We've got an interesting problem on our hands. This conundrum represents a significant part of our current economic state. What is the answer? I'd really like to know your opinion.Facts:
- A homeowner buys his dream house for $600,000 and puts down $300,000 and mortgages the other half with an interest only loan.
- Real estate bubble bursts.
-House now worth $270,000.
-Due to negative amortization, now owes $350,000
-Guy wants to walk away.
Is he right? Should he walk away?
Is the bank right? Should they expect him to honor his contract?
Lets take both sides.
Guy:
-His interest only mortgage is ending and he will owe principal plus interest in a few months
-He's not late on his payments, so the mortage company will not re-finance
-He could buy his exact house down the street for $270,000
-It's not his fault the real estate market crashed
-If he leaves, he leaves $300,000 in cash at the house
-If he stays, he pays $350,000 more
Bank:
-Valuated the house at $600,000 before lending
-Loaned $300,000 to qualified buyer with an asset worth twice that
-Is making a good profit off the interest only mortgage right now
-It's not their fault the real estate market crashed
-If nothing changes, they stand to make hundreds of thousands of dollars
-If buyer walks away, they own a home worth $270,000 which means they're down $30,000
What's the right thing to do? I'd really like to hear your opinion.
My answer may be a little old fashioned, but I think if you owe money, you pay it back.
ReplyDeleteThe bank wasn't making a 'real estate market play' when the loan was made...it was making a 'person play'
My rule of thumb for ethical choices is to ask "what would happen to the world if everyone made the same choice?" We are in a global recession that will ultimately harm hundreds of millions of people (if not billions), including many children, because a number of Americans decided not to pay their mortgages. The health of the world financial system is still questionable and a wave of new mortgage defaults could trigger another financial crash, and another financial crash could turn a global recession into a global depression. So, if everyone in the homeowner's position walked away tomorrow the consequences would probably be very unpleasant for hundreds of millions to billions of people.
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