In the real estate boom, many homebuyers extended themselves financially to buy a house that may have been beyond their means. With the exuberant market, people were encouraged to buy with low introductory interest rates and interest-only loans, the belief that their income would increase to meet their payments, predictions that real estate prices would never fall. As should have been predicted, adjustable-rate mortgages have adjusted and monthly mortgage payments are higher and income hasn’t increased. More people have fallen behind with their mortgage payments.
With declining home prices and interest-only mortgages, more families owe more on their mortgages than their home is worth. Financially, it could make sense, at least in the short term, to walk away. In this state of negative equity, abandoning the mortgage and the house would actually be financially beneficial.
Here is why:
If the house you purchased for $400,000 is now worth only $300,000, but thanks to an interest-only mortgage, you still owe $400,000, your net worth increase by $100,000 simply by wiping the mortgage and the house from your balance sheet. Of course, if this is your primary residence, you still need a place to live. But from this point you could buy a more affordable house or rent for a while.
There is a major drawback to abandoning your responsibilities. If you walk away, you will trash your credit rating, making it more difficult or impossible to rent an apartment, qualify for a new mortgage, and perhaps get a job.
Freakonomics addresses this dilemma (if it is a dilemma at all):
My new wife and I bought our home in Temecula, Calif., as a place for us to start a family… We bought the house in early 2007 for $445,000 and put $50,000 down… Now that the market has crashed in our area, our house is worth about $250,000.
Although our monthly mortgage payments are high, we can still afford to make them, but should we? If we walk away and buy another house with my parents cosigning on the loan (or even just rented a place), we could save almost $1,000 a month in payments and maybe even have positive equity in the next few years. If we stay in our home, we’ll be stuck for many years, and if the market ever does get back to what we paid, the best option we’ll have will be to break even with a sale and then buy another house with an inflated value.
I’m certainly concerned about the ethical side of it, and know that walking away is not “the right thing to do.” But my question is from a purely economic perspective and I’d be saving a significant amount of money by lowering my monthly payments and erasing $140,000 in debt.
What should this family do? Are there ethical considerations, or is it simply a question of math? Credit rating aside, the financially responsible option may be to walk away, accept your mistakes, and start over. But if people can simply walk away from their obligations, what incentive is there for people to buy houses they can afford and work hard to continue making payments responsibly?
New laws are now in place to help families facing foreclosure, which should encourage people to choose options other than abandonment. But they may not help every family that finds itself in this predicament. What should they do?
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{ 81 comments… read them below or add one }
I’ve heard it said time and time again that the U.S. is one of the few places in the world where it’s almost laughable how easy it is to walk away from a home. Many of the people that are now foreclosing on homes are not doing so because they can’t pay, but because they don’t want to. The mantra “my house is worth half of what I paid for it, why should I pay so much every month?” repeats again and again. I think this is an ethical question and the answer in my mind is simple – if you could afford to pay for it then, you should continue paying for it now. Unfortunately, we have a system in which buyer’s remorse is translated to abandonment and a mere slap on the wrist.
To me, it seems like littering on the side of the road, but on a larger scale: doing the wrong thing now costs everybody more, later.
The primary purpose of a home is to live in.
That seems to be one of the biggest things homeowners in this situation failed to realize (You could probably have an entire series of posts on the biggest things investors/banks failed to realize in this situation). The primary concern shouldn’t be how much the house is worth, but rather how much the house is worth to you, living in it from month to month. Even though new cars depreciate the second you take them off the lot you keep paying the bill, mostly because you need a car and it’s worth it to you, just like a house should be.
As for walking away… I can understand why people are doing it, but that doesn’t make it right. If you were viewing your house primarily as an investment and not a place to live, it’s not fair to stick the bank with the consequences of your bad gamble. The banks wouldn’t have seen an extra cent if your home appreciated by $200k, why should they lose more when it goes down $200k.
-MBirchmeier
If you need to walk away from a property then YOU SHOULD! As a homebuyer, you are making an investment in a property with the hopes of appreciation. Guess what? The bank is also an investor. When you go to them for a loan, their greed peeks just like yours does. The bank says “hmm, this person has great credit, we’ll lend them money at 7% and use the house as collateral in case we don’t get paid.” Sounds like they are investors to me. If an investment goes bad for the buyer then the same thing will apply to the lender. That’s life! WALK AWAY IF YOU MUST AND DONT LOOK BACK!
On the one hand: I don’t get to “walk away” from my stocks when they go down by 40%, so neither should someone who bought an obviously overpriced house. And this will come out of my pocket about as directly as possible – it sticks the losses with the banks, and the losses at banks are being covered with taxpayer (my) money.
On the other hand, if the system is set up that way, I can’t blame someone who takes advantage of it. It varies state by state if you can get away with it though. In some states, you would still be liable for the balance of the loan. If your credit is shot though, you might be able to do a one-two punch and declare bankruptcy to wipe out the balance. (Though bankruptcy laws are tougher than they used to be.)
There was a very interesting response on the Freakonomics blog to this question. It basically said, stop paying your mortgage. You will then get a notice of default. Once you get this notice have a lawyer write a letter to the mortgage servicer asking them to produce the mortgage. Chances are your mortgage has been chopped up into securities and the servicer will not be able to produce it. If this is the case, you will live essentially for free for a time. Then declare bankruptcy. You will not be able to buy a home for two years, but you will be able to substantially repair your credit in that time. If your house gets foreclosed, forget it. It will take 7 years to repair your credit.
I’m not saying that I condone this behavior. However, plenty of people bought high “knowing” that you can never lose in real estate. The historical data shows that housing prices essentially track inflation, the exception being the last decade. If you bought your house at $400,000 and it’s now worth $200,000 assuming 3% inflation it will take you 24 years to break even.
What would you do?
I own a house that’s underwater and I intent to stay. I don’t like people who walk away from theirs. Right or wrong, they can walk away and it makes sense for some of them to do so. Banks should be punished too for their uncontrolled greedy for quick money.
The real solution is it shouldn’t be so easy for them to walk away. Credit history should be longer at least. Banks should learn a lesson (ha, like that’ll happen) not to lend to just everyone. Investors shouldn’t invest on stuff that they don’t understand. …
The home isn’t owned by the people alone, it’s owned by the banks and in small part by the home’s residents. It’s the bank that agreed to buy that home for $500,000, and agreed to let you live in it, repaying the debt over time. If you look at it from the point of view of the BANK making a stupid decision, not researching the area, making bad assumptions about growing home values, and deciding to invest in the property, then the question of who is at fault, and what is ethically right, becomes a bit more complex. I think from a populist point of view, it would be more ethical to continue paying on the mortgage, just so that the bank can keep making its money, and keep supporting the economy as a whole. On the other hand, it’s kind of unethical to get someone involved in paying for something that wasn’t really worth what it was claimed to be worth, and forcing them to stick with it when they have no personal/financial interest in it.
One thing you have to keep in mind when just “Walking Away” you could still be held liable for the difference in your mortgage and the final foreclosure sale price of the home. The mortgage company could pursue you for the difference and then bankruptcy may be the only option.
What a conundrum…
No, it’s not ethical to walk away from a mortgage, but many others weren’t ethical in creating this mess either. Is it acceptable to tell people they should have just not bought because of the high costs? That they should have seen this in advance?
From a personal standpoint, walking away from your debt is never ethical. That’s not to say it will not be the only way out, but from the overview standpoint, the look at if, why, and when to walk away is too personal and detailed for generic answers.
I agree staying in the house is the best option for all people barring extreme circumstances only
Here is a question to ponder:
Can the bank come back after you personally to fix the $140k difference?? Say this person has $200k in 401k from his employer. If he goes into his bank sets the keys on there desk and says “sorry, I’m done with this property”, moves into a rental with his family, what are the non-filing for bankruptcy ramifiations? He could call his lawyer and work out the foreclosure process with the bank. But in any case, wouldn’t a person with ANY other assets be forced to give them up in the process of backing out of the loan(s) committment?
I feel the mortgage lender should be able to take these to cover the loan balance difference. But with this huge stimulus package, which I’m sure working tax payers who can afford a home in the first place will get screwed twice in this case 1) property value falling from what they worked for and 2) paying more taxes in order to fund the current (and probably future) stimulus/bailout packages.
It really takes a lot of time AND effort truly to educate yourself in order to make it from a paycheck to paycheck lower to middle class lifestyle, to that next level of middle-class or upper-class. There also is very little effort needed to live off of government handouts week-to-week. Here is to hoping that people keep finding the motivation to educate themselves continually and budget wisely, instead of giving up and becoming the uncaring mob waiting for future government handouts.
