Photo (cc) by cogdogblog
I recently got an email press release from a website that specializes in helping homeowners with something known as a strategic default: walking away from a mortgage, even when you have the ability to pay.
Here’s an excerpt from that email:
“They wouldn’t work with me at all, so they basically made the decision to take the property back.” – Jeff Horton (strategic defaulter)
(Website Name) client Jeff Horton opted to strategically default on both his primary and investment properties in Florida late last year. Horton’s property values had each decreased approximately $100K in equity. He has been living mortgage and rent-free for the last 13 months. After months of trying to work out a solution with his lender, rather than drown in Florida’s underwater housing market, he decided a strategic default was his best fiscal option. It was a business decision. Big lenders understand that if they can get away with paying only one person to sign up to 500 foreclosure papers a day they can make more profit. Cue the robo-signing foreclosure auditors.
Bank of America, JP Morgan Chase, and Ally’s greedy lack of oversight throughout the foreclosure process is reminiscent of their irresponsible lending practices in the early 2000’s. How can lenders question a strategic defaulter’s ethics when they themselves are breaking the law and cutting corners to make an extra dollar? Are these the same companies we directly deposit our paychecks with? Horton feels as though his lender gave him no choice.
Since all next week I’ll be presenting a series that agrees with part of what’s in this excerpt – namely that some big banks and the law firms they employed did display a greedy lack of foreclosure oversight – I want to make it clear just how vehemently I disagree with virtually everything else contained in this release.
When you borrow money and put up an asset as collateral, the value of that collateral is irrelevant when it comes to repaying the loan. If it weren’t, any person who takes out a new-car loan should feel justified in defaulting on it, since that collateral drops in value by 15-25 percent the instant it’s driven off the lot. For that matter, anyone whose house has depreciated in value since this crisis began could use that logic to justify a better deal from their lender.
If you owe $500,000 on a house that’s worth $200,000, and see no hope of ever getting back to even, the math could favor walking away. I can understand strategically defaulting – but I can’t understand how people like Jeff Horton, along with the author of this email, can in any way attempt to claim the moral high ground.
“They wouldn’t work with me at all, so they basically made the decision to take the property back… Horton feels as though his lender gave him no choice.” This is BS of the highest order. The lender isn’t under any legal or moral obligation to alter the terms of your original agreement just because the value of your collateral went south. If that were true, the same logic would justify the lender coming back to Jeff Horton and demanding a higher interest rate and/or a higher mortgage balance if the properties he purchased had radically increased in value.
“How can lenders question a strategic defaulter’s ethics when they themselves are breaking the law and cutting corners to make an extra dollar?” Lenders who broke the law probably can’t question a strategic defaulter’s ethics – but those of us who live up to our obligations and play by the rules can certainly question the ethics of both parties.
While it’s true that some banks have disgraced themselves yet again, pretending that these practices somehow justify defaulting on a loan you’re capable of paying is pathetic. Default if you must – like I said, I don’t blame you for that: it may well be the right thing to do. And if it helps you sleep at night, tell yourself it’s the bank’s fault for not “working with you.” But don’t try to pass that off on me.
I once let a stock broker friend of mine convince me that I should buy $30,000 worth of a company that ultimately went to zero – and it was money I could ill afford to lose. Did I blame him? You bet – at least at first. But after I thought about it, I realized that it was me who was at fault. I was the one who was so greedy that I carelessly acted on his stupid advice, and as a former broker myself, I should have known better. And guess what? Now I do.
You’re the one who bought a house and/or investment property at the top of the market. Time to man up, Jeff Horton.