REBECCA ROBERTS, host:
This is TALK OF THE NATION. I'm Rebecca Roberts, in Washington. Neal Conan is away.
More than 10 million households in the U.S. have underwater mortgages - that is, homes that are worth less in value that the mortgage payer owes. These homeowners often cannot take advantage of lower rates on loans or refinancing deals. And their homes are likely to go into foreclosure if the mortgages aren't kept up. So, it doesn't make sense to just give the house back to the bank. Some critics say it's morally reprehensible to walk away from the mortgage. It's breaking a contract and failing to live up to your responsibilities. Others say, is it about morals or about money? Today: walking away from underwater mortgages.
Later in the hour: the best way to help earthquake victims in Haiti. But first, walking away from an underwater mortgage. If you're making this decision, we want to hear from you. What are you considering? Or are you critical of those that walk away? Our number here in Washington is 800-989-8255. Our email address is email@example.com. And you can join the conversation at our Web site. Go to npr.org and click on TALK OF THE NATION. We begin with James Hagerty. He's a reporter for The Wall Street Journal. He joins us from station WQED in Pittsburgh, Pennsylvania. Welcome to the program.
Mr. JAMES HAGERTY (Reporter, The Wall Street Journal): Thank you.
ROBERTS: In reporting on this subject, you've spoken to people who walked away. What did they say? How did they feel?
Mr. HAGERTY: Well, some of them that I talked to had to think about it for a long time before they did this. It's not a simple calculation, and every case is different. I think - and there are two types of people. There are people who really just can't afford the mortgage, and for them it's just a matter of finding an early solution of getting out. But there are other people who can afford to keep paying the mortgage. They've got a good income. But they now see their house is, really, a losing bet because they think that if they have to pay off their mortgage, they're going to pay far more than the house is ever going to be worth. And for them, it's a really a dilemma.
ROBERTS: And what are the horns of that dilemma?
Mr. HAGERTY: Well, it's tempting to walk away. For one thing, if you just stop making your mortgage payments, you can probably live there for free for six months, a year, even two years before you get kicked out. And that means that you can go probably rent a similar home for far less and save a lot of money in the short term. On the other hand, it means that you're going to destroy your credit record. So if you need a credit card loan or a car loan later on, you might pay more for that or even not be able to get it. It means that you probably won't be able to get another home mortgage for at least three years, or maybe five years.
This stain is going to remain on your credit record for seven years. And it can mean, in some states, that potentially, a lender someday could come after you for the amount of money the lender lost on that mortgage in what's called a deficiency judgment.
ROBERTS: So that's over and above just the lender talking the house.
Mr. HAGERTY: That's right. The lender takes the house and sells it, but he's still got a loss. In some states, the lender then could try to get that money from you, say, from your future earnings or from any other asset you might hold.
ROBERTS: We are also joined today by Brent White. He's a professor of law at the University of Arizona. And he has some interesting advice for people who are underwater on their mortgage. He joins us from member station KUAZ in Tucson. Welcome to the program.
Professor BRENT WHITE (Law, University of Arizona): My privilege. Thank you for having me.
ROBERTS: So you are actually advising people to walk away. Why?
Prof. WHITE: Actually, I don't advise people to do anything. Rather, I wrote an academic article in which I made an observation that has been somewhat taboo. And that observation is that to millions of Americans who are underwater would, in fact, be financially better off if they did walk away, just like Morgan Stanley recently walked away from five properties in San Francisco, five buildings which were underwater. Morgan Stanley just gave the properties back to the bank. But most homeowners, or homeowners as a group, don't walk away. They don't strategically default.
And they don't so because of anticipatory shame and guilt and what I believe is an exaggerative fear about the consequences of waking away from a mortgage. And I argue in my paper that these emotions of fear and shame and guilt are cultivated by the government, by the financial industry and, to some extent, the media. And they do this by cultivating a double standard, a standard in which Americans, average Americans are told to have a moral obligation to pay their mortgage and to meet their financial obligations, whereas corporations freely and frequently default when it's in their financial best interest to do so.
