The Consumerist has a fantastically interesting discussion about some recent articles advocating for strategic defaulting on mortgages (i.e. walking away from your home if you’re underwater).
The discussion largely centers around a recent article by a University of Arizona professor. Here is the abstract, if you don’t want to click through:
“Contrary to reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners do not strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to induce homeowners to ignore market and legal norms under which strategic default might not only be a viable option, but also the wisest financial decision. Unlike lenders, individual homeowners have thus generally not acted to minimize their losses and have born a disproportionate share of the burden from the housing collapse.”
It seems to me that the end of the Consumerist piece hits the nail on the head:
And yet… if a business finds itself in an untenable financial position, it is considered smart to put a stop to things immediately and, hopefully, go on to fight another day. If only individuals had the same freedom in the marketplace.
Although I’m not in this situation, and my decision making may be different if I were trying to hold together a family and a real job, my advice would be to sieze the empowerment, walk away, and live to fight another day.
The over-dependence on lenders, employers, and others to provide for individuals has paralyzed many into situations where they see no way out. Largely, this is a function of their own lack of skills and/or confidence in those skills. If you are industrious, hard-working, and have an aptitude for something, you can almost certainly produce a living for yourself and your family. You may face hardships, to be sure, but there are few things worse than writing a monthly check knowing that you are literally throwing money away.
Obviously, individuals should make, and abide by, their own decisions, and contractual obligations are to be considered, but the collateral in the house serves as the balance. The bank owns the house, the borrower is paying towards it, and upon completion of the payment, the borrower assumes full ownership. Choosing to walk away doesn’t change the fact that the bank owns the house, it simply changes the financial (and otherwise) realities of the individual.
If there were more individual empowerment in today’s marketplace, I think you would see a dramatic increase in the level of service provided by vendors, a great reduction in the amount of ridiculousness put up by financial institutions and their ilk, and a general rise in the happiness levels of Americans. To reach this point, individuals must start treating themselves like businesses when dealing with businesses – along the bottom line.
This doesn’t mean that you should ignore your fellow man, or be uncharitable, or wish ill-will towards those who work for the banks. Remember, they are employees, not the corporation.
To paraphrase Prof. White, individuals should act “to minimize their losses” – it only makes sense, and will make the world a better place.
After all, it’s what the bank would do to you.