This week I read an article in the Wall Street Journal regarding people defaulting on their “American Dream” of home ownership and then turning around and renting as a result. Yes, it is sad that many individuals lost their home during the housing bust / great recession. However, the truly sad part is what some of these people will say in a national publication about their irresponsible / immoral behavior, and gloat about it.
The following are just two examples from the article of how some individuals are reacting to either being displaced from or abandoned their home and the associated liability (i.e., mortgage).
Scenario #1) In 2004, a couple buys a two-story home in suburbia California. The article doesn’t list his occupation, but she is a school teacher. Also, the home is purchased with a no-down-payment loan. Additionally, they added such amenities as a powder room with granite countertops, a backyard pool and play area, and a purple-and-turquoise fantasy playroom upstairs for their three daughters.
Fast forward to 2009 and the home is valued at $200,000 less than their $430,000 mortgage. In addition, they are experiencing troubles getting tenants for two rental properties they own. After several months of wrangling, the homeowners received a modification approval. The bank spokesman confirmed the bank offered the homeowners a modification under the Obama administration’s Making Home Affordable program. Unfortunately, the homeowners turned down the bank’s lowest payment offer since they had already been working on Plan B — exploring the same neighborhood’s “For Rent” signs. The couple now lives just a stone’s throw from their old home with a pool for the kids, the other with a golf-course view — for a fraction of their former monthly payments.
You would think that walking away from their home and mortgage obligations would cause them to reevaluate their priorities. Not so! The new rental house is bigger than their prior home and has a pool with three waterfalls, and boasts a cascading staircase that mom says she could picture her daughters descending on prom night. The rent is $2,195 a month. The homeowners extol how it’s now a better life after defaulting on their mortgage.
Some homeowners are leaving behind their homes and mortgages right away, while others simply quit paying and wait until the bank kicks them out. By doing so it frees up cash to use in other ways. In this scenario the family of five used some of the money to buy season tickets to Disneyland, and plans to take a Carnival cruise to Mexico in March. Their excuse for the new extravagances is “we’re saving lots of money.”
In this scenario the bank took a $235,000 loss on the sale of the prior home, and the family is also considering walking away from the mortgages on their two rental properties. To add insult to injury, the wife in this article shows a visitor to their new home the $1,800 dining set she bought with some of her newly available income, she notes the advantages of being a renter rather than an owner. In addition, she was quoted as saying, “you take a risk for the American dream…I don’t have to worry about paying property tax, homeowners’ insurance, the landscaping, cleaning the pool or any repairs.”
I am so thankful that this “teacher” is not instructing or nowhere near my kids!
Scenario #2) A fireman made four attempts to modify the larger of the two mortgages on his home, which add up to $423,000. Eventually, he was offered a monthly payment that, together with back taxes, was higher than what he had been paying. Today he’s working to partially reimburse his lenders by selling the home, which he expects to fetch about $300,000.
Ironically, with an income of about $8,300 a month and a rent of $2,200, this individual says he now has the financial wherewithal to do things he couldn’t when he was stretching to pay the mortgage. He recently went to two music concerts, and he also kept his black BMW 6 Series coupe, which has payments of about $700 a month. In addition, he admits that he is able to take his girlfriend out to dinner more frequently, and is quoted as saying “I don’t know if I’ll buy another house again, because it’s such a huge headache.”
The sad part is that these scenarios are not isolated incidents. One major credit firm and a consulting firm forecast that “strategic defaults” by homeowners who can afford to pay are likely to exceed one million in 2009, more than four times 2007′s level. Stiffing the bank is bad for peoples’ credit, and bad for banks. Swelling defaults could also mean more losses for taxpayers through bank bailouts.
Whether it be Wall Street or Main Street, there is a growing sector of society that believes that it is okay to walk away from your responsibilities, because you made a mistake. Unfortunately, we all end up paying more to cover these mistakes. In addition, actions speak louder than words! In both scenarios listed above, none of the individuals listed showed any remorse based upon their continuation of luxury lifestyles. The financial sins of today will be paid back over many, many years and our children and grandchildren will be unduly burdened as a result.
Without morals and ethics, there is no shame…if there is no shame, then irresponsible and self-centered habits will only be encouraged, glorified and become the norm.
Since the stock market is just not making much progress up or down during this holiday season, and there is no “screaming” economic news to report, I thought it would be good to vent about morality and responsibility. Continued irresponsible behavior, especially financial, is a huge tax on all of us and will have a greater impact on our financial security as a nation than what the Federal Reserve’s policy is with interest rates.
Quotes
“No man is rich enough to buy back his past.”
Oscar Wilde
“If you’re looking for a big opportunity, seek out a big problem.”
Author unknown
“Let everyone sweep in front of his own door and the whole world will be clean.”
Johann Wolfgang von Goethe
Tony Moeller, President
Integrity Investment Advisors
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