So I'm working on a piece on consumer borrowing, which will be out, on the Atlantic's somewhat lengthy production cycle, right around the new year. For that content, you'll have to wait for the print edition. But here's an observation that I'm not going to use: a lot of people seem to think that they can walk away from their secured debt nearly for free.
I've been following various personal finance boards and shows for months now, and you're suddenly seeing a lot of people sort of casually saying they don't want to use a windfall to pay down the HELOC, because they might let it go in a short sale next year, and they'd rather have the cash. Or people saying they're thinking of just letting the car be repo'd.
Most of these people--frequenters of personal finance boards and callers to Dave Ramsey or Suze Orman--are rapidly set straight by others. If you have sizeable assets or stong income, the bank isn't going to let you do a short sale just because your house has lost value and you don't want to waste any more money on it. The second mortgage holder you've decided to stop paying will probably block the sale. If you let the house go into foreclosure while you still have assets, unless you live in a non-recourse state, the lender will come after you. As will the lender that repo'd your car. The borrowers always seem sort of shocked to find out that yes, lenders have legal recourse if you decide to stop paying them.
I wonder if they haven't gotten this notion from all the articles about jingle mail and desperate families trying to short-sell. What seems to have sunk in is that you can stiff the bank. Yes, you can, but often only if it's not worth suing you.
Personal finance writers are trying to walk a very fine line between telling people who are forced into short-sale or foreclosure that this is not the end of the world, and encouraging other people to think that it's not so bad. I'm not sure they're succeeding. I mean, yes, a lot of people live in non-recourse states, but even then, short sales are very different, and a foreclosure is a neutron bomb on your credit report that means, at the very least, that you will not be able to buy a house for five years or so. And repos are never non-recourse except in bankruptcy.
We spent the last twenty years giving people a bad idea of how much debt it was safe to take on. Now we're giving them odd notions about the best way to get out of that debt. Are we ever going to have a healthy relationship to credit? Or is this just part of the American soul?
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