Monday, November 30, 2009

To Walk or Not To Walk: Underwater Homeowner’s dilemma

House owners around the United States are struggling with a mortgage entered into with the hope that the housing boom of 2001 to 2005 would continue to drive up prices. Reality is very different. The "subprime" lending practices by mortgage companies and banks launched a wave of foreclosures in recent years. The tide of foreclosure rates has not yet been stopped. Confusion over regulation oversight of the "subprime" derivatives only exacerbated the problem and raises concerns that government officials are asleep at the switch. As the boom in "subprime" lending took off, some in Congress were voicing concern of the practices and financial stability of Freddie Mac and Fanny Mae. The true nature of Freddie and Fanny were blinded by the increase of home ownership among the low and middle class voting pool. Several prominent liberal leaders in Congress, namely Rep. Frank (D-Ma), promoted the idea that solvency of Freddie and Fanny is rock solid.

Over the past two years the reality of Freddie and Fanny solvency is contrary as the Federal Government had to bailout the program and recues the banking industry to a perceived financial meltdown. Why are these politicians allowed to stay in their seats? Why is there not more outrage from the constituents? Now many Americans are realizing that they are upside down on the mortgages and scrambling to balance mortgage payments with job loss and general downturn in the Economy. Brent White, 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", states that "Homeowners should be walking away in droves, but they aren't. And it's not because the financial costs of foreclosure outweigh the benefits."

White asserts that homeowners are not walking away because of the moral obligation one has. I agree with White that many see a stigma behind a bankruptcy or a foreclosure but one of the most successful businessmen in the United States, Donald Trump, and uses bankruptcy like the normal citizen uses their credit or debit card. Then again, what signal or example does a responsible parent give to their offspring by folding up the tents? A program currently exists that is attempting to encourage mortgage companies to assist borrowers to refinance their current mortgages. The $75 billion Treasury program allots $1,000 initially to Mortgage Company then an additional $1,000 annually for the next three years. The program was a result of the $700 billion financial bailout program.

Today, President Obama is expected to announce expansion of this program that would include delaying payment until the loan modifications are made permanent. Once again the public is turning to Government for the answer. While a select number of mortgage companies participated in predatory lending practice the vast majority of homeowners were fully aware of the contract being entered into or at least should have been. Forget the moral dilemma of walking away for a moment and imagine what our economy will look like if just 15% of homeowners walked away. The taxpayer that did not get themselves upside down or buy the big house will be on the hook.

That being said, let's return to the moral dilemma of walking away. Is the stigma of a foreclosure the motivating factor why homeowners are not walking away from their homes? What lessons are parents who walk or don't walk displaying for their children?