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Credit counselor praises self-destructive borrowers

By Holden Lewis ·
Tuesday, June 15, 2010
Posted: 2 pm ET

The head of a credit counseling organization says she's glad that consumers have irrational and self-destructive attitudes about mortgages.

The National Foundation for Credit Counseling conducted a financial literacy survey in which 15 percent of respondents said that there is "no justifiable circumstance under which it would be acceptable to default on a mortgage." (Emphasis in the NFCC's news release.)

There are several justifiable circumstances for defaulting on a mortgage and going into foreclosure. Among them: being unemployed and not making enough money to make the monthly house payments.

Are 15 percent of Americans so dumb as to believe that there is no justification for giving the house to the lender? That's scary. And here's something that's scarier: NFCC spokeswoman Gail Cunningham agrees with those people.

In the news release, Cunningham says: "Taken together, the NFCC survey data brings us some encouraging news: consumers still place a priority on making their mortgage payment, less than one-fourth think that defaulting on a mortgage is justifiable simply because the property is underwater, and a significant number take mortgage obligations so seriously that they find no acceptable reason to default on a home loan. Americans continue to prioritize their obligation to service their mortgage loan, and this is indeed good news for homeowners, mortgage lenders and the housing market overall."

On the contrary, it's indeed bad news that there are people who would struggle to pay unaffordable mortgages when it would be wiser to hand the keys to the lender and move into an affordable rental.

Cunningham's comments make you wonder about the quality of the advice that the NFCC's member credit-counseling agencies give to troubled borrowers. Lenders provide more than half of credit counseling agencies' funding. We know who pays the piper, and we know who calls the tune.

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Holden Lewis
June 17, 2010 at 2:16 pm

How about seeing the purchase as a long term debt that, in the end, even if the loan exceeded the value for a time, will almost always be a more beneficial use of funds for the home owner than renting?

You have identified the problem. There are homeowners in hard-hit areas (Phoenix, Las Vegas, Miami) who, realistically, can't expect home values to return to their nominal peaks until 2025 or 2030. For those people, it might be a rational business decision to strategically default -- especially if they had planned to live in the house until 2012 or 2015. In such a case, the bank is going to lose money anyway -- why not now instead of later?

Also, I believe my obligation to myself and my family trumps my moral obligation (such as it is) to a mortgage lender. If I have a choice between paying the lender for an underwater house for decades, or funding my kids' education or taking a better job out of state, I'm going to choose myself and my family.

Better yet, we can take morality out of it. A mortgage is a contract that says if I pay, I keep the house, and if I don't pay, the lender gets the house. The owner-borrower always has that put option, which is a morally neutral thing.

Todd Christensen
June 16, 2010 at 2:36 pm

Looking at the other extreme, what about the 23% that feel that defaulting on a mortgage is justifiable just because the home is worth less than what is owed? Really?!

That seems like a house flipper mentality, thinking only of profit and the impact on one's self only. What about the impact to neighbors and communities? Being a home owner brings inherent responsibilities to the community within which it is found. This is the type of attitude that feeds the reactionary extreme that Bjorn refers to.

The same misguided mentality, if applied to auto loans, means that you would stop making payments as soon as you drove the car off the lot. "Hey, it's worth less now than what I owe!" Wah wah wah.

How about seeing the purchase as a long term debt that, in the end, even if the loan exceeded the value for a time, will almost always be a more beneficial use of funds for the home owner than renting? Revolutionary, I know.

Holden Lewis
June 16, 2010 at 10:00 am
June 16, 2010 at 9:36 am

Do you have a link to the actual survey? (Yes - I am too lazy to look for it myself.)

I only ask because the type of response of that 15% might be more a backlash to the number of people at the opposite end of the spectrum than what they actually believe. If some people are needlessly defaulting or defaulting because of obvious fiscal irresponsibility - and then this type of behavior gets inflated by the media - people who have strong feelings about doing whatever is possible to fulfill their financial obligations and pay their debts may answer more strongly than they actually believe in order to make a point, even if they're just making that point in their own heads. That's marketing, psychology and statistics more than mortgages, but that doesn't make it any less true.

In short, an answer on a survey means a lot of different things to a lot of different people. Defaulting is indeed the best financial option in certain, but obviously not all cases, but that doesn't mean it's the best option if measured by other less tangible standards than pure dollars and cents.

Holden Lewis
June 16, 2010 at 8:48 am

I'll get to a psychotherapist, pronto!

June 16, 2010 at 8:42 am

The writer has revealed much about themselves that they should evaluate.