Did The Banks Force You To Sign Your Mortgage?

My Two Dollars posted an article last week that made me see red.  In the article, David (the author) said that he’s changed his mind and that he now thinks that it’s OK to walk away from your mortgage if your property value has declined to where you’re underwater on your mortgage.

Even if you can afford to pay.


His argument (and he links back to another article in the NY Times that advocates the entire thing) is that the banks have been unwilling to help the borrowers out who they know are underwater, so turning around and ‘sticking’ it back to the banks is fair play.

I think that’s baloney.  I actually think it’s a lot more than that, but the words I’d like to use are ones that I try to stay away from in a public blog.

First, two wrongs don’t make a right.  Just because the banks are being ‘big meanies’ doesn’t mean that walking away will somehow wrong that right.  There are other ways to go about dealing with this issue.  Keep working with your bank.  Try to sell your house.  Or, keep making the payments.  I mean, to act all flabbergasted that the banks are not jumping up and down to work with you, are you serious?

If anybody really thought that the banks were their buddies just because they acted all buddy-buddy to get a mortgage deal signed, well, give me a break.  Banks are in the business to make money, and they do so largely in part by signing loans.  Why do you think that the bank owes it to you?  Let me ask this of anybody who thinks that it’s OK to walk away: If the value of your home had continued to go up and you sold it for a nice profit, would you have ‘shared’ that profit with the bank?  Didn’t think so, but how is anybody throwing a tantrum because the bank won’t ‘work with them’ any different?

Second, nobody forced you to sign the papers in the first place, did they?  As far as I know, a lot of people signed a lot of papers agreeing to pay a lot of money for houses that, as it turns out, were not going to hold their value.  While I agree that this is bad news, the fact is that there was nobody from the banks or the mortgage company holding a gun to anybody’s head (except maybe on the Sopranos).

Let’s face it, many of the same people that bought houses inflated in value was because they saw it as an investment.  Just like any investment, a stock, a bond, whatever…there’s a risk.  But, instead of these people dealing with their losses like they would in any other investment, they would now rather  leave someone else to deal with their losses.

That’s baloney.

Third, the short-sightedness is unbelievable in the logic that David uses. Why? Because banks aren’t the only ones that lose here.  Yes, you might be ‘sticking it to the bank, but let’s think for a minute of all the other people, real people that aren’t hiding behind corporations or skyscrapers, that get screwed every time someone walks away that could afford to keep paying:

  • Neighbors – Anybody around the vacant home now has to deal with an empty house that will, more often than not, turn into an eyesore as the lawn goes uncut, the snow doesn’t get shoveled, and gets open to all sorts of problems such as infestation, scavenging, broken pipes, or any other number of things that even a few months of neglect can bring on.  And usually these sit for more than just a few months.
  • Neighbors – Yes, I’ll mention the neighbors again because now what happens is that the bank will have to foreclose and this will usually lead to lower values in the neighborhood.  So, every one of your neighbors watches their own home value drop when you walk away.  You think the bank is the one eating your loss, but chances are your neighbors are even more.
  • The municipality you live in – I’m guessing that when you walk away, you’re going to stop paying the property taxes.  Since most municipalities rely on property tax collections to fund their operations, you’re leaving them with less for as long as the foreclosure process goes on.  That means less money to provide police and fire safety, less money to keep up infrastructure such as roads and other essential services in a time when many cities are barely scraping by as it is.
  • The kids in your school district – Where I come from, property taxes also fund the public school system.  You leave, and there’s less money to fund the schools.  At least here in Michigan, educational spending has already been cut a few times, largely in part because of declining property values AND less property taxes collected because of people who enter foreclosure.  To think that there are people contributing to this willingly is simply nauseating to me.

I wonder if anybody that walks away simply to screw the bank  looks in their rearview mirror as they’re driving away and sees all the rest that they’re leaving behind.  Because, there are a lot of other people affected by that selfish decision, not just the bank.

