An article last week by Wall Street Journal personal finance columnist Brett Arends advised homeowners that are deeply underwater on their mortgages to “do the math” and walk away, pooh-poohing any “morality” argument thusly:

Your instincts, while honorable, are leading you astray.

The economy is fundamentally amoral.

Sometimes I think middle-class Americans are the only people who haven’t worked this out yet. They’re operating with a gallant but completely out-of-date plan of attack—like an old-fashioned cavalry with plumed hats and shining swords charging against machine guns.

Do you think your lenders would be shy about squeezing you for an extra nickel if they thought they could get away with it?

They knew what they were doing when they wrote your loan. Many were guilty of malpractice, but they pocketed good money and they’ve gotten away with it. And if they thought your loan was “risk free,” how come they were charging you so much more than the interest on Treasury bonds?

If you’re only a small amount underwater on your mortgage, it’s probably the case that you’re going to be better off staying put. But if you are deeply underwater, it’s a different matter.

Whether we like it or not, walking away from debts is as American as apple pie. Companies file for bankruptcy all the time, and their lenders eat the losses. Executives and investors pocketed millions from the likes of Washington Mutual, Lehman Brothers and Bear Stearns when the going was good. They didn’t have to give back one cent of that money when the companies went into bankruptcy.

Limited liability, after all, is one of the main reasons every business from your local dry-cleaner to a major multinational gets incorporated in the first place. They’re not shy about protecting themselves if things go wrong. You shouldn’t be either.

Couldn’t have said it any better.

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2 Comments

  • Ginny

    I know every situation is different, BUT, More times than not, doesn’t it make sense to do a short sale where you’ve got the chance to negotiate a “paid off” or “satisfied the debt” at close of escrow so the lender won’t come back later and try to collect the shortage on Recourse loans? To just roll over and play dead and let the house go to Foreclosure, an owner loses that chance. When IS foreclosure a better choice? My paperwork always recommends that an upside down owner talks to their attorney before signing a short sale listing, and many times, that’s the last I hear from them. I have yet, to find out what the situation is that an attorney would recommend Foreclosure over a Short Sale. Thanks!

    • ChristopherHanson

      It’s often the last time you hear from them, becasue the attorney has – most likely – suggested they walk away and let it go to foreclosure.

      In CA owner occupied, purchase money loans are non-recourse. Is a short sale, the banks are reserving rights to make future claims for non-payment. And that doesn’t factor in the liability for sold out junior liens.

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