There is one huge problem with walking away – something larger than any you mentioned.
The problem is this: we regularly pay for things that are worth much less, immediately, with borrowed money.
We buy a car on a loan, and the minute we drive off the lot it’s worth 1/2 what we paid for it.
We sometimes borrow money to purchase hard goods such as washer, dryers, lawn mowers – which are worth less as soon as we use them.
We sometimes pay for vacations with loans (it’s a bad idea, but we do) – worthless the minute they are done.
So the problem isn’t what the VALUE is at the end of the loan. We get loans for lots of things that are worthless at the end of payment of loan. The problem is how we view our homes as investments.
Homes, typically, are good investments. In fact, buying one now may be a very good time. But thinking of them AS AN INVESTMENT is a bad thing. Why?
Well, I own a home and I own a rental property. The rental property get “depreciation”. Well…so does a home, but we don’t get to take it off the taxes, do we? I will have to pay taxes on the depreciation once I sell the rental unit (unless prices fall quite a bit more). But I don’t get that advantage with my home. In fact, I pay alot more on the upkeep of my home….so the home is actually costing me quite a bit of money to maintain.
The investment side of me says that this upkeep is paying to make the home worth more when I sell. But in this market, that’s a losing game. So maybe I should stop the upkeep? Of course, that’s quite stupid. But that’s the same stupidity that applies to walking away from a home. If you walk away, everyone loses, not just you. You may see a short term gain (net worth rises an artificial amount, and it is artificial because you aren’t actually realizing this gain), but you cause long term damage to the housing market, the community, and your credit score.
As a landlord, I would NEVER rent to someone who had a credit rating (yes I run credit checks) which had a “walk away” on it. Sorry, it’s not happening. Means you’re a huge risk.
You can continue to live in the home and then, at the end of the mortgage, you can sell the home and you’ll have equity. That equity MAY BE LESS than you paid initially. But if that’s the case, chances are the prices of many other things will be less, too….so it could be a realistic gain (house price falls 20%, but other commodity prices fall 30% – you’re ahead when you sell).
The best thing, if you’re meeting the payments, is to stay put. If you’re not meeting the payments, approach the bank and set up a rearrangement. They all do it….and with the new crappy law that just got passed, you may get significant relief (at the cost of my tax dollars). My sister lost her job and immediately drove to the bank with her mortgage, laid out the scenario, and they worked out so she only paid interest for a period of time – extending her loan term, of course. This saved her significant cost for 3 months until she found a new job, and then was able to revert to the old mortgage terms.
They say this is difficult, and I’m sure it’s a bank by bank thing….but it CAN be done.
I say difficult times need smart and creative people and solutions. Too bad our politicians, who claim to be so intelligent, are really dumb as dirt and are trying to make us all poor as dirt.
I forgot to add one part:
I never view my home as an investment. To me, it’s a place to live. I list it in Quicken at the purchase value, no more, no less. If, when I sell, it goes for less…then I will suddenly see a loss.
What got many people in trouble was that people would update the Quicken (or whatever they used – the calculator in their minds) to show the fair market value of their home and saw “untapped cash reserves”. I know this, because my wife used to talk about the untapped equity in our house. To shut her up I opened a HELOC which I never touched. I did it so she felt like there was access to capital. But in reality, the HELOC to me was an albatross. In fact, today it’s a problem because it shows up on my credit report and if I go for a refi, I’ll get slammed.
So I’m shutting down the HELOC.
Houses are NOT investments. If they turn out to be one, terrific, good for you. But treat them like one, and you’ll get burned.
One last comment:
What ever happened to personal responsibility in our nation? Our politicians have allowed us to get away with being irresponsible for so long, that nobody understands that “it’s not my fault” is not an excuse, nor is it a solution.
Blaming other people, or casting the burden of blame on others, is criminal. Walking away from a home casts the burden of blame on many other people – homeowners whose property values fall, and banks who suffer the loss of income.
It’s pretty easy in my mind, you walk away. The bank made you a loan secured by the house reserving themselves the right to make a busload of money off your back and still own your house. So fine, they can own your house. The bank would never extend any favours your way so don’t worry about any ethical considerations when it comes to paying. The rules are the rules as far as the bank is concerned, no need to feel bad for their feelings.
To those who say the homeowner gets only a slap on the wrist: No, the howeowner is plenty punished. They’ve lost all their mortgage payments so far, their home, their credit, etc.
Think about it, it’s $100,000. I could buy the average American’s labours for 2 whole years for that much.
I think they should walk away and rent, not take out another loan on the parents’ credit. I’m boggled as to how someone would still want to borrow money after this experience. Now as far as ethics, I guess the ones that apply in this case are just like bankruptcy. It’s legal. I don’t see that people think it is a big deal (I do). If I were forced to do a bankruptcy, I’d do so, but I think it is taken very lightly. The main point of bankruptcy’s existence is that the debtor does not have to pay his debts. And that is a big, loud point that means that is a fact, even if one does not file.
As far as the incentive of others to keep up with obligations and live within their means, when many of their fellowmen do not, I don’t entirely understand the relationship. People define themselves by their own behavior.
This person says they can still afford to pay the mortgage. So where’s the debate here? He should continue to pay. All the arguments about the banks making money off of borrowers, or making poor business decisions doesn’t erase our responsibility to live up to the terms of our agreements. Two wrongs don’t make a right. This person – apparently of sound mind and of his own free will – promised to pay, and is still able to do so. He has NO business walking away from that contract and sticking the taxpayers with the bill just because he’d rather not live in a home that’s worth less than he wants it to be worth.
If the family were truly unable to pay, that would be a different story. There’s absolutely no excuse for the person in the example to walk away.
I think the bigger concern is, a year down the line, after the home is foreclosed upon and is sold by the bank, are they going to come sue you and demand the difference? Chances are they are in most states. What would you rather have a $400,000 loan on a $300,000 home or, a $155,000 unsecured loan owed to a bank because you left your home, and it was sold at auction for less than the retail value?
Kyle: I don’t understand why there are two wrongs. There are no wrong with walking away. The bank agreed to everything, just like the buyer agreed to everything. If the buyer lost their job and couldn’t pay then the bank gets to fire-sale the home without regard for the buyers well-being.
If the bank lent the buyer 100% of the money for the house then how can the bank not have the vast majority of the risk? The bank exacts an interest in payment for the risk and profit on top of that. I would not for a second bust my hump and sacrifice $100,000 to preserve the bank’s profit. Remember, the customer is devastated too.
The bank should have lent then 50% or 75% of the money so the risk would be much less to both. The buyer shouldn’t have done it. Now they both learn.
Here is the answer to your question. With a question——-
Did you sign a contract or other paper with your personal signature (which gives your honor, and your full faith and trust) when you bought the house, thereby agreeing to pay the loan in full? If you DID NOT sign such paper(s) you have no obligation and can walk away anytime. However if you executed the contract with your signature, then you are obligated to discharge the loan in such manner as you will fullfill your agreed to terms. Another course of action is your proving that the contract you signed was in some way illegal or flawed.. This would require a real estate/banking lawyer to examine and present the flawed mortgage contract to the court. In the case of an illegal contract you would be set free of the responsibility of repayment, and could exit the home free and clear of the mortgage.
H Spencer
Wow! I think that even just terming it “walking away” sends the wrong message. When you buy a house, get a mortgage, you sign your name to a legal contract. You are purposely determining that your name is mud when you “walk away”. The fact that it is 2 years before you can buy a new house, or 7 years before your credit gets cleared, or that the bank may have lost the papers is completely irrelevant.
I can’t believe that I sound like a conservative old fart ranting about personal responsibility, but as a young, progressive, liberal, I believe that if the fabric of legal contracts frays so much that people believe “There are no wrong with walking away.” from a legally signed contract, then civil society is not possible and debtor prisons will return.
@Customers revenge:
The whole system works because it relies on people to meet their agreements, if they are able to do so. For the most part, laws of this manner are there to protect the customer when they *can’t* pay, because you’re right the banks would take no qualms about suing you for the difference if they had to foreclose upon your house if you lost your job, or were for some other reason unable to pay. Therefore various laws exist to prevent this from happening.
But taking advantage of laws designed to protect those in hardship when everything is going just fine for you is no more ethical than the banks going after those unable to pay for the difference on their homes. You agreed that the house was worth a certain amount, and agreed to pay the bank. Perhaps you should have done better research before agreeing to pay, or agreeing how much the house was worth.
