NPR ran a story this morning about a homeowner who is considering walking away from their mortgage because they are so far underwater. Regular readers will recall my recent entries (here and here) about my feelings on this issue.
What I found most interesting in today’s NPR piece is not that the bank’s renegotiation of the mortgage includes a $107,000 balloon payment (though it does), or that the new terms of the mortgage are more favorable on paper (40 years @ 2%). What I found most interesting is that the person the bank referred NPR to for comment, Mr. Scott Talbott, Senior Vice President of Governmental Affairs at the Financial Services Roundtable, had to say about this particular homeowners obligation:
Talbott says that homeowners who get modifications have an obligation to stay — and pay.
“The borrowers have signed a contract,” he said. “They have signed a promissory note, which says, ‘I promise to repay.’ So in addition to a legal obligation, you can argue there’s a moral obligation to repay.”
Fortunately, University of Arizona Professor Brent White was quick to point out that this is not exactly the case. You may recall Prof. White as being mentioned here before, as he has become the face of the non-morality argument for walking away. He responds:
“A contract is not a moral document, it’s a legal document,” White said. “So all this language about moral obligation and contractual obligations rest upon homeowners not knowing what a contract is.”
In reality, these contracts are built with clauses that define the course of action should the homeowner walkaway (essentially a default). These are known by both parties, and agreed upon, when they initially enter the agreement. There’s no trick, no subterfuge, and nothing untoward – it’s simply business.
However, there may be consequences, as Mr. Talbott from the Financial Services Roundtable reminds us:
walking away from a mortgage would bring down the Salters’ [the homeowner] credit rating. And, he says, if everyone did it, home values would go down even more.
Both of these consequences seem appropriate for the situation – especially the reduction in value of other homes. That’s the point of the market: to adjust the value in accordance with the supply and demand in such a way that the item in question is valued accurately. If that means that these homes are suddenly “worth less,” it’s not because of the homeowner’s walking away. It’s because their initial valuation was inflated (through many means, likely) and this adjustment was due.
There has been much discussion that the integrity of individuals has been on the decline, and that people in previous decades or generations would never have walked away from their home. While individual integrity may have changed, walking away from your home is not an issue of individual integrity. It is a business decision. Those who criticize homeowners for walking away would surely laud a businessman who shed a losing investment or big liability.
Don’t get me wrong – there are consequences for walking away from a mortgage. But, there are (usually far worse) consequences for paying on an underwater home for the next 40 years – even if it’s only at a 2% interest rate. The contract will detail how to handle this situation, should it occur, and following an agreed-upon protocol will see the situation through.
Ultimately, if individuals act in their own best financial interests, the market and the financial institutions will adjust accordingly. If that means walking away from an underwater mortgage, so be it.
If you feel like sharing your feelings on this issue, I suggest you send a note to Mr. Talbott – firstname.lastname@example.org. I’m sure he’d be glad to hear from you.