Walking away from your mortgage

[iheartthed]

At least we don't have debtors prison, like Dubai.

I wonder who will be arrested now that the entire city is on the brink of default.

[iheartthed]

From today's LA Times:

Professor advises underwater homeowners to walk away from mortgages

Brent T. White, a University of Arizona law school professor, says that it's in the homeowners' best financial interest to stiff their lenders and that it's not immoral to do so.

Reporting from Washington - Go ahead. Break the chains. Stop paying on your mortgage if you owe more than the house is worth. And most important: Don't feel guilty about it. Don't think you're doing something morally wrong.

That's the incendiary core message of a new academic paper by Brent T. White, a University of Arizona law school professor, titled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."

White contends that far more of the estimated 15 million U.S. homeowners who are underwater on their mortgages should stiff their lenders and take a hike.

Doing so, he suggests, could save some of them hundreds of thousands of dollars that they "have no reasonable prospect of recouping" in the years ahead. Plus the penalties are nowhere near as painful or long-lasting as they might assume, he says.

"Homeowners should be walking away in droves," White said. "But they aren't. And it's not because the financial costs of foreclosure outweigh the benefits."

Sure, credit scores get whacked when you walk away, he acknowledges. But as long as you stay current with other creditors, "one can have a good credit rating again -- meaning above 660 -- within two years after a foreclosure."

Better yet, homeowners can default "strategically": Buy all the major items they'll need for the next couple of years -- a new car, even a new house -- just before they pull the plug on their current mortgage lender.

"Most individuals should be able to plan in advance for a few years of limited credit," White said, with minimal disruptions to their lifestyles.

What kind of law school professorial advice is this? Aren't mortgages legal contracts? In so-called anti-deficiency states such as California and Arizona, mortgage lenders have limited or no legal rights to pursue defaulting homeowners' assets beyond the house itself, White said. In other states, lenders may decide that it is not worth the legal expense to pursue walkaways, or consumers may be able to find flaws in the mortgage documents, disclosures or underwriting to challenge the original contract.

The main point, he said, is that too often people's emotions get in the way of clear financial thinking about mortgages, turning them into what he calls "woodheads" -- "individuals who choose not to act in their own self-interest." Most owners are too worried about feelings of shame and embarrassment after a foreclosure, and ignore the powerful financial reasons for doing so.

Buttressing these emotions is a system that White labels "the social control of the housing crisis" -- pressures and messages continually sent to consumers by the "social control agents," namely banks, government and the media. The mantra that these agents -- all the way up to President Obama -- pound into owners' heads, White said, is that "voluntarily defaulting on a mortgage is immoral."

Full article: http://www.latimes.com/classified/re...,3801270.story

[andybsg]

There is nothing immoral about walking away from a mortgage. It is a financial decision, just as it is not immoral for a bank to foreclose on your mortgage. It is just business.

[janesback]

in regards to walking away , personally, I wouldnt.............The economy is going to come back, and your home will appreciate in value

You know folks, when people buy cars, they depreciate a few thousand the second they drive off the lot.........then in 5 years, they are worth nothing, compared to the 20 k you paid for it..............

most things depreciate, I realize homes and land are supposed to appreciate. In time, theyll come back.........Also, your credit report is going to suffer big time........be careful

[mwilbert]

Walking away if you are only a little underwater is probably not worthwhile unless there isn't any way you can afford the payments. Walking away if you are way underwater is probably sensible unless you live in a recourse state [[like Michigan) and have a lot of other assets that the bank could potentially come after. If what you actually have aside from the house is a lot of other debt, then bankruptcy is a option that should be strongly considered.

Even if you believe property in metro Detroit is way undervalued right now, which is certainly questionable given the vast surplus and plunging population, you need to think about how rapidly you expect that problem to be resolved. Suppose you think the long-term outlook is favorable; do you think the short-term outlook is strong? You could likely buy another property in a few years even if you went bankrupt, so unless prices rocket up immediately, walking away from your current property wouldn't cost you that much appreciation.

So while there are no doubt many reasons why any particular person might not want to give back their house, in my opinion for some people it is not only the best but the only sensible option.