IMO the worst case scenario in all this is if to many homeowners able to pay their mortgage stop doing so willingly, the banks will lobby to remove the customer protections that are being abused, leaving those that are truly unable to pay vulnerable.
-MBirchmeier
As I pointed out (for those of you who advocate walking away and renting), good luck renting. Once your credit report shows that you walked away, you have no shot of getting a decent apartment.
Walking away is a terrible alternative for many reasons. It should be a “Last Resort”…no other option is left.
Customers revenge takes a typically Marxist view that the banks are making money off the back of the mortgage holder, and won’t do him/her any favors. Incorrect. I have found my bank(s) to be very helpful in difficult situations. The view that the banks won’t assist is true in rare, very rare, cases – particularly today.
The whole system (actually any system of economics) is based on trust. Marxism relies on people trusting each other to “give what they have and take what they need” – something we know is impossible. Socialism relies on people trusting that the government will provide properly and fully what the nation’s needs are – something we know is impossible. Capitalism relies on people trusting that contracts will be upheld and fulfilled – something we know breaks down from time to time but is generally correct and will occur.
Interestingly, it is at moments of crisis that anti-capitalists cry that the system is “broken” and can’t be fixed. Capitalism and markets do go through moments of crisis, true. But that is why we have a diversity of methods of investment and savings – we can prepare for the bad times. Sadly, very very few of us do. So when the bad times come, we choose to BREAK THE CONTRACT and thus break the system, and call for alternatives.
No alternatives work properly….yet we clamor for them. Why? Because in the 1% of the time that the system does not work, we panic and view the alternatives as fully functional, ignoring their long history of dysfunctional behavior. The safety these systems represent is not matched by their history.
Break the contract, break the trust. Break the trust, break the system. Break the system, and 99% of the populace loses – politicians gain, and we’re all worse off for it.
I am told that in capitalism, the rich are the only ones who benefit. I respond, when the government gets involved, only politicians benefit. What’s the difference? When the market is applied, lots of people get a piece of the pie. When the government is applied, corruption increases and only a specified few get a piece of an ever shrinking pie.
Good luck with all that, you folks who intend to walk away. You make it worse for yourself and you make it worse for everyone.
The very thought of walking away from a legal and binding obligation is unconscionable to me. When I signed the papers for my mortgage, I committed legally and morally to paying the money back. If I were to lose my job I would find a way to continue to feed my family and pay what I promised to pay. In this country it can be done. People are not willing to work hard enough to make it happen.
The people that consider walking away from this obligation are no better than Madoff, Charles Ponzi or Allen Stanford. I would propose that laws are introduced that are similar to child support (just because you lost your job doesn’t get you off the hook) that require a “earning potential test” prior to relieving an individual of the obligation to pay back loan. If they don’t pay it back, they should not be allowed to have a mortgage ever again. When someone makes a promise they live up to it. Businesses, CEOs and now irresponsible homeowners are now entitled to a get out jail free card with a bailout. Stop the insanity!!!!!!!!!!
Rick: You find the banks helpful. I do not. Just have a look at my website for 2 pages of personal experiences that I’ve had with the banks and other financial institutions that I deal with (type “bank” in the search box). I deal with 3 banks. One is great, two are not. I have 5 mortgages, an unsecured line of credit, a HELOC, 4 brokerage accounts, and accounts with investment companies. So I think I have a lot of experience with banks. In general they are filled with the lowest possible level of service, they tilt every advantage towards themselves, excepting the initial efforts to get your business they are not compassionate or honorable at all, and they frequently go against the spirit if not the letter of their agreements if it suits them. Since customers have nowhere to go they can be bullied easily by banks.
It just doesn’t make sense for a person to work for a house that is worth 100K upside down. It might take 10 years to pay off 100K, which is maybe 15% of a lifespan! Are you saying it’s reasonable for a person to be enslaved for 15% of their life? Nobody denies at all that the purchaser was stupid and “walking away” is an extreme letdown on the system. But a person only has one life. I’m looking at this practically. Everyone should keep all their promises, there should be no lawyers, a handshake should be good enough for anyone and all doors should have no locks on them.
If I’m a shareholder of the bank that made such a loan to a person with 100K upside down then I authorize my bank to reduce the loan amount to at most, the value of the asset.
I’ve dealt with far more banks than you. Some bad, most good. If they are bad, I transfer funds or change loans. There is NO REASON to deal with a bad bank. I have helped my mother out of a bad mortgage by taking on her bank head on. It was a bad bank.
But, by and large, I deal with only 3 banks right now and all 3 have been excellent. Sovreign, Hudson City (a local bank) and BofA. I have encountered minor glitches. In each case, I have had them remove fees, return money, or reduce debits that I felt were improperly assigned. Each one was very willing to work with me when I was unemployed 2 years ago (luckily I didn’t have to do anything).
Taking a bad attitude into any relationship will guarantee that you fail. You seem to have a bad attitude toward banks. I am sure the people who service you recognize this and react accordingly.
As for walking away, YES I DO ADVOCATE STAYING. Why? Did you ever buy a car with a loan? Why did you continue to keep the car and pay the loan? Were you “enslaved” to the bank who held the car loan?
The concept that being underwater is a bad thing is based on flawed logic. If you’re meeting the payments, and there are no issues, then walking away is flat out stupid. As my wife says “I can live in a house, I can’t live in stocks or bonds”. A house is NOT an investment while you live in it. It is one when you sell it. So you should maintain it like it is an investment, but not manage the value like one. Sounds like a conundrum, and it is – people who view houses as “locked up capital” are fools who string themselves out. And now we see how their behavior is hurting all of us.
I have managed my finances efficiently for 30 years. Today, I am in debt only with my mortgage. Yet I will be paying, because of my financial acumen, for all the fools and nitwits who strung themselves out or walked away from their underwater homes. Is it right that I did everything correctly and the government is going to penalize me to benefit the foolish?
Is it right that someone who can walk away from their home does so – thus lowering house values and further damaging credit markets just because they are unwilling to live up to their obligation?
No it’s not right. In fact, it’s flat out wrong. Only a fool who got himself into trouble would further that foolishness and walk away. Bad decisions multiply with people who have no concept of how to manage their affairs properly.
As I stated, walking away is an option ONLY if there is no other. If you’re meeting the payments, even if it takes 15 years to pay off the mortgage you should stay. Why? For several reasons I’ve already stated:
1. No landlord in their right mind will rent to you. If they do, you’ll likely live in a pretty bad apartment.
2. Your credit will be utterly destroyed. It will rebuild, but in the meantime you may not be able to find a job. I do credit checks on all my potential employees, as do most companies. Good luck getting that job if you walked away.
3. You have a contractual obligation. You may laugh at the obligation because you’ve “lost value”. But when you were gaining value, the bank didn’t ding you for the extra value you were potentially collecting on, did they? So, when the market turns against you it’s the bank’s fault? Yes, I can see how your logic works. It’s only fair if it works FOR ME. If it doesn’t work for me, it’s someone else’s burden.
Point 3 is the reason I fear for our country. People like you feel personal responsibility is something that is not honorable or valuable. You feel that every major company is “out to get” you. If you face any difficulty or stress at all, you will push it off on others because it’s “not my problem”. You don’t want to be “enslaved” by a bank. I’m sorry, but no bank has enslaved me – even if my house is underwater. And mine was back in 1992. I was $20,000 under on a $140k home. I guess I should have walked away – right? I still own that home today, and I own another along with it. Had I walked away, I’d probably be in much worse condition than I am now.
If you were a shareholder in a bank and authorized such a move, then that’s a bank I would not work with. It is clearly being mismanaged. The best solution, today, to people suffering from mortgage difficulties is to extend the life of a mortgage by 10 to 20 years. It will reduce their monthly payments significantly without having to touch principal. That is the fair thing to do.
As for lawyers, while I’m no fan of them, I disagree that a handshake should suffice. I’ve done that twice. It hasn’t worked. Thankfully I’d never do it on anything meaningful. It’s people like you who make the handshake worthless – if you’re willing to walk away from a home underwater, then there is no value in your handshake, is there?
