Strategic Default: Walking Away from Mortgages

(CBS)  Despite some indications that the economy is recovering, the housing market remains a disaster area. Currently, about seven million homeowners are behind on their mortgages and that number is only getting worse.

Banks, with the help of the government, are offering some relief to homeowners who've lost jobs and just can't meet their payments.

But there's a growing number who can pay but are simply walking away from houses that are now worth as little as half of what they paid for them.

It's called "strategic default." People have done the math and decided making those monthly payments is just throwing money away, leaving the mortgage holders - the banks - as zookeepers of an ever-growing parade of white elephants.

In the past year it is estimated that at least a million Americans who can afford to stay in their homes simply walked away.

Full Segment: Mortgages - Walking Away
Web Extra: Walking Away From A Mortgage
Web Extra: The Case For Walking Away
From Your Mortgage

Web Extra: YouWalkAway.com
Web Extra: A Mortgage Walkaways Going Viral

Among them Chris Deaner and his wife Dana of Sun City, Ariz.

West Foothill Drive has become a street of shattered dreams. "Amazingly, 16 out of the 44 houses on this street have foreclosed over the last year," Deaner told "60 Minutes" correspondent Morley Safer.

Deaner says his own home will become number 17 on that foreclosure list.

When Deaner, an auditor for a local university, bought his three bedroom house in 2006 for $262,000, he thought he got a bargain.

"You know, first time homebuyers, we don't know houses are overvalued. We just know we need to get in before it keeps going up, and up, and up," he explained.

But then the balloon burst. So how much does he think he could get for that $262,000 house today?

"Right now, about $142,000," Deaner said. "Big drop, over 43 percent."

Deaner and his house were, as they say, "underwater." With a mortgage of about a quarter of a million dollars on a home worth less than $150,000, he has one very expensive lemon. He says he tried to talk his bank into renegotiating his mortgage, but because he earns enough to keep paying, the bank said no deal.

"They refused to. They said it was gonna affect my credit, and they were gonna take my house. And I pretty much said, 'Go for it,'" Deaner told Safer.

Deaner said he could afford to stay in the home. But he chose not to. He is walking away. That lemon of a house is now the bank's problem.

"It's almost like the 'in thing' to do right now, it seems like," he said.

And because Deaner, like many Americans, only made a 10 percent down payment on his home, "taking a hike" is a lot easier. By law in Arizona and nine other states, the bank cannot go after any of his other assets. But his credit rating will suffer.

"Aren't you fearful that you're gonna get a reputation as being a deadbeat?" Safer asked.

"Yeah. But with the money savings that I will have in four to six years, I'm confident I'll have money to buy my way into a house if I want to," he replied.

Asked if he doesn't even feel a twinge of guilt, Deaner told Safer, "No, especially after dealing with my lender, trying to contact them. None at all.

Web Extra: The Case for Walking Away From Your Mortgage


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Neither do Jean Ellen Schulik and Danny Kuehn. They bought their Phoenix bungalow three years ago for nearly $400,000. The bank now values it at $85,000.

Even though they can afford the mortgage payments, they felt they were trying to bail out an ocean with a bucket.

"No logical business person would do anything other than walk away. And so, there was a lot of soul searching. And I did a lot of crying, 'cause I'm in love with this house. And every day I would redo the math and think, 'Maybe we missed something,'" Schulik said. "This just can't be right."

But it was: the value of their house was dropping anywhere from five to eight thousand dollars a month, so Schulik and Kuehn just felt it was time to walk away.

"I don't think we're villains. We fulfilled the parts of our contract that we have with the bank. We've let them know what we're doing. It's all legal. It's not anything I ever expected I would be doing. And it sure doesn't feel good. But it seems like it's the right thing to do," Schulik said.

"What do your neighbors make of it?" Safer asked. "Another empty house breaks down the value of everyone's house."

"And we've seen that here. I think they will be upset, and I understand that," Kuehn replied.

"But you're hardly alone in Phoenix right now, correct?" Safer asked.

"Yes, it's interesting the number of my coworkers who have approached me to say, 'How are you doing this? Because I need to do it,'" Kuehn explained.

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[StrategicDefault]

Strategic Default is not a good option for home owners. No government programs available for the "Jumbo loan Holders" so leave it to the private sector to come up with a solution.
http://www.youtube.com/watch?v=gN3abKAffvk check out the video for a private investor solution.

