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David Bach’s Thoughts on ‘Strategic Default’
By JLP | January 11, 2010
I received a copy of David Bach’s short-but-sweet book, Start Over, Finish Rich: 10 Steps to Get You Back on Track in 2010
Walking away from your house in this way can be a huge mistake. Take Adam, a guy I recently met who owned a beachfront house in Florida. Adam told me he had paid $820,000 for it in 2007 and was carrying a $650,000 mortgage. Problem was, it was no worth less than $600,000. So even though Adam could easily afford to continue making his mortgage payemnts, he had decided to just walk away and, as he put it, let the bank deal with it.
“So what do you think?” he asked me.
I didn’t hold back. “You are the all-American problem right now,” I told him. “you earn plenty of money and can afford you home—yet you are letting the bank foreclose because on paper it’s under water. What if I told you your house would be worth $1 million in 10 years—would you still walk away?”
“Of course not,” he said, “but that will never happen.”
The truth is, he doesn’t know that. No one does. Waht we do know is that losing his home to foreclosure is going to seriously affect his credit score and ptentially keep him from being able to buy a new home for years.
Although the prospect of his home being worth $1,000,000 in 10 years seems far-fetched, it only implies an appreciation rate of 5% per year. A little high, but not unheard of.
I do think people tend to get a little too focused on the here and now and forget about the big picture. And, as you guys already know, I’m not fond of walking away from your obligations when things don’t look so good. Had the guy bought the house and it suddenly increased in value $200,000, he wouldn’t be walking away. You can’t have it both ways—or at least you shouldn’t be able to have it both ways.
More on the book later…
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Topics: Housing Market | 33 Comments »
January 11th, 2010 at 1:58 pm
It’s especially stupid as the mortgage holder could file for a deficiency judgment in FL then he would be liable for the difference in value.
Even if it isn’t worth $1M in 10 years, it seems pretty likely it wouldn’t be underwater in a few years.
-Rick Francis
January 11th, 2010 at 2:05 pm
Let’s call these people what they are: deadbeats.
Hopefully the lender sues Adam with a deficiency judgment.
January 11th, 2010 at 2:09 pm
Rick,
That’s a good point. I hadn’t even thought about that.
Dang…I have some smart readers!
January 11th, 2010 at 3:35 pm
I was underwater for years in after buying a house in LA in 1989. However, it never occured to me to walk away from it. I just kept making a fixed payment, even though I had an adjustable mortgage. From 1989 to 2002, interest rates trended down, so my self imposed fixed payment took a decent bite out of the principle balance. I sold it in 2002 for a nice profit and was able to trade up to a bigger house in a better school district. In spite of some dark years in the red, it all ended up ok by staying the course.
January 11th, 2010 at 4:02 pm
I was recently in the company of a young couple, both employed and making decent money, that have 3 cars and 2 homes. They were excitedly telling me of the benefits of their recent Chapter 13 filing. They are under the impression, as a result of legal consultation, that they will pay $0.20 on the dollar and have bad credit for 10 years. Can bad credit really be the only negative implication of declaring bankruptcy? Shameful.
January 11th, 2010 at 4:27 pm
I agree with Rick, Florida is one of the states that the mortgage company can file a deficiency notice after the forclosure.
When the banks finaly get caught up with all the forclosure paper work he’ll most likely be looking at a lawsuit.
January 11th, 2010 at 4:45 pm
A dumb move is being closed-minded and stubborn, and risking your family’s financial stability over moral concerns not shared by the counter-party.
A smart move would be considering all possible options, consulting with an attorney, and then making the best possible choice for your family.
Since this is only an except, and I may be missing some context here, I’ll try not to dig into Bach too badly. With that being said, Bach’s argument is a logical fallacy, an irrelevant conclusion. What if Adam’s house would be worth $100,000 in 10 years? Would he still make that decision? Of course.
Like Bach later goes on to state, asking such questions is absurd as one cannot know the future. Yet what is truly striking is how he makes the jump from stating that it will adversely affect his credit score to surmising that it must be a bad move.
I completely disagree. Everyone’s situation is different, as are local and state laws, and that’s why you should always consult an attorney. But for certain people–many people–it does make sense to walk away.
