Until now, most people who have negative equity in their houses have paid their mortgage whenever possible, despite it being a terrible business decision. This irrational behavior has been chalked up to the impression that paying a mortgage is like keeping your word of honor.
Recently, as more people have witnessed how large corporations (and government in general) have defaulted on their contracts, suffering the penalties rather than continuing to pour money down a hole, all legally, these same people are realizing their mortgage is only a contract, with the terms of default spelled out clearly, and taking the default route is not only not “breaking a word of honor” but also not breaking the contract itself. Default is built into the system which is why homebuyers pay exhorbitant interest to the bank in the first place — the bank is taking a risk. From an excerpt in one of the articles below:
“Loeb said he thinks much of the criticism aimed at homeowners who default is based on a poor understanding of what a contract is.
A contract is nothing but a legally binding agreement between parties with competing interests that sets forth mutually acceptable terms for their interaction.
Loeb said every mortgage loan agreement includes default and home repossession as a possible outcome.
‘If you stop making payments, you’re not breaching the contract, because default and foreclosure are valid means of fulfilling the contract,’ he said.
White said it’s not uncommon for commercial-property owners or investors to default on loans that they no longer consider beneficial, and while it might affect their ability to obtain future loans, no one is calling them immoral.”
A year ago, one could barely see any articles, other than from fringe websites, pointing out it was hypocritcal for government officials to coerce people into continuing to pay nonsensical mortages while watching the banks default on their contracts and receive bailout money in the process. Now, however, that has changed and there is a flood of articles pointing this out. The proverbial straw that broke the camel’s back seems to be a recent event in which a bank that owned a housing complex with over 11,000 units decided to stop paying its mortgage, not because it ran out of money, but because it decided the property wasn’t worth the cost. Cases in point:
“NEW YORK — Tishman Speyer Properties walks away from 11,232 Manhattan apartments because it can’t pay its mortgage. That’s good business. Rick Gilson, a college custodial supervisor in South Dakota, wants to walk away from the mortgage on his mobile home. If he does, he’ll be a deadbeat.”
Well said, New York Times. It’s been years since I’ve read anything in your pages worthwhile.
Today’s article of doom: Aw, shucks, I wonder if some of that rally was overdone?