Walk Away Renee (from your underwater mortgage)

Now is the time, according to the experts in economics, to strategically default or walk away from your underwater mortgage.

Banks do it. The rich do it. It’s time for you to do it.

It’s the only way to restore balance in the real estate marketplace.

“Underwater” means that you owe far more than what your home is worth. In Bend, for example, if you bought at the peak in 2007, you likely paid close to the median price of nearly $400,000. That median has plummeted to closer to $200,000. It will likely take another decade for the median to reach $400,000 again.

And yet, by walking away from your mortgage it means that you could pocket thousands of dollars and see your credit affected for maybe 3 to 5 years.

You can live in your home for at least 6 months and possibly a year or longer without paying a mortgage until the bank throws you out of your home. Yes, you lose your home, but you regain your financial independence.

It is not only the right thing to do for you and your family, it is the moral thing to do.

But, don’t take my word for it. Read this essay in the New York Times Magazine (Jan. 10, 2010), by Roger Lowenstein, an outside director of the Sequoia Fund, and a contributing writer for the magazine. His book “The End of Wall Street” is coming out in April.

Here’s the link: http://www.nytimes.com/2010/01/10/magazine/10FOB-wwln-t.html

In his article, Lowenstein debunks the notion that it is “irresponsible” to default on your underwater mortgage at a time when banks refuse to renegotiate terms of your mortgage so that you can stay in your home.

“Businesses — in particular Wall Street banks — make such calculations routinely,” Lowenstein writes. “Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with.”

In fact, Morgan Stanley was practicing due diligence on the part of its stockholders. You should to the same on behalf of your “stockholders” -- your family.

“Banks signal their complicity with this ethos when they send new credit cards to people who failed to stay current on old ones,” he writes.

Lowenstein concludes: “No one says defaulting on a contract is pretty or that, in a perfectly functioning society, defaults would be the rule. But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth.”

Another article in yesterday’s Sunday New York Times, Richard H. Thaler, a professor of economics and behavioral science at the Booth School of Business at the University of Chicago, makes the same case.

Here’s the link: http://www.nytimes.com/2010/01/24/business/economy/24view.html

Thaler writes, borrowers “think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. It’s as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.”

Both authors, and many others, reference a 54-page paper published last month by Brent White, a law professor at the University of Arizona’s James E. Rogers College of Law.

Here’s the link: http://www.sacbee.com/static/weblogs/real_estate/SSRN-id1494467.pdf

White makes a strong case in his paper titled: “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.”

Here is White’s introduction to his paper:

“Despite reports that homeowners are increasingly ‘walking away’ from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences.

“Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations - and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision.

“Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.”

Instead of being a powerless teabagger, it’s time to do something about the inequities that face our country today. Walk away from your underwater mortgage. You’ll be doing yourself and the country a favor.