Posts Tagged ‘Short Sale’

A homeowner called in response to one of my “We Buy Houses” advertisements. She was interested in selling but not “highly motivated,” to use the industry term. Her condo was worth maybe $37,000 in fully fixed-up condition. She and her husband had more than $75,000 in debt on the place, in a first and a second mortgage, secured at times when credit was much easier.

I regretted breaking the news to her that a short sale was the only way out. I outlined the process. Both lenders would have to agree to accept less than what they were owed. The owner of the second lien would have to agree to take “much less” than the $18,000 due. She and her husband didn’t like the idea of walking away from an obligation, nor the prospecting of becoming renters, not homeowners.

“You are already renters.” I didn’t say that exactly. But that was the essence of what I told her. If you’re paying to live in a place in which you’ll never build equity, aren’t you in fact renting? I say certainly. Holding the deed is a mere formality. “I admire your integrity.” I did say that. She’d actually been overpaying on the second, hoping to eventually retire the debt. Should she continue doing so?

“I wouldn’t,” I replied. Should she devote the extra funds toward paying down her first mortgage? My answer was the same: “I wouldn’t.”

This report by a University of Arizona law professor, Brent T. White, identifies two reasons people keep paying on underwater mortgages. One reason is to avoid shame and guilt. Another is exaggerated anxiety over foreclosure’s perceived consequences.

This point from the report is most poignant: 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.

In other words, the banks didn’t worry about honoring their moral obligations. His point is, “Why should you?”

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