Are short sales moral?
I am going to talk a little bit about the “moral side” of a short sale. My favorite part of this story… the twist at the end that makes the whole thing laughable.
I was reading this article on CNBC this weekend about short sales and felt I needed to jump into the discussion. The Phoenix Real Estate Guy has written a lot about short sales as they have been a major part of the Phoenix housing market for the last few years.
The premise of the article is, should people who can technically afford to pay for their underwater home continue to do so, or should they be allowed to walk away? Here is how the author sums up the situation:
These borrowers have the wherewithal to make their monthly payments on their underwater homes but choose not to, because they know they won’t make their equity back any time soon. They also see that they can now buy more home for less money, given how low home prices have fallen. They can get in at the bottom, rather than pay what amounts to rent on their current homes. In other words, they’re in a position to make more money by walking away from their debt and letting their lender eat the loss.
I’m no bank apologist, but is that fair?
When I have this conversation with home owners I always tell them, no matter what have been taught to think, what you are doing is making a business decision. If you invested $400,000 in a stock that was now worth $250,000, and was unlikely to return to $400,000 for another 10-12 years, would you continue to hold that stock or would you sell it and invest in a better option that will guarantee you a higher rate of return?
Most agree when I phrase it like that it is a no brainer. There is always the follow up thought, but they signed a contract.
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But they signed a contract
Sure they did, but there are always options. Right inside all home contracts it lays out exactly how these options will work. You as the home owner have the option of stopping to make payments. If you chose to stop to make payments, then the bank has a right to take the property back.
In every situation, when we sit down with a someone considering a short sale we discuss this. If you are no longer happy with the terms of the contract, then the bank is giving you a way out. How is this different than what businesses do every day? They look at their bottom line and when things are bad they make changes.
You have options
You do have options, they are listed right in the original contract you signed. You can stop paying, and the bank can take the property back. But there is another option. The other option is you can renegotiate a contract. That is exactly what a short sale is. The seller goes to the bank says I am not happy with this situation. I would like to renegotiate the contract and agree to give you $xxx,xxx.00 for the home now instead of continuing our current business agreement. The bank then has an option of agreeing to this renegotiation because it is better than the foreclosure alternative, or no they can decide not to agree and instead foreclose. Both sides have options here.
So even though both sides have options, obviously the Mortgage Bankers Association is not happy with the results. Showing his frustration over the situation, John Courson, chief executive of the Mortgage Bankers Association said of those looking to short sale “What about the message they will send to their family and their kids and their friends?”
But are you ready for the punchline? The Mortgage Bankers Association did a short sale on their own building in Washington DC.
So before we get all high and mighty about morals remember, contracts are not moral or immoral, they are business documents in a business transaction.
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