It's not a bad decision to walk away from a debt that is bleeding a person or a family dry while not giving back anything substantial in return. The bad decisions were: adjustable rate mortgages, exceedingly over-valued real estate, and refusing to renegotiate terms on loans.
And those bad decisions don't rest solely with the lone-takers; the lenders are culpable, too.
First: adjustable rate mortgages. In other words: "let's all role the dice on an asset as critical as ones home." The banks are betting rates will go up; the homeowners are betting rates will go down. Cross-purposes like that practically guarantee runaway inflation on hard assets like real estate. When rates do go down, the banks scramble to change terms so as to cut their losses, and homeowners get tempted into new mortgages, effectively eating their equity at that point. When rates go up, homeowners beg for new, fixed-rate loans and banks become very reluctant to part with their existing, money-making loans. So, banks want rates to go up, but offer more loans and easier terms only when rates are down. And homeowners play the opposite game. The result? Principle never gets paid off--all the money in real estate is tied up in this see-sawing interest game.
Over-valued real estate: half a million dollars for an apartment?!? C'mon! Half a megabuck should be able to buy 3,500+ sq. ft., with four bedrooms, three baths, pool, jacuzzi, a dream kitchen, huge living room, separate den, all sitting on better than a full acre of land. Seriously. For less than a tenth of that, I'm buying a 2,800 sq. ft. home on an oversized city lot. That price is just gods-be-awful excessive. And not only should the home-owner have known that, but the bank should have, too--especially the bank! It's their job to know the value of things, and what constitutes a good deal. Both parties should have laughed at that price tag and walked away from it, leaving whoever was trying to offer that sickeningly over-priced apartment to reconsider very carefully what they were asking for.
Finally, renegotiation: bad terms do happen. Decisions that make sense one year may stop making sense years later as the economic climate changes. In the example from the story, the principle had not reduced one bit--that's a bad deal. When one finds oneself in a bad deal, it behooves one to renegotiate terms so as to make the deal workable. And, it behooves the term-holder to listen, because trying to keep someone in a bad deal is going to result in what? That's right: the person's going to walk away. Then the term-holder is left with nothing. Goose, golden egg... sound familiar, Mr. and Mrs. Banker? You can't make money when folks are no longer willing to pay you money; thus, a bad deal isn't one-sided--both parties get hurt by it. |
