Thoughts on Walking Away From Your Home Loan(NYT)

[billyoc]

If you’re among the millions of people who will not qualify for the Obama administration’s program to help troubled homeowners, you’re probably wondering what you’re supposed to do now.

Perhaps you no longer have enough income to pay your loans. Or you can afford the payments but don’t qualify for refinancing under the new plan because the value of your home is too far below the balance of the loan. If you’re far enough underwater, you’re probably questioning the wisdom of writing a monthly check on a place that may take 10 or 15 years to get back to the value it had two or three years ago. It isn’t easy to come up with the answer, and if you have moral misgivings about not making good on your mortgage, a religious officiant may offer as much useful guidance as a financial planner.

In an economic environment like this one, however, the consequences of giving up on your mortgage may not be as painful as they were a few years ago. Yes, it’s almost always preferable to negotiate a better deal on your existing mortgage than to walk away. But if you can’t work things out with your lender, you probably won’t be sued. You shouldn’t receive a major tax bill either. And the damage to your credit will not be permanent or insurmountable.

http://www.nytimes.com/2009/03/14/your-money/mortgages/14money.html?_r=1&ref=business

I would save my mortgage payments for a year and go rent something.

[cliffordu]

1. Or do what I did and buy an old airstream and live in the woods for

nothing, basically....

OK - 375.00 rent.

It's easy to live without credit or insurance or cars once you understand that most of the convenience this society offers is slavery to corporations.....

(Sorry about the thread dilution....)

[scottl]

2. Question

Isn't there some way the banks could convert these mortgages to a lease with an option to purchase,
at a reduced amount, and for a specified period o\f time? Then,apply all lease payments to a new down payment and sell the houe back in the future?

[Warpy]

5. That would make a great deal of sense

but bankers are a conservative lot and very slow to accept change. They still think they can unload distressed properties in a reasonable amount of time and don't consider how attractive they are to vagrants, vandals and vermin in the meantime. They'd rather keep the properties empty and risk having them stripped for copper, fixtures and appliances than go through the trouble of managing a lease or the expense of paying someone else to do so.

It took them about 12 years to catch a clue in the last housing bust.

[billyoc]

3. No dilution there, the article should spawn discussion of alternatives.

I lived in trailers a lot in Morgan City, LA when I was working in the Gulf. I thought it was great living and cheap as hell.

[Warpy]

4. Instead of looking at the paper value of the house

look at what local rents are doing. Rents in most places are still going up. If that mortgage payment is anything close to what a rental would cost you, keep it. You will still build equity over the life of the loan, you'll keep that mortgage interest deduction to sweeten the pot, and you'll have a hedge against rising rents.

Plus, you know that no landlord will be foreclosed and skedaddle with your security deposit while you're informed of eviction.

Know your market and base your decision on that. Clearly, if rents are significantly cheaper than your monthly PITI and you're young enough to outlive a foreclosure, defaulting might be the best option. However, it's a drastic option and should be considered very carefully.

[TwilightGardener]

6. Since when do people feel like they should be able to walk away

from their obligations just because their "investment" took a hit? Sorry, I hope all those who don't want to pay their mortgages because it just isn't the cash cow that they had hoped (it's only just a worthless "shelter" now--awwwww!) get the nasty slap on their credit that they deserve, and don't qualify for loans in the future. If you lose your job, get sick, etc.--that's a different story. But NO ONE should buy a house primarily as an investment--no one OWES you a return on it--that's bullshit.

[MattBaggins]

7. Devils advocate

I have no need or desire to do such a thing but business is business. It is exactly the kind of mind set that the banks and wall street use. It is simple smart money management. If your house has lost more value than you can recoup it is simply a stupid financial decision to keep paying on it.

You should know the saying; don't throw good money after bad money.

[TwilightGardener]

8. Well, it IS a "stupid financial decision" to simply walk away from your debts--

because who's going to lend to you (at a decent rate) in the future when you've just proven yourself uncreditworthy? That's not what I call smart money management--and when the market eventually rebounds, and you have absolutely nothing to show for it except a huge black mark for seven years, that's not very smart either. Again, I'm not talking about people who have no choice, simply can't swing the mortgage at all--I'm talking about house flippers, rental-property owners and the like. Banks and Wall Street get away with being deadbeats--ordinary people don't.

[MattBaggins]

9. Depends on how much under you are

If you are 30-40% under on your mortgage you aren't going to get a loan anyway. You might as well have a negative credit score at that point. If it would take you longer than 7 years to get out of the hole why keep paying?

Simple math problem. Which is greater, 7 years of bad credit or X years to pay off that bad mortgage? If X>7 what is the best financial decision?

[TwilightGardener]

10. A thirty-year loan (what most people have) is just that--the expectation

is that you will make payments on it for thirty years--a whole LOT of shit can happen over the span of that loan. Values can rise, fall, rise, fall--just like the recent bubble, where people were suddenly sitting on a golden egg and cashing in on their equity, even though prior growth may have been slow/steady. Anyone simply walking away now (even though they can manage to cover the payment) is locking in their loss--the market may recover sooner than one thinks, values can and probably will go up again, and in some areas, there's been little change in value as it is (Nebraska is not doing too badly). It's not day-trade stocks, it's a long-term committment, and lenders know that--that's why when you are in a financial pickle, you pay your mortgage above all else, keep building that equity, keep that committment, because nothing else you own (for ordinary people) is ever going to compare in worth or importance (especially in lenders' eyes). And you don't get dinged for your house value compared to what you owe on it, unless you're trying to refinance or sell it--when I bought my car with a loan, the dealer/finance people didn't assess my house property value and compare it to my mortgage. But had I stopped PAYING my mortgage altogether, then...no car.