Would You Stop Paying Your Mortgage?

Post Author: Bill Pratt

I was listening to the “This American Life” podcast today and heard something that intrigued me.  The podcast recounted the story of a few NPR reporters who bought a mortgage-backed security (MBS) earlier this year.  This particular MBS is a kind of bond that bundles some 2,000 mortgages together and pays the investor (the NPR reporters) interest from the proceeds of the mortgage payments made by the 2,000 mortgage holders.

Sounds like a good deal, right?  The only catch is that this MBS was actually a “toxic asset.”  That means that a large percentage of the 2,000 mortgage holders have stopped paying their mortgage payments, and therefore the investment is highly risky.  The NPR reporters paid $1,000 for the MBS, which was originally priced at $100,000 (a 99% discount due to the risk).  These are the kind of securities that helped cause the recent world financial collapse.

The NPR reporters knew this going in.  Their goal was to buy one of these MBS’s, do some detective work to figure out who some of the mortgage holders were, and then find out why they weren’t paying.

After some initial investigation, they were able to locate an 81-year old man in Florida who had stopped paying his mortgage and agreed to talk about it.  What happened?  Well, he bought a brand new condominium in Sarasota so that he could downsize from his current home.  He took out a $300,000 mortgage on this condo only to see it quickly drop in value.  It dropped in value so much that his $300,000 mortgage was more than the value of the condo.

What did he do?  He decided to stop paying his mortgage, thus defaulting on his loan and stiffing the bank who loaned him the money and the investors who bought the MBS which included his mortgage.  The NPR reporters asked him why he stopped paying.

He answered that it was a very painful decision for him, that it went against everything he was taught growing up.  But, he claimed, he had no choice.  One of the NPR reporters challenged him, telling him that he did have a choice, that he could have kept paying.  He didn’t have much of a response, only saying that it “didn’t make sense” to keep paying.  It’s important to note that he had enough money to keep paying, but that he chose not to.  The only consequence for him is a bad credit rating, but since he is 81 years old he probably won’t need to borrow money again, so this didn’t seem so bad.

What do you think of this elderly gentleman’s decision?  Was he wrong to stop paying?  It seems that millions of other people did the same thing in the last several years as housing prices fell, thus precipitating the financial crisis.  Please vote in the poll below and then leave some comments telling us what you think.

  • Dan

    Thanks for the post. I am in an almost indentical situation. I moved out-of-state last year and put my old house on the market, expecting the sale process to take many months due to the state of the economy. Going on over a year now, the house has still not sold, and will likely not sell unless I lower the price to result in a significant loss.

    My options now are to just keep paying the mortgage, or to sell at a loss and have the bank give me an unsecured loan for the difference. Such a loan will have a credit-card like interest rate. Keeping the house involves property taxes, insurance and maintenance costs.

    I have been urged by several professionals to do just what this article describes, simply stop paying the mortgage and allow the house to be foreclosed. This would be a morally and practically wrong choice because:

    – The loan is my responsiblity and I have a contractual obligation to make payments
    – I can (albeit barely) currently afford to pay the mortgage and my new location’s rent
    – It is not the bank’s fault that the mortgage is underwater
    – My credit rating would be destroyed, preventing me from buying another house, getting a new job, etc.
    – Our country’s crisis is largely due to people not taking responsibility for their situations like this, and I refuse to be part of the problem.

    I can understand if someone loses their income and is no longer able to pay, but even then defaulting on one’s obligations should be an absolute last resort.

    In my situation, the right thing to do is to keep paying the mortgage and trust God for the outcome. It is not the easy choice, but the alternative is having to live with literally the equivalent of stealing tens of thousans of dollars from my bank, which did nothing wrong.

  • Bill Pratt

    Dan,
    Thanks so much for telling your story. I agree that you are doing the morally courageous thing. I also want to invite all of our readers to say a prayer that Dan’s house will sell.

    God bless,
    Bill

  • Happily, my wife and I bought our house in 1991. We did take out some equity to pay for our kids’ college costs, but not enough to put us in danger of going underwater.

    Here are my thoughts on Dan’s analysis:

    The loan is my responsibility and I have a contractual obligation to make payments.

    This is true, however, if the shoe was on the other foot, the bank would base its decision purely on a cost-benefit analysis without regard to moral obligation. There are plenty of examples in the last few years of banks defaulting on transactions when they concluded that this was the more profitable choice. Moreover, when the bank lent you the money, it was not expecting repayment based on your moral purity. It was counting on the fact that it would be to your financial advantage to repay the loan because of the value of the house that secured the loan. It chose to accept your house as security for the loan and if that security turns out to be insufficient, it has no one to blame but itself. It is as responsible as you are for misjudging the future course of real estate prices.

    I can (albeit barely) currently afford to pay the mortgage and my new location’s rent.

    Can you afford to do the other things for which you might be morally responsible? Can you save for retirement? Can you save for your children’s education? Is making the bank whole more important than other responsibilities that you may have? I think these are all legitimate factors to take into account.

    It is not the bank’s fault that the mortgage is underwater.

    This may or may not be true. Many banks relaxed their underwriting standards and made questionable loans because they believed that they would be able to package them into mortgage backed securities and pass the risk on to unsuspecting investors. This played a large role in inflating housing prices. Many lenders were at fault.

    My credit rating would be destroyed, preventing me from buying another house, getting a new job, etc.

    These are absolutely legitimate concerns.

    Our country’s crisis is largely due to people not taking responsibility for their situations like this, and I refuse to be part of the problem.

    This may be true, but there are a lot of different entities that share the responsibility. Should you choose to default, you will not be waltzing away without consequences. In my personal opinion, you would still bear more than your fair share of the responsibility for your decision to buy a house that turned out to be overpriced and the bank would bear its responsibility for lending you money to buy that house.

  • My wife and I were in a similar situation. When we contacted gov’t officials to see what we could do to get some of the Obama spending money to help with our home loan we were told that we would have to stop paying our mortgage? Stop paying our mortgage??!! That is just not right and not how we work so we just kept struggling and kept paying and we are in a better situation now and have had some help with some non profit credit counseling service. But we own up to our responsibilities, if everyone had taken ownership of things we might not be in the financial crisis we are in… my 2 cents.

  • Leslie Chicago

    I just spoke to a friend who has decided to allow her home to go into foreclosure. She bought her home in a Chicago neighborhood at $250K and its now valued at $126K nearly 4 years later. But the county government is estimating her home value over $250K (my home’s price fell too but the county values it over $200K; market value says $110). She is not saved but just felt cheated by the economy and the promises of City government to improve a neighborhood that has never seen social and cultural ammentities. Anyhow, I started thinking, maybe I could just stop paying my mortgage too because of a financial loss in 2010 I was feeling a bit strapped. But I decided to think about what God says. He says he will provide for all of our needs. In my situation He has. My pay check covers basics but any extras are really a far reach. God has extended small consulting contracts to pay for other things like property taxes and a vacation (payment plan) as well a some new clothes. Im thankful for this blogs post on “Should I stop paying my mortage”. As much as I’d like to no longer have a mortgage, I submitted it in prayer to God and I will let him “work it out” for me. I know one day, Ill be out of mortgage debt completely. God is faithful to help his people. Thanks!