Consumer Law

Times Article Which Raises Questions About Responsibility for Loan Losses

By Jeff Sovern

As bailouts proliferate, today's Times has a particularly interesting article on the impact of the mortgage crisis on one family: "Coming Up Short: The Pain of Selling a Home for Less Than the Loan."  Mike and Linda Kelly of Central Valley, California owe $300,000 on their home and want to sell it.  The best offer they could get is $220,000, or $80,000 short of what they owe.  The lender, CitiMortgage, agreed to a sale at that price, but at the last minute told the Kellys they would still have to pay $40,000 over the next 20 years, at the rate of $166 a month.  In essence, the Kellys and Citi would split the loss, except that since the Kellys would have 20 years to pay their share, Citi would bear more than half the loss.  The Kellys asked if their share could be cut to $20,000, but before Citi responded, the buyer pulled out.  One of the interesting things about the article is it conveys a sense that the Kellys feel entitled to walk away from their debt without paying it (though you can never be sure about these things because you don't know what they said to the reporter that didn't get quoted in the article).  Thus, the article includes the following:

Feeling trapped, the Kellys are increasingly angry at Citi and other financial firms. ?They damaged our economy and don?t take any of the responsibility, not really,? Mrs. Kelly said. Nevertheless, on Aug. 26, she mailed in the September mortgage payment.

Yes, Citi damaged the economy--and it looks like Citi is taking a loss because of its loan to the Kellys--but don't the Kellys also have some responsibility for their choices?  Is this a situation where the Kellys think that if their home had appreciated in value, they should keep the increase, and if it declines, the bank should bear the loss?  This doesn't look like a case in which the borrower was deceived into taking out a mortgage: Mr. Kelly works in financial services, which suggests some understanding of finance (though since the article doesn't say exactly what he does, it's impossible to be certain; Mrs. Kelly seems not to work but volunteers at a blood bank).  But there's an even sadder postscript: Mr. Kelly was laid off shortly after the Kellys sent in their September payment.

Full post as published by CL&P Blog on September 19, 2008 (boomark / email).