Walking away from a mortgage might make sense

San Jose Mercury News ^ | September 26, 2010 | LINDSAY A. OWENS

[Oldeconomybuyer]

Millions of middle-income home- owners are struggling to pay down bloated, underwater mortgages while wealthier Americans are simply mailing in the keys to the mansion and calling it a day.

It's time for average Americans to start seeing their mortgage papers for what they are: records of financial transactions, not moral documents.

In a free-market society, an individual homeowner is not responsible for the strength of the nation's housing market. If anything, walkers may stimulate the economy, by spending a portion of the money they were sending to the banks each month.

Take a look at your finances and decide for yourself whether homeownership makes sense. A better decision for the future of your family may be to rent, pay off your credit cards, and put the savings in a college fund for your children or grandchildren.

Walk away from your house if it will be better for you to rent. And remember, walking away now doesn't mean that homeownership may not work for you later.

[allmost]

I think you may be using a rather large brush to characterize other’s circumstances. Some are first time buyers. Some get screwed with nefarious brokers. Some may have personal financial issues which happen in life. When someone buys a house for say $300,000 and someone 2 years later says it's only worth $190,000 things get complicated.

[kabar]

If it makes sense financially and it comes down to being able to relocate and find a job, I say go for it. It is the reason we have bankruptcy laws.

I personally know of a case in Scottsdale, AZ where someone bought an expensive condo as an investment. He took out a mortgage for $600K. The place is now worth around $300K. Rents have also dropped. So how long should someone hang on to such a property that is bleeding them dry each month? If you sell it for $300K, where do you get the other 300K to pay off the mortgage?

[Mouton]

What some are doing is not paying the mortgage, waiting for the foreclosure, which probably takes over a year these days, and using their funds to buy things they could not afford when they were hampered by a living expense. BTW, when they don’t pay their mortgage, which includes a tax escrow, whom makes up the taxes? Who bails out the mortgagor? Me and my family, that is who. Some has to pay, and I don’t want it to be ME.

I am beyond tired of paying for someone else’s mistakes by buying more home than they could afford or having over extended their finances or for kids they cannot afford, or for government provided entitlements that are nothing more than theft from those who pay taxes.

[bergmeid]

This article is insane.

And think about this - if a homeowner walked away from his/her mortgage, should this person be allowed to have other mortgages in the future and if so, should he/she be allowed to make a profit on selling a future home?

[oh8eleven]

When someone buys a house for say $300,000 and someone 2 years later says it's only worth $190,000 things get complicated.
Only if you you were in it for a short term gain. Like I said, if you planned on being there 20 years, who cares?

[CapedConservative]

An author, I forgot the name, was attending a Royal function in England. He asked on of the Ladies in attendance “Would you sleep with me for $1 million?”. She giggled and replied “Why, of course.”. He then asked “Would you sleep with me for $20?”. She very indignantly replied “Of course not! What kind of lady do you think I am?”. His repsonse was “Madam, we have already established what kind of lady you are, we are just haggling over price.”.

In the end, integrity, your word, is all you have. To walk away from an obligation you are capable of paying says exactly what kind of integrity you have.

CC

[Iron Munro]

If you won’t is a lot different than if you can’t pay.

If you just don’t want to pay for the bad deal you made walking away can be a solution if your sense of ethics is low enough and you don’t mind sticking others with your financial loss.

Nothing is free.

If the purchaser reneges on their obligation the loss is sustained by other consumers and/or taxpayers (aren’t they the same people?).

But isn’t it discriminatory to allow only home owners to renege on their loans? After all, what about the people who would have bought a house but didn’t (like the blacks who got reparations for farm loans on farms they never owned.

What about people who are upside down on other types of loans? What about people who bought something that no longer satisfies?

For true equality the financial institutions and the federal government will also need to make arrangements to allow others with poor judgment, poor luck or poor taste to walk away from other losing financial obligations.

- Lost a pile at a gambling casino?
- Got a car that you no longer want?
- Need to throw a big wedding reception beyond your wherewithal?
- Want to take the girlfriend on a world cruise you can’t afford?
- Want to buy a fast food franchise but you’re living on welfare?

No problem - Be a Progressive Thinker!

Take a loan out to pay for whatever you want and walk away from the loan payments.

[phobia-dude]

I agree. If you have a car that went down in value, you don’t just give it to the bank? People need to honor their commitment.On the other hand, this nation must abolish the federal reserve bank, which creates the economic boom and bust cycles. Interest rate of almost zero % is like stealing our money!

