Brent t. White (
www.brentwhite.com) is an associate professor of
law at the James E. Rogers College of law and the author of Take this
House and Shove It: The Emotional Drivers of Strategic Default.
bill AnD sArAh o We $100,000 more on their mortgage than their
home is worth, and bill lost his job months ago. they’ve called their lender
to work out a solution, but their lender won’t even talk to them. they
could dip into their retirement account, or max out their credit cards, but
they’ve decided instead to intentionally stop paying their mortgage. it’s
been suggested that homeowners like bill and sarah are immoral. but such
rhetoric is unhelpful, and misguided.
A mortgage contract, like all other contracts, is a legal document—not a moral promise.
As a legal document, it specifically contemplates that the homeowner might be unwilling or
unable to continue making payments at some point and provides in advance what fair compensa-
tion to the lender would be. specifically, the contract provides that the lender can take the house,
and in most states may opt to pursue a deficiency judgment against the homeowner (though
lenders often choose not to do so).
that’s the agreement. no one forced the lender to sign, or write, that contract. And the
lender wouldn’t hesitate to take the borrower’s house if it were in the lender’s financial interest to
do so. Morality wouldn’t come into play. similarly, the borrower has an option to default—and
the law doesn’t treat it as a moral wrong.
the law aside, it might be argued that one should still keep one’s promises. but a mortgage
isn’t any different than any other promise. if one has a compelling enough reason, sometimes it’s
oK to break a promise. indeed, when necessary to honor a greater obligation, breaking a promise
can be the responsible thing to do.
nevertheless, many homeowners continue to pour their disposable income into toxic mort-
gages that seriously threaten their financial security, their ability to retire and their capacity to
send their children to college.
in contrast, financial institutions frequently walk away from their own mortgages, including
some of the same institutions that argue it’s immoral for homeowners to do so. that’s not only
hypocritical, it’s unfair. banks are looking out for their financial interests, and you have a right to
do the same for your family. C
from an expert in the field:
Shari olefson is a partner with the law firm Fowler White Boggs and
author of Foreclosure Nation: Mortgaging the American Dream (www.
At first blush, a strategic default on one’s mortgage sounds better
than winning the lottery. You just walk away and leave those pesky
mortgage payments behind. but consider the consequences. there are
sound financial, legal and ethical reasons for staying put.
for example, paying rent for years before being able to buy a home
again is not a very good investment of your resources. the cost of rent
may be more significant than the cost of paying down an underwater mortgage.
And if you should want to buy a home again, the appearance of foreclosure on your
credit report will make it tough to get an affordable loan. fannie Mae will not give new loans
to strategic defaulters.
As well, the costs associated with buying another home—such as closing costs and title
insurance—need to be factored in. it’s also likely that interest rates will go higher once the fed
no longer needs to keep rates down.
then there is your credit score, which is likely to suffer a 350-point (on average) hit as a
result of a strategic default. financing a car, getting a credit card or signing up for a cellphone are
just a few of the things that might suddenly become extremely difficult. And foreclosures stay on
credit reports for seven years.
in some states, such as florida, lenders can pursue borrowers for the difference between the
amount they recover from a home sale and the amount of the mortgage. What’s more, lenders
have five years to get deficiency judgments and 20 years to collect them. Many lenders are doing
just that: hiring aggressive collection firms or selling off their judgments.
strategic defaults can leave others holding the bag. Municipalities have to foot lawn-
maintenance bills, neighbors must deal with blighted homes that reduce property values
throughout entire neighborhoods, fellow condominium owners wind up picking up assessments
and other costs not paid by strategic defaulters and everyone pays higher borrowing costs to
cover fDiC, fannie Mae, freddie Mac and federal housing Administration losses.
still thinking of defaulting? think again. C
noVEMBER DEBatE RESULtS:
Should the sponsors of political
ads be identified?
Percentage reflects votes
received by November 12, 2010.
oCtoBER DEBatE RESULtS:
Should the government raise
the retirement age?
YES: 29% no: 71%
percentage reflects votes received by
october 31, 2010. Results may reflect
Debate being picked up by blogs.
DECEMBER 2010 The Costco Connection 17
opinions expressed are those of the individuals
or organizations represented and are presented
to foster discussion. Costco and The Costco
Connection take no position on any Debate topic.