[mwilbert]

“The FDIC has agreed to share losses on a portfolio of qualifying loans with New IndyMac assuming the first 20% of losses after which the FDIC will share losses 80/20 for the next 10% of losses and 95/5 thereafter.�
If I read this right…Uncle Sam takes on 100% of the first 20% of loan losses, then takes 80% of the next 10% and finally takes 95% of any and all losses after that. The newly formed, Wall Street insider owned, OneWest Bank gets to keep billions in assets.

You did not read it correctly. What that means is that the first 20% of the losses is assumed by the investors, then the next 10% is shared 80% Feds/20% investors, and then 95% Feds/5% investors thereafter. This is still probably not a bad deal for the investors [[or else they wouldn't have taken it) but it isn't that good.

[Cincinnati_Kid]

in regards to walking away , personally, I wouldnt.............The economy is going to come back, and your home will appreciate in value

You know folks, when people buy cars, they depreciate a few thousand the second they drive off the lot.........then in 5 years, they are worth nothing, compared to the 20 k you paid for it..............

most things depreciate, I realize homes and land are supposed to appreciate. In time, theyll come back.........Also, your credit report is going to suffer big time........be careful

Your credit being tarnished is not the big issue it use to be. I"ve known people to come out of bankruptcies and foreclosures in a couple of years to post high scores.
Too much is being made of FICO scores and they are actually discrimatory in nature. For example...... I have a great driving record, with no points or accidents for 10 years, but my credit score is 550, should my rates be judged by my driving record or my credit score? Its bull sh-t that the government has allow this to happen. FICO scores have infringed on too many things in a person's life.

[reddog289]

I have thought about it myself, Then I looked at my house and thought, No I will leave on a better note. Kinda tempting though when you see nicer houses out there for half of what you paid for yours three years ago.

[jerrytimes]

Thank your friends for me for contributing to the value drop of our homes. That's whats damaged the market is the overflow of forclosures in the past couple of years. I do believe that the banks can go after them if they walked out on their mortgage and bought a different home. When you take a mortgage on a home, true that if you can't pay for it, the bank seizes it, but you are signing an agreement that you'll pay them back.

[janesback]

Jerry ,I agree about the FICO scoring,but its a reality.........they now use your score to predict your outcome on borrowing money, interest rates on your credit card, the ability to get a job, the ability to keep your job, esp if you have a job in retail or banking

Scores also predict your home insurance rates, your auto rates, the ability to qualify for an apartment if you choose to leave your house, and on and on......

In the end , the cost of bankruptcy can be more harmful for your future.........

[rustic2]

One should pay one's debts.

On the other hand, the system is rigged, no question. Those of us who are continuing to pay our mortgages when our houses are worth half of what we paid are being played for suckers. We are throwing money down a hole.

What the answer is, I don't have the foggiest.

[Lorax]

Precisely why too much is made of FICO scoring, and the entire system needs to be scrapped.

People who are slaves to a credit score in order to merely find a job, rent an apartment, etc, is just another form of creeping fascism.

It's gotten way out of hand, and starting over would be a great idea. I have had attorneys, and a mortgage broker as far back as three years ago say that any impending bust would be followed by forgiveness in foreclosure debt and a softer eye toward bankruptcy.

These are all tools used by business to better manage their balance sheets, and are increasingly being used by individuals to do the same. Nothing wrong with that, and as it becomes more commonplace people will realize it.

[Lorax]

One should pay one's debts.

On the other hand, the system is rigged, no question. Those of us who are continuing to pay our mortgages when our houses are worth half of what we paid are being played for suckers. We are throwing money down a hole.

What the answer is, I don't have the foggiest.

The answer is to do what is best for your own personal situation. No one else will have your best interests at heart except you.

The system needs a wake up call- we as a people need to stop letting the wealth interests game the system in such egregious ways. If people started paying cash more, and pulled back from credit use in great enough numbers, the system would correct itself- and send a clear message that things cost too much, and the consumer would then have greater control over what the costs of things should be, rather than borrowing to buy things that are overpriced.

