Hot Topic-Strategic Default Should You Walk Away?

This past Sunday CBS 60 Minutes aired a segment (see below for clip) on the growing issues of “strategic defaults”; homeowners who choosing to walk-away even if they could continue to pay their mortgage.   It has raised the debate again about whether a homeowner has a “moral” obligation to continue to pay their mortgage even when they see no recovery for the values in their neighborhood for the next 10-15 years.

Brent White a law professor at the University of Arizona has written a paper “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis ” that points out two key reasons why more American homeowners are holding on.

1) desire to avoid the shame and guilt of foreclosure;
2) exaggerated anxiety over foreclosure’s consequences

Interestingly enough as residential homeowners are caught in a debate about moral issues when it comes to walking away from their mortgage obligations, Morgan Stanley has walked away from 5 office buildings in San Francisco.  Another investment venture led by Tishman Venture Group has turned over the keys to what has been called the highest price ever paid for a single residential property in the U.S.   In both of these cases the properties are now worth about 1/2 what the investors paid for them during the boom of the market.

According to White “norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility.”  There is an obvious double standard at play when it comes to walking away.  It can’t be considered good business sense and morally wrong at the same time just because you are the little guy.

The answer to the question should you walk away is one only you can answer.  Hopefully before you do you explore all of the options that are available.  Talk to your lender, talk to an attorney, talk to a financial advisor.  Once you understand the consequences you can make the decision that makes sense for you.

Download Brent White’s Paper:  Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis

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