Let’s also mention the circular effect. As I mentioned, walking away typically leads to a foreclosure, which more often than not leads to a decline in the home value on the abandoned property and all the properties around this.  These declining values will then lower values so that someone else goes underwater.  Then, they walk away and that depresses the value even further, which leads to someone else walking away, and so on and so forth.

When does it end?  Are we supposed to become a nation of renters because if things kept going and going, that’s the end game.

I think I’ll pass on that one, thanks.

If we want this real estate mess to stop, there has to be personal responsibility.  There has to be sacrifice in order for this cycle to stop and for us to start the process of stabilizing the real estate market for good.  It amazes me when I see blog posts and news stories like David’s who either want to delay this process, or want to make it someone else’s problem.  In the end, that’s all it’s doing every time someone walks away is making it someone else’s problem.

Let me put a disclaimer or clarification on all this.  If there are circumstances where you can’t afford your house, say you lost your job or you have a medical expense, or something else that’s put your finances in the tank, none of what I said applies to you.  I understand there are thousands of people who had to walk away from their homes because they had no other choice.  I’m not chastising you in this article.  What my comments and my anger are centered around are those people who still have their jobs, who can still afford the payments, but choose to consider not making them simply because things didn’t work out like they planned.

One of my favorite bloggers is Funny About Money.  Funny lives in Arizona and until the end of 2009, she worked for Arizona State University, but found herself out of a job due to budget cuts, and is now effectively retired.  She now lives on her banked time and unemployment, and will soon be living on Social Security and a small-to-modest retirement account.  She will be scraping by.

She also has a house that is worth a lot less than she paid for it a few years ago.  Yet, she plans on staying there and in all the months that I’ve read her blog, she’s never once seriously considered walking away.  It would be the easy thing to do.  It would probably help her out.  But, she’s never considered it because she knows it would be the wrong thing to do.  I feel bad because she’s definitely feeling a big impact in her life as a result of the real estate declines.  But, I’m proud of her because she makes the right choice, even if it’s the difficult one.

If someone in her position can make the right decision, even though it puts her in a tough circumstance, why is it so hard for others to comprehend doing the right thing even if it means sacrificing?  People in generations past made a lot of sacrifices that, while they were tough, led to opportunity.  Now, people want the opportunity without the sacrifice, and there are way too many people encouraging this mentality.

So, please, can we stop already with the sympathy to those who choose to walk away from their mortgages even though they can afford them? OK?  It’s baloney!

22 thoughts on “Did The Banks Force You To Sign Your Mortgage?”

  1. "Few" or is it now a "majority" in society has a way to blame on others. These individuals never take responsibility for their own action. AKA..irresponsible homeowners that was said to have been forced into signing mortgage paper like you mentioned and had to walk away from payments when they no longer can afford to pay.

    It's the same with BANKRUPTCY. When someone has a mountain pile of debt due to their reckless spending, they resort to filing for bankruptcy. These people are never responsible for their own action. They blame others or take the easy way out in life.


  2. Great post. Your points are very good as are Money Honey SFs. Just like to add another way that the neighbors could be effected is that if a bank loses money on loans then they have less money to loan out to others. Oh, yeah, another way that the neighbors could be effected is that if a bank loses enough money then they will have to lay off workers.

    It's really hard to understand people who just don't want to pay even though they'd agreed to the terms and have the ability to pay. I could totally understand not wanting to pay and grumbling about it, but to actually walk away – not good. ugh.

    Love your ethics.

  3. First of all, every homeowner needs to end their emotional attachment to the value of their house. Homeowners out there realize their homes have fallen in value. But, they don't realize how much. They think it has only fallen X, when really it's fallen in value by X + 10%. People just need to accept that their homes will not be going up in value for quite some time.

    That being said – housing is in a desperate state. I read this week that housing prices will bottom in 6 months. Then, zero growth for years.