@Customer Revenge:
a. We know what happens with the economy and a lot of people who have nothing at all to do with banking business when people follow your advice. As it was mentioned above by Rick and Emily and others – do you really want to live in a society when legal contracts don’t mean anything?
b. Why do you view a bank as a single individual? There are a lot of people working for a bank, most of them aren’t involved in any decisions regarding mortgages. For example, all the programmers and DBAs who don’t even work with people. Additionally, even a reasonable mortgage could be upside down – e.g. if the prices drop by 50% or more.
c. “If I’m a shareholder of the bank that made such a loan to a person with 100K upside down then I authorize my bank to reduce the loan amount to at most, the value of the asset.” Well, I don’t. Assuming the bank does what you say and the value of a home goes up again, why should the owner be the one to get extra money? Real estate values fluctuate, they hardly ever go up in a straight line. Being upside down for a period of time is perfectly normal – a lot of condo and co-op owners on the East Coast were upside down in mid-90s, even those who gave 20% down. So, according to you, every time real estate prices go down, the bank should make “gifts” of 100K to everyone? Because this is what this is – a gift. How would banks make money then?
d. I used to rent out – I was briefly upside down on my previous condo in the 90s (that I had bought with over 20% down), but instead of selling with a loss, I rented out and “upgraded”. I agree with Rick – I would never rent to someone who walked out on his home. If the person failed to return his debts once, how could I trust the same person to pay the rent on time e.g. if this person loses his job or just decides that the rent is too expensive. Landlords aren’t in charity business. Landlords have their own mortgage on the home being rented as well as other expenses. So the landlords can’t afford to rent to someone who failed to pay even once.
I also agree with posters above in that a house isn’t an investment. It is a home. If you can afford it, you shouldn’t worry much about how much it is worth unless you have to sell it.
BTW – it was fairly obvious to everyone with a brain that the real estate prices were in a bubble. Even if most of us missed the effect this bubble’s collapse would have on the economy – most of us didn’t know much about CDOs and such, it was fairly obvious that the housing prices would have to fall eventually. So if someone went ahead and bought at the top – they should take responsibility for it and continue paying. Asking the bank to bring the loan value down is about as ridiculous as my asking to buy a stock from me at last year’s prices.
Situations change and in life we have choices. Banks were duping folks into shoddy loans and people were walking right into the dog $hit and not over it. Some purposely. Both parties are to blame and frankly, each situation is different and warrants different treatment. Still, it’s just time to pay the piper. Let’s just all suck it up and move on.
For those asking questions about states and bank recourse laws, I write a post about it here: http://bit.ly/11Uyb6 Scroll down to the middle for the state by state list/chart.
In response to Matthew Paulson:
In CA, you are NOT held responsible for the deficiency. It’s CA state law… and, in my opinion, crazy.
In any case (or state), most lenders don’t pursue deficiency judgments because legal fees really eat into the potential profits. A certain percentage of borrowers wouldn’t be able to pay anyway. I also imagine the lenders are swamped with foreclosure proceedings and auctions, and just can’t handle intensive work to pursue judgments.
I am a Gen X-er. Growing up, the mantra I heard from my parents is that if you wanted something, you had to EARN it. However, it seems like the mentality in this country has shifted from EARNING to DESERVING. People stopped waiting until they had the capital to buy something and jumped in to get that designer purse, new car, or new home because heck, they DESERVED it, regardless of ability to pay.
So, it comes as no surprise that some people now, finding that the investment they made is suddenly worth less, they DESERVE not to have to pay it.
Everyone took risks here: buyers, the government, and banks. Why are banks the only culpable party in so many people’s minds?
I find this morally reprehensible. No one complains when the value of an investment goes up and they profit. When stocks or real estate investments rise, no one asks for anything. But the minute the investment is worth less, some people find that they “deserve” a bailout. Investments go up, and sometimes they go down. A contract is a contract, and once we, as a society, shed the notion of personal responsibility, that the agreement of terms should be null and void, we have lost any sense of civilization.
Well if you’re a homeowner I can’t understand why you would want the guy to walk away, you should want him to stay and if he can’t afford to stay to be able to restructure the mortgage with his lender (which the new plan will try to do for some people). Because if he walks away the housing market just crashes further and it means your house will become worth less. Personally I don’t own but may want to if the market crashes much further so I hope people walk away. I was upset about the mortgage plan because it will help prevent some of the crash that would happen when more and more people walked away from their homes. Right now home prices are still way too expensive historically and have much further to fall. Without doubt they will continue going down, the question is how much will they overshoot on the downside and if more and more people walk away they will overshoot to the downside by a lot.
Kitty:
a) Legal contracts mean a lot. This is a very very special situation and THE PERSON WALKING AWAY is not walking away scott free. They _are_ tarnished and they’ve lost a ton of money.
b) The bank is a single “person” with whom you have made the deal. It is a system that is designed by the leadership. I don’t blame any of the front line individuals for anything. And you mention that even a reasonable mortgage can be upside down: Very very rarely. The houses only crashed because of the bubble, and even if the did crash to 50% the bank and the individual would have risked similarly and lost similarly.
c) The bank makes a ton of money off mortgages. Banks are cash cows. They take on very little risk (except over the last few years when they lost their minds) and lend back your own money to you. If you have $1000 in deposit and a mortgage, about $9000 of your mortgage is enabled by your own money. The bank charges you say 5% on $9000 = $450 per year, and pays you about 1% on $1000 = $10. So the bank makes 4500% profit from you. THEY ARE MAKING PLENTY PROFIT. You should not feel sorry for an institution that screwed up such a good and easy deal by being greedy enough to lend 100% of the value of homes that were valued at an all time high.
d) I agree with you. I have 8 rental units and I would choose bankrupt people last, for sure, no doubt about it. I think you’re not seeing it personally.
I somewhat agree with your last statement. But I reiterate, the homebuyer is destroyed, no scott-free. And as for stock investments, the bank manages those risks better typically. The loans are made with stocks as security, just like the house, and if the stocks drop too low then the loans are called in. The investor is forced to sell the investments and is left with relatively a small loan to repay relative to their whole portfolio, not a whopping negative $100K for someone who might make $50K per year. It isn’t the same.
I say that the bank should lower the loan as a shareholder because I would like to recover the money. I would not expect the buyer to stick around so I would want the bank to reduce the loan. Perhaps the property will increase over the life of the loan and the bank can recover it. It’s a more sane situation.
Rick: “It’s people like you who make the handshake worthless – if you’re willing to walk away from a home underwater, then there is no value in your handshake, is there?”
I see you’re misunderstanding me. You believe that **I** would walk away. I wouldn’t. I have never. That’s because I would not have taken that loan. All my mortgages are on houses that are worth more than when I bought them, and none of them are higher than about 70% of the current value.
I just have compassion for the consumer who lost $100K and I do believe that many people were literally sold on buying a house that was too big for their means. The consumer is at considerable fault and responsibility without a doubt. But consider that the banks are full finance professionals, and if professionals advise you of something, especially when charging you for that advice, then that weighs heavily on your decisions. A guy in a suit with a computer and charts tells you that your debt service ratio is well within affordability and you should get the biggest house you can to take advantage of rising values and tax breaks, giving you pamplets and contracts full of legalese, explaining the details of complicated payments and interest rates that change over time. At some point the average person is at a disadvantage in knowledge and has to TRUST the banker. That’s where the banker’s responsibility comes in. A person decides to buy a house, then their advisor team helps them to structure the details. That includes the realtor, banker and lawyer plus the media in general. When all these geniuses and experts are saying the same thing then it takes an above-average person to say the opposite.
Many many people don’t understand compound interest for goodness sakes. They just get strung along.
I do understand your point about continuing to pay when you’re upside down a little and are going to live in the house for many years until you can get caught up.. The property will likely appreciate and you’ll accumulate equity until it’s positive. Consider it rent. But if a person ever had to move they would be screwed at that point anyway.
Nice hot button topic. Lots of strong feelings on this.
I don’t have time to read all the comments above so I apologize if I repeat another’s sentiment.
What strikes me is how we encourage corporations to be unethical by shirking their contractual obligations. Think of all the encouragement to have GM get out of their contracts by filing for bankruptcy. But individuals are supposed to have ethics when it comes to making financial decisions. As a mortgage-paying home-owner, I will continue to pay. I’m not upside down, but I understand why others might just walk away.
The same thing seems to apply with jobs and lay-offs. Employees are supposed to be loyal and work hard for at least a few years, but companies lay some people off right after hiring. Also, they often quickly resort to lay-offs to improve returns in the near term.
Being a site typically frequented by folks that are fiscally responsible, I am not surprised at the commentary. But I am surprised at the lack of a pure financial analysis of the situation versus the ethical soapbox rants.
Above “Steve” wrote to say that he cannot walk away from his stock losses of 40%, why should these folks be able to walk away for their houses that far under. It is an Apples and oranges scenario Steve-O.