And, in fact, they would be obligated to protect the interest of their shareholders and walk away from an underwater mortgage if it was a financially wise decision. And my argument is that this norm asymmetry, the difference in norms between average Americans and banks leads to distributional inequalities whereby average Americans are bearing a disproportionate burden from the housing collapse.
ROBERTS: And if you divorce the decision from guilt and shame and make it purely a financial one, how do you factor in the potential effect on your neighbors' housing prices if there's a foreclosure on their street?
Prof. WHITE: Well, you know, I think that's a relevant concern, and, you know, we should be neighborly and be concerned about our neighbors. But when you're hundreds of thousands of dollars underwater and being concerned about your neighbor means going through your retirement and having no money for retirement or not being able to send your child to college, you have to ask, how much pain is the average person supposed to bear for the good of the rest of the economy? And my point in my article is that it's too much. It's not the responsibility of homeowners. The - for the most part, people who are still in their homes were not people who were speculating. They were not people who bought more than they can afford. They're people who bought houses that they thought were good decisions. As they were being told, was - you should buy a home - they're being told this by the government, by the media. They're being told there's no such thing as a real estate bubble, so they make a decision, and then now they are suffering.
And they're suffering in ways that have serious consequences for their financial future. And I don't think it's the role of the individual homeowner to prop up the market for the rest of the society. Rather, the government needs to step in, either provide direct assistance to homeowners, just as it provided direct assistance to the banks. Or the government needs to force banks to bear their share of the burden by riding down underwater mortgages, so we could have forced cramdowns, where banks would bear at least a portion of the negative equity.
ROBERTS: We heard, at the top of this hour, a clip of tape from a woman named Heather Baker who was unapologetically walking away from her mortgage. And that interview was done by NPR reporter Tamara Keith. And in the context of that piece, Heather Baker goes on to say that had she been the first foreclosure in her neighborhood, it would have been a much harder decision. But considering there were other houses already in foreclosure, she found it easier to be the second or third person. Is that something you found in your reporting, James Hagerty?
Mr. HAGERTY: Yes. I think this is very much a concentrated problem. It's not scattered evenly across the country. It's very much in four or five states -Florida, Nevada, Arizona, California, Michigan - and a few other places. So that means that many of the people who are in this soup have lots of company. And if you bought a home, say, that was completed in a new community around 2006 or 2007, probably all of your neighbors are underwater. So, everybody has the same problem. Everybody's talking about it, and I think that becomes a kind of contagion. And there also becomes a sense that, well, everybody is doing this, so it much be okay.
ROBERTS: Let's take a call from Bill in Boston. Bill, welcome to TALK OF THE NATION.
BILL (Caller): How you doing? I actually - I bought a condo back in early 2005 when I was just 22 years old. I naively got an adjustable rate mortgage. I'm in the construction industry, and I saw everyone around me buying homes and flipping them within a year or two, you know, for a profit of 40 or $50,000, and I thought I could do the same. And probably about six months after I moved in, I saw the housing market starting dropping everywhere around me, the complex and then prices plummeted significantly. And then my mortgage started going up and work started to get really slow. My mortgage started out at 1,100 and last year peaked at about 1,800. And I couldn't afford it anymore.
So it actually just became a decision, in the long run - as someone at a young age of 26, even though I knew that it would hurt my financial situation, in the long run - it was a better situation for me to walk away from the whole - even though morally it hurt very much. And it's something I struggle with to this day. It actually foreclosed in October. But in the long run it made more sense for me financially.
ROBERTS: And Bill, what have been the consequences in terms of your credit score or fees or things like that?
BILL: It's, I mean, it's pretty much as bad as it gets, you know. It's something, you know, I still have - I still owe the bank about $80,000 from the foreclosure because I bought it at $170,000, and people are selling their condos now for $90,000. So, it's - I knew what was going to happen when I eventually let it go, but I also knew that these small programs, these six-month programs that they were getting me to reduce my mortgage, and six months later, I was still going to be in the same boat. So it was just going to be, you know, a domino effect in the long run. But it's a difficult situation to deal with, especially at a young age.
