 |
 |  |  |  |  |  |
photo: KENDRICK BRINSON/LUCEO IMAGES FOR THE WALL STREET JOURNAL (DEREK FIGG)
|
Pay or walk away?
By JAMES R. HAGERTY and NICK TIMIRAOS In good times, it would have been unthinkable to stop paying the mortgage. But for Derek Figg, it now seems like the best option. Mr. Figg, 30, felt trapped in a home he bought two years ago near Phoenix for $340,000. He still owes about $318,000 but figures the home’s value has dropped to $230,000 or less. After agonizing over the pros and cons, he decided recently to stop making loan payments, even though he can afford them, and move to an apartment nearby, saving about $700 a month on his monthly housing costs.
‘I PROMISE TO PAY’ A growing number of people in Arizona, California, Florida and Nevada, where home prices have plunged, are considering what is known as a “strategic default”—walking away from their mortgages not because they can’t afford them, but because they don’t think it makes financial sense to make payments on something that’s not worth what they owe on it. Driving this phenomenon is the rising number of households that are deeply “under water,” owing much more than the current value of their homes. A standard mortgage-loan document reads, “I promise to pay” the amount borrowed plus interest, and some people say that promise should remain good even if it is no longer convenient. George Brenkert, a professor of business ethics, says borrowers who can pay—and weren’t deceived by the lender—have a moral responsibility to keep paying off their loans. It would be disastrous for the economy, he says, if Americans decided it was OK to walk away from such commitments. Walking away isn’t risk-free. A foreclosure stays on a consumer’s credit record for seven years and can send a credit score plunging. A person with that kind of damaged record faces higher interest rates for auto and other loans, and credit-card issuers may charge more interest or refuse to issue a card. In addition, many states give lenders some degree of power to seize bank deposits, cars or other assets of people who default on their mortgages. Even so, in neighborhoods with high foreclosure rates and declining property values, “it’s going to be really difficult to prevent a cascade effect” as one strategic default emboldens others to take that drastic step, says Paola Sapienza, a professor at Northwestern University. A study by researchers at Northwestern and the University of Chicago found that as many as one in four defaults may be strategic. GET TOUGH Banks warn that they may get tough with strategic defaulters by targeting borrowers’ other assets. “We will try to reduce people’s payments if they have a hardship,” says Thomas Kelly, a spokesman for J.P. Morgan Chase, a big bank. “But we have a financial responsibility to get people to pay what they owe if they can afford it.” Another risk for defaulters is that banks could turn over their claims to collection agencies or other firms, which could then dun the borrowers for up to 20 years after a foreclosure. Such threats appear to deter some borrowers. Brent White, a law professor at the University of Arizona, says homeowners should decide whether to keep paying based on their own interests, “unclouded by unnecessary guilt or shame.” He says borrowers can take a cue from lenders that “ruthlessly seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility.” But it isn’t just a matter of the borrower’s personal interest, says John Courson, head of the Mortgage Bankers Association, which represents lenders. Defaults hurt neighborhoods by lowering property values, he says, adding: “What about the message they will send to their family and their kids and their friends?” Mr. Figg says that deciding to default on his loan was “the toughest decision I ever made.” He worried that if he ever lost his job, he would be marooned in a home that he couldn’t sell for enough to pay off his loan, limiting his ability to find work in other parts of the country: “I couldn’t move up. I couldn’t move down. I couldn’t move out of the city.” Lenders, Mr. Figg argues, are guilty of having “manipulated” the housing market during the boom by accepting dubious home appraisals when they made the loans. “When I weighed everything,” he says, “I was able to sleep at night.”
| ||||||||||||||||||||||||||||||||