Stocks, if down, you don’t continue to buy them at the old price, you cost average down. One cannot do that with a mortgage, they continue to make payments on the original loan value. It’d be like continuing to buy shares at 60 when the stock is at 30m and doing so every month.
Who would do that? Is it not the classic good money after bad? I currently am doing exactly that with my mortgage (purchase price of 750k, 600k mortgage 300k Zillow value as of the other day), but evaluating my options to stop that hemorrhaging.
I did make the bad investment of buying at the peak in the Bay Area, but I did not speculate, I bought the house I could afford here, and I can still afford to hold. But should I? (CA is non-recourse on a first mortgage)
All in PITI I’m paying 5k/month. I could probably rent a house on my block next door for 2k/month and invest the other 3k.
I do have impeccable credit 800+, that would be ruined, but I’ll be building a healthy cash cushion, and probably be able to hold some of the cards I own and pay in full every month – so even if they jack the interest rates – what do I care, I never pay any.
I haven’t decided what to do – but I have yet to see anything that makes staying a better financial decision than walking away, and improving my balance sheet by 300k, and then using the savings to build up my cash assets.
The big risks would be:
Unemployment – This one is scary – but I’m in a stable job/industry
Ability to own a house again – building my cash for future huge down or outright purchase is my offset here (plus I think the stigma and lender view of this era will be different than in the past)
I’ve seen some write of an underwater house like an underwater option – don’t exercise it (walk away) – take your loss (in this case my down payment of 20%) and walk away. As of now – this is the way I’m leaning.
I’m not asking for a bailout – but will happily take it if they do anything around principal write-downs, as it would eliminate me making this walk away decision.
From the banks pure financial perspective – one would think the bank would prefer to reduce the principal on my mortgage and keep me paying them with interest (albeit on a reduced figure) than foreclose, not get payments for some time, spend money on the foreclosure process and a sale and then get the same amount they could have reduced my principal to back from the eventual foreclosure sale.
I appreciate the domino effect of such action by them, but I’d make the case that the financially wise decision may be to mark these assets to market on their books and lock down these lower risk revenue streams they can hang their hat on – versus thigns they truly cannot value properly. It will be interesting – do I wait for this mark to market principle write-down scenario to happen (if ever), walk away, or put my head in the sand continue to bleed financially – that is my dilemma.
I don’t need sympathy, I don’t need ethical/moral rants, but I would appreciate financial discussion – are there dimensions to this situation I am not considering?
It seems to me that contracts are binding when we feel like they should be. Marriage is a contract, and how many people honor that? There are people on contracts at work who just walk out.
I agree that people ought to take contracts more seriously, think smarter about their decisions and the possible consequences of their decisions, and then live with their choices. But I think this lack of respect for anything but “Me” is woven very thoroughly throughout our culture. Individual rights have taken over, and I’m not sure it’s for the best.
We bought our house at the height of the market with a 20% downpayment fixed 30 year loan. We did everything right but got caught in a very bad situation. House prices in our neighborhood fell more than 50% and the neighborhood is getting more crimes. When we first moved here, it was nice and safe. What would you do if your family’s safety is suddenly compromised? A lot of places have become blighted from this crisis. We weigh heavily on this decision. Stay on and live in a rapidly deteriorating neighborhood with no hope to even breakeven in 10 years. Or walk away now, start saving money again, start living in a safer area immediately. There are so many things to consider. Most situation is not as clear cut as you think. Don’t judge until you know what really goes on for the walk-away families.
We moved to Temecula in 2006, bought a house for about $550K which now is only worth about $200K. I lost my job in late June of 2008; my company was one of the first casualties of the economic breakdown. While before I was able to contribute to our obligations, now my husband has to single-handedly support three kids and an unemployed wife. With 4 mortgages to pay (2 homes) and all the other obligations, and not to mention deteriorating stock values, we have slowly eaten away at the kids’ college funds, 401K and other liquid assets just to try to keep afloat.
Like many others, we face the dilemma of making a moral decision vs a financially sound (or practical) one. Do we continue to bleed profusely until we’re sucked dry so we can say “we did the right thing?,” or should we walk away now while we still have some money in our pockets to ensure our future and, more importantly, the future of our kids? It isn’t an easy decision to make, but one has to be made. (This situation only applies to the home we’re currently occupying. The other home is also upside down but the mortgage is still somewhat manageable.)
To be sure, we had every conversation possible with our lender to try to find a workable solution to our situation only to be told each time they can’t do anything for us. The rule that the borrower have to be behind on their payments before they can start looking at a modification is absurd. We haven’t been behind, nor did we want to. We waited for what the stimulus package would do for us responsible borrowers only to find out we still wouldn’t qualify for help.
For those of you who are quick to make judgments on the “walk away” people, having a better understanding of an individual’s situation, would you still insist on us staying in our home and “do the right thing” so that you and your interests would not be affected?
I agree, and disagree with homes being an investment. I consider it an investment on the grounds that I am working towards something that will one day be paid off. Meaning I will not be paying to live there anymore (minus expenses of course) – where as if I rented for 40 years I would be in the exact same place I was.
I disagree with it being an investment when you start ‘tapping into equity’, because too many people get into trouble with it. They start raving about what they could do with all that money instead of asking whether they should. If things go badly, and they get into financial trouble the house is gone which is not a situation I want to be in. Ever.
While, I would not just ‘walk away’ from my obligation to pay my mortgage.. I still think it’s funny when people make ‘unethical decisions’ that effect lenders or creditors. We all know what good upstanding, and caring people they are. : )
We bought a home for a modest amount 50 miles form employment, because we did not want to be house poor, shortly after purchasing the price of the new homes in my development doubled, now they have plummeted to half of what I paid for my home (I paid $250,000, the price my neigbors, who are moving out paid was $500,000 and these homes are now worth $125,000) We did not sell when the price went up, we however were growing concerned, we loved our home and we loved our jobs. We were content.
At this point we are about to lose our jobs because the compamies we work for are going out of business.
Now I feel we did everything right, as we were suppose to, but I am very angry that the people running our banks were so consumed with greed that they have caused my hardship (and they are still living large) I have been thinking of walking away because the jobs have moved 300 miles away, but I do not want to ruin my good credit. I have never made a late payment on anything, I have also never been this angry. I want to walk away very badly, I could get that new job easily, but do not know if moraly I can.
I think those of you that speak of honor and morals and make blanket statements are misinformed to all that is going on out there. The only dishonest folks I see are those at the banks and investment companies.
If these folks running reputable companies are out for themselves, then I am doomed if I don’t look out for myself and finally do what’s right for me. I see this as a whole new way of life, where morality and doing the right thing are a thing of the past. That’s what the banks have opened the door to without much thought to what they were unleashing. You would be stipid if you did not adjust to the new way to survive in this new ruthless society. Another fallout will be that when we do get back on track, companies and products will be under a much bigger scrutiny. It better be good before we do business with them ever again.(One of the first things I did when my bank went under was switch to a credit union.)
@Linda, Rock and a hard place:
I don’t think most people are faulting people for walking away due to circumstances outside of their control, health issues, job loss etc. People who walk away because they are unable to keep up their end of the bargain have likely faced tough times and are making the option they feel is the only one for them to make.
But the situation in the story highlights a different group of people. Those who have not experienced hardship, and can still afford their homes, but they’re walking away because their home has gone down in value, not because they fell upon hard times. Especially frustrating when these people have the money for a sizable down payment on a new home that they buy before foreclosure and the hit to their credit rating.
-MBirchmeier
I just don’t get the thought behind walking away from a mortgage. If you signed up for it and it is within you ability to keep the house (barring selling or foreclosure) then a person with good character should stick to their contract and pay no matter what the economy.
@MBirchmeier – I agree that many people here missed the point. To reiterate my first comment, the story is not about economic hardship, but about buyer’s remorse – i.e. we can pay, but why bother if we can move and save money?
On the other hand, if walking away is the best option for your family based on your circumstances, then that’s what you have to do. But there are many people contributing to the problem that have no hardships at all.
I commented before, but the truth is that I don’t understand how this walking away is done. Legally speaking.
@Linda I don’t fault you for walking away, and I think there is a morals and integrity problem if you don’t take care of yourself and those who are important to you. This business about justifying the walking away only for those who are in hardship is nonsense. I don’t think it’s justified to wait to be in a state of hardship if you can save yourself. To do so is just plain foolishness. Nobody in this mess is superior, morally or otherwise. The majority were unthinkingly going along with the prescribed mindset of using credit, getting goods without the ability to pay for them, and putting complete faith in future income and the capitalistic system. For instance, you didn’t want to be “house poor”. To my way of thinking, owning a mortgage makes you poor period. I personally don’t feel I have enough faith or psychic ability to pledge income for 30 years, and never have.