[allmost]

Even if you are long term. If you recently bought and can buy the house next door for half the price the thoughts probably occur.

[kabar]

From the article:

"Why doesn't the middle class walk away? There are several reasons. Many individuals I interviewed feel as though their contract with the bank is sacred. But nothing was sacred to the mortgagers who hawked predatory loans and the banks who sold loans to the highest bidder. In fact, Morgan Stanley, one of the major traders in mortgage-backed securities, recently walked away from several of its San Francisco buildings."

"It's time for average Americans to start seeing their mortgage papers for what they are: records of financial transactions, not moral documents. "

[babygene]

“Sure it might make sense...if you don’t mind reneging on your legal and moral obligations.”

Well my house is paid for, so I don’t have a direct stake in the issue, but I don’t believe there is a moral or legal obligation involved. It’s a business deal, nothing more. The buyer is betting (with encouragement from the “experts” that the prices will continue to go up, and the lender is betting that he will be covered even if you default. Also BTW, the buyer is paying the lender interest to cover the risk of a default, so there’s no “moral” issue when interest is paid on a loan.

As for the moral part, he lender didn’t loan you the money based on your “word”, he loaned it based on his ability to foreclose if you didn’t make the payments... And if he foreclosed and the property brought more than you owed, he would keep the extra cash.

As for the “legal” part, that’s what bankruptcy laws are for... There’s nothing illegal about going bankrupt.

[CurlyDave]

Unpaid taxes usually results in a tax lien which is generally paid by a new purchaser before clear title can be transferred. The property may be sold to pay the tax lien after some period of time.

I am not certain you or I ever end up paying the lien.

[Oldpuppymax]

Sure it makes sense, now that honor and personal responsibility have been declared null and void by the leftist, ruling class. Any time you buy a new car, you’ve paid dramatically more than the thing is actually worth. So should all of those obligations also be “walked out on???”

[Future Snake Eater]

Moral obligations, sure, but what legal obligations? You’re not taking the house with you.

[kabar]

A home can act as an anchor preventing you from leaving a depressed area to go elsewhere to look for a job. In the meantime, people are sacrificing their future to keep up payments. From the article:

"In my research on homeowners in default in Santa Clara County, I have spoken with many individuals who are cashing out 401(k)s, borrowing from friends and family and using credit cards to pay their mortgage. Sadly, homeowners who are least able to pay their mortgage, whether because of unemployment or a ballooning adjustable-rate mortgage, sacrifice the most to keep their mortgages solvent. If this trend continues, expect to see increasing levels of wealth inequality for many years to come."

[Future Snake Eater]

Yes, and....some of us in California bought houses we can afford, didn't flip them, stayed in them through the storm...and we're still here.

And some people didn't. So what's your point?

[ICCtheWay]

It is not the best thing to do - but getting out from under the mortgage payment and living cheaper can equate directly to personal and family financial survival... If foreclosure is a highly likely - then walking out early means retention of cash reserves... assuming the family finds a cheaper way to live... The consequences are about the same... Hitting the bottom means hitting the bottom... A loss of a job brings consequences - loss of a home... It is not immoral to lose your home if you lose your job and cannot get another one.

I get the impression that a number of posters on this thread are quite naive and have never gone through tough times... Tough times happens even with the best of intentions and actions to do otherwise.

Consequences of a Foreclosure or Walking on a mortgage - the IRS Regs. considers relief of debt as income... Under a foreclosure or walking away a 1099 is likely to be issued by the mortgage for the unpaid balance of the mortgage - this could be a huge amount - say $100,000 or whatever... You are then obligated to pay Federal Income Tax on that amount as added to your income for that tax year.

[CapedConservative]

For all you folks that think there is nothing wrong about this behavior, please add that statement to all of your load applications....

After all, if you fail to make your views known, you might then be a liar, or is telling the truth now “optional”?

CC

[clintonh8r]

Exactly. But you might be surprised how many self-described conservatives in this forum will disagree with you.

[fso301]

A person planning a strategic foreclosure will first get their ducks lined up in a row. What they are most aware of is that the foreclosure will remain on their credit report for just 7 years. Before the delinquencies show up on their report, they'll purchase new vehicles, etc.

Knowing that the bank would prefer having the home occupied than vacant, they'll plan to either live in the home for free or for those who own another home, they'll rent out the foreclosed home and pocket the proceeds. The backlog in courts is such that they can easily rent out the home for 12 months this way. Depending on the area and court backlog, the less risk averse may go for a second year renting and pocketing the proceeds..