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August 18, 2010

Walking Away from Mortgages: Good or Bad?

When the U.S. housing market took a turn for the worse in 2008, many homeowners who still owed the bank money on their homes suddenly found that they owed more than their home was actually worth. That phenomenon, dubbed “being under water,” led many homeowners to simply walk away from their mortgage obligations without paying any more of what they owed.

Although “walking away” negatively affects one’s credit score, a number that shows how responsible borrowers are in paying back loans, homeowners like 28-year-old Josh Bartlett think it’s easier to rebuild a credit score than it is to wait until home values go up again. Many other homeowners in Florida, a state that has been hit especially hard in the housing crisis, feel the same way.

But, others feel that paying off their full mortgage is their ethical responsibility. Kevin Jarrett, another Florida homeowner who was facing foreclosure, felt he needed to “do what’s right.” Instead of walking away from his mortgage, he made as many payments as he could and accepted the inevitable foreclosure. He compares buying a house to buying a car, saying that “If you buy a car, it loses value as soon as you drive it off a lot, but you still keep making the payments for that vehicle. I don’t see the difference with the homes.”

Quotes

“But, if most of the people who are underwater walk away, then house prices will drop even more, and then that will induce more people to walk away. So, we can have sort of vicious circles in a lot of real estate markets, local real estate markets, that are going to be very dangerous.” – Luigi Zingales, economist, University of Chicago Booth School of Business

“Yes, I’m defaulting. Yes, I’m walking away. But I’m not going to keep running a business that is losing money as the days go on.” – Josh Bartlett, Florida homeowner

“What right do you have to say, well, I’m going to not pay, because now you’re taking money from other people, because, oh, I want to take care of my family. Well, somewhere along the line, some ethics have to come into play, you know?” – Kevin Jarrett, Florida homeowner

Warm Up Questions

1. What is a mortgage?

2. What is credit?

3. What does it mean when a bank forecloses on a house?

Discussion Questions

1. What do you think? Would you walk away from a home that’s “under water”? Why or why not?

2. Do you know anyone whose home is worth less than what they agreed to pay for it? If so, what are they doing about it? What do you think they should do?

3. Many government officials have tried to get banks to help homeowners in trouble by reducing their “principal,” or the original amount owed on a house. Do you think the banks should agree to do that? Why or why not? How could it help or hurt the banks?

Additional Resources

Video Transcript

Lesson Plan: Financial Crisis Glossary

Financial Worries, Credit Crisis Are Felt Around the Globe

What Really Happens in a Foreclosure?

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