You feel you did everything right, as you were supposed to. That means the way you were taught, according to the system and “conventional” wisdom. Having you walk away is the price the system will pay for what it has strongly encouraged. It goes with the territory. If you’ve done something wrong, it’s that you didn’t think for yourself sufficiently, and I don’t see how others can resent you for that.
Linda: I agree with you about the banks and their leadership. How much was the downpayment on your house and how much are you upside-down?
MBirchmeier mentioned that some people buy a new house before walking away on the old house. That activity is something I disagree with. The bank can never be expected to make a proper risk assessment if they aren’t told the facts. However I’m surprised that the bank with the foreclosure could not sue the homeowner for the difference if they walked away without declaring bankruptcy.
Given the right circumstances, I would walk away in a heartbeat, and yes, either rent or buy before it reflected on my credit. Banks play hardball and you should too. It does not surprise me that banks bought these loans, dissected them into a million pieces, paid credit rating companies to “high” rate them and passed them off to investors near and far. But wait, that wasn’t enough! Banks then made bets on them with YOUR MONEY. Is that ethical?? Makes no difference if I walk away or not, I’m the only one suffering here. My bank is going to the government for the bailout money (read “our money, our childrens money, etc) which they will get no matter if I suffer and stay in my home or move. It’s the same as their credit card scheme. Come on in at ZERO percent and then…… Not like it use to be in the old days when you actually did business with your bank, and people actually expected to live in their houses until the house was paid off. And this stimulus to help home owners is a joke.
I must admit that I did not read all thundering amount of comments.
In Malaysia, when one takes a housing loan, not only is he bound hand and foot, but his estate is also bound. Not even death will release him / her of the loan liability.
If our loan is upside down, and we have to sell, then woe betide us. We have to make good the difference. It is not only our credit rating that is thrashed, rather we also get thrashed by being dragged through the bankruptcy courts.
I am really surprised that it seems so easy to walk away from loans in the US.
Wow, I see my situation is definatly not singular. We bought a home on a 80/20 and paid the second off as soon as my old home sold. there went $45,000 i’ll never see again. That left $198000 on a home that now is worth $125000 at best. I refinanced, before this crap happened, with an ARM, thinking we could refi in two years( as the home appreciated within a week at first) into a fixed loan. Guess thats not happening now. My ARM will come full completion in less than a year, meaning my home payment will be over %60 of my take home pay. National average states that %18.5 is normal. Will my greatgrandpaerents be dissapointed if I walk away? Who cares? They didnt leave me any dowery to live on. It’s been stated that banks will work with you…LOL….tell me another. The answer I got was ” just gonna have to pay your loan” Duh! I tried to talk to the person to figure a course of action other than forclosure. I don’t want my credit rating to be bad and i’ve been through a bankruptcy before.( took years to restablish). Maybe most landlords (archaic term, if there was any) will not rent to you but I see lots of home rentals owned by folks that are reasonable . I doub’t all of them go on electronic character alone. My guess is if they know my reasons and see the money is there to pay…they would rather make money than have an empty house thats costing them…unless they are wealthy and have no need to really rent it. Maybe if I rented a BMW and meet them at the rental house, then they would not question my ability to pay..mmmmmm…or would I be better off finding a rusted Pinto and fill it with the neighbors kids?
In closing, I have tried to walk the line and do whats right. I have tried to reach an understanding with the lender. I have tried to refinance( yeh, like any bank will touch an upside down home). i’m looking at my kids and wondering how i’ll support all thier needs and still be able to save for some kind of retirement (alsa, my 401 is mortally wounded) on %40 monthly pay. Doesnt take a brain surgion to figure out that my options are limited. But then again…we have the Messia now to cure it all…ok! No politics. Good luck to the rest of you.
“it’s not fair to stick the bank with the consequences of your bad gamble.”
Isn’t that what they are doing to their customers, the taxpayers? It may not seem fair, and isn’t, but turn about is fair play.
Interesting series of comments but I’d like to suggest that the morality argument is specious.
Given the consequences of “walking away” , and the state of our economy, I question if very many individuals choose to abandon a home when they can afford the payments merely because it has become a poor investment.
The individuals I know (and know of), who have lost homes to foreclosure were laid off, self employed and business has fallen away, or have changed circumstances due to health or health of a family member.
L
Whoever said “I’m in a stable job/industry” is delusional. There is no such thing anymore. I used to think the same thing, til Fri Feb 13.
Anyway, I still don’t understand the American house obsession/fetish. Renting is still held up as failure. “Oh you’re just throwing your money away.” Well, so are you: it’s the ITI in PITI. Sure part of my rent covers my landlord’s ITI (though I doubt it covers the entire nut), and he can try and raise the rent every year (good luck with that this time, pal), but I have the option to move somewhere else at the end of the lease, or even before then if I find a job out of commuting range by paying him an extra month’s rent.
How many buyers live in a house long enough to actually own it? I’m sure now more people are going to stay put, out of necessity, but the serial buyers/sellers/re-fi’ers of the past 15 years never accomplished anything more than renting from a bank, and losing their down payments assuming they made one, so I think I’m ahead for now. Prices are still falling, and at some point I’ll see a bargain too good to pass up, and then I’ll buy it with about half cash, because that’s what you do when you rent and aren’t overextended and underwater: you save money.
As for walk-aways, yes, most of them should never have been offered the mortgage in the first place and lenders went quite insane with disregarding decades of risk and lending standards, but then nobody had a gun to their heads when they signed the papers, assuredly without reading them, so there’s blame on both foolish parties, but in the end the mortgagee bears responsibility for completing the transaction (and don’t get me started on HELOCs and cash-out refis blown on Hummers, Harleys, luxury vacations, home-theatre rooms and granite countertops, etc. Those things are worth zero).
Is it wrong for my wife to buy a home on her own for a great value during this housing slum.. while I file for bankruptcy and surrender the home we currently live in that is in my name only ? I’ve lost my job , I have 20,000 in CC debt(My name only) but we are keeping afloat since my wife works, but we can barely make mortgage payments, let alone MY credit card payments ,and we are definatley underwater in value of the home, and have had to tighten up on spending etc.We ve thought of a loan modification but my wife really doesnt want to continue living in a house that is underwater in value, beside she is not on the title. I know people will debate walking away but i look at like this , No one is looking out for us but us, so we gotta do whats best for my family to keep up with this economy. Wall street certainly is with all the bailout money, which is a joke. It’s survival of the fittest. pluss the thought of having a bigger home at a lower mortgage payment that we can afford sounds like common sense to me. Plus the home is in my name only so its only my credit that is gonnatake the hit, and i can start rebuilding it right away by adding my name to my wifes cards. I refuse to get caught up with this brainwashing notion that you must meet your obligations and so forth, it seems to me that all those rules have ben thrown out the window. Just turn on ur news. Everyone is getting a bailout except the american people, So guess what ? Im giving my self my own bailout.
I have a question for anybody out there…I am walking away from my home, and I have 50k to put into a house to purchase for cash. The other house will be foreclosed upon. Can the creditors take the new “cash” house later on? We are all under the assumption that when I got the loan for my old house that the collateral is the house itself…therefore, giving it back is the collateral….they can’t ask for my new house. they can ask me for money in order not to destroy my credit….
any help would be appreciated.
Thanks!
In California…
The lender only has a lien over the home they are making a loan on. FYI, though: even if you’re paying cash, some lenders are still requiring a “pre-approval” or “pre-qualification,” and at least proof of funds prior to approving the sale.
If you can pull it off, the previous lender whom you foreclosed with cannot go after you.
That is in California.
If you just walk away from the house you will still be liable for the amount the bank loses on your mortgage after they sell the property. If you work out a short-sale agreement with them they can accept the proceeds from the sale as payment in full. Just walking away isn’t sensible especially if you haven’t spoken to the lender about ways to settle the debt. Otherwise they will issue a lien against you for the difference but they can’t take the new house. However if they issue the lien against you it may not be possible for you to get a new mortgage for the new house anyway.
