Lemmings Falling Off a Cliff - by Eric Carle

Lemmings Falling Off a Cliff – by Eric Allie

I’ve been battling bronchitis for the last two weeks and haven’t been my peppy self. Hopefully this new dose of antibiotics I’m taking will kick its butt. However, I’m still dragging myself into work….of course that might be my problem. But I overheard the most irresponsible comment today at lunch, and I just had to post on it.

“Their accountant told them that everybody’s credit will be effected by the housing market since so many people are walking away from their homes and that they’ll be in the same boat as everyone else. So, they might as well short sale their house. They haven’t paid their mortgage in 8 months.”

This was a comment I heard of others discussing buying and selling their homes. One lady made this comment, quite lightly, about her son (I think) with the impression that it was fine since “everybody else was doing it.” She even went on to say that [her son] had a good job and could afford the mortgage payments, but because their property was no longer worth what they purchased it for, it was in their best interest to short sale it.

I also know someone very close to me that has decided to “strategically” default because they are no longer happy with the price they paid for their home. They hemmed and hawed over the decision. And, since a mortgage broker wouldn’t talk to them until they defaulted, they decided to take that initial step and default. I don’t know if they will eventually follow through or not; they are under the impression that they’ll be able to buy another house in a couple of years for half the price. (Oh yeah! Let’s reward irresponsibility! Oh, wait. That’s me being snarky.) Once they find out how long it will take to repair their credit, they may decide otherwise.

In my opinion, this sounds like the exact reason we’re in this mortgage mess and one of the reasons our economy is so pitiful. It’s the “everybody else is doing it” syndrome. It’s hard for me to believe that walking away from a home is a good thing. Especially if the owner can afford the payments!

What do you think? Is this just fine and dandy? Should defaulting homeowners suffer any consequences? They knew when they signed the dotted line how much the total cost of the house/townhouse/condo was. Are they predicting a future where they’ll be able to easily land a brand new house as easily as they did the first time around?

P.S. I predicted 4 years ago that home prices wouldn’t keep going up. I’m not a psychic, I’m just a realist….tune in later for my psychic predictions of where this market is going.

20 Comments

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  1. FB @ FabulouslyBroke.com

    Short-sightedness like that is what is causing a ripple, mass effect of problems on the economy.

    People don’t see that their individual actions have an impact. You bought the house, it has lost its value, suck it up and be a responsible person to your debt.

    If not, you never should have had the house in the first place. Buying a house, investing in the stock market — these are all risks people take to gain money. If not, we’d just sleep on our cash at night.
    .-= FB @ FabulouslyBroke.com´s last blog ..Please be careful- Gmail Phishing Attacking going around =-.

  2. Little House

    @FB @ FabulouslyBroke.com
    I couldn’t agree more. I think people who are “strategically” defaulting on their homes feel that it’s everyone for themselves and that their actions aren’t impacting anyone else. Yet, that couldn’t be farther from the truth.

  3. Mogul Myra

    Unfortunately, this is the American mentality at its core. And what’s worse, is that everyone expects the government to bail them out of their own deliberate, well-thought out, disastrous financial decisions that lead to their own financial ruin.

  4. Budgeting in the Fun Stuff

    I’ve blogged about this before – I think strategic defaults are almost evil. It’s supremely dishonorable to default on a promise on purpose in my opinion. And like you said, it’s selfish to “save yourself” and cause a ripple effect of problems for everybody else. In my opinion, foreclosures should only be allowed for people with real problems. Everybody else should have their paychecks docked. I guess this is why I am not allowed to rule the world, lol. :-)

    • Little House

      @Budgeting in the Fun Stuff – I’m guessing in states that have recourse on defaulted homeowner, there are very few “strategically” defaulting for that very reason – the banks can come after them and “dock their pay checks”!

  5. Evan

    As long as the eventual defaulter knows that their credit is going to be trashed I don’t think there is anything wrong with strategically defaulting. The banks took a risk on the house and on the person. They get their house back and the other person walks away…that was the contract.

    @ Budgeting in the Fun Stuff,

    Their paychecks will be docked if they live in a recourse state. A recourse state is where the bank can come after you for the difference in a short sale.
    .-= Evan´s last blog ..What Happens When you Make an Extra Payment on a Loan =-.

    • Little House

      @Evan – The only problem with the banks getting their houses back is that they now can’t sell them for what the previous owner was willing to pay, causing a huge deficit for the banks. I’m not so sure I’m okay with people doing this.

  6. Squirrelers

    To me, all of this goes to show that one can’t live in a vaccum about any home purchase. It isn’t guaranteed that the home value of your new purchase will hold or increase; rather, it might plummet to extreme depths you couldn’t have imagined. Just ask the people in Detroit. Also, one’s income capacity might be dramatically decreased due to only the economy, but health or personal situation. Just saying, these decisions to buy homes can involve a lot of money. If you’re borrowing and taking on debt, be very, very careful to think through all circumstances.