ROBERTS: And you still feel like it was worth it? That getting out of that mortgage is - it was the right decision?
BILL: Absolutely. It was something I struggled with for two years. And the stress that it brought upon me was - it was huge, you know. It's something that you think about constantly. Don't get me wrong, I still have stress now dealing with the situation, especially morally, but in the long run I knew after talking to, you know, some of the older people around me that it just made more sense.
I even spoke with a lawyer, the condominium complex lawyer and they said, you know, just in the long run it makes more sense for you to get out of this mortgage.
ROBERTS: Bill, thanks so much for your call and thanks for your honesty.
The sense that if people actually did walk away more, it might force lenders to negotiate better terms. In some ways they are counting on the guilt and shame and hesitation to keep people from just leaving a mortgage behind - Brent White?
Prof. WHITE: Yeah, I think that's an excellent point. And when you hear Bill talk about the stress and the strain of feeling like he's violating some moral code, I think this works to the advantage of lenders who actually understand that a contract is not a moral document, it's a legal document. And the law does not provide for punitive damages, for breach of a contract because it's not considered to be a moral wrong.
In fact, the law encourages the efficient breach of contract. I mean, people should default on a contract when it is in their economic interest to do so. And because sophisticated parties understand this, they generally decide in advance for the consequences for a default on a contract or breach of a contract.
In the case of a mortgage contract, the bank is the sophisticated party, and the bank puts in the penalty. And the penalty is if you default, then the bank gets the house back and that's actually the agreement. And so, a homeowner who lets go of their house and gives it back to the bank is honoring the contract and is, in fact, doing nothing immoral.
ROBERTS: We are talking about underwater mortgages this hour. When should you walk away? Is that ethical? We're taking your calls at 800-989-8255. And you can send us email. The address is firstname.lastname@example.org.
I'm Rebecca Roberts. It's TALK OF THE NATION from NPR News.
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ROBERTS: This is TALK OF THE NATION. I'm Rebecca Roberts in Washington.
Underwater, upside down, it's just all a way to say that your house is worth less than you owe. It's just one more term we've had to learn after the mortgage crisis. And today we're asking: When is it okay to just walk away?
We're talking with James Hagerty, reporter for The Wall Street Journal, and with Brent White. He's a professor of law at University of Arizona. And, of course, we want to hear from you. If you're making this decision, give us a call. What are you considering or are you critical of those who walk away? 800-989-8255. Our email address is email@example.com. And you can join the conversation at our Web site, go to npr.org and click on TALK OF THE NATION.
Let's hear from Tom in Detroit. Tom, welcome to TALK OF THE NATION.
TOM (Caller): Hi, how are you doing?
ROBERTS: Good, how are you?
TOM: Very good. I'm critical of those who walk away from houses that are able to pay. The - it's just a continuing cycle of people - the pressure of the prices coming down because of the vacant houses and because of bank-owned properties and then more people walk away. So, you know, if you're doing that, you're hurting your neighborhood, you're hurting communities, so on and so forth.
It's another thing if you can't actually make the payment. You can't afford to actually live there. When this whole thing started, there was talk of, you know, possible world hazard, you know, the hazard of making it okay to walk away or not to live up to your obligation. And at this point that's what it is. You wouldn't ever had this conversation a year or two years ago because it really wasn't in people's minds for this to be okay to do.
ROBERTS: Tom, thank you for your call.
Brent White, do you see a difference between people who can't afford a payment or people who can afford it, but have decided it's a bad investment?
Prof. WHITE: Well, I think that the people who can't afford to make their payments are simply more sympathetic in the eyes of the public. But I don't see a moral difference. And the reason I don't see a moral difference is that the contract itself provides for the option to walk away. And, in fact, in a non-recourse state, that means a state where the bank cannot come after an individual for deficiency judgment.
