Antonio & Alexia's Blog


Are Home Borrowers The Only Ones with Ethical Responsibilities When Walking Away from Their Mortgages?

One of my best friends is seriously thinking about walking away from his mortage via a strategic default. But his guilt and sense of moral obligation and ethical responsibiliies are killing him. He wants my opinion... he bought his home in 2007 for about $850,000 and it is now worth only $550,000. His payments are going to almost tripled the amount he currently pays in about a year.  A strategic default occurs when a homeowner stops paying their mortgage even though they are still financially able to do so.

I told him the standard Realtor talk: I could not tell him what to do, he needed to talk to a his bank about possible options for a loan modification, also to talk to his CPA to understand potential tax liabilities, and to a lawyer for potential legal ramifications, and to consider the hit on his credit scores.

Strategic Default?  Then we went off record, and as friends we discussed the issue in an open manner. I do not understand why is the homeowner the one that is supposed to be the only responsible party and to pay up and not go back on his promise to hold his own. A loan after all, is a business transaction between an investor and his partner, the borrower. The Investor puts up the money and expects a return in his investment, the borrower agrees to make payments until the loan has been paid off completely. Investor makes his money back plus some helfty profits and the borrower will end up with the property free and clear, hopefully worth a small fortune.

There is no investment of any kind that has no risk at all. Lenders have always reaped good returns on those investments, and traditionally have had good  safeguards against losing. They even have Private Mortgage Insurance (PMI) that they ask the borrowers to pay for, and the government has a golden parachute to bail them out. How come they do not have moral or ethical obligations to make them feel guilty? They have scared people into staying in their homes and continue to make payments even though, those houses will remain underwaterl for many years.

Home owners traditionally have paid their mortage, and their house was one of the major debts that they wanted to pay off first. The investors greed helped create the economic collapse, the no-money, interest only loans they sold to unqualified borrowers were irresponsible, they deserve to lose. Home borrowers already lost their downpayment, and their closing costs, along with their dreams, sometimes compiled with the loss of a job and their own self steem. Why should they feel guilty about losing the house? why should they be the only ones asked to be moraly and ethically correct? The lenders have recovered quickly and will go on making money. Homeowners, however, will take years to recover, if ever.

We concluded that as equal partners in this transactions with the banks, homeowners should be able to call it quits, accept the loses and go forward and not feel guilty about a strategic default. Making high payments on a house that has no chance of providing a return for years to come is not in the homeowners best economic interest.

My friend will let the house go, and start the recovery period, knowing that nobody will loan him money for at least 3-7 years. He will rent for a while, save money and be prepared to invest in homeownership again... sometime down the road. He realized that he has nothing to be ashamed off, or guilty of, he will lose his down payment or initial investment, it was a risk he took, the lender took a risk too, it is after all, a simple business transaction that did not pay off  for either party. If you make a bad investment, you have the right to walk away from it.


The Realtors In Motion       Antonio & Alexia Cardenas   

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Comment balloon 11 commentsAntonio & Alexia Cardenas • January 31 2011 01:33AM


Excellent post.  I agree that many homeowners feel that they owe the bank.  The lender makes their money in the first five years.  Banks don't want to see mortgages paid off.  That's why they came up with refinancing.  How will they make money?  But as you say, it will be years before home values will be up to what they were pre-2007.  Such a struggle for everyone right now.

Posted by Pamela Seley, Residential Real Estate Agent serving SW RivCo CA (West Coast Realty Division) over 9 years ago

It's amazing how many people (including agents) toss around the term "Strategic Default".  Wow.

Posted by Cameron Novak, Featured Corona Real Estate Agent Team (The Homefinding Center) over 9 years ago

Pamela, It just does not seem right, for the homeowner to have to be the only one to have to step up to the plate. Where is all the bail out money that the government gave to the banks? Anything left for the borrowers?

Cameron. All you have to do is to google the words Strategic Default, to see how many articles have been written about this subject. Homeowners making payments for years without hope of ever seen a return in that money is not in their best interest. If banks could bail out, why not the borrowers? Thank you both for your visit.


Posted by Antonio & Alexia Cardenas, "The Realtors In Motion" (Alameda County - San Leandro, CA.) over 9 years ago

Very difficult situation... and one that only the homeowners can answer for themselves.  While I agree that banks need to step up to the plate.... yet, when a homeowner has refinanced and taken out equity just because they "could" gives me an upset stomach when they want to just walk away now.  Again, very difficult moral dilemma.

Posted by Peggy Hughes/pha logistix, inc., SF NYC LA (pha logistix inc) over 9 years ago

Peggy, yes, it is a difficult decision, in this particular case, however, my friend did not refinance, I do agree with you, some borrowers went out of their way to max out their equity, for them, they will have some serious tax consequences. Thanks for stopping by


Posted by Antonio & Alexia Cardenas, "The Realtors In Motion" (Alameda County - San Leandro, CA.) over 9 years ago

Antonio, Investors do deserve to lose. Investors did not care about the risk of placing borrowers in crappy loans … as long as the return was fat. Now the pendulum swings in the other direction and borrowers do have a choice to give the screw back to their lender. The banks are getting the money right, left and center.

Posted by Kathleen Daniels, Probate & Trust Specialist, Probate Real Estate (KD Realty - 408.972.1822) over 9 years ago

Antonio & Peggy, Regarding the equity discussion … shame on the lenders for turning their investments into ATMs. Borrowers are responsible for spending their home. It was equally irresponsible on a borrowers behalf.

Posted by Kathleen Daniels, Probate & Trust Specialist, Probate Real Estate (KD Realty - 408.972.1822) over 9 years ago

Kathleen, thanks for your visit, I always appreciate your input, this is not an easy situation to be in, most homeowners that have lost their home will never own another one again. Banks putting ATM machines inside the house via a computer made it too easy to get into trouble, it was just too tempting. The consequences of this debacle will be seen for years to come


Posted by Antonio & Alexia Cardenas, "The Realtors In Motion" (Alameda County - San Leandro, CA.) over 9 years ago

Antonio and Alexia,

I love what you've done with the dollar bill!  Perfect illustration for your blog post!

Mike in Tucson

Posted by Mike Jones, Mike Jones NMLS 223495 (SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) ) over 9 years ago

Thanks Mike, it is a great way to see how skewed the money is nowadays with the mortgage and financing issues. Washington will be that surprised indeed.


Posted by Antonio & Alexia Cardenas, "The Realtors In Motion" (Alameda County - San Leandro, CA.) over 9 years ago
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