Whistling the Underwater Mortgage Blues

Underwater mortgage got you down? Don't walk away, skip away whistling a happy tune, content in the knowledge that you're at least getting out with your dignity intact.

Recently Patch asked, "" This is a great question and one that gets to the root of the housing bubble: GREED. You might as well ask, "Is it morally wrong to steal from a thief?"

When I began my professional career as a banker in 1982, banks were highly respected pillars of the community. Commercial Banks and Savings and Loans claimed a moral, or more precisely, a fiduciary responsibility as a capital resource and financial guardian for their constituents. They were widely viewed as quasi-public institutions.

There was no such thing as too big to fail as banks were precluded under Glass-Steagall from expanding beyond state borders. They were closely regulated with strict capital and due diligence requirements. These banks operated on thin profit margins and were hardly viewed as cash cows. They survived by charging fees for services (imagine that) and narrow interest rate spreads.

This all began to change in the mid 80s with a rash of deregulation allowing banks to grow into regional, and then national monstrosities. They became more and more disconnected from the stake holders in their communities and discarded the notion of fiduciary responsibility for an "anything goes" mindset. Many banks began publicly trading their shares for the first time which lead to an unquenchable thirst for profit.

Indeed much of what ails our country today comes out of this "profit over people" corporate culture that pervades all of our national institutions. The conditions were absolutely ripe for the exploitation of the housing market. The Savings and Loan crisis of the late 80s and early 90s was the first clue that things were headed in the wrong direction. It was also a proving ground for how easy it was for banks, builders, Realtors, appraisers and mortgage originators to collude in manipulating  the real estate market. The one sure thing they told us was that real estate values would always go up up up. They would see to that.

These actors, led by the banks, made obscene profits from this scheme which they had perfected by the late 90s. As a banker I specialized in troubled assets and loan restructures, presiding over many bankruptcies and foreclosures, so I have first hand knowledge of what sound lending practices look like. While it's true that some lending requirements had been eased under both Clinton and Bush with their administrations desire to push home ownership, that was not the root of the problem. Neither was the Community Reinvestment Act which was enacted much earlier. The problem was the willingness of mortgage lenders to skirt what rules remained. In short, they fudged the numbers to make sure that loans that shouldn't have been made were.

When I remarried, my wife and I bought a home in 2003. By this time I was out of banking. I was appalled at how easy it was for us to get a low interest, zero down loan. Our mortgage originator wanted us to buy a much more expensive house and was pushing us towards an ARM. I felt like I was dealing with a used car salesman. It was a hard sell. Fortunately I knew better, but many didn't and were sold homes they couldn't afford under terms that were destined to end in default. These unsuspecting buyers were bilked out of thousands of dollars in origination fees and sold homes that were artificially overvalued. Should they have known better? Perhaps, but they were still caught in a con. The banks failed in their fiduciary responsibility to insure these loans were sound.

So no, under those circumstances it's not morally wrong to walk away from an underwater mortgage. In fact my advice would be skip away, whistling a happy tune, content in the knowledge that you're at least getting out with your dignity intact. While I'm at it, if you haven't already moved your money from your mega bank to a local credit union or community bank, you really should. If the feds refuse to bust the big banks we still have the power to do it with our feet.