Susan Woodward, an economist, has done a study that shows that people in non-recourse states pay about $800 more per $100,000 they borrow at closing for the right to walk away without recourse, without a deficiency judgment. So the contract provides an option to default. And then people in non-recourse states pay for that right. They pay $800 on average per $100,000 they borrowed for the right to walk away.
And so we tell people you have a contract. The contract gives you a right to walk away and you paid for that right to walk away by paying more money at closing. So I don't see the immorality in an individual saying, well, I'm going to exercise this contractual right that I actually paid money for.
ROBERTS: James Hagerty, how many states do have that situation where there is no further financial consequence than taking the property. And are, you know, strategic foreclosures more common there?
Mr. HAGERTY: Studies have found that people walking away - it is more common for people to walk away in states where there is no consequence. The states are really divided on this. No two states are alike. And so you can't say that in 25 it's okay, in 25 it's not. You have to look at every individual state and see exactly what is provided.
It may make a difference whether it's an investment home or whether it's your personal home. It may make a difference how large the home is. So, people who are considering this should look into the legal aspects of it.
ROBERTS: Let's hear from Brett in Adrian, Michigan. Brett, welcome to TALK OF THE NATION.
BRETT (Caller): Hi, thanks for having me on.
ROBERTS: You're welcome.
BRETT: I'm in a mortgage that my wife and I, we can actually afford this house. I'm unemployed and my wife is working. And we can - we're able to manage our finances to be able to pay for our home. I'm a student in alternative energy looking to graduate in April. Well, the unemployment will be running out soon thereafter. So, we're almost at a point where we're going to have to brace for impact, you know.
So, and the other thing is is my field of study, there are no real alternative energy job resources in Michigan. They're mostly out West. So, we're left with the option of moving West. But then here we are getting settled into a new environment from where we're at and the costs there are for that. But, again, if we walk away from our home, that's going to hurt our chances of buying a home out West.
ROBERTS: And, Brett, as you say, you brace for impact as graduation day approaches, what sorts of things are you considering?
BRETT: Well, that would be to pack up and move went and get in, hopefully, the community we go into is more of a renter's market, you know, which a lot of foreclosures are being bought up by, you know, investors and they're turning them into rental properties. Hopefully we can get in there, build a nest egg and by that time that nest egg is large enough for a down payment that we may - we will - our credit scores will rebound somewhat.
So, I mean, we've got several avenues of approach to the situation, and, really, none are that good.
ROBERTS: Brett, thank you for your call.
James Hagerty, I've seen different opinions, I suppose is the right word, about how long it takes a credit score to rebound from a foreclosure and when someone might be able to get another loan for a house or a car.
Mr. HAGERTY: It's going to be on your credit record for seven years. And it will be at least three to five years before you could qualify for a mortgage. So you have to be prepared to be a renter for a number of years. I think another thing to stress is that it's not always a question of foreclosure if you leave.
There is also the possibility that you might be able to do what's called a short sale. Sometimes the bank will agree to let you sell the house for less than the loan balance due and then forgive the debt. That can be a better option that may do less damage to your credit record.
ROBERTS: Yeah, Brent...
Prof. WHITE: I'm going to add to that, that I think that, you know, the initial thing is that a homeowner has to be willing to miss a payment or two for the most part before being so willing to consider a short sale or a deed in lieu of foreclosure, which are options that have less of a hit on an individual's credit. But individuals are basically put in a situation, they're held hostage with their credit score, and they're told that, you know, you're going to have to show your credit if you want to get out of this home.
And it's so effective because we overestimate, I believe, the value of a credit score. We use language - it's very common - it's going to destroy your credit. You won't be able to get a loan for this or a loan for that. Well, it's going to temporarily destroy your credit or mess up your credit. But assuming an individual has otherwise good credit and continues to make payments on other loan obligations, they can recover within two to three years, four years on the outside for, in terms of their credit score.
