The Dilemma Of Walking Away From A Mortgage
STEVE INSKEEP, Host:
It's MORNING EDITION from NPR News. I'm Steve Inskeep.
MARY LOUIE KELLY, Host:
And I'm Mary Louise Kelly.
INSKEEP: to pay or not to pay. Not because they can't afford their mortgage, but because they don't want to keep paying on a home that has lost value. This is called strategic default, and it's controversial - some would even say unethical - because it means backing out of a financial obligation.
Still, with about a quarter of American homeowners owing more on their mortgages than their homes are worth, some say it's irrational to keep making those payments. NPR's Yuki Noguchi talked with one such couple, and has this report.
YUKI NOGUCHI: Grace Chen is no financial novice. She's a CPA working for a venture capital firm. But she and her husband have big financial regrets about buying their house.
LOUIE KELLY: We made a bad investment. I mean, I'm from a finance background. It makes no economic sense for us to hold onto this asset.
NOGUCHI: The asset - their home in Mountain View, California - bought for nearly a million bucks, is now worth 20 percent less just three years later. They can't refinance because the value of the home has dropped so much.
LOUIE KELLY: I don't know. It's just frustrating because I'm just trying to do the right thing. But I don't know. I think we have to, like, take care of our own business, too, if we're not going to get any help.
NOGUCHI: The help they're asking for is an interest-rate reduction from their lender, Bank of America. For the past year, Chen has spent many lunch hours on the phone, trying to get a loan modification. She acknowledges they overspent, but also feels the banks and Wall Street helped create the housing bubble.
Until now, it's been her husband, Antonis Orphanou, who's argued for walking away. He says they could rent a similar size house down the street, for a third their mortgage payment.
LOUIE KELLY: I personally feel like our money just evaporates. It's as if - just throwing money away.
NOGUCHI: But here's the thing: This couple isn't in financial trouble. They haven't lost their jobs; their interest rate hasn't changed; in fact, they haven't even missed a single mortgage payment.
But they're tempted to. Chen says she's usually the type to immediately pay bills online, but when it comes to the mortgage, she procrastinates.
LOUIE KELLY: Sometimes, if it falls on a weekend, I won't make that payment until the following Monday. I mean, that's how it's gotten to me. It's like, I want to give them the money at the last possible minute. Maybe it's just going to be one day, but I'm not going to make that click. And it will be like, oh well, we just missed that payment.
NOGUCHI: The thing that holds Chen back is her worry that a foreclosure could limit future job opportunities because employers often screen for poor credit.
The mere fact that people like Chen and Orphanou are considering a strategic default does not bode well for the housing market, which already stands on a shaky foundation.
INSKEEP: Well, it would really mean another tidal wave.
NOGUCHI: William Wheaton is an economics professor at MIT who studies real estate. He estimates there are about 2 and a half million homeowners at risk of strategic default. He says buyers overpaid, and lenders enabled and even encouraged the overspending.
INSKEEP: There's two parties to blame, and they have to share in the pain.
NOGUCHI: Wheaton says one way to divvy up the pain and prevent strategic defaults is to pressure banks to refinance homes, and allow both homeowners and lenders to share in the upside if the house is later sold at a higher price.
This is not a solution the American Bankers Association supports. Robert Davis is executive vice president of the ABA.
LOUIE KELLY: We believe that people should meet their contractual obligations when they have the ability to meet them.
NOGUCHI: Buyers' regret is simply not a good reason to abandon a home, or leave a community with a vacant home, he says.
Chen, the California CPA, says she's heard that argument before. On the day we spoke, she sounded tired, her voice a little raspy. She'd spent two hours in a heated exchange with a friend who told her she was wrong to seek any help at all, and to even consider walking away.
LOUIE KELLY: Because he felt like his taxpayer dollars are going to help people like me, and he didn't like that at all. So I get that. I get what he's saying.
NOGUCHI: And while she understands, she's not at all sure they're going to keep making those payments.
Yuki Noguchi, NPR News.
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