Over the holiday weekend, there were a number of press reports about a discussion paper, Under Water and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis. Reportedly Brent T. White, an Associate Professor at the University of Arizona’s James E. Rogers College of Law advocates that homeowners who are underwater (meaning, the outstanding mortgage balance[s] is more than the value of the home…is now, or in some cases, will ever be) should simply walk away from their obligations and not look back without feeling a bit of guilt. Obviously this all got my attention, but before I took to this here blog and declared “You Have Got to be Kidding Me!” (which at first glance seemed like the most expedient way to address it), I opted to read the discussion paper (rather than just the abstract). Before you click the link below, pour yourself a fresh cup of tea.
Here’s my take:
The media reports do not encapsulate all of the issues raised by Professor White’s paper. I can see why: it is 54 pages long, and is chock-full of cites, argument and reasoned analysis.
He touches upon why people are under water. But in my own words, I’ll summarize: Some bought at the height of the market and believed all the wicked cool things that people with nice teeth, shiny cars and nifty watches said about buying real estate.
“Real estate always goes up!” Right.
Apparently, those buyers, and those who bought nice teeth, nifty watches and shiny cars ignored what happened in the late 1980s. It was as if that troublesome period of American History never happened at all. Believe me, I’ve met with clients who were surprised when I told reminded them about it.
Others used their homes like ATMs. Why? Here’s the most honest and simple answer: because they could. Values were inflated. Loans were underwritten on lies and hope. So why aren’t people walking away in droves?
The Emotional Ties that Bind
According to Professor White that there is an emotional undercurrent fueling a (for lack of a better term) homeowner’s sometimes irrational desire to fight to keep their home. My experiences confirm that. I also agree with Professor White that in some cases, that emotional undercurrent is interfering with some homeowner’s making sound, rational and logical financial decisions for them and their families.
I wish I could count the number of times I have told a debtor seeking chapter 13 protection that there is no conceivable way to save their home, but they are determined to fight – even when there is no income….or even a whiff of sustainable income. Remember, in chapter 13 homeowners cannot currently modify the mortgage notes on their principal residence. The code doesn’t allow it. The law ties my hands.
White makes a compelling case for people to walk away from their homes based solely on the numbers. Add up the cost, weigh it against the benefit, and keeping the under water home is just silly math. Why pay to effectively rent a house that might be worth something in 20 years? If the house is underwater, you don’t even own a switch plate. When people who are underwater tell me they want to save their home since “it’s the only thing they own,” I remind them about the switch plate. It’s sort of like a cold glass of water.
Actually, it’s better described as Cher in Moonstuck slapping and screaming at Nicholas Cage (who is also in a world of financial hurt) to “Snap out of it!” I use that illustration because if for no other reason, we must try and smile when discussing this incredibly difficult subject matter.
White even makes a compelling case that one’s overall credit score and future credit worthiness will not be as adversely affected as many assume. But credit – and the reliance on credit – is what got many people (and this economy) into the heaping mess it is currently in. Credit, and the supposed need for “good credit” is exceptionally overrated.
In an effort to explore why homeowners steadfastly hold onto their homes, White suggests that many are myopic and suffer from “selective perception.” But I think it’s important to be fair here: those traits are uniquely human. They are among the many wondrous flaws that make us human.
Well, perhaps not just humans. Once of my cats is convinced that a red laser pointer is an unwelcome pest that she is determined to catch and devour because I think she thinks it will please me. She’s nuts. Seriously, she’s utterly out of her (as my Nana would say) “bloody gourd.” But I digress.
It teeters on the high precipice of logic and reason (with a downward slope to the land of the absurd) to suggest that all homeowners who are underwater can and should walk away without feeling bad about it. Why? Because not everyone in an underwater home is there for the same reason. But media reports be damned, this is not all White’s paper discussed.
Would the Person Who First Started This Problem Please Raise Their Hand?
For at least the last ten years, elected leaders of all shapes, sizes and parties have advocated home-ownership as if it were the best thing since Double Cheese-Hamburger Helper. We all heard the arguments: home-ownership leads to neighborhood stabilization and is a road to build long term wealth. Some bought into this boatload of crap. Some bought homes that had no business of owning real estate. Many of those people just got duped – plain and simple – by their leaders, and among others, people with nice teeth, a cool watch and a shiny car…who would never, ever lie to them.
Others (more than many are probably willing to admit) were motivated by something else: greed. Do I really need to spend a lot of time on this issue? And before anyone accuses me of pontificating from a throne of judgment, I remind my readers that I too am human. But there is a welcomed perspective garnered from increasingly understanding the music the devil entices you to dance to.
For many who are underwater, upside down, or just feel completely screwed, regardless of the emotional undercurrents that fuel the decisions to keep an upside-down home, there are some people who want to fight for their home because to them, it’s the right thing to do.
It’s their home. It’s their signature on the dotted line. It was their decision to buy it, to refinance it, to cash out. It has memories. It has important memories. They want – nay, they need to do the right thing. They are prepared to do what it takes because it was their decision. They feel bad about not being able to keep a promise they said they would make. This is not what they envisioned for the family. For their children. And this need is fueled by something that cannot be – under any circumstances appropriately encapsulated in a 54 page paper.
All swords have two edges. There are others who are waiting for a handout. I recently took a call from a homeowner who just got an approved modification on investment property (which as a matter of policy, I have huge problems with – but we’ll save that for another blog, another day). The caller told me he earned $60,000 a year at his job,and he could easily afford the mortgage payment on his principal residence, but was a wee ticked off that the modification offered by the bank required him to fork up $500 per month, in his words, “out of my own pocket!” (which he – by his own admission – could handily afford). Should this guy be allowed to “walk away”? Are you wondering if I responded by saying “really? Really?”
I want readers to know that White discusses other options than what has been portrayed as a flagrant abandonment of personal responsibility. He discusses cram-down rights in the bankruptcy code, and discusses the idea of a chapter 13 “pre-packs”, which he describes as allowing a debtor in a particular ZIP code to file a pre-pack chapter 13 so long as the median housing price in that area dropped by 20 percent or more. He tosses up the idea of the government providing low interest loans for the financing of mortgages – given what’s going on with student loans, and my own personal and professional experiences with them, I am not an advocate of the government lending or guaranteeing any lending product. Certain foreign investors might be also inclined to agree.
He also argues in support of prohibiting lenders from adversely reporting mortgage delinquencies on credit reports as a means of molding future lending norms. If lenders cannot report a delinquent homeowner on a credit report, they might also think twice about reckless lending. Can’t say I’m a fan of this proposal…but I’ve only written about what I read. I have not talked it out yet.
The media needs to be a bit fairer: Professor White has used 54 pages to discuss, among other things, why people can walk away from their bad real estate decisions. It’s food for thought. And it’s time for open and honest dialogue to follow.
- Walking Away from the Mortgage and the Home? Consider this…
- To Reaffirm or not Reaffirm: That Really Is The Tough Question
- 20/5 Redux: Thoughts on When to “Walk Away”
- Saving the Home: Thinking Beyond “Delay and Pray”
- Some People Fear Spiders…