It's true that the mark will remain on their credit score for seven years in the case of a foreclosure, but the impact lessens significantly within two to three years. And someone can then not have to worry so much about their credit score. And you got to weigh the value of a credit score to the cost of staying in an underwater home. And if you are $100,000, $200,000 underwater, you're paying twice for your mortgage, which you can rent a comparable home for.
Well, your credit score's probably not worth that much money. And you may lose a few thousand dollars in higher credit payments over a couple years. But we're talking hundreds of thousands of dollars that an individual might be able to save by exercising their contractual right to give the property back to the bank.
So, but the financial industry benefits from an exaggerated fear about credit scores that - and it's, in fact, very hard for individuals to get good information about their credit scores and what it really means to have bad credit for a few years.
ROBERTS: We have an email that echoes that sentiment from South Bend who says: I'm considering this, I've had my house for sale for nearly two years, I have another job in another state and I'm currently paying rent on an apartment and the mortgage on my current house. If I walk away, my credit will be terrible for a few years, but I can recover. If I continue to pay on the mortgage, I'm giving up my savings, my kids' college fund, needing to replace my car. I don't want to walk away, but I don't know how long I can continue to pay on something that has no value to me or to the mortgage market.
Let's take a call from Gary in Phoenix. Gary, welcome to TALK OF THE NATION.
GARY (Caller): Thank you. Your email that you just read, I think that that's, that person is right at the crux of this conversation. And while I think that Professor White is hitting all the key issues, I just wanted to stress this social approbation associated with it. I find it ironic that in a society that worships capitalism and abhors socialism, that the approbation would be upon the rational capitalist that determines the cost of staying in the loan - that determines that the cost of staying in a loan exceeds the cost of walking away.
If you believe in capitalism, the rational actor stays or goes regardless of any social costs or social impact or social norms. So all of those social considerations are socialism and not capitalism. And thank you for allowing my comment.
ROBERTS: Gary, thank you for your call. Well, he's echoing in a slightly different way of what you're saying, Brent, that the emotional social context to this decision is misplaced.
Prof. WHITE: Well, you know, I think that it's - we - the fact is, we live in a capitalist society where we don't expect economic actors to be concerned about the economic consequences of their actions for other people. I mean, it would be nice if people went on spending some money right now because consumer spending is down, and that might be good to jumpstart the economy. But we don't expect individuals to sacrifice their own financial well-being and go buy some product they don't need because it's good for the economy.
And so if we're going to exist in a society where we expect people to look out for their economic interests, it should be true for banks, as well as individuals. Now, you might imagine a society - and a society that I would, in fact, think would be better - and that would be where corporations and banks were expected and required to behave in socially responsible ways, and so that banks were required to write down underwater mortgages and required to bear some of their responsibility for this crisis. I mean, we had banks before Congress, I believe today, apologizing for their role in the crisis and apologizing for reckless behavior, but yet not taking responsibility for the bubble and burst.
Then the burst has left millions of Americans suffering and millions of Americans with their financial future hanging in the balance. And I don't think we can ask those people to give up their financial security for the good of the whole when we don't expect banks to do the same thing.
ROBERTS: When we talk about the feelings of guilt over walking away from a contractor, shame over not being able to meet your obligations, do you think there is something more fraught, James Hagerty, when you're talking about owning your own home, as opposed to say, paying off your credit card debt? Is there some part of the whole American dream of owning your own home and being part of a neighborhood that makes - that heightens the emotional context to this decision?
Mr. HAGERTY: Yes, I think so. And I think one reason this is so difficult for a lot of people is that we've never been faced with this on a large scale, at least since the Great Depression. We're in an extraordinary situation here, where almost one out of four people with mortgages are underwater, and some of them are just very far underwater.
So people have never had to grapple with this before, and it's taken some time to work out how they really feel about it and what really is their best interest. I think one thing is that it's a generational thing, partly. It's easier for people who are young and not too attached to a community to walk away. It's much harder for people with children in school and deep ties to the community.
