“Buy and bail” is a bad idea, even if you stay out of jail

Example: Buy and Bail

A homeowner purchased a house for $600,000 a few years ago.  The value of the homes in her neighborhood have steadily declined for the past two years and the market value of her house is somewhere around $450,000 today.

Because of the declining values in the neighborhood, there are several houses that have been abandoned and gone into foreclosure.  The houses were all built by the same builder when the subdivision was developed.

The homeowner still owes close to $600,000 on the mortgage because of her financing choice when she purchased the house.  She thinks it would be a much better deal if she could abandon her $600,000 mortgage and get a new mortgage for an identical house down the street and the new mortgage was at the current market value of $450,000.

So, she goes to the bank and says she wants to buy an “investment” property in her neighborhood.  She has a good job, good credit, and has never missed a mortgage payment.  The bank, desperate to lend money to people like her, approve the loan quickly and she purchases the new house with a new mortgage at the $450,000 value.

The next step for her is to move her stuff out of the old house and into the new house.  She stops making payments on the $600,000 mortgage and plans to stay in her new house indefinitely.  After a few years, her credit won’t look too bad and she’ll be able to move again and get financing to purchase a new house.

I feel like a chump for paying my mortgage

The people who took the conservative approach and bought a house they could afford are feeling like something isn’t quite right.

I had a conversation with one of my clients the other day that went something like this:

“So let me get this straight…I pay my mortgage every month, I bought my house with a 20% down payment, and I chose at 30 year fixed rate mortgage instead of an adjustable rate mortgage. Now, as a reward for all this good decision-making, I get stuck with tens of thousands of dollars in negative equity while my neighbors walk away from their houses with little damage to their credit score and they’re relieved of their debt???!!! I feel like a chump.”

For some reason, there are people in the world right now who believe they should be relieved of the consequences of their poor financial decisions. This would be like buying a share of stock in a company, having that stock lose value, and thinking that your money should be returned to you at the original purchase price. It just doesn’t make any sense to a reasonable person.

Why are we in a situation where people think they should be able to walk away from their houses? From the hundreds of stories I’ve heard most fit into one of these categories.

1. The inconvenience of living-up to the terms of the agreement. After all, how can people maintain a lifestyle they can’t afford if they are forced to live within their means?

2. The pervasive “entitlement attitude” in the United States right now. Just because you see something on TV doesn’t mean you deserve it without working for it.

3. Because everyone else is doing it.

4. Because nobody is saying it’s wrong.

I would even argue that this sort of behavior is fraudulent. When mortgage documents are signed, that represents a commitment (a legally binding commitment, by the way). Of all the documents a person signs in a lifetime, a reasonably intelligent person would know that it is prudent to UNDERSTAND what is being signed.

Why a person would sign legally binding documents without reading them is a mystery to me. This is a big purchase and there’s generally a lot of money involved. The lender was willing to loan the money with terms that were agreeable to both parties. If there was any question about the terms of the agreement, the time to object was BEFORE the documents were signed.

This would be like having a child, and deciding after the child reaches age three that you would actually rather not have the child. The time to make that call was BEFORE the child was born. Do you hear me, Nebraska?!