Sunday, November 29, 2009

Default on your mortgage? Maybe, says law school prof...

The Herald has an interesting article today. I'm amazed people have loyalty to the banking industry, who in this article tells people they have a "moral" obligation to pay back loans. Where is the word morality defined in capitalism?

1 comment:

Steve Wintermeier said...

I would strongly urge most people to ignore the advice to walk away from their mortgage except for those who are SEVERELY underwater or truly cannot afford their mortgage payments unless they plan on renting for the foreseeable future or perhaps permanently. Even with a good credit rating, going forward lenders will be extremely wary about loaning to a borrower who walked away from a mortgage as a matter of personal financial comfort(as a newly chastened and responsible lender, would you sign off on a loan to a person you know deliberately walked away from their mortgage when it simply got inconvenient even if they had a "good" credit rating?). On a personal level this is a dangerous gamble and should be approached with caution.

Keep in mind on a national level if 15 million people walked away from their mortgages, you are talking about roughly $1 trillion in additional losses for the nation's banks, or in other words essentially the end of the modern financial system. Longer term the best solution is probably the Australian system where mortgages are two way - meaning even if you walk away you are still on the hook to pay back any losses the bank incurs unless you declare bankruptcy.

Finally, contrary to popular and populist opinion, the vast, vast majority of those 15 million homeowners are underwater because they overleveraged their homes, not due to inappropriate behavior by the banks (and remember, Federal agencies, i.e. the taxpayers, own the majority of these loans - not banks).

Steve Wintermeier