If taking a credit hit means saving myself from months or years of paying into a mortgage, only to get thrown out on the street, I know I’d walk away. And people completely overvalue credit ratings to begin with. Look at this another way: Would you pay $50,000-$100,000 for 200 points on your credit score? I don’t think so.
Why is everyone so concerned with what someone else decides to do with their mortgage anyway? It’s not like their default is taking money directly from your wallet. I know some will say, “But we bailed out the banks so it is taking my money!”. Well, you should be taking that up with your congressmen! Yet somehow nearly all of the incumbents got to keep their seat last election.
And if defaulting is such a bad deal as everyone is claiming then why not let themselves make the decision? They will clearly be paying for it for years to come.
I think the real reason people get so worked up over other’s strategically defaulting is that the complainers cannot make that decision themselves. They are bound by their false sense of superiority and will pay through the nose if only so that they can hold it higher than someone else.
January 11th, 2010 at 4:51 pm
JPL,
Thank you! Note that the laws vary from state to state anyone considering defaulting should look research their state laws to be sure.
Foreclosure really should be the absolute last resort. Even for those that are really in financial trouble a short sale makes far more sense. The impact on your credit is less and you can minimize the amount of deficiency by selling the house for as much as possible and by eliminating steep legal fees of a foreclosure.
-Rick Francis
January 11th, 2010 at 5:27 pm
JT,
You’re right. We don’t have enough info to make a clear judgment on this case.
But…
Clearly this guy bought at the peak of the market—in FLORIDA, mind you. Prices had to have been going through the roof and this guy most likely expected them to continue on their upward trend. We have to assume this or he wouldn’t have bought.
Turns out he was WRONG. He took a gamble and lost. Now he wants to bail on his obligation. Besides, WHO do you think this hurts the most? Obviously the penalties for such behavior are not harsh enough.
The way you defend people who walk away from their obligations makes me think you might have done something similar in the past.
January 11th, 2010 at 5:59 pm
JLP,
You’re right too–in regards to the part about his expectation of continuing price appreciation. He did take a gamble and he was wrong. A lot of people were. That’s not what I’m arguing though.
And what do you mean the penalties aren’t harsh enough? What would you propose? A debtor’s prison, perhaps?
Additionally, who I think this “hurts” the most is irrelevant because I don’t have a problem with it. However, you do! So, pray tell, who do you think it hurts the most?
In regards to your subtle ad hominem at the end there, the answer is no. I’m merely defending what is right and the liberties that have been granted to us. My points are valid and strong and can stand on their own unlike the attacks of others.
Also, let me remind everyone of one simple way that all of this could have been stopped: You don’t loan the people the money to begin with. The banks took on a risk; that’s why they charge interest. They lost on their gamble and they too will pay the price too.
Not to mention the fact that the same institutions that demand you repay your loan are all too happy to walk away from their obligations.
I love how they try to word it to sound differently than a strategic default. “We’re going to give them the properties to get out of the loan obligation”. Wow, that’s exactly what a lot of home owners are doing right back to you!
People make bets and take risks all the time; that is the nature of our system. Those who are correct are rewarded, and those who are wrong are punished (financially). People have the right to default on whatever they so choose but they will pay in some fashion. The free market is capable of handling that risk and has already priced it into your interest rate.
You have every right to call them names and look down upon them but you do not, and should not, have the right to infringe upon their actions.
January 11th, 2010 at 6:10 pm
I’ve never understood this argument either. You’ll end up paying much more than the actual cost of the house in interest and fees even when things go according to plan! (On a 30-year loan at 5.5%, you’ll end up paying more than $1.2 million for a “$600,000″ house.)
You took out a mortgage because it was a good long term investment or you couldn’t afford to pay 100% cash. Don’t jump ship because of a dip 3 years in to your 30 year plan. It’s just stupid.
January 11th, 2010 at 7:12 pm
Deja vu once again. JLP, please refer JT to where he can cut and paste the previous comments on this subject. Remember…moral vs legal debate, etc. BTW JT’s comment ‘I think the real reason people get so worked up over other’s strategically defaulting is that the complainers cannot make that decision themselves. They are bound by their false sense of superiority and will pay through the nose if only so that they can hold it higher than someone else’ sounds like an attack to me. Face it, some people have more morals than others…and choose to stand by their obligation rather than shun it. Or call it entering an agreement in good faith, a basic tenet of contract law. It’s not that they cannot make a decision themselves to walk away. They simply choose not to.
