April 7, 2008
Is It Better to Just Walk Away?
With the foreclosure wave fully in motion, many articles have popped up over the past few months, profiling families in default and telling the personal stories of homeowners, whose dream had gone bust when they couldn’t refinance to keep up with their rising mortgage payments.
Most anecdotes spoke of homeowners doing anything they could to try to stay in their house - taking a second job, negotiating with the bank, whatever it took to stay in their pride and joy and keep the keys.
Now, it seems a new class of homeowners are cropping up who are turning in the keys, when they fully have the resources to pay the mortgage. A recent Wall St Journal article highlighted a small, but growing trend of homeowners who can afford their mortgages, but are walking away from their homes - becauase it’s no longer worth as much as they paid.
” …home prices have fallen so far so quickly that some homeowners in weak markets are concluding that house prices won’t recover anytime soon, and therefore they are throwing good money after bad. Also, many borrowers who bought in recent years have put down little if any equity.” With very little cash down, there’s no skin in the game for the buyer. Makes the decision easier, doesn’t it?
From an investments standpoint, this somewhat makes sense to me. Why keep pouring money into a moneypit? However I woud hope that home buyers are looking to purchase a home - a place to hang up their boots, spend time with love ones, build memories, etc. - as opposed to an investment. Of course, for those who are in a position where they need to sell (i.e. relocation, divorce, etc.), the circumstances are different.
But, it also seems to me that our society has created a mindset where it’s ok to walk away. Spend too much on credit cards? Declare bankruptcy. Have second thoughts on your home purchase? Go into default. Marriage not so great? Get a divorce. The article notes that while a foreclosure becomes a “…strong negative on your credit report for as long as seven years, …the impact on a borrower’s credit score declines over time.” Ahhh - just like a bankruptcy. And I personally know of individuals who went into bankruptcy who received credit card offers within a few months and to this day, don’t seem one tiny bit affected by it. They are still able to have a nice car and go out for good dinners. So, at least from appearances, I can’t detect anything is different.
I don’t know what to make of this, except that it seems to me that there are quite of bit of folks who quickly bail when the going gets tough, rather than taking responsibility for their decisions and seeing it through. Which is unfortunate.
Would you walk away even if you could afford to keep your home?
david gordon said:
I just advised a close friend of mine to stop paying the mortgage on her condo in Sacramento. She paid $310k about 2 years and recent sold comps in the complex are around $160-170k. Just brutal.
Even though she can afford she doesn’t really want to be stuck there for another 7-10 years for prices to get back to her purchase price. She is still on the fence but I think I have her leaning toward living for free for 6-8 months and then letting them foreclose. Like I told her - I would do it if it were me!
April 7, 2008 1:12 AM
Artie V said:
Ultimately, I see all of this as the chickens coming home to roost, ultimately. I don’t mean to be insensitive, but everyone being bit by this mortgage crunch were part of the problem over the last 7 years of this housing madness.
For the folks losing their homes - these were the people that bought at prices WAY over what their income could support. For the past 5 years of home shopping, I banged my head looking at the median income, trying to understand how the hell are the Joneses able to win a bidding war on a 700k home when I couldn’t dream of buying at that price. Now I know; eyeball deep in adjustable rate madness. Have at it…
People dropping and running while they’re ahead; mixed feelings. This type of behavior is what makes it harder and harder to declare bankruptcy in the first place. I don’t think many people are doing this - relative to the proportion of legitimate bankruptcy filers, but surely something the industry will anchor on to further fetter us to the debt cycle. On the other hand, I have very little sympathy for the banks for their part in this problem and suffering these fools in the first place. These are the hardest ones to profile, since it’s easiest to loan money to people who seem like they don’t need it…
And yet somehow, the primary culprits (Realtors) are still able to make a profit through it all. Pity.
April 7, 2008 1:16 AM
David said:
Maybe after enough losses (assuming there isn’t a huge taxpayer-funded bailout), banks might come to the startling conclusion that they should lend to people who can pay them back.
Of course that’ll only last as long as the people in the institutions do (maybe 2-5 years for your typical lifespan on the Street), and then they’ll all get turned over, and another kid out of his Wharton MBA will come up with a brilliant plan that looks suspiciously similar to lending money based on the idea some asset class (stocks, bonds, housing, Mexican pesos, Argentine bonds) always goes up.
April 7, 2008 8:25 AM
anon said:
I sure hope that the first poster’s friend understands that along with “living for free for 6-8 months” comes living with a foreclosure history for 6-8 years–that means that buying another place is likely off the table, as is living in rental housing that runs credit checks. If your income is sufficient to cover all your costs in cash (and pay your rent in cash at the start of the month)–then sure, you might not feel the pinch too much. But consider whether you would really be able to get by without a credit card or car loan–with credit tightening across all sectors, you’ll need to be able to do that for the years it will take for the foreclosure to come off your record….
April 7, 2008 1:47 PM
Farrah said:
I know that foreclosures cause serious damage to FICO scores. Does anyone know what the credit ramifications are of giving a home back to the bank when the owner hasn’t missed mortgage payments?
April 7, 2008 2:05 PM
Jenny P said:
Thanks everyone for chiming in.
david gordon - Yikes about your friend! Her almost -50% equity would be very difficult to make up. Then again, if we ever see double digit annual appreciation, it would only take a few years. Is her bank willing to meet her halfway?
Artie V - Well said. I kept banging my head too. I’m sure mine is slighted dented by now. What I think they’ve done to make declaring bankruptcy tougher they will ultimately do to folks who can afford their mortgage but choose not to. I understand that in California, mortgages are non-recourse (i.e. they can’t go after your other personal assets). Maybe they will start becoming recourse loans.
David - Yep. I unfortunately think you have it right. If it’s not tech and the dot com, and it’s real estate, there will be a new flavor soon. Hope everyone just learns the lesson.
Anon - I agree with the terrible credit history. I guess it seems that some folks just don’t care or what they plan to do in next 6-8 years don’t involve credit (hard to fathom, since we live in such a buy now, pay later world). I think this would be the one and only reason I would not to walk away. I would want to be a homeowner again. Of course, unless I had such massive amounts of cash I don’t need to borrow to make that happen.
Farrah - good question. Any readers out there that can chime in?
April 7, 2008 9:16 PM
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