“Millions of Americans are now deeply underwater on their mortgage. If you’re among them, you need to stop living in a dream world and give serious thought to walking away from the debt.
No, you shouldn’t feel bad about it, and you shouldn’t feel guilty. The lenders would do the same to you—in a heartbeat. You need to put yourself and your family’s finances first.”
The amazing thing about that quote is that is comes from the Wall Street Journal!
With this article, the recent move toward social acceptance of “walking away” from a mortgage seems to have hit the tipping point. Socially, walking away is coming to be considered somewhat like divorce, it’s unfortunate but sometimes it’s the best thing to do.
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ken44 02.26.10 at 10:36 am
I’m sure many home owners who are seriously underwater will consider walking away esp. since it’s in their best financial interest. It’s not what their family/friends think but what cards the bank still holds which keeps them up at night.
In Cal. a friend asked me when I thought his $280,000 home would return to the $400,000 range (2005.)
He still hopes it will be in a few years but I suggested it will likely take 10 years assuming it returns at all.
John Wake 02.26.10 at 12:07 pm
I bet in real inflation adjusted 2005 dollars, it never returns to $400,000.
BJK 02.26.10 at 7:56 pm
There should be plenty of shame for many who are walking away. It used to be that when things got tough the tough sucked it up and got multiple jobs and did for years what was right NOT what was easy. I am especially disgusted with those who are just walking away even though they CAN make their payments. They seem proud to boast that they can turn around and buy cheaper right away because they’ve got the resources to do so.
Mark 02.26.10 at 8:15 pm
I would say this: 18 months ago, if I knew I could walk away so easily and start over again, I would have bought the biggest house on the block with the littlelest amount of money and wouldn’t have made a single payment. I probably would still be living there for free.
Michelle 02.26.10 at 8:57 pm
I’m, if not underwater, then am just floating on the water (to stretch the metaphor); my house is worth just about what I owe on it, thanks to a HELOC in addition to my mortgage.
But I have no intention of walking away from it; I can easily make my payments (so long as the prime rate doesn’t return to its 2008 levels, but even then I should be able to make the payments), so what motivation would I have to walk away?
packerlover 02.27.10 at 7:27 am
when government allowed the first person to do it, it made it acceptable. Pretty hard to stop the rest after the first one does it. I wonder what the ramifications would have been if the Feds stepped in and said, “if you walk away from your home, or lose it to foreclosure, you will NEVER own a home”?
Shift 02.27.10 at 9:15 am
Packerlover,
Why do you think this is about the government?
What kind of world do you think this is?
There is a contractual agreement between two parties. In the contract the penalty for not paying thee mortgage is to forfit the property. That is pretty much it.
Why do you want to have the government start punishing one side of the transaction?
Michelle 02.27.10 at 9:54 am
Packerlover,
So if you lose your job, or have extreme medical expenses that are not covered by insurance or inadequately covered, and fall behind on your mortgage payments, you can never own a home again? I don’t understand.
I also don’t understand what political philosophy this comes from; it can’t be liberal because liberals would never try to impose a punishment like this upon a person. It can’t be conservative or libertarian, because they believe that government should not intrude upon the citizenry or upon businesses. So where does it come from?
Lauren 02.27.10 at 2:47 pm
I used to think it was horrible to walk away from a mortgage when you could still pay. I take contracts seriously. But because my stepson is going through a short sale and because of recent news articles, I now have zero sympathy for banks and lenders.
My stepson and his fiance bought a house in Phoenix in 2006 for $236K. They split up a year ago. They couldn’t sell the house, because it is now worth $79K. The bank refused to modify the loan or lower the principal and write a new loan for either one of them, so at least one of them could stay there. My stepson (credit in the high 700’s) asked for a loan of $103K on the house, and they refused. They were stuck. The bank took 9 months to respond to a short sale offer, and then gave them 48 hours to submit new paperwork back to them. When the fiance couldn’t do that, the bank said too bad, you’ve got to start the whole process all over again. The bank finally decided to approve the short sale for $79K, fully one year after the first offer.
There was an interesting article in The AZ Republic a few months ago about how lenders lower their minimum opening bids on foreclosures at auctions on the morning of the auction, against state law. That allowed investors to buy the properties, with little competition, for much less than they would have otherwise. That and other things I’ve read in the past year lead me to believe that a lot of banks and lenders do everything they can to lose money.
RE Investor 03.02.10 at 11:13 am
The banks have little incentive to try and modify mortgages. Thanks to the “too big to fail” philosophy. Basically, if a bank were to try to modify the mortgage (good business sense) they would run in to legal issues with the bond holders that hold the different tranches of the overall mortgage. It is easier to simply “follow the contract” and allow the home to foreclose. This gives the bankers legal cover to the bond holders since they are following their contract to the bond holders and in some cases collect PMI or derivative hedge proceeds. If the bank does lose money on the transaction (their money was in some of those bonds), they simply borrow from the fed window at .25% interest, invest it in a bond and make 3%, put some in their proprietary trading desk (Wall street jargon for trading stocks and bonds for themselves) and make some good spread. Return the money to the fed plus .25%, pocket the spread and put it towards the loss. Face it folks - we, the little people have very little to do with the equation now. The normal logical thing to do, which is to cut the principal on the note or do a debt to equity modification (done regularly in commercial properties) is simply not an option on residential because of all the derivatives and chopping up of these mortgages on Wall Street. If you are lucky enough to have a whole mortgage, owned by a local banks portfolio, then you may have a shot at a true modification that is worth something because the bank truly would have incentive then - it would be their money. Otherwise, honestly, the bank actually wants you to walk away.
The real danger to keep an eye on is YOUR elected officials. Steve Pierce in Prescott darn near, single handedly caused the bankruptcy rate in Arizona to quadruple. He attempted to remove the antideficiency laws in the state. This would be a godsend for banks. They could then double dip. Foreclose on property, collect any derivative insurance or PMI insurance on the property, then go after homeowner for “difference” between homes sale price and owed balance. They would of course sell the property at auction for as low as they could get. This would boost their insurance collection proceeds, the bond holders would take the loss, and then the bank could collect a deficiency judgement from you as free cash flow. Think about that the next time you vote at the polls - especially those of you in Prescott that may read this.