New comments/thoughts I welcome. I’ll tune in to TV Land if I want reruns.
January 12th, 2010 at 9:57 am
Stacey,
You’d better call out JLP way before you ever say anything to me! He’s the one rehashing the same obligation argument. Not to mention constantly repeating various frugality tips, many of which I come to read the site for. But that’s half the point of the site, rehashing older material for new readers, so I’m not faulting him for it like you’re trying to do to me!
But let’s think about how inane that comment really is. If someone came up to you and said the Earth was flat, you would, hopefully, point them to evidence showing the contrary. Now, if a different bunch of people, or even the same ones, started ranting about how the Earth was flat again, you would use the same argument. Does that make your argument any less correct? Absolutely not.
And what does “more morals” even mean? Morality is a set of standards and codes that one lives by, not some scale of goodness that you can have more of.
Why are you so worked up about defending this man’s mortgage contract to his bank? Why are you defending the banks? Haven’t they been defended enough?
I really, truly hope you respond Stacey. I’d love to here a respone.
Thanks!
January 12th, 2010 at 10:56 am
JT,
I don’t think Stacey (or any of us for that matter) is defending the banks. I have voiced my displeasure with the banks and lending institutions time and time again.
That said, IN THIS CASE, the banks are holding up their end of the deal. They financed the purchase of the house and agreed to receive payments with interest until the house is paid for. The bank is not trying to get out of this deal.
A society can’t function properly if people make deals and then walk away from them when things don’t go their way.
As far as the rehashing of posts go…
I do get post ideas from the news. I think they make for great discussions. I’ve been in a black hole for ideas on original-type posts and I don’t want to blog about making cheap meatloaf (though I did post about expensive meatloaf once) or making my own soap. So, until inspiration hits, this is what we have.
I will say that these discussions have been beneficial. I think they are awesome as long as we act like real adults and don’t resort to name-calling. We should be able to discuss these matters and learn from each other.
January 12th, 2010 at 11:09 am
JT) When someone like this guy walks away from his obligations, everyone else pays the price (including you and me). In this case, his gain is societies loss. You think the banks are going to “eat” this with no changes on their part? If this practice continues, I expect even tougher lending standards, and higher interest rates _for_everyone_.
Also, banks have a duty to it’s shareholders to sue deadbeats for any losses they realize (if it makes financial sense to do so).
I still smile knowing that this deadbeat lost almost $200k of his own money, plus will not be able to buy a house for at least 7 years. I would be even happier if Bach called this guy out and published his last name as well. We might not be able to throw these people in debtor’s prison, but we should be able to humiliate them publicly.
And yes, JT, Adam has no morals — when you sign your name to a contract, you are supposed to uphold the contract to the best of your abilities. In this case, Adam could afford to pay, yet he decided to just walk away from his obligations == No Morals.
How would you like it if a bank decided your 4.5% mortgage was no longer profitable, and they broke the contract and want payment in full within 60-days? Why is it that only one party in the contract is allowed to break it?
January 12th, 2010 at 11:47 am
@#2 BG:
“Let’s call these people what they are: deadbeats.
Hopefully the lender sues Adam with a deficiency judgment.”
100% agree.
@JT (#7) “Why is everyone so concerned with what someone else decides to do with their mortgage anyway? It’s not like their default is taking money directly from your wallet.”
In a sense they do. As a group, these people hurt the economy, hurt the employment, hurt the value of our investments – hurt all of us. Yes, sure, I know you hate all the banks and you think they should lose. The problem is – banks aren’t just CEOs or a few executives who make decisions. Banks employ a lot of people. Banks lend to businesses. Banks borrow from people who buy their bonds which may be held by a bond fund in your retirement portfolio. When WM went under, bondholders were wiped out. When banks lose money, banks lay off people who add to unemployment. Unemployed people don’t buy, so other businesses suffer. Unemployed people don’t pay taxes, so revenues suffer. Not only that, banks respond to losses by tightening credit. This means not only that fewer people can buy houses which leads to further price decline but also that the businesses can’t expand. It also means that some of those laid off people who have great ideas and could’ve opened businesses and hired people don’t have access to starting capital. So maybe an individual walking away doesn’t immediately affect you personally, but many people walking away affect the value of your investments (if you have any), and your employment.
