I’m not paying my mortgage today.
So said a friend of mine today, who has decided to stop making his mortgage payments, let the bank foreclose on his condo, and just walk away. Mortgage payments for May are made today, and he’s not making his. He is the first person I know to do this, so I’ll keep you posted on what happens.
I’m surprised that he, of all my friends, is the one taking this route. In early 2007, he bought a two-bedroom condo in Chicago (in Uptown) for about $320,000 (one deeded parking spot included). He was in love with it. He drove me past it several times. He got a great roommate to help him cover the mortgage payment, which meant that his share of the payment was less than rent would be for a comparable place, at the time.
Then, like me, the taxes bit him. Like mine, the conniving real estate and mortgage folks assured him taxes would be “about $2,000.” Instead, they’re more than $4,000/year. Because of the way Cook County tax assessment works, he (like me) is paying 2007 back taxes AND 2008 tax installments at the same time. This means his monthly payment skyrocketed to $2,800/month.
In addition, a new Target slated to open one block away and reinvigorate the somewhat blighted, er, up and coming Uptown neighborhood will not be opening, due to the useless alderman (Helen Schiller) the neighborhood couldn’t quite get rid of last year (they almost did). Uptown violence is also escalating. My friend now hears gunshots near his condo. Like so many alderman, Helen Schiller seems more interested in homeless people and gang members, and their votes, to the exclusion of all else. But I digress.
Last week, my friend had his condo reappraised. It has lost $40,000 in value in one year. Obviously, there is no incentive to pay a mortgage for a penny more than the new price. It’s logical.
My friend has a degree from a prestigious Midwestern university and an MBA. He works in finance. He makes almost $100,000 per year (excluding bonuses). He drives a brand new Cadillac. He has the support of family and friends, all of whom agree that it’s senseless to pay a mortgage larger than the value of your home. He knows what he’s doing. He’s already hidden his cash; on paper, he’s broke. He may be able to live in his condo for quite some time before the foreclosure process starts and forces him to move out.
I’ll let you know what happens…
Your quote: ‘Obviously, there is no incentive to pay a mortgage for a penny more than the new price. It’s logical.”
How about the question of your friend’s lack of character for not fullfilling the terms of the contract he signed with the lender. It doesn’t say the value of his property is guaranteed to never fall, he promised to pay until the loan was repaid.
What a loser!
Thanks for reading and commenting, Joe! I agree with you: He can afford his mortgage, and he is not fulfilling his end of the bargain (though I’m not sure all of the housing bubble bargains were all that honest to begin with, but that’s a separate issue). I don’t perceive this as a mark of good character.
I do think, however, that logic and character can be different, and separate, attributes of one person or one decision. Business decisions, for example, can be logical (for the bottom line) yet brutal (for the people affected).
In an earlier post, I referred to Harvard professor Elizabeth Warren (specifically her post at http://www.creditslips.org/creditslips/2008/03/one-in-ten.html), who explains why it makes perfect sense for one in 10 homeowners (one in 10 have no equity in their homes) to walk away. As she notes, “Indeed, most of them, if they were the rational maximizers so prominently featured in classical economic analysis, would stop paying now, put the money in a savings account and wait the 90 days or two years or whatever until the lender could force them out by foreclosure.”
Walking away from loan obligations is not something I advocate or support, but I can see the rational side of it, if one is willing to accept the consequences of such rational choice.
Somehow i missed the point. Probably lost in translation
Anyway … nice blog to visit.
cheers, Ichabod.
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