Millions of Americans are drowning in mortgage debt; they are underwater, but for strange reasons they refuse to get out of the pool. Roughly one-quarter of all homeowners have negative equity exceeding 10% of the outstanding mortgage. Within the next 18 months, it is expected that 48% of all homeowners will be underwater. We have already seen the tsunami wave hit the real estate market in Florida, Arizona, Nevada, and California. Las Vegas finds 81% of homeowners underwater. Home prices have dropped 48% in Miami. Prices are down 54% in Phoenix. Only 15% of homeowners in Merced, California have any equity in their homes. Homeownership has turned into a savage journey that has driven a stake in the heart of the American dream.

The lenders are not modifying loans. The homeowners are breathing water. From a purely financial basis it would make sense for most homeowners to default on negative equity. Simply allow the home to go into foreclosure or short sale and go find a nice rental or a comparable purchase at a much lower price. The math tells you to walk away from negative equity. A typical homeowner in Miami who purchased a home for $350,000 a few years ago now realizes that the home is only worth $185,000. They can buy a comparable home for $160,000. Over the life of the $350k mortgage, the homeowner would have to pay a total of $796,000 for principal and interest, with monthly payments of $2,212 (30 years at 6.5%). The mortgage on a comparable $160k home results in total payment of $309,000 and monthly payments of $858 (30 years at 5%). The savings equals $487,000 over the life of the mortgage and monthly savings of $1,354; these figures do not include savings on taxes and insurance, or reinvestment of savings.

It may be argued that many Americans are just financial dolts, too stupid to do basic math. The truth is that most Americans are very savvy shoppers. We can spot a rotten deal. And we have computers and calculators to help us with our ciphers. It may be argued that we are creatures of habit. We’ll make the mortgage payment because that’s what we’ve always done. But the truth is that we are not stupid slugs.

Why would anyone pay nearly a half a million dollars extra to the banks? Why not just walk away? The answer is fear and loathing. We are afraid of foreclosure. We are afraid of default. We are honest to a fault. The bankers and the government (one and the same) want you to be afraid of default.

Former Treasury Secretary Henry Paulson said, “Any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator – and one who is not honoring his obligations.”

President Obama says it is a virtue for homeowners to make their payments each month. CNBC caricature Rick Santelli ranted people who face foreclosure “losers”.

The government, the banks, the credit bureaus, and the media are all telling us that not paying your mortgage makes you a bad person; it is a reflection of our morality and honor. We are brainwashed into believing that our credit score is a measure of our human worth. Foreclosure only happens to loathsome, vile creatures. The campaign to get you to pay the mortgage is well orchestrated and ubiquitous. When the exhortations are exhausted, the threats begin. The stigma will linger for a lifetime. You will have to sew a scarlet letter on all your sweaters. If you don’t pay, your credit score will be slammed. You won’t be able to get credit. You won’t be able to buy another house. You won’t be able to buy a car. You won’t be able to rent a car. You’re unfit to ride in a car. Take your place at the back of the bus.

This may be the most twisted irony in recent history. The bankers are calling their customers immoral. What’s next? Satan calls jaywalkers evil.

There were two parties to the mortgage contract; you and the bank. When a bank loses money, they write down the loss, get a tax break, ship jobs offshore, transfer the loss off the balance sheet, collect a big bonus, and get bailed out by taxpayers. The bankers are not constrained by morals; they are profit driven machines. When a homeowner loses money on a house, they become the devil’s spawn.

There are many reasons banks are not modifying loans, (see How to Stop Foreclosures) and high on the list is “moral hazard”; if the bankers reduce the principal on your mortgage loan then all your neighbors would demand cuts, even if they have the ability to pay. This is the bankers’ great fear.

What would happen if everybody who is underwater stopped making their mortgage payments? The banks would suffer, and the economy would prosper. Home prices would drop to very affordable levels. Money that is being sucked into the banks’ coffers would instead be spent by consumers. The money would be a huge economic stimulus.

Each homeowner should do the math. In the example cited earlier, the homeowner would save about a half a million dollars – that’s enough money to put the kids through college, buy a few cars, and enjoy your retirement – or a nice bonus for a banker. When considering the morality of foreclosure, it is important to remember your responsibility to yourself and your family. Walking away might be the most morally responsible choice. So far, the bankers have controlled homeowners through fear and loathing, and we have played our role as subservient sheeple; cowering, scared, and ashamed. The bankers are not going to change voluntarily, and if the current condition continues, the economy will suffer for years to come. If enough people walk away, we might just reach a tipping point where the bankers are forced to respond with equity and fairness. Fear mongering is not the solution.

Sinclair Noe

Eat the bankers

www.bank-o-meter.com

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Well said
written by Willard , November 16, 2009

This is well written well said. Are Americans just to honest to walk away? Is there a sense of commitment to the deal that they made so great that they will sit there indefinitely and have there money stolen?

I think they cant stomach the idea of walking away, losing!

As you stated, it isn't stupidity at heart most are honest and hard working and trusted the system. They are still in shock watching their equity disappear? it is honesty

Are you in agreement with Harry Dent that property values are see to fall another 50% or more by 2012?

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