    I'm gonna tell you what. I don't look down on people walking away. Here's an example. A couple built a new house 4 years ago for $310,000 in a nice neighborhood, put in a fence and nice landscaping…they went to refi and their house is now worth $275,000. They thought it was worth $360,000. They are gonna stick with their crappy mortgage and hope to make it for 10 more years and then hope to retire. They pay around $4,000 / yr in property taxes. They both make just enough to have a "normal life" and so forth…however, not much ability to save.

    So, you're saying they should "stick it out" for 10 years??? They pay over $2000 / month. I say they should walk away. Their house will barely go up in value over the next 10 years. They should rent for the next 10 years. They should invest the $12,000 / yr in savings. After 10 years, they could have around $200,000 for retirement. You're stating that they should essentially pass on the $200,000 retirement account and stay in a losing investment????? Please explain.

    Housing will be flat for the next 10 years. People need to make tough decisions. This type of deleveraging will take awhile to play out.

  4. Thanks for the comments.

    Anonymous, under your example, here's the scenario. Right now, you would advocate 20% of people walking away today from their mortgages, because that's approximately how many people are currently 'underwater'. So those 20% pick up and leave.

    What's that going to do? Drive prices down further. So then you'd have another 10-20% walking away. Once those people do, prices fall and fall until the housing market is in such shambles that we'd look at what we have today as 'the glory years'.

    Individually, yes, walking away might make sense. I can't argue with the individual benefits. But, if we are serious about recovery on a national and global level, then unfortunately that model doesn't work.

    First of all, who's going to own these properties once they default? Nobody's going to want to buy them and the banks aren't going to keep them up and they don't want to be in the rental business, so you'd have tens of thousands of houses and entire neighborhoods turning into slums.

    No thanks.

    And speaking of banks, again, can we really afford to let them write off mortgage after mortgage and expect them to stay viable? Do we just let them collapse? Hardly seems like that's going encourage economic growth. Do we continue to bail them out? I'd say we're tapped out as it is.

    Say you go back to your couple you referenced. They invest their $2,000 per month. In what? The economy would be falling apart, the dollar would be worthless, the global economy wouldn't be growing because, let's face it, we're tied into a lot of the economy around the world. Their $2,000 per month is going to go nowhere fast. And if you think there's some magic investment that's going to protect them as we go into a depression, fine, maybe there's a financial advisor or two out there that can lead their clients into that.

    But will the other tens of millions of people be so lucky? I don't think so.

    From a macroeconomic point of view, the walking away theory just doesn't work. It does not allow, in any circumstance, a growing economy. And that's what we want isn't it?

    Staying in their homes would result in less buying power, less savings for retirement, sure. I agree. But that's less compared to the 'glory days' of the 1990's and early 2000's, which was all based on credit. No matter what those days are over, and the sad truth is that tens of thousands of people walking away from their mortgage is never, ever going to bring that back.

    Again, I maintain that the short term relief of walking away from an underwater mortgage is just that, short term relief. The ripple effect from that decision leads to a greater negative economic impact.

    Talk to me about the economy as a whole. Is there a way to allow millions of people to walk away from their 'bad' loans, yet still grow the economy, prevent real estate values from falling further, reduce the deficit, strengthen the dollar, and add jobs? I'd love to hear how this would work.

  5. This all gets into a discussion of where the U.S. economy is headed. Perhaps Bill Gross from Pimco (the largest fund in the world) can help us. He talks about a "new normal," where people will need to accept the fact that U.S. GDP growth in the years to come will be 2% (not 4 or 5% like we're used to) AND he talks about the deleveraging of the U.S. consumer. The U.S. consumer will have to cut back. And, if that means walking away from their home, then so be it.

    Personally, I wouldn't even think about buying a house for at least 3 more years. Why pay for an over-valued asset? Why pay property taxes?

    Economic growth will be outside the U.S. Consumers would be well served to get out of a bad real estate investment ASAP (if it is making them house poor) and begin diverting money into their retirement account. Get a second opinion on how to manage the retirement account.

