June 25, 2010
ORLANDO, Fla. (RNS) -- Lynn Thompson quit paying the mortgage on her investment property -- not because she couldn't afford the payments, but because she thinks walking away is better for her long-term financial health.
Thompson bought the property here for $175,000 in January 2007, just as the housing market began its slow downward slide. At the time, she planned to rent the house and eventually sell it for a profit.
Today, she estimates the house is worth $85,000, maybe less.
Unable to find renters to help cover the mortgage, she tried to convince her lender to allow a "short sale" -- selling below the loan amount, with the lender forgiving the balance. When the lender declined, Thompson decided to walk away.
"I would have basically no money left every month if I made the payments," said Thompson, a single 39-year-old pharmacist. "If I tried to sell the house in, say, 10 years from now, I still would have to come up probably with, say, $75,000."
Desperate homeowners like Thompson have raised an ethical debate: Is it ever OK to walk away?
Nationwide, up to 25 million homeowners -- about one in four -- are "underwater": like Thompson, their mortgages are worth more than their homes. Those who do walk away face an array of financial consequences, from damaged credit to the prospect of a lender suing to recover the balance. Yet for many, the question fundamentally is a moral one. Is it the right thing to do?
It's unclear how many homeowners, like Thompson, are opting for strategic defaults -- allowing their homes to go into foreclosure even when they can make the payments. Many feel their homes are decades away from regaining value and they see no other options.
But especially in hard-hit places such as greater Orlando, where 55 percent of homeowners are underwater, the question is nagging at more homeowners, and the number of strategic defaults appears to be rising.
Strategic defaults accounted for 31 percent of all defaults in March, up from 22 percent the year before, according to an April report by Paola Sapienza of Northwestern University and Luigi Zingales of the University of Chicago.
That doesn't mean, however, that homeowners are walking away without feeling like they violated some ethical or moral code about not buying something they can't afford. Some are left with a deep sense of debtor's shame.
Brent White, a law professor at the University of Arizona whose writings include "The Morality of Strategic Default," said more than 80 percent of homeowners still think defaulting on a mortgage is immoral, and those who do it usually make the decision not for financial reasons but emotional ones, he said.
In other words, it takes more than a dismal financial reality to push homeowners to default. Often underwater homeowners feel angry, depressed or hopeless, he said.
"People walk away because they're angry at their lenders," he said.
"They have been unable to work with them, and the government hasn't done anything to help underwater homeowners who are trying to make their mortgage payments. If people were acting purely on a rational basis, they would walk away much sooner than they do."
At the heart of the question are biblical concepts of promise-keeping and neighborliness, said James Childs, theologian and ethicist at Trinity Lutheran Seminary in Columbus, Ohio, who noted that one neighbor's default can sink another neighbor's property values.
"The simple answer is we make certain promises when we move into a neighborhood that we're going to be good neighbors," said Childs, author of "Greed: Economics and Ethics in Conflict."
"If my greed ... is realized at the expense of my neighbors and I say I'm free to do that, then I've missed an ethical point entirely."
Yet in an economy that rose and fell on the backs of unaffordable mortgages, homeowners aren't the only ones to blame, ethicists say.
White, from the University of Arizona, believes the housing market and economy could recover more quickly if homeowners could rid themselves of negative equity, allowing housing prices to hit bottom faster. The longer homeowners remain underwater, the longer they feel poor and spend less money. What's more, a job loss or medical illness could be even more devastating.
For now, Mike Booth will remain in his home. He and his wife bought their first home in 2008, two years after they married, for $205,000 -- a bargain since the house was appraised at $240,000.
Today, he estimates the house would sell for $165,000, but the 30-year-old engineer is taking the long view on what he and his wife call "our little castle."
"We've entered into a binding moral contract," said Booth, who lives in suburban Orlando. "... Really we don't think about it being underwater. It's kind of like being in a long-term investment, and tracking it daily doesn't make sense."
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