There isn't a car out there that should be more than 10k as far as I'm concerned, and few houses that are worth more than 100k based on what the value of the dollar actually is. Gas should be half it's current cost, groceries the same. Utilities are out of control nationwide- electricity costs per month here in Florida are what rent costs were 20 years ago.

Unless incomes are exponentially increased to meet the inflated cost of goods and services as they are, then we will always be behind the curve.

People need to realize that even Walmart is overpriced for what you're getting. When they start to suffer the ill-effects of our bludgeoned economy, then there will be some hope that a true market correction is underway.

[oldredfordette]

Excuse. It's been posted.

[Novine]

More advice in favor of walking away.

http://blogs.reuters.com/felix-salmo...st-guilt-trip/

He makes a good point that no one in corporate America has any guilt about dumping their debt.

[Funaho]

I currently owe about $54k on a house in SW Detroit that, judging by other sales in the neighborhood, might sell for 50% of that, if I'm lucky. That's not just underwater...that's the freakin' Mariana Trench.

When I got this mortgage it was pretty much shoved down my throat [[or maybe up the other end) by Citibank and Chase as a way to pay off my credit card debts. I was told that I just needed to do this ARM for two years or so to rebuild my credit and then I could refinance into a normal mortgage. Of course, a mere 12 months later my mortgage company, New Century Financial, collapsed and started this whole mess.

Am I going to walk away from my mortgage? No, at least, not right now. But I gotta tell you, it's a decision I've weighed a LOT lately. It's not that the payments are too high; it's the rapidly rising cost of living in the City. For example, my homeowner's insurance is almost double what it was three years ago [[$905 first year, $1440 second year, $1660 this year.) I also went from working in Southfield to working in Ypsi, which hit me hard especially when gas was over $4.

For the moment, I've decided not to pursue various necessary improvements such as a modern furnace and new windows, because I don't want to throw another $5-10k at the house when I might not have it long enough to recoup that investment.

I suppose could move and try to rent out the house, but I really don't have the time or patience to be a landlord, and I don't have the extra income right now to pay for two homes while I try to find tenants, not to mention the repairs I'd need to do to make the house rentable.

[xphillipjrx]

Precisely why too much is made of FICO scoring, and the entire system needs to be scrapped...Nothing wrong with that, and as it becomes more commonplace people will realize it.

FHA minimum score used to be 580, then 600 and then 620. Now all FHA lenders are creeping to 640 as a minimum score for FHA financing. Minimum score for any conventional loan with Mortgage Insurance is 680. This means a person will need to be almost two years away from their last period of late payments before qualifying for a mortgage. The analysts are looking at foreclosures and raising score requirements based on performance of current loans. They aren't going to scrap the system until they can figure out how to craft a new system.

[reddog289]

funaho's post remined me of some of the things that kinda make me wanna walk. My "little brother" did and I don't blame him a bit. His payment for reasons pretty much doubled in the 12 years he owned the house. His furnace was old,windows were bad, etc. He just packed up and left it last winter. While I kinda miss that house, I think his neighbors are glad he left.
My furnace and windows are old and I am underwater, yet I hate the thought of moving when I still don't have all my stuff here yet.By no means am I a finanical guru, Yet I think that too many people just bit off more than they could chew. I hope there is a sensible end to this mess.I never looked at my house as an investment per say, Just a place to sleep , work on my cars and grow a garden..

[Cincinnati_Kid]

funaho's post remined me of some of the things that kinda make me wanna walk. My "little brother" did and I don't blame him a bit. His payment for reasons pretty much doubled in the 12 years he owned the house. His furnace was old,windows were bad, etc. He just packed up and left it last winter. While I kinda miss that house, I think his neighbors are glad he left.
My furnace and windows are old and I am underwater, yet I hate the thought of moving when I still don't have all my stuff here yet.By no means am I a finanical guru, Yet I think that too many people just bit off more than they could chew. I hope there is a sensible end to this mess.I never looked at my house as an investment per say, Just a place to sleep , work on my cars and grow a garden..