    I think many people don’t view housing that way, or mortgages. They view these things as liquid assets, and liabilities as short-term obligations they can find a way out of if they really needed to. The reality is vastly different of course.

    Taking all of this into account, if the borrow walks away knowing that they will have their credit severely damaged, then so be it. They’ll still have consequences. It’s the lenders that weren’t careful, in my view, which ultimately helped get us into this mess. I don’t see housing recovering overall for quite a while.

    Maybe the lenders are the lemmings!
    .-= Squirrelers´s last blog ..10 Tips to Improve Productivity =-.

    • Little House

      @Squirrelers – I definitely agree that people don’t look at a house as a “mortgage” – a loan from the bank that you have to pay back (even if that means selling it and giving the difference back to the bank).

  7. First Gen American

    We bought my mom’s house at the peak of the market in 2005. I kind of knew it was the peak, but she was relocating to be closer to us and it was the right thing to do. That house is worth a lot less than what we bought it for. It wouldn’t even occur to me to default on it. It could have been a lot worse, but we did buy a cheap house so on a $$ basis, it’s less money than buying something at the top of your price range.

    My approach is just to pay the stupid thing off as quickly as possible and hope that when the day comes we need to sell it, we would be better off than if she had rented the whole time.

  8. Money Reasons

    A contract is a contract, so I’m not a fan of strategic defaulting!

    After all, if everybody was so selfish, it’s another for a systemic risk!

    I think lawsuits are going to start to happen against the dafaulters though!

    Well see, I wish they would stop so the economy would recover more quickly…
    .-= Money Reasons´s last blog ..Being a Genius Doesn’t Equal Success In Real Life =-.

  9. Everyday Tips

    I think my blood is boiling. I do not know what has happened to the core value of many Americans over such a short period of time. I cannot imagine my grandparents even considering a strategic default. Of course, they paid their house off as quickly as possible, so they would never be ‘underwater’ in the first place. Plus they bought a home they could afford for the long term.

    Argh!!!!!!!!!!!!!!!!!!!!!!!!!
    .-= Everyday Tips´s last blog ..How Many Cars Do You Park In Your Garage =-.

    • Little House

      @Everyday Tips- I think it’s the concept of easy come, easy go – or worse – they think they deserve things that others have. I know that sometimes I complain about what I don’t have, but I then think about the things I do have and am thankful for them. I didn’t over extend myself when it was easy to take out a mortgage loan though I was definitely enticed by the idea. I think too many people couldn’t control their wants and plunged in head first without thinking of the consequences.

  10. youngandthrifty

    That is absolutely ridiculous!

    That’s like selling your stocks because the stock market is going down, on margin lol.

    I am prepared to be paying a bit more for my house even if the market is down, as I am planning to live in the house for 10 years +.

    I wish there would be laws in place (or some kind of psychic superbeing power that can control people’s minds) to prevent them from doing this with their property!

    • Little House

      @Young and Thrifty – I think that in the past, the “law” was that people had to have a good credit score and a decent down payment in order to purchase a house in the first place. But it’s like that old saying, “You give them an inch and they take a mile!” They loosened up their standards and now they are facing the consequences of loaning money to people who really couldn’t afford the house they purchased.

  11. Evan

    @Little House


    Little House :@Evan – The only problem with the banks getting their houses back is that they now can’t sell them for what the previous owner was willing to pay, causing a huge deficit for the banks. I’m not so sure I’m okay with people doing this.

    But the banks know the risk..
    .-= Evan´s last blog ..Why Do Short Sales or Strategic Defaults Even Happen =-.

    • Little House

      @Evan – Yes, banks do know the risk. Every time they loan money to people, they take a risk. However, in the past they were able to calculate a small percentage of people who would default based on historic trends and data (or calculate their shrinkage – per say). Now, those percents have greatly increased, past the point of what the banks probably expected, causing the lending industry to tighten up on extending credit. So again, I don’t think I agree with people strategically defaulting.

  12. Blogging to the Bank 2.0

    Hi, just needed you to know I have added your website to my Google bookmarks due to your extraordinary blog layout. But seriously, I think your internet site has one from the freshest theme I’ve came across. It extremely helps make reading your blog a lot easier.

  13. Greg Stanley

    Hi, I like your friendly blog and approach. I’m in Canada and often review American comments about the mortgage market and housing conditions. One reason Canada has done so well is that we ‘manage debt’ as a focus. We have a system here that you can use too. Look at my website and if you have questions just call me or write. http://www.thesmartermortgage.com
    Happy to give free advice to my American friends! Cheers, Greg

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