The merits of walking away

by Joseph Askins on 5/11/10

In January I posted an excerpt from a New York Times Magazine article titled “Walk away from your mortgage!”, in which a University of Arizona law professor argued the government “should encourage borrowers to default when it’s in their economic interest” instead of letting buyers continue to sink underwater.

That week, Lawrence O’Donnell of MSNBC and David Corn of Mother Jones discussed this article and the implications of “strategic defaults” on Countdown with Keith Olbermann. On Sunday the topic was addressed on CBS’ 60 Minutes. Watch each segment above and below.

Almost one-third of all Chicago-area single-family homes with mortgages were underwater at the end of March, up from just over 27 percent in December, according to Zillow.

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{ 9 comments… read them below or add one }

Dan May 11, 2010 at 10:04 AM

The American Dream 2 (Wall Street Journal, Dec, 16 2009)

http://online.wsj.com/article/SB126040517376983621.html

Reply

Phil Byers May 11, 2010 at 11:24 AM

As an agent, I am now getting the question that came up in the 60 Minutes segment on Sunday – is there a law in Illinois that protects people from having the bank go after your other assets if you walk away?

Reply

Joe Zekas May 11, 2010 at 11:58 AM

Phil,
Illinois is a “recourse” state, meaning that banks can go after sellers income and assets for a deficiency judgment if they walk away and the property is sold at a loss.

Whether or not the bank will do this is virtually impossible to predict.

I found the 60 Minutes segment, as with much of the reporting on this topic, to be seriously misleading in the comparisons to larger institutional players and developers walking away from their loans. When that happens the walker typically has bargained for and paid for a non-recourse loan. The payment is in the form of putting more equity into the deal and / or paying a higher interest rate than on a recourse loan. Exercising what is, in effect, a contractual right is very different, ethically and legally, from walking away from a contractual obligation.

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Dan May 11, 2010 at 12:41 PM

Joe Z,

“Exercising what is, in effect, a contractual right is very different, ethically and legally, from walking away from a contractual obligation.”

So you are against individual home owners walking away from mortgages on their private residence?

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Joe Zekas May 11, 2010 at 1:21 PM

Dan,

I didn’t say that, nor can it be fairly implied from waht I did say. Too many fact patterns to make any sweeping judgments on the topic.

Would you agree with what I did say: that there are different legal and ethical considerations in an individual’s walking from a recourse loan and a corporation’s walking from a non-recourse one?

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dave May 11, 2010 at 6:52 PM

I find this subject very interesting. I have an investment property, well let me rephrase that. I have a property that I don’t live in, as a result the mortgage is at a higher rate.

The bank that holds the mortgage contacted me and asked if I’d like to refi at a lower rate. The representative indicated he could do it through the Home Affordable Refi Program. Unfortunately the property didn’t appraise where it needed to, so that didn’t pan out.

The project developer has subsequently been foreclosed on, my tenant can’t pay rent and I have to admit that I’ve considered walking. I don’t like the idea, but if the bank isn’t willing to work with me, I don’t know that I can rule out the option.

Reply

Dan May 11, 2010 at 9:40 PM

Joe,

There are different legal considerations between corporations and private residences; that much is fact.

The ethical issues will be debating over the next couple of years in multiple forums, however I doubt that anyone will argue that every citizen should do what is in their family’s best financial interest.

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Babyboy June 14, 2010 at 10:34 AM

While Illinois is a “recourse” state, almost all mortgages, given in this state, on personal residences, are “non-recourse.” Your note will state whether its recourse or non-recourse.

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Joe Zekas June 14, 2010 at 11:10 AM

Babyboy,

First time I’ve ever heard an assertion that most mortgage notes are non-recourse in Illinois on personal residences.

I don’t believe it’s true.

Any other attorneys or lenders out there who want to weigh in?

Reply

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