Incidentally, they may be hurting themselves too. The probability is much higher that their home is going to worth more 10 years from now than less. Real estate goes up and real estate goes down. At some point, someone can always be underwater. There is nothing new about it: a lot of condo and coop owners on the East coast were underwater in the 90s when value of some condos dropped from $157K to 90K; from 400K to 250K; from 90K to 35K. Those who stayed get more than their money back in 2000s; even with current crisis, the values are still way way above the 90s lows.
When I bought my condo in 1991, I paid 125K. With a little over 20% down, my mortgage was 90K (or around it – I don’t remember details). In mid-90s, the value briefly dropped below 90K, so I guess this counts as “underwater” though probably not by much. But then in 97, I upgraded to a townhouse (180K) and rented out the first condo. Incidentally, the family who sold the place to me were more seriously underwater: at closing they added a check of their own money to the bank to cover the difference. They were buying a place in Florida. Guess what – not only I made out nicely by selling my first condo several years later and clearing enough money to pay off the mortgage on my current place with a single check, but this family who moved to Florida did very well too. Even with the crash, the values of properties now are still above mid-90s values.
Granted, it’s anecdotal, but if you look at historical curves, you’d see that it’s full of mini-bubbles. The probability is higher that eventually prices will recover.
Regardless, I agree with BG on moral aspects. Borrowing money and then not returning it is similar to theft. Plus, if we start breaking contracts, it leads to problems for everyone as higher prices of lending get passed to customers in form of tighter credit and higher rates.
@BD – I’ve never understood the argument about having to pay much more than the actual cost. How many houses one pays for if one rents during the same years?
January 12th, 2010 at 11:50 am
I agree 100% JLP. These discussions are beneficial and I have been doing my best to not resort to shallow personal attacks. I value everyone’s opinion on this site.
And I hope you didn’t misunderstand me when I was talking about rehashing posts. I have no issue with it at all. This is your site and you get to decide what goes on here. It’s easy for people like myself to make small, quick comments, but much more difficult to write an entire article, much less come up with original ideas. I applaud your efforts and I am grateful for this site. Thank you!
Back to the discussion–I think it’s obvious that the reason the bank is holding up their end of the deal in this case is because they only stand to gain from it. If it was going to cost them money to hold the mortgage they wouldn’t have written the loan in the first place. Actually, some of them did know these loans were mathematically bound to default so they securitized them in order to get rid of them!
And it’s not like these banks are left with nothing. They get back the house plus whatever interest was paid minus the lost “value” on the house. And as others have pointed out, they can still sue for a deficiency judgment.
I think another crucial issue that people are missing is that just because Adam can afford to pay the mortgage today doesn’t mean he always will. What happens when he loses his job in six months? Now he’s going to lose the house either way but he’s paid six mortgage payments that he’ll never see again. That money could have been used as an emergency fund!
Like I said earlier, we can’t know the future but, given the economy, this is a reasonable assumption, especially in a bubble state like Florida. It’s also perfectly reasonable that his house will continue declining in value. I’d say it’s even probable. I think it would be silly to stay in a mortgage and pay $100,000 with absolutely no idea how long it will take before you will see that money in the house’s value.
We have entered a secular bear market. Asset prices have been falling and will continue to do so. Boomers are looking to retire but can’t, 16-25 year old employment is drastically low, students are getting swamped with massive loans that they won’t be able to repay, and the labor participation rate is the worst it’s been in decades. None of this is good for the housing market. Housing values haven’t even stabilized much less gone up. And there’s going to be a swath of new inventory this spring as HAMP forces foreclosures onto the market.
The banksters would not bat one eye to save a penny even if it means defaulting on their own obligations. They look at the numbers and the law and that is my advice for everyone in Adam’s situation. Why do something for them that they would not do for you?
Choosing to break a mortgage contract because it makes financial sense is seen by some as immoral. They don’t want to live in a world where people’s words are no good. I wish the same; that no one ever told a lie, or cheated, or stole. However, this utopia does not exist.
In our capitalistic society people are permitted to enter into and break contracts according to their own free will. That is an inherent element to private property. The right to trade it and profit (or not) from it. And if you don’t like that then get out of this country because you are a communist. Okay, just kidding on that last part.
