Came across this blog post in The Huffington Post today regarding the morality of a real estate short sale:
Is walking away from a home when you’re upside-down immoral or simply a financial deal that didn’t work out? This question was put to the group of real estate professionals recently and the discussion, especially when it came to the million dollar market, exploded.
My first issue with this post is that I think it conflates two different types of situations: a short sale, and a strategic default.
In a true short sale, one thing must be true: the homeowner must be in imminent failure of default with no available recourse (typically from a hardship). In other words, the homeowner must have a payment of X and an inability to meet that payment. Period. A good candidate for a short sale is one where foreclosure is imminent and almost certain.
A strategic default, on the other hand, is where the buyer just “walks away” from the property. There could be a hardship, but more often than not there is none. A buyer has the capability of paying the loan but chooses not too.
We already wrote earlier today that some lenders are creating policies that encourage working with the banks, and not just walking away from them.
Confusing these two issues already raises my eyebrow; because there is a difference between a situation where a homeowner has no choice (short sale), and where the homeowner chooses to walk away from a loan willingly (strategic default). Now, to be fair, there are circumstances where a short sale was attempted, the borrower was a good candidate, the bank refuses to accept the short sale, and then the borrower defaults strategically. But in that case, it’s not really all that much different from foreclosure.
For many low-to-mid-range homeowners the scenario goes like this: buyer purchased a home when the market was high, with an adjustable rate mortgage and bought at the top of their game. Time goes by and the ARM resets, doubles the mortgage and blows the family out of their budgetary waters. Add a major life change; wage cut, job loss, illness with or without health insurance and our humbled buyer, sinking deeper into debt drifts closer to the mouth of foreclosure. But should a higher price point or a higher income stream make a difference?
Consider the family who buys a $1.5 million hilltop home in 2006 with the Denver market at its peak. Using a stated income loan and 5% down, they move in and comfortably pay the monthly mortgage. Over the next few years home prices decline and their $1.5M home has depreciated by $250k of its former value. In the midst of an historical banking crisis, recession hits, banks stop lending leaving the homeowner unable to make his employee payroll. He puts his home on the market, jumbo loans have all but dried up and his neighborhood’s filled with vacant spec homes selling at deep discounts or falling into foreclosure like a McMansion of cards.There has been a lot of criticism lately of the high-end buyer, yet it may not be as cavalier as it may seem. The tricky part with a high-end short sale is that though the seller can prove hardship, they may have assets which don’t allow for bank approval. Like homeowners across the income spectrum, many of them in the million dollar range, they burn through much or all of what they’ve got, waiting for the market to turn around, in an attempt to save their FICO score and face. Is there any difference between homeowners who look at their balance sheet and realize they’ve got a liability on their hands or the option of starting over? We understand the relief for the homeowner put into an adjustable rate mortgage at 8% interest, who now has no job and no ability to refinance. But should our empathy be limited to those who purchased homes under $200,000?
The point here that I do think is fair is the criticism when borrowers have assets that are excluded from the short sale hardship scenario. However, most of those are typically retirement assets like a 401(k). If a borrower has significant non-retirement assets, the chances are the bank will consider them when considering your short sale offer.
Most of us begin with integrity and every intention of repaying our loan. Inherent to the process is the understanding that at its heart, buying a home is a business deal. You loan me the money, I pay you under the agreed upon terms and interest rate, if I default you have the right to redeem your secured asset, my home.
Damn straight!
So… is the short-sale-as-business-deal much different morally than an off-shore account to lower one’s taxes? Or cheating on them? I don’t know. But with tax day just behind us, it looks like we’ll all have to belly up. Equally.
Short sale, yes, absolutely. “Strategic default”? Depends on the circumstances. Do I think it’s ethical or moral for someone who earns $150,000 a year to walk away from a $250k mortgage with a loan payment of $1800 just because their house is underwater? No way!
What are your thoughts and comments? Chime in in the comments!
