Sending the right message

A January 7 article from the New York Times entitled Walk Away From Your Mortgage! mentions the WSJ article I referenced in my January 3 entry about strategic default, where a Mortgage Bankers Association executive expressed concern over the “message” people send to family and friends when they default on a mortgage, and how it harms communities. Even Henry Paulson and President Obama have implied that people who voluntarily walk away from mortgages are irresponsible deadbeats.

While they are referring to people who voluntarily default when they can afford to pay, the line determining whether one can afford it is becoming less clear now that the number of unemployed Americans has hit 15.3 million, and 40% of those have been out of work for two years or more. The variations on affordability are virtually limitless because every family’s situation is unique. Who determines what’s affordable? Giving up vacations, new cars and restaurant dining in order to pay the mortgage is one thing…but what happens after that?

Do you try to survive temporarily using credit cards for groceries and gas? Do you stop paying other bills to keep paying the mortgage? Do you turn off the heat and hit up the food banks just so you can remain a homeowner? Do you withdraw your teenagers from school so they can work at McDonald’s and contribute to the family income? How long do you hold out, hoping for the employment and housing markets to bounce back? Every family facing an underwater mortgage and/or financial crisis has to decide for themselves where to draw the line, and it’s never an easy decision, especially when it involves losing your home and hearth. When you reach a certain point, worrying about the message your actions send to the community becomes ludicrous. You simply do what you need to do.

In the meantime, being judged as irresponsible by the mortgage industry (who has everything to gain) and government officials (who will never have to worry about paying their own multi-million-dollar mortgages) doesn’t improve the situation. The NYT article suggests that these are the people who should be sending exactly the opposite message:

“…the government should stop perpetuating default “scare stories” and, indeed, should encourage borrowers to default when it’s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck.”

This attitude could actually help homeowners, unlike the quagmired mortgage modification programs. While it may sound like I’m attempting to justify my own choices, it has a much larger impact than just making people feel better: Knowing that homeowners are likely to behave like big corporations and cut their losses might give lenders an incentive to actively modify mortgages on a large scale, potentially improving the situation instead of making it worse.

As for the message we are sending to family and friends about our own impending mortgage default, it hasn’t been a difficult thing to explain, and we have encountered overwhelming support. Now that our situation has unavoidably changed, through no fault of our own, apparently for the long term…nobody can find a reason we should remain in our underwater and now-unaffordable home. It’s become a bad investment that could take decades to recover from, and it’s not worth the stress. Over the long term, the only beneficiary would be the mortgage bank — which, ironically, wouldn’t hesitate to walk away from a bad investment.

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