Colbert: Your Mortgage is Only as Good as Your Word

by Alex Stenback on January 18, 2010

The Colbert Report Mon – Thurs 11:30pm / 10:30c
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This clever bit from The Colbert Report has been making the rounds.  Though he sort-of misses the opportunity for the kill-shot in not illustrating how often businesses (and govts) will walk on debts if it improves their finances, usually under rubric like “preserving shareholder value.”

Still, the idea that “ruthless defaults” – walking away from a mortgage even though you can afford the payment, and just don’t want to pay on a severely underwater asset - might gain broad socio-pop acceptance for individuals (business have forever been mostly forgiven for this type of behavior – “it’s just business” dontcha know) has to be causing a real puke-fest in the upper echelons of banking.

{ 2 comments… read them below or add one }

Ray Klotz-Edina Realty January 19, 2010 at 9:38 am

I think the phrase walking away from a mortgage “might gain broad socio-pop acceptance” is here in a big way. I just recently closed on a townhome where the sellers took advantage of the market to buy their dream home and once it was closed on short saled their townhome. Their existing mortgage was not sub prime or interest only but a vanilla conventional loan that they had no problem making the payment. Where I live there has been 2 other similar situations. Personal responsiblity has gone out the window and the aftermath is further depressed home pricing.

Alex Stenback January 19, 2010 at 10:10 am

It’s definitely happening, though I am not convinced that a lack of personal responsibility is really what we are dealing with here. In many cases, “walking away” is a perfectly rational reaction to set of circumstances largely beyond their control.

Keep in mind that the credit markets, from a structural standpoint, evolved to a point where this was bound to happen.

Here’s what I mean.

Take your average home buyer, who purchased a home in 2005 because the circumstances in their life made it an attractive option. They weren’t speculating on appreciation, and didn’t form an opinion on the market (took the prices as a given) and trusted the advice of their circle of professional advisors.

Fast forward to today. Depending on the region, that person is now underwater, and probably by a big number. Yet the circumstances of their life have changed, and they need to move. What now? Empty out the kids college fund or the retirement accounts? Turn down a promotion or a new job? These are precisely the types of choices many are being forced to make, all set against the backdrop of a banking system that was saved from the abyss and returned to profitability with public dollars, the bill for which has not even started to come due, but will be borne in large part by “average” home-owning citizens.

In other words, this “average” homebuyer bears very little, if any responsibility for what’s happened to the credit and real estate markets. Yet, in framing an argument that morally intones “repayment in full no matter the costs” is their solemn obligation, we are asking those “average” homebuyers to bear a disproportionate share of the costs for a credit and real estate market implosion that they were not responsible for, but will assuredly be paying for whether or not they keep paying on their mortgage.

Also, should it be lost on anyone. More regulation and improved disclosures will not prevent this situation from recurring. A high number of walk-aways probably will because it will force banks/lenders/et all to ration credit in a way that prevents ridiculous boom and bust real estate cycles.

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