Read more from Brian at ... And The Horse They Rode In On

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Brian Crawford January 19, 2012 at 11:43 PM
Hahaha...I kind of assumed that. Considering that I was once the one auctioning homes on the court house steps I think I have some inside insight that might be useful for folks like yourself. Maybe not. I don't expect to change any minds, just perhaps open a few. I believe strongly in personal responsibility just as I believe strongly in fiduciary trust. In this case I believe the one outweighs the other.
Brian Crawford January 19, 2012 at 11:47 PM
By the way you will hear me use the word fiduciary often in this discussion. Fiduciary responsibility was drilled into me early in my career and it's something we've lost. I think that's important.
Mike Korom January 20, 2012 at 02:52 AM
Brian, if some is upside down in their car should they walk from this too? If they have a credit card balance, by definition they are upside down, should they walk from them? Those evil doctors charge way too much, no reason to pay them. Fiduciary.....hmmm.
Hannah January 20, 2012 at 11:43 AM
I like your Noam Chomsky reference, Brian! Glad to have some not-so-conservative posts to read in my hometown news source!
Brian Crawford January 20, 2012 at 11:54 AM
All valid questions Mike. I have to admit, this feels odd. I spent much of my early career as a Collections and Recovery Manager. I started out as a repo man, and a pretty good one at that. I am the last person I ever thought would be leading a debtors revolt. Yet here I am. In the case of the car, of course not. Everyone knows the minute you drive off the lot you've lost at least 15% of value. Even though insured, a total loss will result in a negative equity of a few thousand dollars. I saw this happen many times; unfortunate but not disastrous to one's overall finances. Credit cards are a different story. I paid mine off and cut them up five years ago. Because the credit card companies have engaged in predatory practices many consumers find themselves with a mountain of debt at usurious interest rates. While there is a great deal of personal responsibility here there is also a failure of fiduciary responsibility by the lenders. This is why we need a functioning Consumer Protection Bureau. The biggest problem is that consumers are lured into running up large balances at low interest rates and then find their payments have doubled or tripled when the company arbitrarily raises their rate to 30%. If someone finds themselves in trouble they should first attempt to negotiate in good faith with their credit card company for a lower rate or more manageable terms. Unfortunately most companies will force you to default before they are willing budge.
Brian Crawford January 20, 2012 at 12:17 PM
Thanks Hannah. Chomsky is an important figure and someone I admire.
RL January 20, 2012 at 04:07 PM
Gee Brian, so its OK to walk away from something your responsibility to handle. "No problem, let someone else handle this". That kind of attitude is pulling this country down. While we are at it, forgive the student loans and forget those pesky credit card bills! Nobody made the buyers or loan recipients sign those documents. NOBODY. I am sick and tired of the whining by everyone that owes money on a house, car, student loan, etc. Go to work and pay your bills. Your attitude is pathetic.
Brian Crawford January 20, 2012 at 06:11 PM
Thanks for your input RL. Just for the record, I pay my bills. But then I've never been upside down $100K in a mortgage someone guaranteed me was worth what I paid for it 3 years ago. If I had I believe I would feel fleeced.
Mike Korom January 20, 2012 at 08:41 PM
Brian, herein lies the difference in your view of this and mine. You believe another agency (in my view bureaucracy) will solve these problems. In my view personal responsibility trumps both. Another question for you, if the home (investment) had continued to rise as it had done the previous 50+ years would those homeowners (investors) given the profits to the bank when they sold?
Mike Korom January 20, 2012 at 09:00 PM
Let me give some Noam Chomski quotes and the audience can decide. "The Bible is on of the most genocidal books in history". "I have often thought that if a rational Fascist dictatorship were to exist, then it would choose the American system". "Everybody's worried about stopping terrorism. Well, there's a really easy way; stop participating in it". - All Noam Chomski
Brian Crawford January 21, 2012 at 01:27 AM
Of course not. But here's the problem, for my entire life home ownership has been the entire foundation of the American Dream. You bought your home when you were starting out and the equity in that home would provide a nice retirement as a supplement to Social Security and whatever you could scrape together in a 401k. This is what built the middle class. Between 1970 and 2000 real median home prices averaged around $150K, never fluctuating more than $20K or so. Then in 2000 prices started to explode. From 1998 to 2006 (the top of the bubble) these prices increased to over $275K. The only possible explanation for this is a carefully orchestrated manipulation of the housing market. This was clearly no accident of the free market. If you look at this chart you'll also notice the small bubble during the S & L crisis that was the model for this fiasco: http://www.jparsons.net/housingbubble/ It will take years, perhaps decades for the market to catch up. Meanwhile a large swath of the middle class is stranded with no home equities to rely on. This is a huge problem.
Brian Crawford January 21, 2012 at 01:43 AM
All taken out of context. Although there's not much there I would disagree with except perhaps the rational Fascist dictatorship, I'll have to look that up. One of my favorite Old Testament stories is Dinah and The Shechemites, Lots of blood and gore. http://www.biblegateway.com/passage/?search=Genesis+34&version=NIV
Brian Crawford January 21, 2012 at 01:52 AM
And actually, I believe what I've advocated is for people to take personal responsibility, accept the fact they've been swindled, and (pardon my French) tell the banks to go to hell.
snp January 22, 2012 at 03:09 AM