In all seriousness I do have a question for everyone. Do you disagree with this case because he can afford the payments? Would it be a different issue if he could not? I ask this in a very sincere manner.
Thanks again!
January 12th, 2010 at 12:09 pm
Thanks for the response kitty!
You make good points when referring to the people affected by defaults (of all kinds) and failures of businesses. I agree, it affects a lot of people. With that said, you are missing one key ingredient. The only reason these people had jobs in the first place is because the Fed blew a bubble. The crazy high home prices were nothing other than an illusion. It was all artificial, debt-driven fiction. And the problem with bubbles is that they are always followed by a bust.
These jobs were never created on a sustainable system and so they must disappear into the ether from whence they came. As must the all of the debt that was created as a precursor to those jobs. It’s sad and unfortunate that people are losing their jobs by the droves but this correction must happen for us to truly recover.
The government can try, and fail, as it might to prevent foreclosures, shore up jobs, and stimulate the economy but when the stimulating stops we are right back in the same position we were before. The math is never wrong.
In regards to your condo story that’s certainly the first I’ve heard of it. Do you perhaps have any hard data on the housing prices in the area you are referring to? I’d love to take a look.
I’d like to close with one thing. You mention that if we all started defaulting then that would inevitably lead to higher prices. I agree and, I believe, I stated this as well. But one thing I’m learning is that those higher prices and rates are coming to us whether we default or not. Credit cards are raising interest rates to upwards of 30% almost across the board. They know what’s coming and they want every dime outta you before you don’t have a dime to give. It’s interesting because this very action is pushing many to default on payments that they would otherwise be able to pay at the old rate. Maybe we should ask the banks to do the right thing and not raise rates?
January 12th, 2010 at 12:37 pm
#17) “In all seriousness I do have a question for everyone. Do you disagree with this case because he can afford the payments? Would it be a different issue if he could not?”
Yep, I’m upset specifically because he _can_ afford to make the payments. If he couldn’t afford the payments, then I could care less if he walked away. Remember, it’s to uphold the contract to the best of his abilities. If he couldn’t afford to make the payments, then he would not be a deadbeat — he’d just be “broke”, and there are a lot of honestly broke people right now, and mostly of no fault of their own.
What Adam is doing is similar to someone collecting welfare even though they do not need it. We as a society decided that debt-forgiveness (and welfare) are good things, a safety net for people at the bottom. When people undeservedly start abusing these safety nets, then the few will spoil it for all, with only a single option left — get rid of the safety nets: eliminate welfare, and institute debtor’s prisons.
January 12th, 2010 at 2:09 pm
Thanks for the response BG!
Your points are certainly reasonable. Although I still don’t agree, I absolutely see where you’re coming from as that was my initial thoughts on the subject when I first heard about this happening.
January 12th, 2010 at 5:10 pm
More fun news for housing prices
Just wait til interest rates go up and the tax credit ends!
January 13th, 2010 at 8:45 am
Ok, here’s my response, JT. JLP is right, I am not defending the banks. I took offense at your tone against people who wouldn’t walk their obligation. If you refer back to the previous post on the subject I did agree w/you to the extent that if it came down to food for my family vs paying on the mortgage, of course food would win.
As far as the “more morals” argument, maybe I picked the wrong vernacular but you have to admit there is a scale to one’s morality. For example, after seeing many tax returns for folks, there are some who are conservative and take deductions/claim their income to the letter of the law. Let’s assume the rest of their lives are squeaky clean as well. Well that’s an example of being at the “very moral” end of the spectrum.
Then I have a set of bozos who live in the gray areas. For their charitable deductions they supposedly donated $5,000 of used clothing for that year. If that’s “thrift store value” that would mean the original value of the clothing could be anywhere from $20-$50K. Not very likely unless they’re Oprah. Or how about those Scout-supporting folks who write off their cookie and popcorn purchases (entirely, not just the est. profit on them)Hello! You’re receiving something in return…you can’t take the whole price of the goods. Or the case of the “single mom” living w/her child and child’s father, collecting WIC money, etc while the boyfriend drives a Mercedes station wagon?
These would be examples of being on a different point on the morality scale.
So yes, I stand by my perspective that there are degrees of morality.