***Can I walk away and buy another home for cash******************
Thank you so much Odie and Mayjerr for your comments,
I didn’t want to get too wordy w/ details…actually I didn’t walk away to just walk away…I had 2 condos, both went downhill due to renters, I spent over $20k paying the rest of their rent…put up the condos for sale for over 1 yr. and my friend’s condo sold and mine didn’t, oh, well…his gain…
now, I’m still in my house and have been going to and fro w/ Countrywide regarding my “loan madification” all these mods do is make one mad…so, I saw no reason to keep making payments on my “new” rising mortgage of $1700 a month…I teach school, I’m not a doctor,
I could afford the $1000 month mortgage and always paid on time…so, now I cannot do the short sale because Countrywide told me I must be behind on payments to qualify for their mods or their “NEW OBAMA PROGRAM” ha ha! which has a loophole…
you must have a fannie mae or mac loan which I understand is a gov. loan…anyways, I don’t qualify…I’ve gone this far up the mountain, and they’ve given me another stone to push me down the hill
As I mentioned I have 50k to purchase a home outright, let this home go and be done with it.
Any comments would be appreciated.
Thanks.
K
I don’t know the law as far as whether you would be putting your new home at risk, but I’d say that if it is safe to do so, walking away and buying a home outright would be the smartest thing to do. Credit means nothing and has no value, if you have the money to live your life.
Thank you Yana,
I will take that into consideration :)
K
I live in California. We refinanced two years ago and cashed out some money. Most of the cashed out money was used for home improvements. We are having some financial diffuculties and are considering letting the bank forclose (walking away.) I have been told because we refinanced, our mortgage loan became a recourse loan. My question is this… since California is a “one action rule” state, and if our loan is now “recourse” can they still sue us for the difference if they forclose? How does that work in California with the “one action rule.”
So here’s my situation,
I was 23 when i bought my house 3 years ago for 260,000. I could afford this then, and I can afford this now, i have a fixed loan for 5 years then my rates adjust. Obviously due to my age all I know about real estate is what I’ve seen in my lifetime, and that has been that you buy a home on an adjustable rate that is fixed for 3-5 years, and then you refinance once you’ve established the credit to get a better rate. My credit is flawless, i have worked hard to keep it that way, i haven’t missed a single payment or been late even once, i have to stretch every month to support my wife and 3 kids, but i do it by working hard.
Now, I’m 26 and my friends are starting to look into buying homes because they can actually afford it in this market. There are tons of programs offering $5-15k incentives for first time home buyers, these were not available when i bought my home. The reason is obvious, to stimulate the economy and get the surplus of home here in California bought up. My dilemma comes in the fact that just because they are buying now, they can buy the house next to mine for 100k less than i paid, and get up to $15k of that paid for. Where’s my bonus? i busted my ass to buy my family a home at a young age, i pay my bills, and now I’m 100k upside down in my home with no recourse, all because i was a little ahead of the curve. I kick myself because if i was just a little more lazy in my early 20’s, id be paying 100k less for my home.
This is an ethical and financial dilemma for me, do i walk away and file bankruptcy, saving myself $900 a month, and spend the next 7 years repairing my credit to buy a new home at a later date, or do i stick with it and hope I regain 100k worth of equity in a reasonable period of time?
I mean, just look at the math, i could walk away and buy a home as nice as mine, if not nicer, in a “for sale by owner” circumstance for $900 less a month, and in 7 years, i will have over $70,000 of income i didn’t waste on an over priced mortgage, and my credit will be free and clear by then. This is a serious dilemma for me…
What would you do if you were in my situation?
Unfortunately Ahead – You already made your gamble. I would stick with it and not gamble again. I think changing things in the way you propose would cause you more trouble, much more trouble than it’s worth.
Unfortunately Ahead-
I agree with Yana. Three years ago when you bought your home, you didn’t know what would be going on three years later. What kinds of things are you going to want to do in the next 7 to 10 years that you’re going to want good credit for? It’s not worth it, IMO. We’re in the same boat that you are (more or less), and we’re looking at a possible refi, but that’s all. Our house is a place to live and we like living in it — no need to cast financial disaster upon ourselves just because houses are cheaper now.
Unfortunately Ahead: If what you’re saying is true then I support the financial decision to declare bankruptcy. I am interested to know how you can keep enough assets after a bankruptcy to buy a “for sale by owner” home. Or do you buy the second home first and then let the bankruptcy court take the first?
Well I the option i was considering was buying a for sale by owner first, and then letting everything essentially collapse behind me. The issue as i stated, is my moral to financial obligation. I feel no moral obligation to my bank, because they don’t care about my best interests in the slightest, my moral obligation is to my own integrity, which means a hell of a lot more than leaving the bank with my upside down house. Conversely, I need to think of the best interest of my family, and finances are a huge part of this obviously, 3 kids to put through college, I have 13 years until the first one is ready for college, so thats plenty of time to start over.
Yana makes a very good point comparing this to a gambling scenario, which it is to an extent. I would be wagering my credit (and my integrity) in hopes of creating a better financial situation for my family.
We’re obviously at a historic low in the housing market, especially for my lifetime, and it is cheaper to buy a home than build one here. So it is inevitable that housing prices will jump up after the surplus is gone, but with the large volume of bad loans and unemployment continuing to flood the market with homes, which perpetuates unemployment in the construction industry ( which by the way is more like 40% unemployment compared to the overall “10%” that’s admitted to). How long will it take?
On the other side, if i stay, and feel proud of my decision( save my integrity) and my home doesnt gain enough value to bring me back above water (about $100,000), I will now be faced with a situation where i will loose my home due to adjusting rates(underwater homes can’t refinance), and have to start this whole process way down the line instead of now.
I guess I’m just thinking out loud here, but I’m sure I’m not the only one torn with this particular dilemma, Thanks for your input.
I don’t think bankruptcy represents poor integrity. It is neither the bank’s fault, nor your fault that the price of the house went down. Both of you would pay dearly in a bankruptcy but it is simply a business decision. You basically say “Here, take everything I have — it isn’t enough to cover the debt, but it’s everything I have.” How could there even be any guilt in that?
Your comment about the refinancing and the kids indicates that you’ve thought about the bondage you would be in should you keep slaving away to pay that $100K of negative value. You could not move for years, likely not refinance and might be forced into bankruptcy in a couple of years anyway.
Yana says it’s a gamble and you don’t know how much it’s worth. The bankruptcy option is the only option where you do know how much it’s worth. The gamble is in sticking it out.
For $100K plus the appreciation of whatever new home you did buy I think it is totally worth bankruptcy. As well, the time to rebuild your credit will pass quickly, way more quickly than the time it would take to pay off $100K.
This is my first visit to this site and I am amazed at the various responses to these posts. In my previous employment I was a licensed financial advisor. Allow me to make one thing clear, when you purchase a home and you place a mortgage on it, this is a financial transaction between you, the seller and your bank. People continually attempt to make purchasing a home an emotional attachment. Rick has stated that he is a real estate investor and as a real estate investor you of all people should know better than to get emotionally involved with this type of transaction.
This great country of ours is based on capitalism not socialism. The banks have made business decisions to issue loans and have charged fees and rates comparable with their perception of the risks involved. In the event their investment choices were poor, and they failed to charge the appropriate fees to accomodate their risks then they will sustain losses. In the event they are unable to absorb their losses, they have the ability to file for bankruptcy just like every one else. Should the banks have written the loans, should the buyer have bought the house for that price? Who cares? People are currently faced with a dilemna regardless how they got there and they are considering all their options as they should be doing.
This whole argument over ethics is irrelevant. Every person has their own ethical situations they have to deal with in these difficult times and do not need to be preached to on how they will need to be able to sleep with themselves at night. People are searching to determine the financial impact on their options they are not looking for people to teach them religion.
Unfortunately, every persons financial impact will be different as well as which option is in the best interest of their family. In addition, most banks are not willing to discuss options with you unless you are a large depositor or you are in default. My wife has been in the banking business for over twenty five years so don’t even try to argue this with me.
When you are looking at the financial impact of your decision, keep in mind all that is going on in Washington and in the international communtiy as it all effects the value of the US dollar that you are trying to protect.
We bought a condominium two years ago and financed with a 30 year loan with 20% down. After a year of living there we realized we hated it and moved back into a house we own free and clear, i.e, that mortgage was paid off years ago. We now have the condominium for sale at an underwater price, but there has been no offers after a year on the market. Our HOA will not allow us to rent it either so we throw about $2000.00/month at a declining asset that we no longer desire. The bank loaned us the money and we signed a contract stating that we would give up the property if we didn’t pay the bank back…which we would be overjoyed to do. So when looking at it that way I have contemplated walking away. I’m not worried about my credit rating. I buy cars with cash and I’ll never take out another mortgage. Yet from an ethical standpoint, I can’t bring myself to do it. Maybe I’ll be able to talk myself into it though if the housing bust continues.