When you walk away from your underwater mortgage, the lender will sell your house for cents on the dollar and still what is left of the mortgage (from you). How is walking away good advice?
David W January 22, 2012 at 03:55 AM
Brian, we are struggling with this issue right now. We are 60+k under water. There are alternatives to your proposal. If you can afford it, buy a 2nd home and rent your first one. I have considered your proposed method, but some moral fiber in me says exhaust every other avenue before giving up and walking away. I feel our government made this environment. instead of requiring the banks to relieve some of the debt when the bailouts, they let the banks pocket the money and clean their books up from bad debt. Thanks Washington for your entitlement programs of everyone should be able to own a home despite of their finiancial situation. Thanks Washington for all of the jobs lost in the building industry. Thanks Washington for letting people walk away with no real penalties. Thanks Washington for really make it difficult for those who want to do the right thing as we watch our neighbors walk away. Now let's move on to the next entitlement program and screw up the health care industry with obamacare. Thanks Washington... For nothing!!!
Mike Korom January 22, 2012 at 04:19 AM
David, you are spot on! Your determination will serve you well. Others will continue to place blame on others. I believe these recent times will create a paradigm shift where self responsibility again be the norm.
Brian Crawford January 22, 2012 at 04:52 AM
I feel your pain but I also feel much of your anger is misplaced. While Washington may have helped create a perfect storm by cutting and failing to enforce regulations, easing lending requirements and lowering interest rates, Washington wasn't the one manipulating housing prices. By the way, most of that occurred under a Republican President working with a Republican Congress. Almost all of those lapses in good government have been corrected under the current administration. The loose ends that are left are due primarily to Republican obstructionism. Government is what we make of it, WE are the government. When you let the FOXes run the hen house this is what you get. I also disagree with your take on Obamacare, Our health care system is already screwed up, at least for those who aren't seniors. I've just recently started using Medicare and everyone I know who's in the system now is very happy with it compared to private insurance. During the healthcare debate Obama wanted more of a Medicare for all approach but unfortunately Senate Republicans used the threat of filibuster to hold out for private insurance pools. While the Affordable Care Act is a step in the right direction there is still much progress to be made. The cost controls and insurance pools under Obamacare won't take effect until 2014. What we're seeing now is the insurance companies trying to squeeze every dime they can out of the American public. When fully implemented Obamacare will put a stop to that.
Brian Crawford January 22, 2012 at 06:14 AM
I too applaud David's moral fiber. I am not an amoral person and I didn't come to my opinion overnight. This is something I've struggled with as well, but the more I study this the stronger my belief is that millions of Americans have been swindled out of their future. My hope is that the administration will come up with a creative solution to help folks like David. Up till now the government's efforts to solve the crisis have been unsuccessful. I'll be very disappointed if this isn't high on Obama's list during next week's State of the Union address.
Brian Crawford January 22, 2012 at 06:30 AM
It really depends on how much you are under water. I'll have to play around with some math and see what I can come up with.
David W January 22, 2012 at 05:32 PM
Brian, We all know when this crisis started. It was in the 90's when housing lendors were forced to lower their standards because of government mandates. If they did not, they could not compete. To insure the banks, Fannie Mae and Fredie Mac gauranteed the homes. Now yes the bubble burst under the Replublican President. and yes I do not think he was aggressive enough protecting us, but to protect us he would have had to go back to conservative lending and would most assurerdly been labeled with things like racist and elitist. Imagine how hard it would have been to make those changes knowing it would have been best for the country while everything was still going well. Exactly... you got it now. He and the Replublican party had no choice on that matter. maybe if Fannie and Freddie didn't insure those bad loans and the goverment didn't lower its standards to make homes affordable, we would not be in this mess. Now, Where Bush and both parties failed the people, is to not make the banks who took the government bailouts, help those bad loans. how simple would it have been for the government to say, If you take the money, you will bring the under water mortgages back to even. People could still move, people would still be upgrading their houses, and the housing/construction indusrty would be fine. To summarize, both parties are reponsible for where we are today. Obama has had 4 years to make it better with a democratic house and senate. Thx Obama for Nothing!
Brian Crawford January 22, 2012 at 05:57 PM
All I can tell you David is I was there, and still have many friends in the industry. The easing of lending standards was only a small part of the equation. If all loans had been made in strict compliance with the new standards we would have perhaps seen a rise in foreclosure, but nothing close to a crisis. I hear your version of events often from my conservative friends who want to place the blame on the CRA (which had virtually nothing to do with the foreclosure crisis), Fannie and Fredie, or irresponsible consumers. This is exactly the story that the criminals who perpetrated this fraud want you to believe; to somehow lay this at the feet of poor home buyers. Many folks like yourself have swallowed it hook, line, and sinker. I can't do anything about that other than speak truth to power. The lender who sold you the mortgage that you're $60,000 upside down in had a fiduciary responsibility not only to you, but to it's share holders, to ensure home values were reliable. If you bought that house in the last 8 years you were swindled brother. I am praying for a solution to your troubles because until these wrongs have been righted our economy will continue to suffer.
