Saw this courtesy of Calculated Risk…..
Joan Shaffer is turning in the keys of the north Phoenix Tatum Ranch home she bought with her daughter in late 2005. They put nothing down on the home, took out a loan that let them pay less than they owed each month and now their loan is $200,000 more than the house is worth.
“We paid $585,000. It was the peak of the market, but no one told us,” said Shaffer, a real-estate agent from Colorado. “We would probably have to spend the next 20 years trying to get right on the mortgage. That’s crazy.”
As Calculated Risk said “It’s amusing that she is a real estate agent.” He has such a gift for understatement.
On a more serious note, I saw a link to this discussion thread in the comments of CR post. The discussion is about the morality of just walking away from ones mortgage and it takes place on a forum for mortgage brokers. I recommend that everyone take the time to least skim the thread. The perspective of the people who where involved in making these loans is very interesting.
I certainly did not read all of the comments but one commenter jumped out at me, “sheriebaby.” Sherie and others argued that the the foreclosure of the home to the bank constituted satisfaction to the terms of the contract under one possible closure scenario.
This ignores the intent of the foreclosure provision. As CJKatl said on April 20, 4:27 pm, the intent of the foreclosure provision is only to add punitive dissuasion to breaking the loan contract. Implicit to the agreement is that you do not want to lose your house. In exaggerated terms, the intent is like saying “If you break the loan we will take your firstborn,” and you reply, “Hah, I don’t want the brat, you can have him because I’m splitting.” The intent of the bank was not to obtain your child, but compel you to keep the terms.
Saying that you can walk because it is provided for in the contract is only to encourage the lawyers to write up even more lengthy documents covering every possible situation in a way most disadvantagous to the party under onus. Obviously the mortgage is supposed to help both parties, but on average the person seeking to buy a home is under a more pressing need than the lending financial institution. It should be considered a kind of grace that the bank will accept the house in lieu of the mortgage payment, and teaching the banks that such mercy will be ruthlessly exploited will only hurt the general borrowing population in the end.
Not that the banks did not write up exploitative contracts in the first place, in most cases having a better understanding than the borrower of how untenable the arrangement fundamentally was. But I agree with the commentators saying a necessary exit should be made with dignity. Do you want banks to start writing debtor’s prison into mortgage contracts? Do you doubt they can bring pressure to bear to move the legal system in that general direction over the next 10 yrs or so?