  6. Money Beagle is right. The best analogy would be to use the example of folks buying a new car. We all know that when a new car leaves the show room, it's value declines 30% (thereabouts). Using this logic, all new car owners who took auto loans should just walk away!

  7. they dont think about the longterm either. yeah my house is now only worth 155,000 and I paid 165,000. buuuut eventually it probably will go back up some. and people need to quit looking at your home as an investment, your getting usage out of it by living there so that covers your cost. quit being selfish walking away if you can continue to pay. "it cuts my lifestyle" sooo?? grow up people and sacrifice a night at the club for you house.

  8. What interests me is that people act like houses have never gone down in value before. Our parents houses went down in value; our grandparents houses did too. But people bought homes TO LIVE IN, not to check and see if they'd made more in equity every month. If people started treating the mortgage like those of us who rent, and just accept it as another payment, one that they'll eventually no longer have (as opposed to people who rent for life, and assuming they don't refinance it up to their ears) maybe they wouldn't be so worried about it going up and down in value.

  9. If someone can walk away from their house, rent something fairly nice, save $1000 / month, invest it in their retirement account with the help of a professional….then, after ten years, they will be MUCH better off than someone who "stuck it out." Over the next ten years, we WILL see more financial turmoil around the world…asset bubbles popping in China…long term recession in the U.S….on average, U.S. home prices will be flat to negative (if you factor in property taxes going up to cover increased costs). WHY SHOULD SOMEONE STAY IN THEIR HOME IF THEY ARE LITERALLY GOING TO LOSE $200,000?!?!?!?!

  10. I agree with the original post completely. And my answer to the question posed by anonymous, "why should someone stay in their home if they are literally going to lose $200,000?" is simple: because they signed a document saying that they agreed to repay a certain amount of money to the bank that financed the house. Nowhere in that document did it state that the payments only had to be made if the house went up in value over time.

  11. I guess if the banks screwed you, and didn't give you help when you asked for it that MAYBE it would be ok to walk away. But sticking it back to the banks doesn't help anyone in the long run…

  12. I totally agree with it affecting neighbors and neighborhoods. I'm in the market to purchase right now and have looked at only foreclosers thancks to an AWESOME program that wants to get them off the market ($40,000 for a downpayment that i don't have to repay? THANK YOU!!). Most of the ones that we looked at were moldy, gutted, ransacked messes that will ultimately probably have to be knocked down. We could always tell which one it was on the street. Luckily, we ultimately found one that with some minor repairs is ideal for us and have a closing date of 3-31!

  13. A business will do the same. It's the smart thing to do. If a business can do it why can't an individual. The best example of this was the Tishman Speyer Properties walking out of thier loan in New York.


  14. Have we lost all our morals? What happened to keeping one's word? I see legislation – eventually, at least – that keeps people from walking away when they have the money to stay. Forcing someone to declare bankruptcy before they can go into foreclosure may end up being part of it.

  15. Frugal Babe your answer rocks! No where on my mortgage document does it state that I can stop paying my mortgage when my value goes underwater. I bought my condo for $135k, similar ones in the building are selling for $108K now… because of foreclosures and "investors" who don't mind losing a little to get rid of a property that isn't making them the big bucks. However, for a homeowner like me who needs to refinance to lower my 8% interest rate, this is bad news. Should I walk away? No. Why? It would be wrong to do. So I will stay here for another 5 years I hope, while making cuts in my bidget to ensure that I can pay down my mortgage. And I hope at that point my home is at least worth what I bought it for. No one told me there was a guarantee that my home prices would increase. I bought, the price fell, and now I wait. People should encourage others to behave responsibly as well. Home ownership is a privilage, not a right.

  16. There's one class of "other people" you forget: non-homeowners, who have not yet purchased homes because, even with the recent crash in the housing market, homes are still ridiculously expensive.

    I say, please walk away. It's legal to do so, the banks knew it would be legal to do so when they gave you the mortgage, and doing so helps correct still-overly-inflated home prices.