And yes, I now understand why you repeated your comments, as you explain in your flat-world ex. I just didn’t appreciate the attitude you took toward the people who are doing what my moral compass says is the right thing. You made them sound like lemmings…unable to make their own decisions. Most likely they are just trying to do that which enables them to look in the mirror each morning and not turn away in shame.
January 13th, 2010 at 9:53 am
Stacey,
Thanks for the reply. I understand where you are coming from. Those types of people make me angry as well. But I have a problem with them because they are committing fraud and breaking black-letter law whereas Adam and others are breaking a contract which is a civil offense.
My apologizes for offending you as well. I don’t think people who stay in their house are lemmings by any means. But I don’t think people that choose to leave are bozos either. If continuing to pay your mortgage while it is underwater is something you must do to not feel shame, then it’s your prerogative to keep paying. I can understand that mentality as I have never defaulted on any payments, much less been late. It’s also easy for me to talk about this because I’m not in the situation. I’m sure it’s another matter entirely to be living this.
Thanks again!
January 13th, 2010 at 12:17 pm
I found all the comments to be fascinating even when it gets a little edgey I believe we can learn from each other and gleen information.As I was reading I realized some of my “morales” agree with one person and some with another oops! not really consistent or responsible as I thought.I am 55 with a mortgage paid off for 3 years now.Several comments caught my attention like “moral compass”,” degrees of morality” hmmmm we can justify anything but also it depends on our point of view,background etc.
JT you facinated me because yours was not the popular view, Stacey you surprised me because you took it personally and got emotional,BG you made me ponder,kitty you made me reflect and I saw some merit in both sides,JLP yours started the whole firestorm but lively discussion is what is needed thanks!
January 13th, 2010 at 1:32 pm
Chase negotiated a short-sale, meaning that they worked out something beneficial to both parties. If they would have simply stopped paying, the mortgage holder would have sued them.
Banks do screw people by repricing existing credit card balances. This is within their contracts, but is still their contracts.
An analogy to the underwater houses would be when interest rates went to double digits in the 80s and the banks were only making 6% on mortgages. The cost of their borrowing dropped below what they were taking in. They did not break the contracts.
Many would argue that they would of had they been immune to lawsuits. I think that many would avoided such practices for the sake of their reputations. Kind of like a credit report.
Borrowers have the option to avoid credit, however, after defaulting. Businesses cannot afford such a mark of shame. This statement may be naive, though, given the sub-prime debacle.
January 13th, 2010 at 1:33 pm
“within their contracts, but is still their contracts” this was supposed to say something about being shady
January 13th, 2010 at 3:39 pm
Only suckers stay in houses that are underwater. In case you losers that think short sale/default is wrong, its called a ‘business decision’.
You are thinking that the US economy is going to recover. the only way it will recover is if all the debt is defaulted. Obamination wont do that. Jobs are gone/never coming back. what the market needs is lower prices…owners that can sell via short sale without bringing money to the table..will.
Deceive yourselves if you want, but when you ‘long term’ David Bach think owners go to sell you’ll face a sad story:prices are lower and will continue to be lower, making those folks already underwater, more underwater.
The conditions that existed to move the housing market forward are gone: easy credit and jobs.
January 13th, 2010 at 5:21 pm
#27) “Only suckers stay in houses that are underwater.”
How so? Have you calculated all of the costs of foreclosure aside from the fact that you might get sued by the bank for deficiency and having to defend yourself in court (ie; lawyer costs).
Here are some costs you might be neglecting to take into account if you ‘strategically default’: Moving expenses, having to find a new place to rent (with variable rent rates), shame if co-workers / friends / family finds out.
After you decide you don’t want to rent the rest of your life (and a bank is willing to lend you money again after 7 years), you have the repeated costs of realtor fees, loan originations / mortgage costs, higher interest rates, likely more expensive property in the future, etc.
I think the ‘suckers’ here are the ones who ‘strategically default’ — but hey, do what you want — but don’t come asking me for a bailout.
In this specific case of Adam, who is only $50k underwater on a $600k house (not even 9%) — his choice to strategically default was a dumb financial move. I’m betting he’ll realize that maybe the long-term consequences are not worth the $50k.
January 13th, 2010 at 9:44 pm
I am a person who made a huge mistake in 2007 buying a rental property on an interest only loan with 20% down. The hose has lost 40% in value and it costs me $8000-$10000 a year out of my pocket to keep. I have tried to talk to the lender and they will not help me at all. I am willing to re-finance the existing balance on a 30 year mortgage but the house will not appraise.
