In this difficult housing market, many recent home buyers are either behind in their payments or owe more money on the home than it is worth.

For some homeowners behind in their payments, a job loss or other financial calamity accounts for their inability to pay.  For other homeowners, it was that they were sold on a loan with an adjustable rate and often were not properly educated on the implications of the rate adjustment.

For people behind in their payments and for which there is simply no way they can make their payments and the lender will not negotiate a new payment plan, a foreclosure or short sale may be the only option they have.  For those people I am truly sorry and have nothing but empathy… even if they have little money into the house, they will have damaged credit for years to come and the shame of losing their home.

The second group of recent home buyers is different though.  These are the buyers that can afford to make their monthly payments but owe more than what the home is worth.  60 Minutes had a segment recently where there was a couple profiled that sounded like they can afford the payments on their adjustable ARM, but simply do not see any reason to do so:

But Matt and Stephanie Valdez say they knew exactly what they were doing when they bought a small two-bedroom for $355,000. They could afford the initial payments and planned to refinance the mortgage before the interest rate jumped to 11 percent. But they couldn’t do it because the value of the house had fallen below what they owed on the mortgage. They say they can afford the higher payments, but see no point in making them.

“The house keeps going down, payments keep going up. Where’s the logic in that? And how can we fix it? I mean, that’s what this whole thing’s about for us is how can we fix this? And if we can’t fix it, then what do we do?” Matt Valdez asks.

“Why pay a $3,200 payment on a 1200-square-foot home? It makes no sense,” Stephanie Valdez adds.

“That’s what you agreed to do when you bought the house,” Kroft points out.

“Fine. If the value is going up. But we’re not going anywhere. The price or the value is going down. It makes no sense because we will never be able to refinance and get a lower payment. There’s no way,” Stephanie Valdez replies.

“You’re saying, essentially, that you’re going to stop making payments on it? You’re just gonna let it go into foreclosure?” Kroft asks.

“You know, that’s the only advice we’ve gotten so far is walk away from the home. We don’t want to do that to our credit. Why can’t our mortgage company work with us?” she says.

Full article:

http://www.cbsnews.com/stories/2008/01/25/60minutes/main3752515.shtml 

These buyers signed a contract and regardless of the situation, they say they can still make the payments.  Consequently, if they choose to stop making the payments simply because “it makes no sense” to follow through on the contract they agreed to, then I don’t see how that is any different from white-collar fraud or theft.  It certainly would be in the bank’s interest to work with them on a loan modification, but at the same time, they are not at fault for the buyer’s decision.

When circumstances dictate that a person cannot afford the obligations they have, bankruptcy, short sales and foreclosures are fair and viable options for them to get out of their trouble.  When a financially able person simply chooses to walk away because the deal doesn’t look good to them anymore, I don’t know how you can see that as anything other than stealing.  When the home sells for 10% or 20% less the next time around and the bank takes a $20,000 – $100,000 loss on the house, how is that any different than taking that money directly from the bank’s vault?

When a bank takes a loss on a home, it simply doesn’t erase profit from their balance sheet… they will raise prices on other customers in an atwww.t to maintain their profit margins.  Further, when a foreclosure or short sale home sells for a depressed price in a neighborhood, that sale will have a negative effect on the values of all the other homes around it, and that effect can linger for a year or more as buyers look at recent sales in the neighborhood to determine what they will offer on a home.

Banks are certainly not blameless in their role in this mortgage mess but they are also not the sole villain either.  In this difficult market, I believe many people have lost sight of personal responsibility and are shifting their problems onto the rest of us.

Just this week I had a reader contact me about his situation.  He had purchased last year when he was married and since then has become divorced.  When they purchased, they rolled their closing costs into the mortgage amount on the home and the neighborhood values have fallen approximately 10% since that time.  He wanted to know more about the options available to him.

Once I explained the options and the long-term consequences either way, he decided to dig in, get a renter or two, and hold out for a turnaround in the market.  Obviously not happy with the situation and the near-term outlook, he decided to take the responsible path, which is to hold to his obligations.  I was quite proud to read his decision and hope that most people, when faced with a similar situation, do the right thing as well.