Brian Crawford January 22, 2012 at 06:15 PM
I also understand you don't like Obama but to say he has done nothing is incorrect. The problem is that everything they've tried up to this point has been mostly unsuccessful, partly due to Republican opposition. It should be noted that the "free market" has also failed to find a solution, in fact the banks have completely turned their backs to the situation other than to keep on piling up foreclosures. I haven't heard even one of the Republican candidates for President talk about foreclosures much less put forward any fresh ideas. How many debates have they had? This is a hugely complex issue that is way beyond the market's capacity to fix. It's going to require massive government intervention. But then of course Pubs will just cry socialism! Your best bet is to hold your nose and vote for Obama and a Democrat Congress in November.
RL January 22, 2012 at 08:58 PM
Brain, Someone from the DNC could not have said it better. It is funny how fast you want to blame republicans for the housing mess. I am not a Bush backer but he did raise the warning flag with Fannie and Freddie. Your buddies, Dodd and Frank shot him down. How much did Fannie and Freddie take in taxpayer money? Why did they have to take the money? The answer - to re-capitalize themselves because of bad loans. Not one penny of taxpayer money should have gone to Fannie or Freddie, or to GM, or to AIG, etc. I'm tired of the imperial federal government making decisions on my behalf. Hold our nose and vote for Obama and a Democrat Congress? Are you insane? This guy has added 5 trillion to the debt in three years. He wants to grow government. Why would a rational person want this? Obama and his leftist friends cannot leave fast enough. Brian, do you still work and pay taxes?
Brian Crawford January 22, 2012 at 10:31 PM
Thanks RL, do me a favor and send a recommendation to the DNC. Maybe I can freelance for them. I don't place all of the blame for the housing crisis on the Pubs, I'd say it's about 80% Pubs / 20% Dems. Certainly Republican financial policy in general has been disastrous over the last 30 years. I honestly don't remember Bush trying to rein in Freddie and Fannie but if you've got a link I always have an open mind. I wasn't a fan of bailing out the banks/AIG either but I'm afraid too big too fail has become a reality (see: failed Republican economic policy). As for GM? They sold more cars than any other auto manufacturer in the world last year. Remember how everyone laughed at Cash For Clunkers? Turns out that was the catalyst for the entire turn around. GM is still a privately held company, although the gov still owns a third of their stock, and they've paid back over half the money we let them borrow. What's not to love?
Brian Crawford January 22, 2012 at 10:38 PM
You are the government my friend (good lord, I sound like Mitt Romney) and that's exactly what we elect government officials to do: make decisions on our behalf. It's called Representative Democracy. If you don't want to participate in it there are other countries out there with different systems. Pick one. Obama's share of the debt is actually $3,326,459,058,047 through 01/17/2012 (I have a spreadsheet that tells me these things), but keep in mind most of that is due to necessary stimulus, increased safety net spending, and a sharp drop in tax revenues due to high unemployment all of which he inherited (blameitonbush). There has been no large expansion of government. Obama is about as much of a leftist as Ronald Reagan who granted amnesty to illegals, expanded government and added thousands of government workers to the payroll, bailed out Social Security with a huge tax increase, raised gasoline taxes and supported federal handgun controls.
Brian Crawford January 30, 2012 at 05:43 AM
Update: Earlier this week President Obama announced the activation of the administration's long dormant task force on criminal misconduct in the mortgage crisis and financial collapse. Robert Kuttner's piece on task force co-chair Eric Schneiderman is a must read for anyone wanting a deeper understanding of how they ended up in an underwater mortgage and what the prospects are for relief. http://www.huffingtonpost.com/robert-kuttner/eric-schneiderman_b_1240453.html
RL January 30, 2012 at 01:51 PM
Brian, First of all this piece is from the Huffington Post. They never have an agenda. Secondly, in the first two paragraphs "progressives" are mentioned twice. This is nothing more than a liberal rag writing about the "less fortunate" who did not make bad decisions but are victims of a cruel system. The very banks you dislike are the same ones who received the majority of stimulus funds. A program you have encouraged in your columns. So, you like your cake and eat it too. I'm all for re-structuring mortgages. I've done it once, about to do it again. The rates are great. However, I have not asked for my mortgage balance to be lowered. I agreed to a price and I'm going to pay it. Let me ask you this - if the imperial federal government starts to force banks to lower balances, would you be Ok for everyone to receive a lower balance regardless of means?
Brian Crawford January 30, 2012 at 02:19 PM
Thanks for the input RL. Perhaps you didn't realize that Patch and Huffington Post are both members of the AOL family. In fact Patch reporting is often cited on Huff Post. Using pejoratives like "liberal rag" and "imperial federal government" exposes a lack of understanding of the broader perspective. I think the banks should be forced to write down all mortgages that were part of the bubble to prices within the inflationary trend line of the last 30 years, regardless of means for reasons I have previously stated.
RL January 30, 2012 at 02:41 PM
Looking forward to my write down. Thanks for the update.
Ben October 13, 2012 at 04:47 AM
Ha...what a joke. So we level the playing field and we're at fault. Where were you when the rules of the game originally changed?


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