Ethics smethics. Do what makes sense! After the feds bailed out all the banks, the old rules are no longer in effect and people should not be required to stay locked in a losing situation just because someone else wants to label you a loser, a deadbeat, etc.
In your mortgage, you agreed that if you defaulted on payments, you would relinquish the property. It’s in the contract!!! As long as you had good intentions when you signed the mortgage, you should feel no guilt. Move on, pal (without remorse)… I certainly will.
One thing some people need to realize is: Responsible people are not asking banks to pay the difference of the loan. All we want is to refinance at a lower rate so that we can pay out more to the princpal and recover ourselves faster. Banks will not work with you until you act irresponsilbly. (Sometimes not even after that) Therefore creating a monster. Reward the losers and punish the hard working and responsible. Is it that hard to lower the rate???? explain this to me….they would still make money off the loan and people would continue to pay
I guess my furture plan is not bad at all – I purchased my house about 5 yrs ago – The home has only 2 bedrooms and 1 bath with about 1000 sq feet and worth 50% less than what I paid for it – My wife is not on title nor on the note since I just got married with her but been living together for about 3 yrs – We have decided to walk away from this house to get into a better newer house with more room and cheaper – We are now in escrow for our new purchased with lower payments which will also included taxes and insurance – Our new home will have 4 bedrooms and 2 baths with about 1800 sq feet – I think this was a good plan because we are also now waiting for are first child to be born and we are planning to have another child right after – With out making this choice we wouldn’t have the room for more childern – In this situation I the furture father to be had to look at the best interest of his family and not the bank!!!!!!
I completely understand the ethical and financial problem. we are in a home that is worth $140 less than our mortgage. We can afford our current mortage, but seem to be living pay check to pay check and our credit card debt keeps rising. We are current with our loan, and have great credit, but are always stressed and our saving is nothing. We want to refinance at the great new rates but do not qualify and the banks won’t even work with us because we are in good standing. it’s funny, they will only help you once you screw them. We are thinking of not paying the next few months of mortage and pay all our other debt off instead and then short selling. We currently could rent a house nicer than ours, save $1000 a month and be otherwise deblt free. This is not my dream house and would have mved two years ago if I could. I know may credit will be bad for a few years, but we feel with the current market the banks are not going after people and if we do not do it now we will always be stuck in a house with no equity. What would you do?
John – If your mind is set I would stop making payments with out paying off any debt – I would save the money on the monthy payments not being made and live rent free till the short sales goes though – So think about it how much money would you be able to save in the next 6-8 months with out making you monthly mortage payments? Also why would you want to payoff any debt at this point your credit would be affect by this time anyway – I would save that money and have a good full back for the future of your family -
typo on the last sentence ###### full back #####should be ###### fall back ###### opps
smelly4dogs, I saw your post saying you are in the process of buying another house and letting one go. How do you do that? We are in a bad situation like a lot of other people. We did the 7 year interest only because we moved to a different town and we weren’t sure exactly how much my husband would be making at his new job.
We figured after 2 years we would refinance. Well, that didn’t work out because of the market. So now we have 2 years left until the loan adjusts. We do have a first and second on the house. The 2nd is fixed.
We have excellent credit and have always paid on time. I am just wondering what do do now? I don’t want to ruin my credit. So do we wait out the 2 years or not pay now? I just don’t want to walk away, I would like help, but my bank said we aren’t behind so there is no help. So it looks like the only way to get help is to NOT pay. It’s so frustrating!
I have heard people say try and buy another house now, and then let this one go. I just don’t feel right about that. Has anybody ever done this? How does it work, with the debt to income ration. I don’t think it would work for us. I just don’t know what else to do right now. Any ideas?
I bought my home for 175k with my first husband, divorced, re-fid to buy him out. Then remarried. Second husband fell from roof. Smashed his leg – and is a self-employed contractor. We have spent a decade in and out of hospitals, surgeries, unable to work due to his injury. We have diligently made mortgage payments, but now we are so upside down and so outta cash (and now I am unemployed) that I just don’t know what to do. We are literally 250k under. Come to find out, last re-fi appraiser used over-inflated comps and we had to use a shoddy mortgage company (Countrywide). This was to get my husband thru another convalescence. I must have been in a daze, but we were desperate as he had a septic infection (life threatening) and needed to tap the equity one last time. I take full responsibility, but not sure how I could have done anything different given our circumstances. Now we have an upside down mortgage and 88k in left-over med bills – plus more surgery ahead. How can I keep my home “wisely” and ever expect to get back on my feet? Ethics? Please! Just someone tell me what would be the wisest financial move! Seems I’ve made mistake after mistake! Would I be making another one by hanging on and scraping by? I have two kids – 14 and 10. Help!
I would recommend you scrap by at this time unless you are willing to let your house go. However before doing that if you have a secound on your home after a forecloser the bank will come after you because you cashed out. Seeing that you and your husband have 88k in medical bills and mybe a bank following you for the secound (loan on house) i would bankrup both then start over. The down side is you will not own your home and you may need to rent for now.
I live in an area destroyed by the mortgage companies and the auto industry. when I moved in I paid a fair market price, and got a conventional loan I could afford. now my once stable neighborhood is a war zone where I am a prisoner of my home due to a dramatic increase of crime. yet my home has lost an amazing amount of its value and I couldn’t sell what was a 100,000 home for 20,000. I fear I would not be able to give it away. I didn’t pay to own a house in a dangerous area, and I may make the mortgage take this house if things don’t get better. but that said, why cannot I and other “under water” borrowers sue the mortgage companies that used questionable and risky behaviors at the detrement to our way of life. Negligence is unexcusable under the law! If my actions cause signifigant money damages to another I am liable, why are we not being forgiven some of our loan balance or compensated for our loss. I wan’t to move but I am supposed to have some moral obligation to follow through on the deal but morals do not exist in wall street were my money is abused repeatedly and continues to flow unchecked by regulations from the govt. maqkes me sick!
My husband is a construction consultant; we had our best income (180K) just a year ago. Then, in October 08, the bottom fell out and we lost over 75% of our income (from Baltimore City). We tried to hang on to our family home, realized we weren't going to make it and attempted to file Chapter 13 but the monthly payment to the trustee became impossible to maintain. We are now going to convert to Chapter 7 and have to walk away from our family home of 10 years (we have 2 kids in community college) and have used up any savings and retirement money (we are 55 yrs old) We had already attempted to apply for a modification w/Wells Fargo (what an exercise in frustration!): we were turned down because we didn't have enough income. They'd rather we foreclose and leave them w/house to sell at a loss. Finally , after much agonizin and gut-wrenching discussion, we're going Chapt 7 and walking away from our beloved home. We found a sympathetic landlord who's willing to help out a desperate family in need. We see the light at the end of this tunnel and maybe we'll buy again and maybe we won't but we've gone thru the fire and wrath of family members who think we are a disgrace and morally bankrupt for making this difficult decision. We're going to hold our heads high and move forward w/ dignity and know we made a positive decision for our family and Wells Fargo can go “fly a kite”. Good luck to everyone who finds themselves in this predicament; it's the most difficult time.
As usual, it is not a black and white issue. Individual borrowers are mortal; they have 30 – 40 earning years. Depending on a person’s age, a borrower may not have the time to recover from this crash. Considering the crash of the 1990’s was far less severe and still lasted 8-10 years, its conceivable this crash could take 10 – 15 years to recover the values that were seen at the peak. Considering the future value of money, that will still be a loss, especially adding in the opportunity cost incurred by paying the carrying costs.
Now that the moratorium on foreclosures has lapsed, the second shoe is about to drop with a landslide of pending foreclosures, further declines in values, bank failures and I’m sure bailouts at tax payers’ expense. Banks have been playing hardball with borrowers not seriously negotiating in modifying the terms of their mortgages or allowing borrowers to refinance into affordable terms. There is a moral law that you reap what you sew. In addition, you are morally obligated to support yourself in your retirement years. Bottom-line its beyond a moral issue, it’s a business decision, depending on your age, your financial situation and how far you’re upside down.
Question for you guys. I purchased 2 years ago for $388,000 and now my home is worth $225,000. I pay two mortgages each month, the second being $20,000 total. If I walk away completely does the bank have cause to go after me for the second, or will it be considered a straight foreclosure with both the first and second being in default? I live in California.
As for the ethical and moral issues, I have just lost my job and cannot afford a $2,550 per month mortgage. I find it difficult to feel uneasy about potentially walking away. I do feel bad that I can no longer provide a beautiful home for my new wife.