I have thought about just walking away from it so I don’t plow through all my savings over the next couple of years to keep it. It seems to me the banks got into trouble and the American taxpayer came to their rescue. Now they are not willing to work with homeowners. I have always paid all my bills on time and it would kill me to walk away from this but I don’t see financially any other way around it.
I don’t have a crystal ball but I don’t see this house being worth even what the loan balance is let alone what I paid for it for many years if ever. I don’t believe the banks will ever lend money as freely as they did a couple of years back.
January 14th, 2010 at 10:58 am
#29 Bruce) Were you honest on the mortgage application indicating that this loan was for an investment property (hence, not your primary residence)?
If so, then yours is a business decision and less of a moral/ethical one. Probably best if you spoke with an attorney who specializes in investment properties.
If you are determined to dump the property, work with the lender and try to reach an agreement for a short-sale, and a deal where you walk away from the table in the free and clear.
Good luck.
January 14th, 2010 at 1:57 pm
Wow, my comments look a lot better next to Fred’s. Thanks for taking some of the heat off me man.
BG, while Fred is forgetting the hidden costs of defaulting, you’re forgetting that Adam’s home value is not a constant. It can, and most likely will, continue dropping in value for some time to come.
I just read an interesting article about how jumbo loan delinquencies are way up, including Adam’s state of Floride. This will only further help to push the value of his home downward. And considering it is for such a large amount, it only means it has that much farther to fall.
January 14th, 2010 at 5:47 pm
#31 JT) I hear what you are saying. I guess my point is, for your primary residence, it really doesn’t matter what it’s value is as long as you plan to live there — since it is just shelter.
One thing for certain is that the home will always be worth more than $0. Once you finish making the mortgage payments, you owe $0. The home will guaranteed to _eventually_ be worth more than you owe as long as you continue making payments.
Being underwater on a mortgage is only an issue if you want/need to sell the place. Being underwater will ‘trap’ you in the house, but as long as you don’t need to leave the trap, eventually the trap just disappears on it’s own.
I have no intentions of leaving my home that I bought in 2005. It’s current market value only affects me because my property taxes are indexed to it’s appraised value.
If my house appraisal dropped 50% today and stayed at that level, I’d pay $3k less a year in taxes. A 50% drop would put me underwater by $43k (35% underwater!!!, compared to Adam’s measly 9%). It wouldn’t bother me if this happened, though, because I plan to have the house payed off in 4 years anyway (God willing I keep up my double mortgage payments on my 15-year note).
Actually, the $3k in yearly prop-tax savings would allow me to pay the house off 4 months earlier, because I’d just send those savings to the mortgage company as extra-principal payments.
May 27th, 2010 at 7:25 pm
Googling ‘Strategic Default’ brought me here…
I am in Adam’s situation, but much worse. I bought a house at the peak of the market in Southern Florida. This was my first house, purchased with the excitement of a lucrative promotion. I admit, I didn’t study up on real estate or finance, and got myself into a deep situation, but I also can’t help to shine the light on the lenders who preyed on the early twenty somethings during those times. Were the sub-prime 100% financed ARM mortgages really fair?
Now I know the ‘too good to be true’ speech, and I am to blame for being ignorant, but I feel the banks too should have looked twice at their own too good to be true situation:
“Lets finance single Heather 100% on a $350,000 home. She can afford the payments on these fancy interst only loans. Convince her with the outlook on the exploading housing market so positive, she can sell in 5 years and we all come out on top!”
Now the shame. I decided, before that 5 years was up, and my house is now worth $175,000 I’d like to refinance into a better rate mortgage so I can at least start paying down the principle on this never ending upside down hole I’m tossing money “up” into.
I was denied.
I admit I made a bad mistake that I will pay for with my credit score and shame, but I am left with little choice.
I will be asking for forgiveness of my debts from my lender by proposing a short sale. I will ask the bank to take payment for less than i owe from a buyer I seek out through the use of a Realtor. Hopefully the bank will accept this offer in lieu of foreclosure, as I cannot possibly see a light at the end of the tunnel.
Now I ask of the blog…(I know I am months behind, but here goes)
Where do I stand on your moral scale?