Should you walk away from your underwater mortgage even if you can pay?

[Mormon Red Death]

A Law professor from the U of Arizona makes the argument that people should walk away from mortgages even if they can pay.

Msn Money write Liz Pullman Weston talks about the article.

[falafel]

I wouldn't walk away from it. I'd just return it.

[Color Me Badd Fan]

A Law professor from the U of Arizona makes the argument that people should walk away from mortgages even if they can pay.

Msn Money write Liz Pullman Weston talks about the article.

I've done a couple Chapter 13 bankruptcies for people this year and one of them was for a CPA who had a 2nd and 3rd on her home while the assessed value by the county was actually about a little bit below her first. She bought at the peak (summer of 2006). I was upfront with her that I'd never filed a Chapter 13 and that she was going to be my guinea pig and surprisingly she wanted me to do it.

Anyway, in connection with the Chapter 13 filing, you also file an adversarial proceeding on behalf of the debtors to strip off the wholly unsecured liens. The lender on her second was one of the big national banks, while the lender under the third knew they were screwed. Surprisingly, the holder of the second didn't answer the adversarial complaint, so this client was able to strip approximately $150k worth of 2nd and 3rd mortgages (these people did not use these mortgages to buy a Hummer, they used them purely to buy the house). After talking with a couple other attorneys, apparently the big banks aren't getting around to even answering these adversarial complaints.

In the matter a I referenced above, I simply used the value assessed by the county and didn't even use an appraisal. The value was only around $20k under the value of the first mortgage. I thought the bank was going to challenge the value we proposed.

It was overall a pretty easy process. I can imagine that there is a large number of people in the same position as these folks. I've thought about trying to write a column in the local paper (it's not a huge paper by the way and one of the other attorneys in my firm regularly writes a column for it) and letting everyone in on how to get rid of a pesky second and/or third mortgage on their homes. One of the hurdles people face is the moral obligation they may feel to avoid bankruptcy. This article you cited to could come in handy.

[ERCougar]

Interesting.

Part of the reason you pay an interest rate is that there is an underlying risk involved, an inherent assumption that some loans won't be repaid. It's the cost of doing business. Sometimes, it seems that if you inject morals (at least beyond following the rules) into business transactions, they just fowl things up. Sort of like if an attorney were to inject his personal opinion regarding his client into the process.

[Solon]

I've done a couple Chapter 13 bankruptcies for people this year and one of them was for a CPA who had a 2nd and 3rd on her home while the assessed value by the county was actually about a little bit below her first. She bought at the peak (summer of 2006). I was upfront with her that I'd never filed a Chapter 13 and that she was going to be my guinea pig and surprisingly she wanted me to do it.

Anyway, in connection with the Chapter 13 filing, you also file an adversarial proceeding on behalf of the debtors to strip off the wholly unsecured liens. The lender on her second was one of the big national banks, while the lender under the third knew they were screwed. Surprisingly, the holder of the second didn't answer the adversarial complaint, so this client was able to strip approximately $150k worth of 2nd and 3rd mortgages (these people did not use these mortgages to buy a Hummer, they used them purely to buy the house). After talking with a couple other attorneys, apparently the big banks aren't getting around to even answering these adversarial complaints.

In the matter a I referenced above, I simply used the value assessed by the county and didn't even use an appraisal. The value was only around $20k under the value of the first mortgage. I thought the bank was going to challenge the value we proposed.

It was overall a pretty easy process. I can imagine that there is a large number of people in the same position as these folks. I've thought about trying to write a column in the local paper (it's not a huge paper by the way and one of the other attorneys in my firm regularly writes a column for it) and letting everyone in on how to get rid of a pesky second and/or third mortgage on their homes. One of the hurdles people face is the moral obligation they may feel to avoid bankruptcy. This article you cited to could come in handy.

If this is the type of thing you would put into the paper, you should get your syndicated column going pronto. This is pretty interesting stuff. (plus, you're a pretty good writer, CMBF, in my opinion)

[TripletDaddy]

If this is the type of thing you would put into the paper, you should get your syndicated column going pronto. This is pretty interesting stuff. (plus, you're a pretty good writer, CMBF, in my opinion)

Somewhere in that column about ridding yourself of pesky seconds and thirds, please remember to include a disclosure that BK destroys your credit and the filer will likely be relieved of any pesky future home or auto loans for almost a decade.

[wuapinmon]

That's some cool stuff, CMBF.

[Mormon Red Death]

Somewhere in that column about ridding yourself of pesky seconds and thirds, please remember to include a disclosure that BK destroys your credit and the filer will likely be relieved of any pesky future home or auto loans for almost a decade.

In article I reference below they say your credit will only be harmed for 2 years.

[Mormon Red Death]

Interesting.

Part of the reason you pay an interest rate is that there is an underlying risk involved, an inherent assumption that some loans won't be repaid. It's the cost of doing business. Sometimes, it seems that if you inject morals (at least beyond following the rules) into business transactions, they just fowl things up. Sort of like if an attorney were to inject his personal opinion regarding his client into the process.

You pay an interest rate so that you can own something for which you presently dont have the cash on hand for. Mortgage (PMI) is what you pay to insure that you default the lender is covered.

[TripletDaddy]

In article I reference below they say your credit will only be harmed for 2 years.

I think the article is talking about foreclosure. I was referencing a Chapter 13, which is different.

Also, in a foreclosure situation (which also damages your credit), the negative item won't be removed after 2 years. The author seems to be saying that you could simply get a loan in 2 years....no mention of rates, accessibility, etc. She isn't saying that your credit will be restored. Even people will lousy credit can get a loan sometimes, which is likely what she is discussing. Good luck getting a home loan, though.

[ERCougar]

You pay an interest rate so that you can own something for which you presently dont have the cash on hand for. Mortgage (PMI) is what you pay to insure that you default the lender is covered.

Well, it's not terribly important to the point, but factored into the interest rate is an assessment of risk, i.e. the probability of default. You're right in that a large part of the interest rate is the discounting of future money. PMI is an insurance against default--different principle.

[Mormon Red Death]

Well, it's not terribly important to the point, but factored into the interest rate is an assessment of risk, i.e. the probability of default. You're right in that a large part of the interest rate is the discounting of future money. PMI is an insurance against default--different principle.

yeah fair enough.

[JohnnyLingo]

If the question is "should you?" then I feel if I were in that situation it'd be hard for me to just walk away if I could pay the mortgage.

Basically these people made a bad investment, buying homes at their peak value. Man up and deal with it.

[ERCougar]

If the question is "should you?" then I feel if I were in that situation it'd be hard for me to just walk away if I could pay the mortgage.

Basically these people made a bad investment, buying homes at their peak value. Man up and deal with it.

But you could just as easily say that the lender made a bad investment, and that they should "man up and deal with it". I think that's the original author's point--some people are holding themselves up to a certain "norm" that the lenders don't hold themselves to, and thus are sharing inequitably in the fallout.

[JohnnyLingo]

But you could just as easily say that the lender made a bad investment, and that they should "man up and deal with it". I think that's the original author's point--some people are holding themselves up to a certain "norm" that the lenders don't hold themselves to, and thus are sharing inequitably in the fallout.

Except you are contractually bound to honor the loan you got from the lender. The only way it's a bad investment for them is if you really can't afford to pay the mortgage anymore.

If you're simply walking away even if you have the means to pay, the lender gets screwed in a way that they shouldn't have to deal with.