I Hereby Promise to Pay

These are the words that are on every credit agreement, whether it beis a credit card, auto loan, or mortgage. It used to be that people considered this to be a solemn pledge. This does not seem to be the case any more. In particular, many homeowners who are otherwise creditworthy folks, who actually have the capacity to make their payments, are walking away from homes and letting themselves bego into foreclosureed upon.

Before we talk about circumstances, and why this happened,s and whose fault it is, I would like to state the following: I believe that the entire credit system of the country is founded upon the basic principal that people are honorable, that they will pay their debts, and that they really mean it when they say, "I hereby promise to pay."

The alternative is a credit system like doing business with the Mafia. They actually don't even think about the morality of ayour promise to pay because they have other ways of ensuring payment. If you don't pay the "vig," some guy will come and beat you up or shoot your kneecaps.

I think that the change came along with the incredible increase in housing values in the last five or so years as well asnd the availability of 100% financing. Basically, this allowed people to gamble in the housing market.

Look at it this way. If you go to Las Vegas for a weekend, there are travel costs, lodging costs, meal costs, and entertainment costs. If you add in the $100 you loset playing the slot machines, it's just part of the total cost of the trip. If you get $100 worth of enjoyment out of losing $100, that's your choice. But the important thing is that you are playing with YOUR MONEY!

When you buy a home with no money down, you are playing with other people's money, (OPM as we used to call it), and that seems to make the difference. OPM It allowed people to make modest bets, say on homes under construction, with the thought that theyyou could close escrow six months later and immediately sell the home for more money. To me, that's gambling.

It This process usually involved some amount of fraud too, like saying, "I will occupy this home as my primary residence," when the borroweryou had no intention of doing so. Or perhaps theyour loan officer took a look at your the borrower's paycheck stubs and told himyou that heyou waseren't qualified, so heyou did a stated income loan with enough income stated to qualify.

There are better stories than that. I know a borrower — not my client — who paid $400,000 for a home two years ago. This property is in an economically fragile outlying area that is about 100 miles from downtown Los Angeles. This guy has a good job and can make the payments on his home which is now worth only $250,000, about $100,000 less than the mortgage balance.

He is staying in his home and making payments because he believes he should.

But there certainly are a number of other people who perhaps bought a nearby home on speculation. They are looking at the same kind of loss. They could sell the home for $250,000 and write the lender a check for $100,000 to make up the loss.

As you read this last paragraph, you may have not have realized that you can do this without damaging your credit. But you can, and that tells the world that YOU keep your word.

When you look at any aspect of the mortgage foreclosure mess, you will see only one thing on the table: the lender is going to take a loss. There never seems to be any proposal like this: "OK, you can send us the keys to the house, but you still owe us $60,000. We want you to sign this note for $60,000 payable over the next ten years with monthly payments of $650."

Many people, however, whether they arebe speculators who guessed wrong about the market, or people with loans that they are having troublethat they can no longer afford,ing seem to think that walking away from their obligations is morally permissible these days.

This is a sad time for our cCountry as we witness the carnage in the financial market, but what I think it is even sadder to witness this loss of morality. It is a sad commentary on our society.

So as you contemplate purchasing a home, in addition to considering the financial consequences of home ownership, make a moral resolve to keep your word.

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