Felix Salmon

The happy kind of mortgage default

By Felix Salmon
December 12, 2009

Many congratulations to Mark Whitehouse for writing an evenhanded and even positive article about walking away for the WSJ. He says that “a growing number of families are concluding that the new American dream home is a rental”, and talks about Shana Richey, a schoolteacher who took a $430,000 no-money-down mortgage in 2004 on which she was making payments of $3,700 a month.

Wells Fargo offered Richey a modification down to $3,300 a month, but then she found a larger, nicer rental for $2,195 a month, which includes not only a swimming pool but also the cleaning of that pool. It was a no-brainer, especially since California is a non-recourse state:

Ms. Richey’s family of five used some of the money to buy season tickets to Disneyland, and plans to take a Carnival cruise to Mexico in March… “We’re saving lots of money,” Ms. Richey says.

Good for her. In California especially, no one should pay vastly more for their housing than they have to.

3 comments so far | RSS Comments RSS

Ms. Richey and her family made the move to Club Rancho Drive in August, when she was already several months behind on the mortgage. With Mr. Robbins’s help, she recently sold the house on Caspian Drive for $195,000, money that the bank will accept to settle the $430,000 mortgage debt. She’s also considering walking away from the mortgages on her two rental properties.

Now, I understand California’s mortgage laws limit recourse for primary residence mortgages to the value of the property only, so I don’t see a major problem per se in her selling her primary residence and the bank getting only the fair market value ie that is the definition of non recourse lending. BUT…those laws don’t apply to investment properties and those are full recourse loans to her. Those aren’t non recourse loans and the bank’s can sue for the deficiency. If she can’t pay the deficiency, who eats that loss? Us taxpayers that is who. Again, I can live with what happened with her primary home given the non recourse of those types of loans and I think she is smart to cut her payments. I’m sorry she is underwater on her investment properties but that is soley her problem. Why should she be out buying an $1800 dining set and Disney tickets and hope the taxpayers will bail her out of a stupid investment decision on the rentals. That money should be paying down those liabilities. Very different than the home loan.

Having vented aboveI think you are right, however, that many people paid more to own than rent and these are people that probably never should have been owners to start with. Getting them out of homes and into rentals makes a lot of sense.

Posted by scotta | Report as abusive

$3,300 a month for $430,000 mortgage? That’s what, 9.2% interest rate? I’d walk away from that too.

Posted by Nameless | Report as abusive

Megan McArdle’s alternative (and superior) take on the story:
http://meganmcardle.theatlantic.com/arch ives/2009/12/the_new_breed_of_deadbeats. php

Posted by nyetter | Report as abusive

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