Are banks to blame for people signing the Note for the loan they sought?   Businesses (and Banks) are only as ethical as the leadership running the ship.  This is a very complicated issue with many moving parts.

Strategic Default Homeowner of 2004-2007:

“I hate the bank for forcing me to sign the Promissory Note for the loan (I mean the monthly payment) after I have considered my purchase for the 30-45 days it took to close and after my inspection contingency of said property.   I could probably keep making the payments that I knew I signed my loan paperwork for but I just never thought the market would turn down so much.  My value has dropped by 30% from when I purchased it.  I know that I refinanced since I purchased.    I’m aware of neighbors walking and have read that many are doing the very same.  I’m considering walking too.”

Homeowner of 1988-1990:

“I hate the fact that the market turned shortly after my purchase.   I can make the payments and ride this out even though it may be tough.  It might take several years for the values to go back up but if I live within my means I should be ok.  I love my house, my neighborhood and am part of this community”

My mother living on Capitol Hill (23rd and Prospect) in 1979-1980:

“Since the economy soured it has been tough.  My husband lost his job and has been out of work for over a year now.  It’s stressing us to be sure.  We’ve saved and been frugal.  Some of the improvements to our home will not take place.  We’ll have to forego some of the things we’d like to do and we’ll take the bus to get around or ride our bikes.  To get to soccer practice our kids will have to ride their bike, take the bus or walk.   Our kids will work after school to help defray tuition.  I’ll take on any additional work, tutor kids and earn extra money by holding swimming lessons downtown at the YWCA and YMCA in the Central District.

Christmas?  Well, we will make wreaths and Yule logs and should be able to sell quite a few.  We should make enough so that we can get a Christmas Tree on Christmas eve when the prices drop.  Although gifts will probably be few, I’ll probably make some gifts and knit some hats to keep you kids warm during our cold days.

Today (2011)  times are different.  I think back to my mother and father (Dr. Claude Fly) who got us through the great depression in Oklahoma.  This is nothing compared to that.  People of today seem to have lost the work ethic.   With my arthritis and back problems I try to hire kids to help me around our current home.   It’s hard to get them to work for an hour straight around the yard. “

UPDATE 2/16: This is a hot topic! KUOW‘s show The Conversation will be addressing this issue today at 12:20 p.m.! Call their listener feedback line now to share your opinion opinion at 206 221 3663 (the call in number during the program will be: 206 543 5869).

UPDATE 2/7: Polls closed 9am this morning. Final Tally: Decent folks 6, deadbeats 4, with several abstentions. Thank you all for participating! Even those of you who took the time to read the post and share a comment, even though your comment was “this is a waste of time!” I love irony…

In follow up to my post of a few days ago regarding “strategic defaults,” I thought I’d share this “hypothetical” that is in reality a description of some actual clients with whom I met recently. Several commentators to my post argued that people should repay their debts, period, regardless of the hardship or the absence of any adverse outcome if they failed to do so. Accordingly, I’m interested to know whether the people described below should be considered miserable deadbeats — stiffing their creditors for their own selfish purposes — or good people doing the best they can:

A young married couple, pre-kids, bought a one bedroom (650 sq ft) condo on Capitol Hill for $355k in 2007 with one mortgage, 100% financing interest only 30 year term. Couple tried twice to modify the mortgage, declined each time. Condo now worth about $250k. They are ready to have their first kid and, needless to say, would like a little more living space. Condo would rent for $1200 per month. Mortgage payments plus HOA dues $2600 per month.

Their options:
(1) Grit it out. Condo will not recover value for perhaps 9 years (assuming a 4% appreciation begining today, which is very optimistic). Over that period, couple will have paid an extra $150,000 towards the property (mortgage payments less rental value over 9 years). In the meantime, couple has two young kids in a 650 sq ft 1 BR apartment. Fun!
(2) Move on. They strategically default. Since they have one mortgage, realistically they can default on the loan with no personal liability. [NOTE: CONSULT YOUR OWN ATTORNEY AND DO NOT RELY ON THIS POST FOR LEGAL GUIDANCE.] They rent for a few years (since their credit score is shot) before buying again down the road. Given the passage of time, the market will more likely have bottomed and property will have resumed appreciation, thus increasing their chances of making money on the next house.

