorial advice is this? Aren't mortgages legal contracts? In so-called anti-deficiency states such as California and Arizona, mortgage lenders have limited or no legal rights to pursue defaulting homeowners' assets beyond the house itself, White said. In other states, lenders may decide that it is not worth the legal expense to pursue walkaways, or consumers may be able to find flaws in the mortgage documents, disclosures or underwriting to challenge the original contract.

The main point, he said, is that too often people's emotions get in the way of clear financial thinking about mortgages, turning them into what he calls "woodheads" -- "individuals who choose not to act in their own self-interest." Most owners are too worried about feelings of shame and embarrassment after a foreclosure, and ignore the powerful financial reasons for doing so.

Buttressing these emotions is a system that White labels "the social control of the housing crisis" -- pressures and messages continually sent to consumers by the "social control agents," namely banks, government and the media. The mantra that these agents -- all the way up to President Obama -- pound into owners' heads, White said, is that "voluntarily defaulting on a mortgage is immoral."

Yet there is an inherent imbalance in the borrower-lender relationship that makes this morality message unfair to consumers, White says: Banks set the rules during the housing boom, handing out home loans with no down payments, no income checks and inflated appraisals. Now that property values have dropped 20% to 50% in many areas, banks have been slow to modify troubled mortgages and reluctant to reduce principal debts.

Only when homeowners cut through the emotional fog and default strategically in large numbers, White argues, will this inequitable situation be seriously addressed.

How does White's 52-page manifesto go over with mortgage lenders? Predictably, not well. Officials at Fannie Mae and Freddie Mac -- investors who fund the bulk of all new mortgages in the country -- disputed White's characterization of how quickly after foreclosure a walkaway borrower can obtain a new loan. It's not three years, they said, it's a minimum of five years, absent extenuating circumstances such as medical or employment problems that caused the foreclosure.

"Borrowers who walk away from their mortgage obligations face serious consequences," including severely depressed credit scores for extended periods, said Brian Faith of Fannie Mae.

In addition, he said, "there's a moral dimension to this as homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community

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Comment by Jeff on December 8, 2009 at 2:54am
Listen, we decided a year ago to apply for a Loan Modification.

The loan is held by Fannie Mae and serviced by JP Morgan/Chase.

The mortgage is $996 and we've owned the house for 20 years and never paid late, ever. Nice house, great neighborhood. We even lived in Mexico for two years and still paid the mortgage on the empty house.

I have no income. I retried and refuse to work. Ann was a teacher until the first of December when she qualified for Social Security Disability. She made very good money, about $54 an hour plus all sorts of benefits. I made even better money when I worked.

The house is probably worth between 90 and 135,000 dollars.

It was worth 185,000 dollars a few years ago.

We didn't qualify for Mr. Obama's Making Homes Affordable Program.

We are arguing that decision because based on the criteria we actually do qualify. We contacted our Congressman and they have intervened on our behalf but made it clear that they may not be able to work anything out.

Our mortgage is 3.25% which is VERY low but the Making Homes Affordable Program can bring the loan to 2% interest, even lower.

Here's the problem as told to me by Alison, a representative from my Congressman's office.

The servicing bank, JP Morgan/Chase, makes very little money collecting the monthly payments for Fannie Mae. They are a loan servicing agent. They get a small percentage of the loan payment, very little actaully.

However, if the home goes into foreclosure they stand to profit immensely because in that case they get a percentage of the total value of the loan. Far more than the few dollars a month they get for servicing the loan.

Therefore, it is far more profitable to the servicing agent to allow the home to foreclose than to adjust the mortgage lower. In that case their small percentage for collecting on the loan each month would be even less. So, they'd rather see the home foreclose. They have nothing to lose. They don't own the loan. Fannie Mae owns the loan which means, essentially, the government owns the loan, which means YOU own my loan.


So here's what we decided.

Last June they put us on a 3 month payment plan making payments of $868 per month, which was the anticipated amount, or close to it, that we might pay had we qualified for the Making Homes Affordable Program.

We're still paying that amount today. We'll never pay more. If we get foreclosed we could care less. We've lived here 20 years, taken several loans out on the increased value of the home and profited by MANY thousands of dollars. Many. We just pay $868 every month as if we did qualify, but we didn't, and we get farther and farther behind every month. Fuck 'em.

They can have the house. We'll rent an apartment. We'll NEVER shovel snow, cut the lawn, perform maintenance or make a repair, ever again. Actually, we can't wait.

Based on the money we've taken out of the house over the years we have profited immensely from owning this house. We've actually paid very little over the years if you subtract the HUGE sums we've taken from the total we've paid.

In the end, we win no matter what happens. Uncle Sam and the American people lose no matter what happens. That's the way they seem to want it.

Janet Jubilee said, "The economy is in a mess because of people deliberately not paying back what they owe."

What planet are you on?
Comment by Joe Green on December 5, 2009 at 4:23pm
If you really can't afford your morgage and can't get it reduced, just walk away. Don't do what some people I know did, spent every last cent they had(and one even borrowed from relatives) to keep their house. In the end, they lost them anyway. If you can afford to make the payments, make them, you signed the contract. One big mistake people make with the home they live in is thinking of it as an asset. Well it isn't, it's a liability.
Comment by Janet Jubilee on December 1, 2009 at 10:18pm
The economy is in a mess because of people deliberately not paying back what they owe. The only thing I don't agree with is monthly interest and high property taxes that effect all of us.
Comment by youhavetoforgiveme on December 1, 2009 at 5:33pm
Let's hope so...we didn't cause this problem: They did.

Even if they didn't deliberately cause this, they are the ones that knew more about how money works more than we did.

If they didn't know better, they should have.....

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