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

[ERCougar]

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.

That's a good point. It is immoral insofar as you're breaking a contract.

[Mormon Red Death]

His financial logic for walking away makes a lot of sense... especially if you are significantly underwater. Will this article (and the press it garners) cause the other shoe to drop? Perhaps it is best to lock in my gains this year now rather than later. Eeek.

cheers.

Define significant. I live in Michigan and am 29% underwater.

[Color Me Badd Fan]

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.

This isn't necessarily true, at least with car loans. You're essentially fair game to creditors after you receive a bankruptcy discharge because it's a long time before you can file again. Because of that, you're not as radioactive to creditors as one would believe. Having a BK on your record, from what I've heard, isn't as bad as having foreclosure and no BK on your record. You can still play the BK card if things hit the fan even worse.

If someone is in the position where they could pay the first mortgage but can't afford to pay the second, then a Chapter 13 bankruptcy is the better option than simply letting your house slip into foreclosure.

Maybe someone else could elaborate on whether a foreclosure comes off your credit report sooner than a BK.

[U-Ute]

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.

I have an issue with this attitude. The biggest reason real estate prices were going up is because the banks were giving out loans to anyone with a pulse: free money = rising prices. Then when the housing market falls out and everyone starts defaulting, the banks run to the government and get a handout.

I bought in '06 because I had to, not as an investment. We had been looking for roughly 18 months, and this was the one we wanted. We weren't in the group of people looking to buy and flip a home. Why should I have to bear the brunt of the fallout while the banks get a handout?

U-Ute

PS: Fortunately, I'm in a position where I am basically even, equity wise, and can afford my payment, so my dialog is a bit more hypothetical.

[JohnnyLingo]

I have an issue with this attitude. The biggest reason real estate prices were going up is because the banks were giving out loans to anyone with a pulse: free money = rising prices. Then when the housing market falls out and everyone starts defaulting, the banks run to the government and get a handout.

I bought in '06 because I had to, not as an investment. We had been looking for roughly 18 months, and this was the one we wanted. We weren't in the group of people looking to buy and flip a home. Why should I have to bear the brunt of the fallout while the banks get a handout?

I'm not in favor of the banks getting bailed out, either. "Too big to fail" is a crock.

I am an equal opportunity "bad stuff happened to you, don't break your legal obligations to get out of it" judger.

[Color Me Badd Fan]

I have an issue with this attitude. The biggest reason real estate prices were going up is because the banks were giving out loans to anyone with a pulse: free money = rising prices. Then when the housing market falls out and everyone starts defaulting, the banks run to the government and get a handout.

I bought in '06 because I had to, not as an investment. We had been looking for roughly 18 months, and this was the one we wanted. We weren't in the group of people looking to buy and flip a home. Why should I have to bear the brunt of the fallout while the banks get a handout?

U-Ute

PS: Fortunately, I'm in a position where I am basically even, equity wise, and can afford my payment, so my dialog is a bit more hypothetical.

Then you've got to look at why the banks were handing out money like they did. They didn't do it because the gov't forced them (i.e. the Rush CRA red herring) or because they're kind-hearted souls. They did it because they were making an assload of money originating them and packaging them up as various types of securities. The low teaser rates got the houseflippers involved who would buy multiple homes in subdivisions that weren't even built yet (that's why people would camp out when the developer would allow preorders on homes in large subdivisions). The illusory demand created by the houseflippers massively increased prices.

The people hosed the most on this deal were those that simply wanted a house for their family and thought, just like almost everyone else between 2002-2006, that the prices were justified. The banks have a massive amount of influence on the decisions (and pocketbooks) of the federal government, while individual homeowners do not. The

[statman]

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

Simply not true. BKs stay on your credit report for 8 (?) years (I'm positive it was 7, but I think the change in the BK laws a few years back bumped it to 8). For the entirity of that 8 years, you wil be harmed - there simply are going to be a lot of lenders turning you down for loans. Some will start lending as soon as 2 or 3 years down the road, but those will not be at anything close to prime rates. Even in today's tight credit market, yuou could probably still get a mortgage with a 2-3 year old BK but be prepared to put up at least 10% in down-payment (if not 20%) and to pay ~10% interest...

To say that you're not harmed for more than 2 years is simply bunk. You may be able to get a loan after that, but when you do, you'll be paying way higher interest rates, and that's 'harm' in my book...

[JohnnyLingo]

Then you've got to look at why the banks were handing out money like they did. They didn't do it because the gov't forced them (i.e. the Rush CRA red herring)

Really? The federal government forcing banks to lend to low-income, high-risk individuals had zero bearing on this thing?

The people hosed the most on this deal were those that simply wanted a house for their family and thought, just like almost everyone else between 2002-2006, that the prices were justified.

I never thought they were justified. The prices seemed ridiculous to me and even if I was in the position to buy a home, I wouldn't have done it. My wife tried to tell me that this was the new normal, but I never bought it. Something was wrong.

[/backpatting]

[statman]

Why should I have to bear the brunt of the fallout while the banks get a handout?

Just what 'handouts' have the banks gotten?