In summary, over the next nine years they can either spend $150,000 and subject themselves to a nearly intolerable living situation; or they can save the $150 grand, live normally, and probably make $10-20k in appreciation on their next house. Assume they walk. What say you? Deadbeats, or good people?

This post is not legal advice. For legal advice, consult an attorney, not a blog.

There was a very interesting piece in Sunday’s Seattle Times regarding “strategic defaults” (intentional abandonment of the debt, and eventually of the property, by the debtor/owner, due to depressed value far in excess of amount owed). The article was written by Brent White, a law professor. In my mind, this article implicitly raised a larger issue: As real estate professionals (i.e., anyone who makes a living in the real estate industry) do we owe some larger duty to the market itself that requires us to universally discourage these defaults?

To put the question into context, its apparent that some larger concern drives the passion of those who disagree with the author. I mean, threatening notes? What would drive somebody to threaten this guy? Besides, the counterargument is obvious and called out in the article:

[Mr. White] also rejects the argument that homeowners are wrong to strategically default because of the potential collateral damage to the economic stability of their neighborhoods. Some critics take their concerns further: that if walkaways occur in large enough numbers, there’s potential harm for the overall economy.

Mr. White discounts this argument, claiming that statistics have shown that an increased number of defaults will have no downward impact on the economy. While that may or may not be true, I imagine that regardless of the impact on the larger economy, additional defaults will lead to additional foreclosures which will lead to further downward price pressure in the housing market. In my prior post I off-handedly referenced a “collapse” in the housing market in places such as Flint, MI, and Las Vegas. The tone of my post was, in retrospect, inconsistent with the seriousness of the topic. The worst part of any bubble is of course the ensuing contraction, and a “collapse” is the worst case scenario that will inflict a lot — a LOT — of pain. Certainly some markets are at higher risk for this sort of catastrophic contraction, but EVERY bubble — and thus every local market, other than perhaps Texas — carries with it the risk of a very painful contraction.

So do we have some obligation to take steps to avoid this pain, specifically to encourage people to honor their mortgage debt regardless of the personal impact, in the interests of preventing harm to the larger society? I say, “No.” As professionals, we have an obligation to act in our client’s best interests. So when I meet with a client, its not appropriate for me to take into consideration anything other than what is best for my client, period. Concerns about “society” have no place in that conversation, other than — perhaps — confirming that the client is aware of this larger issue and can make her own decision about it.

And what about my comments to the public, i.e., non-clients? Unfortunately, I am simply not comfortable with a “public face” that is inconsistent with my private beliefs. I’m not willing to be known for one position in public — “You’re immoral and a lousy deadbeat if you stiff your lender!” — versus another in private — “Your mortgage is a black hole and there is relatively limited downside to foregoing that obligation.” So for good or ill, I find myself wholly on board with Mr. White’s message: It may be in your interests to walk away from that debt, and don’t let others influence your decision. While we’ll never know what imact this counsel will have on market values, time will tell the final cost of the housing bubble. But that cost is, in the final analysis, not my concern.

If you’re interested in my perspective on this specific issue raised — whether or not owners/debtors have some moral obligations to their creditors above and beyond the obvious legal duties — see my post on one of my own blogs.

A week ago (hey – I’ve been busy! 😉 ) there was an interesting piece in the Seattle Times, an “open letter” to sellers in the Seattle area. As you can see, the author believes that a successful seller will devote a SUBSTANTIAL amount of time to the project, even if the seller has hired a “full service” agent to list and sell the property.

This got me thinking: Is the author right? Should people expect to work this hard REGARDLESS of who they use as a listing agent? Seems to me that if a seller should expect to work this hard, then maybe that seller would be better off using a listing agent who didn’t pretend to “do it all” but who also charged a lot less for the service.

Or am I missing something….