Just Walk Away

Yesterday one of New York's big Real Estate Developers who developed the Stuyvesant Town Complex stopped paying it's 3 Billion Dollar Mortgage for the complex. Big Developers do this all the time, and its more common than you may think. So I have a question. Why shouldn't every homeowner who is upside down on their properties, just stopped paying their mortgages? It seems that this is what University of Chicago Economist Richard Thaler recently said in the New York Times.

Mr. Thaler stated "It's not just alright to walk away from one's oversized mortgage, it may actually be a moral imperative". He went on to say "After all, lenders had no second thoughts about lending more than many borrowers could afford or than the homes might actually be worth. It's just not fair to expect borrowers to follow rules that lenders don't."

He goes on to say "The real risk to the banks and investors is that the people in those homes might just decide to walk away. And that's what we must do. Doesn't have to be everybody, of course; but anyone who finds themselves seriously underwater with no hope of ever recouping their investment-just walk away Renee. Morality has nothing to do with it. You are a clog in the wheel of a machine that is killing this country and if you remain a cog you enable it. Remove your cog and the machine will not keep running. Remove millions of cogs and the machine gets replaced."

An earlier NY Times article written by Roger Lowenstein said much of the same thing and recently the Daily Kos Blog stated "Remember burning draft cards? Burn Your Mortgage".
Heck there is even a web site called "You Walk Away.com". So what going on here, why can't I just modify my loan? Here is what's up with that...Let's talk reality here.

Here is what typical modifications do. First they reduce the interest rate and extend the life of the loan typically to 40 years. Then, if asked, they look at a principal reduction or a deferment. This caps out at 25%, but typically the most banks give here is 20% and less than 10% of all modifications have this. Lastly, this is probationary or trial for 3-6 months, in which case the modification will be readdressed. With more time afloat the banks rationale is hopeful to prevent the default. Currently over 56% of these trial modifications are going bust again. One of the reasons that you can't modify so many of these loans is that they were sold as investments to many different parties. If the servicing bank changes the note without all the investor approvals, they would be sued immediately. You are in fact trying to ask multiple investors, in multiple countries to all agree to lose money. Fat chance of that happening.

So for a small few homeowners, modifications can be a real option, but for the remaining 90% of homeowners in way over their heads, what's left. Three Options. 1 Deed in Lieu of Foreclosure, 2 short sale the property (sell property for less than the mortgage) or let it be foreclosed.

The banks themselves aren't helping the situation at all. Big bonuses, government bailouts, reckless business practices, are all making these trapped homeowners really mad. They get the diamond mine and we get the coal shaft.

So here we are. If your mortgage payments have or are going to go up, and your local property values are declining, what's one to do? I'll bet we'll see a lot of "Walk Aways" real soon.