Whether to walk away: Housing’s moral minefield

By Brian Eckhouse

Sunday, March 22, 2009 | 2 a.m.

It’s the scruples question of the day. Maybe of the year.

Should I stay in the home I love, or stick it to the bank?

Financially, you are able to make your mortgage payments. But if your mortgage is greater than the value of the house, why pay it? You’re throwing good money after bad. Paying the mortgage may be the right and legal thing to do, but not necessarily the smart play.

This raises a moral question for tens of thousands of valley homeowners: Is your greater responsibility to your family’s financial well being, or keeping your word to the bank?

It may be an excruciating decision for good, decent people: Do I make my payments and refuse to join the next wave of foreclosures that will further blight my neighborhood? Or do I violate personal ethics and walk away from a contract that I signed with my eyes wide open?

One financial adviser says homeowners, in increasing numbers, are taking an unsentimental view toward their houses — once viewed as the pinnacle of the American dream — and making cold, rational decisions to walk away from legally binding commitments.

“That’s the problem with our society: You have an obligation and yet people walk away. If that happens across the country, we’ll go kaput,” says Frank Farley, a professor of psychology at Temple University and a former president of the American Psychological Association. But such people, he says, aren’t lacking justification: They are the victims of real estate greed and incompetence in the banking and subprime lending industries, and they see corporate America making similar decisions.

The number of homeowners bringing foreclosure on themselves could be staggering: More than 234,000 homes in Nevada — 55 percent of the state’s total — are “upside down,” or valued at less than what is owed on them, according to a December report by First American CoreLogic, a data analysis firm. That percentage is the highest of any state.

Put a different way: Most properties bought here between 2004 and 2007 are upside down or “underwater,” according to Steve Bottfeld, executive vice president of Marketing Solutions, a Las Vegas housing consultant.

Depending on whom you talk to, not paying the mortgage even when you can is sound business practice. Or the acceleration of our fraying social fabric. Or pragmatic and rational. Or a bad example for children.

Those who dispense spiritual advice suggest homeowners should stick to their promises and pay their mortgages. Those persuaded by fiscal arguments say there’s something to be said for self-foreclosure, even if they don’t recommend the practice.

Ultimately, personal values shape decisions, says Kristen Monroe, a professor of political psychology at the University of California, Irvine, and an expert in altruism. “You act out of a sense of who you are. Even in desperate times. It’s an identity question.”

Voluntarily foreclosing “is the easy way out,” says a disapproving Dwight Watson, pastor of the Oikos Church, an evangelical Christian congregation in Las Vegas. “Such behavior is rewarded in corporate America. These companies are so big and our economy depends on them, but it doesn’t make their decisions right. It doesn’t make them moral. It’s a blight on our society. It shows we as a society really walked away from personal ethics and integrity.”

Various mortgage specialists interviewed for this story say they do not advise homeowners to abandon their properties. They’ll mention foreclosure as an option, but tell their clients that if they consider it, they had better line up a lawyer to deal with the fallout.

Steve Schauer, a mortgage specialist with Flagship Financial Group, says that of all the upside-down homeowners he meets, about two-thirds say they’re abandoning their homes. The homeowners who opt to stay for moral reasons are the exception, he says.

Rabbi Felipe Goodman of Temple Beth Sholom in Las Vegas is more optimistic: “People feel they can’t abandon their homes. They say, ‘Maybe 10 years from now, the market will rebound.’ ”

Goodman says if asked by congregants, he would advise they stick with their mortgages if they can afford them.

Financial adviser Jeff Ballek says his clients who are confronting the personal quandary have stellar credit ratings, posted 20 percent down payments on their homes, built 401(k) retirement accounts and paid their bills on time. “They’ve done everything right,” Ballek says.

These homeowners are the least likely to be bailed out — and now, perhaps, the most likely to foreclose.

Unless their loan-to-value ratios are under 105 percent — with a $210,000 loan on a home valued at or more than $200,000, for instance — these homeowners are unlikely to get any government help. Nevada has an average loan-to-value ratio of 97 percent, according to First American CoreLogic.

Absent government help, can the homeowners negotiate a reduction in the mortgage principal with their lenders? The answer seems to be no.

Some homeowners think they can persuade lenders to write off some of the principal if they first withhold their payments for three months and feign financial stress. That tactic can “hit or miss,” one mortgage specialist says. More typically, lenders will suggest owners pursue a “short sale.”

And financially healthy homeowners who beg for relief while continuing to pay on a timely basis will probably not get any sympathy from their lenders because they have offered no evidence of stress.

“Is it fair that your neighbor did everything wrong — he bought a house without a job — and the bank will help him, but the bank won’t talk to you until you’re three months behind?” Ballek says. “That’s just not fair.”

Ballek, who says he does not advise clients to default, finds it ironic that homeowners with the most conventional and conservative of all loans — 30-year fixed-rate mortgages — and were most committed to homeownership are now the ones who are considering foreclosure as an escape from their undervalued homes.

“At this point, they’d rather destroy their credit for seven years and start over again,” Ballek says.

“I don’t think the average person has a lot of remorse anymore. They just feel like a part of the crowd now.”

The beleaguered homeowners, Farley says, are empowered by what they see happening in corporate America, where failing companies unabashedly are lobbying for federal bailouts, pursuing bankruptcy protection or otherwise reneging on loans — anything to survive, morality and ethics notwithstanding.

This troubles Watson, the pastor, who worries that homeowners may be co-opting such corporate logic.

Three decades ago, foreclosure — and surely personal bankruptcy — would warrant social stigma, a scarlet letter. Not anymore.

“You used to shake hands and that was the deal. The handshake was golden,” Farley says. “That’s gone. Honor doesn’t quite play out like it used to.”