[Youhavebeenwarned]

This is an argument against strategic defaulting that is based on your own personal best interest not any philosophical attempt to define morality. It is my first and likely to be my only post on these forums but I figured some might benefit from these insights into basic economics and in so doing avoid a costly mistake. Having some major buyers remorse as a recent college graduate who studied business and is not having the effort rewarded in this economy I can feel your pain. Below is a comment that I had posted earlier today on the WSJ under an unrelated article. I thought of you people, those who like my mother base their political philosophy on what seems right rather than what is likely to be the case. It is a mistake I once made in choosing an education that I could not afford but was told at an impressionable age would pay off, I do not hold it against you and wish you the best.

In Adam Smith's wealth of nations he talks a lot about the cost of labor and I agree with him, there is definitely a direct link between the cost of labor and how much that labor consumes in terms of food relative to the real cost not dollar amount of food.
Fast forward to modern times; now we have technology that allows instant communication globally, transported in vastly more efficient super tankers and various international trade agreements all of which form the phenomenon known as globalization.

Globalization, I am all for it but I do question some of our policies. It makes no point to be sending aid in the form of food or discounted food the world over. Agricultural subsidies in the U.S. do not even make any sense. Giving welfare to those who produce more children than they could otherwise support is insanity. The only reason for this so called aid would be to encourage further population growth. This is a case of rich politicians at the behest of certain rich political donors trying to influence the relationship of labor, capital and land aka how we divide the total production of the world between the three necessary inputs of labor, capital investment and land owners. This so called aid exasperates the wealth gap. It means the demand for basics will continue to go up in excess of supply. Anyone who relies on the fruit of their labor to make a living instead of the land that they own or the large stores of wealth they have to invest should be warned. You are not helping the less fortunate here, you are being played against them and mocked behind your backs by your perpetrators.

Also if you were thinking of walking away from your home because you currently owe more in imaginary U.S. paper money which is not backed by anything real at this point aka strategic default on an underwater mortgage you might think twice unless you have the resources to then re-buy property with cash. I am sensing a conspiracy here in housing: Devalue property with a manufactured crisis then use newly printed worthless paper money to buy up all the foreclosures and strategic defaults just as world population is reaching the tipping point where food supply equals demand and property not stored wealth or labor most determines how much things cost. now that would be the biggest heist ever. Think about it you would not even have a moral argument to protest the fact that you were had since you would have just walked away from you property because A) you thought it was worthless just because it was worth less in absolute dollar terms B) You were allowed to. Looks to me like the trap is set.

[ratesarehot]

I was in the mortgage business for years and it was down right disgusting watching people qualify for homes that they new they couldn't afford. Most people tell you what they think they can afford and guess what if you add $1,000 a month to what you think you can afford than you simply can't afford it. Not to mention the mortgage companies that were putting the loans through. I have a company now that pre-qualifies you for a mortgage if you don't qualify than guess what you can't afford it. www.ratesarehot.com

[strategichomedefault]

The banks walked away from our loans and bet against us. They did what made the most financial sense.
Sometimes a strategic default makes more financial sense. Banks and government guilt consumers into keeping their loans, while the banks unloaded these same loans and bet against them! Maybe strategic defaults will cause the banks to consider loan modification.
http://www.mystrategichomedefault.com

[jrob816]

Who do these people think is footing the bill for their walkaway?? WE are. Fannie Mae and Freddie Mac own or guarantee over 50% of all mortgages. They have been getting taxpayer bailout money in the BILLIONS of dollars. So when someone renegs on their contract and walks away, The taxpayer pays the price. If you can afford to pay your mortgage and walk away instead, you are a freeloader on the back of hardworking taxpayers. Stop whining and take responsibility for your decisions!

[erotochub]

It is funny to read most of the feedback here, specially the ones bashing people who walk away. Comparing an underwater mortgage to stock investment? Really? Say you bought shares of a company at $200, and the company is falling apart and is now down to $100, would you sell and cut loss, or would you just hang on and buy more? Same for underwater mortgage. A house that has a market value 50% below its sale price would need about 15 years of a consistent 5% annual appreciation for the owner to break even. Keep throwing money to that kind of a mortgage is essentially buying a company's stock when the company is tanking. Homeowners who walk away are not being illegal or immoral. You fail to pay your mortgage, the bank takes your home - that is the contract! There is nothing immoral by obligating to the contract.

