Saturday, September 27

Is this TRUE?

... I was reading an article all about this beastly debt/credit crisis thingy in the SMH this week, and I came across something that fair boggled my mind.
"In some ways we are worse off than even the US, although, overall, we are better off. The single biggest difference has been largely ignored, and that difference is personal responsibility. In the US, when borrowers find their homes are worth less than their mortgages and it makes no sense to them to pour their wages into a black hole, they can simply walk away. The bank forecloses. The borrower walks. The problem is transferred to the bank.
Different story here. Borrowers cannot simply walk. Even when they no longer own the home they still own the debt. So they do not walk. They fight, because they have to. It also helps that we have not had a central bank that kept money too cheap for too long
." My emphasis there.
But is this TRUE? Can a person really walk away from their mortgage if they don't fancy paying it anymore? Really? Just walk out and not be pursued by the bank's debt collectors forevermore?
I had been wondering why so many people, who so clearly could not service a mortgage, would go out and get one anyway. (Let's not go into the issue of why a lending institution would actually LEND them money they could never pay back, that hurts my brain like thinking about quantum physics.)
But if this is true, then I can see why a person would. If there is no danger of being lumbered with the debt should you find it all too hard, well, why not have a house for a bit?
High finance, I don't suppose I'll ever understand it.


Pink Granite said...

Hi DMM -
It's not how I understand it.
When you commit to a mortgage, you owe the bank.

I have heard that people do "walk away" and mail in the keys to the mortgage company. But they still owe the money. Their credit would be destroyed and the bank/mortgage company would pursue them.

The only ways "out" that I know of are to renegotiate the loan or for the borrower to declare bankruptcy. Bankruptcy laws were enacted early in our history in response to debtors' prisons. But in recent years, bankruptcy laws have changed to become more restrictive for individuals. In bankruptcy you must liquidate whatever you have with a few exceptions and pay everything you can. Then the bankruptcy stays on your record for 10 years. Half of all U.S. bankruptcies are due to crushing medical bills.

The part that you didn't want to go into - the fraud and outrageous lending practices using insane financial instruments - is a HUGE problem. Deregulation began in the 1980s under the Reagan administration and continued through to the present Bush administration. The lack of regulation and oversight led to a free-for-all in lending, which when the housing market began to slump, could no longer be sustained.

There were borrowers who were stupid and greedy. There were also borrowers who were lied to and manipulated. But there were way too many lenders who took the money (fees and re-sale of bad mortgages) and ran.

Just one gal's understanding of this mess...
- Lee

Ms Brown Mouse said...

thanks for that, I didn't think it could possibly be that easy to dodge a mortgage debt. That Mr Sheehan must be making things up.
A mess it is indeed, eh?

cookiecrumb said...

No, it's true. People are walking away. There is a city some distance from San Francisco that used to be considered a commutable suburb, when everyone was dying to own homes. (The farther away from SF, the less expensive, so that's where the dirtbags went.) Now that town is full of abandoned houses. Well, the banks "own" them now.
But Lee is right; the erstwhile owners' credit is undoubtedly ruined.