Homeowners opt to flee instead of fight as loan modifications start to lose luster

[phantom power]

One thing I notice is that "moral hazard" is only for the little people. I don't hear anybody wringing their hands about "moral hazard" regarding trillion-dollar bailouts for the Mighty Captains of Industry.

Recently, Airan-Pace secured a modification for a Miami Beach client that shrank his monthly payment from $3,700 to $1,600. But it was only a reduction in interest rate — allowed by the Home Affordable Modification Program to go as low as 2 percent.

"I called him in and he said, 'I'm not signing this,' " Airan-Pace recalled.

He owed $470,000 on a property worth less than half that.

"Many homeowners feel that if they take a modification now, a decade down the road, they'll still be coming to the closing table with money," Airan-Pace said.

...

"If we increase principal write-downs offered through the program, there are concerns about moral hazard — underwater borrowers with affordable mortgages could engage in strategic default," Reilly said. "Increasing incentives for underwater borrowers to become delinquent could increase the cost of the program to taxpayers and risk slowing the housing recovery."

http://www.palmbeachpost.com/money/real-estate/homeowners-opt-to-flee-instead-of-fight-as-183341.html?printArticle=y

[Fire1]

1. Either owing money or breaking even, of which I plan on the

latter.

[bemildred]

2. There is nothing immoral about negotiating a reduction of principal.

And there is nothing immoral about walking away from a bad investment. Calling it "moral hazard" is a slur and propaganda.

[Statistical]

3. They didn't say walking away is moral hazard.

They article stated that if principle reductions were easy/common that would be a moral hazard.

Home Owners may attempt strategic default. Someone who can pay witholds payments in attempt to get principle reduction.

Sure if hurts your credit report but how much would you trade a couple years of bad credit for?
$10K?, $25K?, $50K?, 100K?

That is the moral hazard.

[bemildred]

7. Correct, the "moral hazard" is the temptation to serve your own interests

rather than the bank's. The central point is that the property is not worth what is owed on it, and that the debt is secured by the property. The notion that one has some moral obligation to the bank to pay for it anyway is absurd. The bank assumes no moral obligation towards you, it does what the law allows and prudence dictates to maximize its own profits. You should do the same.

[dkf]

6. Is there anything immoral with stopping payments on all debts?

It's more stupid to pay for credit cards that represent no residual value at all in many cases. I never understand why walking away is bettter than simply being a deadbeat.

[bemildred]

8. No, again it is a pragmatic decision.

If you have the abilty to pay or assets and the debt is significant, then they may well go after you in various ways, and you will ruin your credit rating, and your life may be made unpleasant in various ways. But if you are prepared to deal with that for whatever reason, then it is perfectly moral for you to do so. This is business, not theology school.

[barb162]

17. By and large, business is amoral in almost all cases

despite attempts to bring ethics in every now and then.

[bhikkhu]

23. I think he is talking about a problem with how you get to that point

As I understand it (and I have looked into for my own circumstances), in order to be eligible for consideration you have to more or less default on your home loan, or at least fall a couple of months behind on the payments. I would be one of those managing ok, but it would be in my interests to stop making payments simply in order to qualify for loan modification.

Of course bankers don't want a program that rewards people for defaulting on their loans, which they probably do view as an issue of "morality".

[bemildred]

24. Yes, I do understand that.

But our current economic system is based on precisely that sort of gamesmanship and unrestrained pursuit of self-interest. So why should the little guy be excluded from that amoral pursuit of self-interest? That's my question, my point of view.

I am all for honesty and integrity in personal relations, but it's a two-way street. If it is good for private individual citizens to be moral and ethical and responsible and altruistic, then why is it not also good for large faceless corporations and bureaucracies and the government itself?

[bhikkhu]

25. I know what you mean

I do feel committed to good citizenship when it comes to dealing with my credit union and local businesses, but most big banks and corporations are by nature virtually soulless machines, lacking the sentience necessary to perceive individuals, much less to be moral in any sense of the word. I don't think it has any meaning there except as a button that may be pushed to produce more profit.

[Bonhomme Richard]

4. A friend of mine just did the jingle mail.....

and moved to Tennessee. His house was 60K underwater and he didn't see any way that is was coming back. Had his own HVAC business that was losing money so he sold what was left to the guys that worked for him and took off.

[leveymg]

5. Here's the homeowner "walk-away" meme, again. Obscures foreclosure crisis.

The message the media isn't broadcasting is the massive human tragedy associated with 2 million plus foreclosures.

[barb162]

9. What's the diff between holding a car loan and a house loan?

As soon as the car is bought, it loses value, its value is less than the car loan. In one year, it loses a substantial value.

[Po_d Mainiac]

10. Life expectancy of a house is a bit longer than an automobile. n/t

[barb162]

14. BWAHA, depends on how well the house is built! n/t

[bemildred]

11. I think it depends on state law, however:

I am pretty sure that you cannot walk away from a car loan the way you can with real estate, if you give them the car back, you still owe them the money less what they get for the car.

[pokercat999]

12. In a lot of states with recourse mortgages (VA) it's the same

car or house. My understanding is it's rare that the bank pursues the borrower on either one. Anyone have a different take?

[barb162]

15. That's my point,, you can't walk away from it even though it

loses money the second you buy it as it is now a used car. But people don't dump their cars as they dump their houses. The other thing about fluctuating values is that a lot of these houses that people are dumping right now could be revalued higher than the mortgage amount in a few years as the house market settles out.

The real point I was making was that people seem to have no problem taking a loan on an asset that consistently keep losing value, the car, and it's an asset that depreciates consistently lower than the loan amount. But as soon the house value is lower than the loan amount, people run away.

[bemildred]

18. People do walk away from their cars just like they do with houses.

The legal consequences are sometimes different, and one needs to keep that in mind.

Another relevant factor is that car payments tend to run around 10% of what you pay for a mortagage.

Some people will pay as long as they are able to, others will dump an underwater asset even when able to pay, hence this story about corporate outrage. I say it's a pragmatic issue, not a moral one. If this were a matter of a debt between persons, I would agree that there is a moral component in keeping ones word when one is able to. In dealing with corporations, which are self-designated immoral entities, it is ridiculous to suggest that we ought to treat them better than they will treat us.

[barb162]

19. The incidence of people walking away from cars is pretty low I think

(but I won't try looking it up). For decades people buy cars that have a value that lowers the minute the sign on the dotted line. But they lovingly wash and shine that depreciating asset every Saturday morning.

[bemildred]

20. Whatever you say. nt

[Robb]

21. I would have thought so, too

...but it appears http://www.nber.org/digest/dec07/w13067.html">we are both incorrect: :shrug:

"The average purchaser finances around 90 percent of the price of the automobile, with the average loan size being around $11,000. Repayment is highly uncertain: more than half of the loans default, and the majority of these default within the first year of repayment."

[bemildred]

22. All I know is I have been acquainted with a lot more people that walked

away from their cars then from their houses. But that is anecdotal, people also have a lot more cars than houses. And the number of people that are in fact bankrupt, financially underwater, seems very high today relative to when I was younger.

The terms that are given on car loans these days are stunning too, seven year loans for a vehicle. I can remember when they would get wobbly about a loan over 3 years.

[Greyhound]

13. Real estate is an asset, a car is a liability. n/t

[barb162]

16. They're both assets, actually.

[bhikkhu]

26. Unless you're a bicyclist. n/t