Some said those people who stop payments and live for free are stealing. Again NO. The banks do not start any foreclosure or short sale process until you are delinquent. If you stay current on your payment, they will NEVER talk to you, should it be loan mod, short sale or foreclosure. Stop payment is the only way and the first step to kick off a short sale or foreclosure process. You cannot just call the bank up and tell them "Hey whassup. I need to short sale my home." They will not talk to you.

[2009survivor]

I bought some homes in a couple different states in 2006 as a college fund for my baby. I did a 1031 exchange with 1 house I sold and the lender convinced me it was stupid to go with one. I could put 5% down and purchase 5 properties instead. If I only had a time machine. Now all are held by GMAC.
Months ago I contacted them to tell them that our business was struggling so and could they modify the loans because I was having to pay $1500 a month to cover them (rents went down, taxes up) and they were opperating at a loss which I could't sustain for long given the economy. I was in great standing at the time had great credit but I saw that there was going to be a problem. They had me send document after doc only to send me 5 form letters saying they would not modify as it was not owner occupied.
We held on as long as we could but finally ran out of money and are now short selling 3 out of 5 and most likely will lose all five. You story on the guy who can pay but isn't interested me. I am a slightly differnt story but I am frustrated. Never imagined this would happen but yeah, they are all totally underwater with no signs of comming back any time soon. If the bank would have worked with me to modify I would have done everythihg in my power to keep those current regardless of their worth but now it doesnt make any sense. Why throw good money on something that is a loss. I feel bad but the banks created this situation and have perpetuated the situation by being jerks and not being willing to work with good paying customers. Its that all or nothing additute. And even when I put th e1st house on short sale i scraped it together to still pay but was pretty much told if your still paying we won't work with you. So It seemed ridiculous to pay. They rejected my plea to work out something even temporarily, they suggested short sale. I really didn't want to lose the places but had no other choice.

[LemonMeister]

Hey Morley your BOSS is involved in this Story BIG TIME! Leslie Moonvies President and Chief Executive Officer of CBS Television Broadcasting sits on the Board of Directors of KB Home. Bruce Karatz former CEO of KB Home was just made a convicted Felon. Bruce did not want to step down from the same board Leslie sits on, he was forced out by Eli Broad. Leslie Moonvies is responsible for countless defective Homes built by KB Home and then financed by KB Home/Countrywide Home Loans. Some of the Blame lies with these homebuilders and the rush to make way over the top profits by building homes with cheap sub-standard materials. Why are homes built and sold for $600,000.00? Pure profits my man http://www.akbhomesucks.com this LEMON built by Bruce Karatz and Leslie Moonvies. KB Home has major influence on the media, their Board is on Evey major Broadcasting Board in the USA and employ spokespersons like Martha Stewart (Convicted also). KB Home is responsible for more foreclosures than any other builder. They employ what the Dallas Morning News coined as the man of the year in 2007. Got it amigo's!

[anwguy]

The only thing I'll say is that IF the property had gone UP in value, they would have been more than willing to take it--downside, nope, someone else is at fault.

The bank made the loan in good faith--could you begin to imagine the firestorm IF the bank KNEW that property values were going to drop--and declined the loan? The loan was granted based upon the values at the time of sale.

While it is a shame that many have lost equity--in the end, we will be paying for it as well--including the banks.

To add to the insult is the prospect of living in the house for a year for free? Such class.

At least they will get nailed for taxes--for the loss considered as income.

[kastner64]

Mr. Safer's questions are - perhaps unwittingly - the questions the banks want us to ask. Of course, if you love your house and can afford to pay off the mortgage stay with it, but the economy will be reeling if more people walk away - hell, guys, these banks are too big to fail! And the state debt is crushing this country? Guys, this country is in two wars that cost us 100 billion dollars each year (!) if you calculate everything including interest! So before you take it out on the little guy, and tell the little guy to ruin his/her life in order to make the economy flourish - I suggest, there are things to be done first: get out of those wars, and make the banks behave more humanely! (For possible ways read the article by Mr. Kaufmann from The Nation under Opinion) on this same CBS website).