ROBERTS: You're listening to TALK OF THE NATION from NPR News. Let's take a call from Jeff in North Plains, Oregon. Jeff, welcome to TALK OF THE NATION.
JEFF (Caller): Thanks a lot. I have a similar situation to some of your previous callers. My wife and I bought a home well before the downturn in California's market. And then, as the economy went bad there and the state had budget problems over the last few years, we were going to stick it out, but our jobs were cut back because of budget cuts. And we - and my wife and I both had to leave the state to find a similar job, and actually were offered a job and living in Oregon now.
And when we started the process, we worked with a farmer up the road that wanted to buy our farm and our house. And the bank told us flat out that they wouldn't talk to us until we stop making payments. And then we've been working in the process and trying to refinance or reduce it, and they still are taking forever to get back to us.
And right now, they're just holding onto the paperwork. What I wonder about is why aren't they working with us when we had a buyer that was willing to do a short sale? It was a local farmer that - you know, be able to buy the farm. It was just incredible. And so, that's where we are right now. We're paying rent somewhere else. We can't afford to do the mortgage. We told the lender that before we left. It's been a year and a half now that we've been trying to work with them.
ROBERTS: Jeff, thanks for your call. Brent White, do you have an answer for him, of why a bank wouldn't work with him?
Prof. WHITE: Well, his story is very common, to start with. It's difficult to get banks to work with individuals. And it's - there's been a lot written to try to explain why banks don't modify more mortgages, why they don't work with homeowners more often. My theory or my position is that banks don't because of the norm asymmetry, because they know that most individuals will not walk away from their homes and will continue to pay.
And so the bank tells individuals you have to stop making your payments first before we'll talk to you, because they know from most people, that's going to be enough. And the person's going to go away and they're going to make their payments, because they're just not going to be willing to default.
And so, if banks started behaving differently, it might incentivize more people to ask for modifications or say they're going to walk away if the banks won't modify mortgages. So banks are willing to take some losses on properties where people actually do walk away in order to not encourage other people to exercise their contractual option to default, as well.
ROBERTS: Well, this brings up an email from Ken in Kingston, Georgia, who says: How many homeowners do you expect will walk away from their mortgages, and what long-term effects will these defaults have on a residential real estate market? And will mortgage companies begin structuring future mortgage agreements differently as a result?
Prof. WHITE: Well, I think it's probably a good thing if mortgage companies start structuring deals differently and at least engage in more careful underwriting practices where they're concerned about whether or not the intrinsic value of the home is actually worth the collateral on the loan, or the intrinsic value the home is actually worth what the loan is for and requires some types of down payments. I think that, you know, part of the problem is that mortgage companies weren't careful in the loans they gave out, and they - and it ran up the market.
In terms of the concern about what happens to the market if people walk away, I think it's a valid concern and it seems to be on the - a concern of an earlier caller, as well, and lots of individuals. What happens if people walk away? What happens to the market? And I think it's a valid concern. But I think we have to ask the question about whether or not we should prop up the market on the backs of the middle class. And to be clear, it is the middle class that's bearing the primary burden of the housing meltdown.
And my answer is no, we can't expect individual homeowners to bear this burden on their own. And we either have to help them out or we have to force banks to modify more mortgages. And they're not going to do it on their own.
ROBERTS: That's Brent White, professor of law at University of Arizona. He joined us from member station KUAZ in Tucson. Thank you so much.
Prof. WHITE: Thank you for having me.
ROBERTS: And also thank you to James Hagerty, a reporter for the Wall Street Journal who joined us from WQED in Pittsburgh. Thanks to you.
Mr. HAGERTY: Thank you.
ROBERTS: Coming up, the scale of devastation in Haiti is enormous, and President Obama promises help is on the way.
President BARACK OBAMA: More American search and rescue teams are coming - more food, more water, doctors, nurses, paramedics, more of the people, equipment and capabilities that can make the difference between life and death.
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ROBERTS: Coming up, the best way to help victims in Haiti. I'm Rebecca Roberts.
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