[Color Me Badd Fan]

Simply not true. BKs stay on your credit report for 8 (?) years (I'm positive it was 7, but I think the change in the BK laws a few years back bumped it to 8). For the entirity of that 8 years, you wil be harmed - there simply are going to be a lot of lenders turning you down for loans. Some will start lending as soon as 2 or 3 years down the road, but those will not be at anything close to prime rates. Even in today's tight credit market, yuou could probably still get a mortgage with a 2-3 year old BK but be prepared to put up at least 10% in down-payment (if not 20%) and to pay ~10% interest...

To say that you're not harmed for more than 2 years is simply bunk. You may be able to get a loan after that, but when you do, you'll be paying way higher interest rates, and that's 'harm' in my book...

The type of BK we're talking about here is Chapter 13 and specifically in the context of someone who wants/must strip off 2nd and/or 3rd mortgages. If these people live in location and have the type of job where it's highly unlikely that they'll move, then they're probably not going to have to get a new mortgage for awhile.

As for car loans, they're obviously not going to be able to qualify for the 0% promotions set out by the car manufacturers. They're also not going to get the 5% loans being offered by the TARP recipients. However, something around 8% is possible. From a pure financial standpoint, it would be idiotic to keep $150k worth of 2nd and 3rd mortgages on your home just to make sure you can qualify for that 5% rate on a car as opposed to 8%. On a five year loan for a $20k car, you're spending $1,700 more on the car over the entire life of the loan or about $30 more per month.

Most of the second and third loans of the 2004-2007 vintage have shitty, adjustable rates. How much are those people paying for that $150k worth of junior mortgages every month? A helluva lot more than $30 a month.

I do agree about obtaining a new mortgage though. In that context, you're screwed once you file BK. However, is it going to be any better if you have a foreclosure on your record? Also, isn't FHA a possibility after you've owned in a while? Can't you still get an FHA loan with a BK on your record?

[wuapinmon]

Johnny Lingo is the Mormon equivalent of Alan Keyes.

[JohnnyLingo]

Johnny Lingo is the Mormon equivalent of Alan Keyes.

Woohoo... that's the biggest compliment you've ever paid me!

I am on par with a diplomat, author, presidential candidate, and ambassador to the UN!

[Color Me Badd Fan]

Really? The federal government forcing banks to lend to low-income, high-risk individuals had zero bearing on this thing?


[/backpatting]

If anything, it helped relax the regulatory environment to the point where all this stuff could have happened in the first place. It was a situation where both the democrats and republicans agreed on a certain point (less restrictions relating to the collective loan portfolio held by individual institutions) but for different reasons.

Do you think Countrywide was worried about the CRA when it was handing out multiple Option Arms to individual houseflippers buying literally dozens of homes in places like Victorville, Queens Creek, Lancaster and North Las Vegas? Pure and utter bullshit. I don't even think the CRA applied to Countrywide.

[JohnnyLingo]

If anything, it helped relax the regulatory environment to the point where all this stuff could have happened in the first place. It was a situation where both the democrats and republicans agreed on a certain point (less restrictions relating to the collective loan portfolio held by individual institutions) but for different reasons.

Do you think Countrywide was worried about the CRA when it was handing out multiple Option Arms to individual houseflippers buying literally dozens of homes in places like Victorville, Queens Creek, Lancaster and North Las Vegas? Pure and utter bullshit. I don't even think the CRA applied to Countrywide.

So in short, you believe it had zero effect.

Thank you for answering.

[statman]

The type of BK we're talking about here is Chapter 13 and specifically in the context of someone who wants/must strip off 2nd and/or 3rd mortgages. If these people live in location and have the type of job where it's highly unlikely that they'll move, then they're probably not going to have to get a new mortgage for awhile.

As for car loans, they're obviously not going to be able to qualify for the 0% promotions set out by the car manufacturers. They're also not going to get the 5% loans being offered by the TARP recipients. However, something around 8% is possible. From a pure financial standpoint, it would be idiotic to keep $150k worth of 2nd and 3rd mortgages on your home just to make sure you can qualify for that 5% rate on a car as opposed to 8%. On a five year loan for a $20k car, you're spending $1,700 more on the car over the entire life of the loan or about $30 more per month.

Most of the second and third loans of the 2004-2007 vintage have shitty, adjustable rates. How much are those people paying for that $150k worth of junior mortgages every month? A helluva lot more than $30 a month.

I do agree about obtaining a new mortgage though. In that context, you're screwed once you file BK. However, is it going to be any better if you have a foreclosure on your record? Also, isn't FHA a possibility after you've owned in a while? Can't you still get an FHA loan with a BK on your record?

Under certain circumstances, it makes perfect sense - from a purely financial standpoint - to take a BK and deal with the impacts of the major dings to your credit. I just balk at the idea that people think you're out in the clear in a couple of years.

Even with the higher price you'll pay for credit in the future, it still might make sense for someone to walk away.

BTW - I seriously considered it myself, but I was 'lucky' enough to sell after ONLY 26 months on the market for $150K less than our basis on the house (about $100K less than we actually paid, and after we put ~$50K in upgrades into it). We were partially made whole though - we got a great deal on a short sale in Utah County. We paid $400K for a house that had originally been sold for $649K. If we had sold immediately, we'd be in a similar house to what we're in now, with a $650K mortgage. I'm kind of glad that I got all the losses out of the way already...