I hear ya Reddog, What pisses me off is the Obama Administration said they were coming out with plans to curtail foreclosures, but what happens when your mortgage company doesn't want to help you?? Some mortgage companies want you to lose your home. They don't give a damn, but little do they realize, that house will set empty for at least a year or more, especially here in Michigan, you would think with all the job losses and high unemployment they would be willing to work with you, but some of them won't budge. Cities with high property taxes are really going to take a beating, because who ever the next person that buys that house will pay double the amount of taxes the previous owner did.

[Lorax]

Exactly correct. Lenders are all enormously wealthy and have no interest in modifying loans. They stand to gain more from getting the property back, and in fact have even gone so far is some cases to establish hedge funds, pooling investors money to buy these same homes [[from themselves) when they go to public auction. Even the auction services are in on it.

It's a planned conspiracy to squeeze the last dollar out of a property, since the vast majority of these loans were bought by "investors" for pennies on the dollar from the failed banks that held them.

Rule of thumb: If your loan was bought by an "investor" or another "bank" formed from the ruins of another institution, chances are it was bought for little of nothing, even as a good paying loan, and has a generous insurance policy on it as well, courtesy of the FDIC. The value of your loan is covered to the maximum in this way, so the "investor" will never lose, only the homeowner loses.

So don't fall for the phony moral outrage foisted on the public by those who seem to think it's OK for the homeowner to suffer the losses while the corporate suits walk away without so much as a slap on the wrist.

If jail time was handed out for the criminal way banks and CC companies have handled their business then there would be some justice, as opposed to most of them getting bailed out and handed multi-million dollar bonuses on top of it.

Walk away and assist your own situation first, it matters not to the banks what you do, they will win regardless.

[Cincinnati_Kid]

Exactly correct. Lenders are all enormously wealthy and have no interest in modifying loans. They stand to gain more from getting the property back, and in fact have even gone so far is some cases to establish hedge funds, pooling investors money to buy these same homes [[from themselves) when they go to public auction. Even the auction services are in on it.

It's a planned conspiracy to squeeze the last dollar out of a property, since the vast majority of these loans were bought by "investors" for pennies on the dollar from the failed banks that held them.

Rule of thumb: If your loan was bought by an "investor" or another "bank" formed from the ruins of another institution, chances are it was bought for little of nothing, even as a good paying loan, and has a generous insurance policy on it as well, courtesy of the FDIC. The value of your loan is covered to the maximum in this way, so the "investor" will never lose, only the homeowner loses.

So don't fall for the phony moral outrage foisted on the public by those who seem to think it's OK for the homeowner to suffer the losses while the corporate suits walk away without so much as a slap on the wrist.

If jail time was handed out for the criminal way banks and CC companies have handled their business then there would be some justice, as opposed to most of them getting bailed out and handed multi-million dollar bonuses on top of it.

Walk away and assist your own situation first, it matters not to the banks what you do, they will win regardless.

Good post, I couldn't have said it better myself.

[wazootyman]

Ugh. I cannot believe anyone recommends just "walking away". First and foremost, when you signed your mortgage papers, you KNEW that it was an investment, and like all investments, there is a risk for loss. But, unlike a typical investment, the consequences of walking away spread to everyone in your neighborhood. Your house has lost value. Suck it up and realize that your greedy attitude of "me first" is the exact reason we're in this situation to begin with. The only people I truly feel sorry for are those who bought a house within their means, on a conventional mortgage, and have gone into foreclosure due to circumstances beyond their control [[job loss, etc).

I bought my house in Livonia for $180k almost five years ago. It's a very modest ranch, and I admit I'm jealous of friends who are now buying bigger houses for a whole lot cheaper. A real estate friend of mine estimates my house to now be worth $128k to $135k. I probably have only knocked off $20,000 or so on my loan. I couldn't be much more upside down, which prevents me from even refinancing - something that'd easily save me a couple hundred bucks a month. But rather than try to weasle out, I've decided to put money into improving the home because I know I'm going to be here for a while, like it or not. I consider the purchase of my house a contract, that even if not legally binding, a social and moral obligation to myself and my community. Walking away makes a bad situation that much worse for your peers. The banks don't really care either way.

