Banks, Wall Street, investors of all kinds – walk away from agreements for financial reasons. Morgan Stanley is strategically defaulting on 5 properties, as I type this, because it would be a BAD FINANCIAL DECISION to continue to pay on upside down mortgages. This happens in commercial real estate on a regular basis. Why do you believe that we as individual homeowners have to abide by a different set of rules?

The bank will make necessary profit-driven decisions without a thought of what’s “fair”. I have a hard time with “right & wrong” in this situation – walking away is often the “right” decision. Some people WILL NEVER regain equity to the amount in which they purchased their home. Some will not for more than a decade.

What if they have to move for a job (the only one they can get in this tough job market)? Do we punish that family or shame them for taking the job and making tough decisions?

“Now banks would not loan money if they were not sure they would make a profit.” No doubt–same goes with insurance companies, and some of the other “necessary evils” we have in our financial system. The thing that sucks (and it’s like a dagger in the heart to those who have been screwed by the system) is that we’ll still need banks and insurance after this whole mess is over to get our NEXT houses, cars, etc…

The era of skyward-racing prices made us all a little blind to the realities of basic financial principles. I know family and friends that fell into it head-first too, and it was not fun after the fact.

I’m not asking you to feel sorry–I think in the end, human nature will dictate that everyone will look out for #1 and do what’s best for them. Heck, millions of people are now paying off their credit cards and letting their mortgages default.

But I still believe that when you walk into that bank branch and ask for money, the expectation is that you will pay it back, not follow the winds of the real estate market.

My thoughts on the subject have evolved since that comment in February of 2009, but I still feel there’s some sense of social obligation to honor contracts we’ve made, especially since our actions don’t only affect others, but the economy as a whole.

if the situation were reversed, the banks would “walk away” from you without thinking twice. they do it all the time

From the New York Times (full article here http://tinyurl.com/yjp4ngh)

Of course, this is not necessarily how Wall Street itself behaves, as demonstrated by the case of Stuyvesant Town and Peter Cooper Village. An investment group led by the real estate giant Tishman Speyer recently defaulted on $4.4 billion in debt that it had used to buy the two apartment developments in Manhattan, handing the properties back to the lenders.

1. If you can qualify for another mortgage on top of the one you already have, do that (FHA loans are great right now). After you close on the new house, then initiate short sale proceedings on the house you own now. If short sale doesn’t work, then foreclose.

2. If you can’t qualify for another mortgage, walk away and rent for a while.

Your credit rating has a value, but the value of your credit rating is not $140K (the amount you are upside down).

If the short sale doesn’t go through, I will allow the condo to foreclose. Anybody have any experience with this scenario? The financial stakes are too high for me to consider the morality and ethics of this kind of financial maneuver; I will do what is best financially for me and my wife.

Please give me some advice..

I also rent out a house that I don’t want to sell at a loss. It’s my understanding that when one rents it out for less than the monthly mortgage payments, the deduction for the loss makes your taxable income go down. I think this is also true in your case so renting out the house shouldn’t bump you up into a higher tax bracket. Plus, you get a depreciation deduction on the house which works in your favor.

Double-check with an accountant since I am not one.
UH2L

Sober up, people. Get your heads out of your asses and realize that the financial institutions pulled a fast one on you, even if they, too, were

Cars can depreciate to a $0 value. Houses and land usually not, unless the land becomes unlivable for some reason. Comparing car loans to mortgages isn’t valid, they are just not the same.

Own a condo and owe 275k;
Last appraised at 215k (5 months ago) – 60k upside down;
Have ARM that’s going to kick in, 2011;
Have no problems paying my mortgage and have invested my “diverted” money (difference of real payment vs ARM payment) and have paid down the principle- still underwater;
Attempted to refinance, but could not due to over ratio of renters to owners in condo association;
Applied for loan modification but do not qualify;
Current credit- top tier – not worried about 100-150 point drop as I will rent for next 3-4 years – and am financially stable enough to overcome the 7 year high interest penalty for foreclosing;
Reason for thinking about walking away from Condo – planning on life changes (career, personal – married) that will take me away from the area permanently. Do not plan on coming back to the area since I was here because of my job. See no incentive for continuing to pay mortgage.
Personal moral concerns – I believe in being responsible for your decisions and contracts. However, I’ve tried to renegotiate my contract based on current and future circumstances, but am now seeing this as business decision on what’s best for me and my future.

