The current drop in housing prices has created some moral dilemmas that I get to help people deal with. The current system is rewarding those who don’t pay their mortgage, and this is causing those who want to do the right thing to have second thoughts. We’ve all heard about banks doing “workouts” for people behind in their payments in order to avoid foreclosure and keep them in their homes. These workouts can include reduction of interest rate, reduction of principle, or lengthening the term of the loan. You can get these goodies if you stop making payments, but not if you continue to make your payments on time. So naturally, some are saying, “Why should I make my payments? If I do, the bank won’t talk to me, but if I stop paying, good things happen.” This is the moral dilemma.
I met with Greg this morning, and he stopped making payments on a $550K loan on a house in Oceanside that he spent $100K remodeling. It’s now worth $350K. He had to stop making payments to get the bank to listen to him. He wants to do the right thing, but the bank and the government are making new rules that reward the non-payers. “The decision to not pay the bank tore me apart inside”, he told me. The bank is offering to lower his interest rate, but not by enough to make a difference. He is willing to stay in the house if the bank reduces the principle to a more realistic market value, otherwise he will let the place go back to the bank and his girlfriend will buy another one for half the price. The question is, why would the bank sell it at a short sale to someone else for $350K, but not him? Why should he pay more when the next guy won’t? It’s a good question.
So what if you were the president of the United States, how would you handle this? If you bail Greg out, then what happens next year if prices are still lower? Do you bail him out again? But if you do nothing, millions will walk away from their homes causing prices to spiral much lower. City and county governments rely on tax revenues, and collapsing property values destroys the government’s income. So doing nothing is bad, yet rewarding those who don’t pay their mortgage only causes more good people to stop paying theirs.