  17. Thanks to all those who have commented. Please keep them coming.

    I agree with Frugal Babe that the answer is simple and ties back to the title of the post. You signed the paperwork, and nowhere in there did it say that the value of the asset which the loan was against was going to go up. If any mortgage said this, then I'd like to see.

    Otherwise, the argument that it's not good for the investor falls flat.

    Did people who lost money in the tech bubble get to say 'just kidding' when the sector burst and have their brokers return their money in full? Of course not, that would be ridiculous. And, in my mind, there's no difference here.

    If people are in a more advantageous situation by renting, then they should move to renting, that's fine. But if they have to take a hit to get there, then that's their responsibility, and nobody elses.

    Trust me, if I had a do-over on every investment or purchase that's lost me money over the years, I'd have a lot more to my name than I do. But, there aren't do-overs except for the selfish ones that are thinking it's OK to make their own rules, and like others have said and what I pointed out originally, it was their decision in the first place, so they should have to live with it.

  18. I was forced – I was told by the loan officer that if I didn't the seller could sue me for the sale price of the house. All the numbers were different then what's I'd see n before & no one would explain why.

    My real estate agent picked me up and drove me to the west side of town to the closing. I had no way to get home even – the only buses in the area are downtown.

    I'm not joking or exaggerating. I was very stupid – my parents told me it was illegal for the loan officer to say/do anything incorrect. Now I know it's only illegal if you have the proof in writing.

  19. Your post is all very well. However, while I agree with the point you are making, you need to remember one thing. And one thing only. THE BANKS WERE BEHIND THIS ENTIRE HOUSING BUST DEBACLE. Remove your pink specs for a second and ask yourself why? Once you've come up with some good reasons as to why banks would lend money for McMansions to brokeass strawberry pickers, ask yourself why the entire population isn't outraged at yet another example of corporate greed. You should be directing your disgust at the banksters and fat cats that schemed, planned and executed the biggest financial fraud in recent memory.

    Screw the neighbors. Screw paying an unaffordable mortgage. So the neighborhood goes down the pan while all these inflated homes foreclose. Who cares? Who cared when the banksters were raking in the dough and selling non existent securities??

    Once you've figured that all out I have one more piece of advice for you: get off your pious high horse and GET REAL.

  20. Oh, and one other thing. When 'funny about money' – of whom you are so 'proud' because she continues to pay money that, by the sounds of it, she cannot afford on a mortgage paid out of a pittance – hits the streets because she can't afford her overpriced mortgage, you'll take her in, right? Jesus. Take those damn specs off, will ya, because they are clouding your vision. Direct your righteous POV at the crooks and thieves that caused this ENTIRE MESS because people are beginning not to want to live in 'your world' any more. As evidenced by the sheer numbers of people who are saying 'Up Yours' in the form of walking away from fraudulent mortgages, dumb consumerism, credit card debt, etc etc etc. It's time to get simple, and personal financial changes such as the ones we are beginning to see will be PAINFUL to the banksters and, unfortunately, everyone else who fell under their axe.

  21. Yes, I'll get real. I live in Michigan too. Our home value has really tanked. In addition, my husband's income is erratic because he works at an auto supplier (his original career in radio collapsed during downsizing several years ago.). When he doesn't work, he's on unemployment. There are no "supplemental pay benefits" for him.

    We're still paying the mortgage. We're still keeping the bills paid. The kid is still in college. The credit rating is still intact.

    How do we manage that? Well, there's no sense in ditching the mortgage. We have to live in the area if I'm going to stay employed. Journalism jobs are hard to find these days.

    Therefore we take on the cost-savings we can find elsewhere.

    Does it really matter in the long run where $100 or $200 or whatever in savings each month comes out of your household budget, or the equivalent in income arrives via any number of means? Answer: No.

  22. or if you were lucky enough to buy a mortgage that isnt upside down like we did because we bought from a church endorsed realtor you realize that you have to live somewhere and eventually paying off ones home is smarter than renting for life.

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