Any opinions or help on something I may be missing would really be appreciated. I still plan on meeting with a loan representative to look for alternative options. But as it stands, I do not see much incentive to continue paying into a seemingly deeper hole that I will get nothing out of, except for a “vacation home” that I will not be vacationing too and will not be able to sell for another 10+ years. Thanks for any insight.
Respectfully- R

Will it always be the case that we will pay our current mortgage? I can’t really say, but we hope that the market stabilizes and recovers sooner rather than later, though with so much government lending going on that eventually has to dry up it seems that may not happen anytime before any of my 3 kids are in college. After all is said and done here are my reflections:

Defaults occur in real estate transactions and business world all the time and have for many years.

A mortgage contract obligates the borrower(s) to make the monthly payments specified in the mortgage. If the borrower cannot or does not fulfill that obligation along with other terms in the mortgage, the remedy is that the lender is entitled to take back the property, which is the collateral for the loan.

The monthly payments are determined by the amount borrowed, and the rate of interest determined by the lender. The lender determines a rate of interest that is adequate to cover their cost of lending the money, their required profit, and the risks involved in extending the loan. In any state one of the risks in extending a loan is that the borrower may elect to stop making payments (due to hardship or due to choice) and default, returning the property to the lender prior to loan maturity. In non-recourse states that default risk is heightened, but the lender knows this going into the loan agreement. The house is the collateral for the loan, just an automobile is the collateral for an auto loan.

The lender does not make a loan based on the borrower’s “word”, “good name”, or “moral or ethical code”. These terms do not appear anywhere in the loan documents. The lender evaluates the borrower’s ability to pay and past behavior as measured by a credit report, and evaluates the collateral (the property) for the loan. Often the lender will even purchase insurance against default (typically from private insurers such as AIG) after making the loan. The lender(s) decide(s) the terms they are willing to offer to the borrower. Default in “good times” means the lender’s losses are minimal if any, and they might even gain, but the borrower has forfeited any downpayment and their accrued principal reduction and had their credit negatively affected. Default in “bad times” means the lender’s losses are significant if they elect to liquidate the property at that time, and again the borrower has forfeited any downpayment and their accrued principal reduction and had their credit negatively impacted.

If a borrower decides that it is no longer in their interest to make payments on the mortgage, then the mortgage provides the lender with the remedy. It doesn’t matter why the borrower makes that decision. Perhaps they decide they don’t like the new color of the neighbor’s house, or perhaps they lose their job, or perhaps their roses or orange tree won’t grow in the backyard because the afternoon sun is insufficient. It doesn’t matter the reason for the default because the lender offered the terms of the mortgage, including the remedy for default, to the borrower. The lender should not complain if a borrower decides to stop making payments because the lender already provided itself with a remedy when writing the terms of the mortgage. Upon default, the borrower has given up their past contributions to the property, the borrower will take a credit hit, and the borrower forfeits the right to any future gains that might accrue to the property if they elected to continue in the mortgage.

Does the lender have to sell its newly acquired (through default and foreclosure) property at a loss? No. It may elect to hold the property if it desires, in the hopes that recovery/value appreciation will restore its position in full. If it has insured against default, it may elect to sell the property at a loss, and collect all, some, or more than the difference between the loan balance and the proceeds realized from sale from the insurer. If it has no insurance against default, it may elect to sell the property and realize a loss, but the defaulting borrower has not forced the lender to sell the property (though currently some government standards are forcing some lenders to sell).

All these scenarios used to be evaluated by lenders when determining whether or not to extend loans. Apparently most lenders failed to adequately consider all these possibilities over the past several years. Many borrowers, including myself, failed to adequately consider the possibility of further significant deterioration in the market.

Currently, if a borrower “walks away”, they lose 100% of any money they put into the property and they suffer the negative effects for several years into the future. The lender may lose some percentage of their contribution as well, if the lender chooses to sell the property.

This is the way the mortgage business works in America. Sometimes good, sometimes bad, but the sun always comes up tomorrow.