I think that anyone who walks away from a home willingly should never be allowed to purchase property again. Rent only; because obviously renting was your intent in the first place. Neighborhoods are strong when neighbors are responsible and look out for one another. If you walk away, break a neighbor's window or run over their mailbox - you don't want to cast any doubt on how you really feel.

[Lorax]

The vast majority of defaulted loans are due to either job loss, medical issues, or greatly reduced income for those self-employed, and many were due to predatory lending. Many fewer are a result of individuals gaming the system. Big name investors destroyed the condo market through speculation, and are a particularly egregious group, and should be forbidden from buying properties in the future.

Don't try and impose some sort of moral litmus test on what is a business transaction. You come across as more hung up on the contractual paperwork with a bank than the meaning of what was signed in the first place.

Contracts can be written and amended to mean or say anything. Banks are not modifying loans, and are eager to get the properties back, since the loans were purchased for pennies on the dollar from the bankrupt banks and lenders who wrote them, and the new owners of those loans "investors" as they are now called, were able to get insurance policies courtesy of the FDIC at the time they bought the loans for so little, so there is no incentive to modify loans. They make more by you defaulting on the contract.

Decisions such as these have no "moral" component, only individual circumstances and choices to be made.

[Cincinnati_Kid]

Ugh. I cannot believe anyone recommends just "walking away". First and foremost, when you signed your mortgage papers, you KNEW that it was an investment, and like all investments, there is a risk for loss. But, unlike a typical investment, the consequences of walking away spread to everyone in your neighborhood. Your house has lost value. Suck it up and realize that your greedy attitude of "me first" is the exact reason we're in this situation to begin with. The only people I truly feel sorry for are those who bought a house within their means, on a conventional mortgage, and have gone into foreclosure due to circumstances beyond their control [[job loss, etc).

I bought my house in Livonia for $180k almost five years ago. It's a very modest ranch, and I admit I'm jealous of friends who are now buying bigger houses for a whole lot cheaper. A real estate friend of mine estimates my house to now be worth $128k to $135k. I probably have only knocked off $20,000 or so on my loan. I couldn't be much more upside down, which prevents me from even refinancing - something that'd easily save me a couple hundred bucks a month. But rather than try to weasle out, I've decided to put money into improving the home because I know I'm going to be here for a while, like it or not. I consider the purchase of my house a contract, that even if not legally binding, a social and moral obligation to myself and my community. Walking away makes a bad situation that much worse for your peers. The banks don't really care either way.

I think that anyone who walks away from a home willingly should never be allowed to purchase property again. Rent only; because obviously renting was your intent in the first place. Neighborhoods are strong when neighbors are responsible and look out for one another. If you walk away, break a neighbor's window or run over their mailbox - you don't want to cast any doubt on how you really feel.

I understand what you're saying, but like Lorax said, most people have had a travesty occur in their household that was beyond their control, be it job loss, illness or whatever. These greedy banks and mortgage companies are refusing to work with people to re-write loans, so what choice do they have? Are the banks and mortgage companies morally right? Hell no!! Most of them want you to lose your home so they can make more money. Taxpayers [[including yourself) helped bail them out and this is how they treat us? To say anyone that walks away should never be intitled to buy property again is ludicrous. After this housing collapse, more people should look at buying a house as a place to live, just like renting, nothing more, nothing less. Houses aren't investments any more period.

[Lorax]

As an example, earlier this year I bought a house in Southfield in foreclosure for about 12% of it's appraised value at the time.

Since then, the appraisals have fallen like a stone, and my great deal is less of a great deal, still good, but when I go to a site like Zillow.com and see the aerial view of homes in my neighborhood with appraisals in the 140-150k range, and the actual sales prices in the 40-60k range, it leads one to believe how inflated the appraisals still are, and how far they have to fall in order to be in line with reality.

These appraisals are used to establish value in order to get loans in the first place, and play a role in establishing property tax assessments as well.

The system by which we operate, banks, lenders, tax agencies, etc, is broken. Credit scoring is broken, and badly designed. Short of a complete revamping of the system, nothing will improve the level of dysfunction we now operate within.