When Jill wrote about how to fix your credit after a foreclosure, a reader, Marke, left the following comment:

I am right now considering whether I should walk right now.

Since millions of homeowners are in a situation where their house is worth less than they owe on their mortgage, I’m guessing that Marke isn’t our only reader facing this dilemma.

Marke suggested the white paper on “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis” from the University of Arizona.

I found the paper very interesting. Strategic foreclosure is obviously a very hot topic for many people right now. Based on economic data, they calculate that:

Millions of U.S. homeowners could save hundreds of thousands of dollars by strategically defaulting on their mortgages.

They give a good example where it might take a couple over 60 years to recoup their lost equity. Many families are in similar situations and are staying put.

Why People Stay

Mathematically, on paper, it makes sense for many homeowners to walk away from their home. But in large part, they don’t. They discuss many underlying reasons including feelings of guilt, fear, irresponsibly, shame, etc.

Deep down, I think we all know the message:

The majority of Americans who believe that voluntarily defaulting on a mortgage is immoral.

Would You Walk Away?

Since we focus on the financials here, I thought it would be a good exercise. Let’s try to take the emotion out of it. Can you do it?

I tried very hard to envision what I might do if I were in a similar situation (which, thankfully, we are not). Would I walk away from my home if I was $10,000 underwater? No. Would I walk away if I was $600,000 underwater? I’m not sure.

Even though I spend ridiculous amounts of time racking up $100 here or there, doing free money deals, you dangle $600,000 in front of me and I can’t honestly tell you if I could accept it. It’s very hard to isolate a hypothetical example, without letting my feelings take over.

Marke and I would like to hear your thoughts! Try as hard as you can to look at it from a purely financial viewpoint.

Would you walk away from your home? And if so, at what point?

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Comments to Would You Walk Away from Your Home?

  1. So if you owe more on your car than it is worth, you also just walk away?

    It means that responsible people will have to pay for another person just giving up. Someone will pay in some way for those who choose not too.

    klip

  2. We wanted our own house and bought our home since it was a price we were willing to pay in an area we wanted to live. No, we would not leave if we were upside down since the actual value of our house doesn’t matter to us at all.

    In my head, I have my home and just need to finish paying off the mortgage in order to get the deed. It would not matter to me if it was only valued at $50,000 right now…to me, it was worth the price we agreed on and I don’t want to move.

    People with different motivations may have different priorities. If I bought a $500,000 house as an investment property and it is now only worth $250,000, I’d be kicking myself and wondering whether I should cut my losses or not.

    I don’t think I’d walk away since I like my credit score, but I also cannot see myself buying a $500,000 house to start with, so who knows?

    Personally, I never understood the people who expected to turn a quick profit…even when the market was great, a house was not guranteed to sell.

    If I ever started investing in property, it would be rental property. I’d plan as if we weren’t ever getting rental income (get a mortgage payment we could cover every month anyway) and then use rental income to offset that cost and pay for issues that pop up.

    The rental property would be paid off in 15 years or less (whether or not it was rented out that entire time) and rake in 80% profits from there on out or be sold like any other house.

    I don’t think people properly thought through their home purchases in advance…hence all this drama.

    Budgeting in the Fun Stuff

  3. I am not underwater here in San Francisco, on my unit in a Tenants In Common situation…we all own the building together but we have individually financed loans for our own portion (which is different than most TICs, where all the owners are on the same loan). I haven’t gained any on my investment in the unit, so my losses are not as bad as others.

    Robert in SF

  4. As for those who own a house that is *remarkably* underwater, you should consider the investment side just as seriously as your “moral” side of keeping up your commitments to the loan.

    Just keep in mind, the loan wasn’t an agreement that you would pay off the loan if you were able…it was an agreement that if you *didn’t* pay off the loan as agreed, you would lose the collateral you put up for the loan, in this case: the house. That’s a general summary, and your contract the laws of various States might vary.

    It seems to me if you are so underwater on a house that you consider an investment and that you would one day sell it at a profit and move on to something else (not a place your grandkids would one day inherit, an heirloom property if you will) …you need to look at this from a business point of view.

    Robert in SF

  5. For property that is significantly underwater, the property value is not likely to increase to a profitable level any time soon and certainly not in line with the returns you could get from taking your loan payments and investing them in a more “safe” investment such as index funds or even CDs….

    Robert in SF

  6. In other words, calculate how much the property would have to be worth in whatever time frame for you to profit a certain percentage (8%/year as classic example of index funds averaged over more than a few years) and then see if its less time that it would take for your credit rating to build back up (7 years or so?)….to get the approval for another home loan to buy a place at a reasonable price.

    I think for a lot of these McMansions that are claimed to be the majority of the underwater homes, you will see it’s going to take a lot more than 7 years for those to become profitable (if ever???).

    If the house was an investment, and your money is being thrown into a bad investment, you don’t keep throwing it away like that.

    As for the car analogy being underwater…cars are not an investment, they are a liability. They are not intended to be more than a tool with a limited life-span that will have value in a much shorter time-span than the house investment. The payment for the car ends before then car loses all value, and the value comes from more than the resale value. It comes from the utility of the vehicle and the savings on replacement cost for that utility. This is a general statement about cars, such as sedan or SUV for the majority of people, not Hummers or Mercedes Ultra-Rich 2010 status symbols.

    I hope this was clear….an investment that shows no sign of “paying off” anytime reasonably soon is a bad investment and you need to take a hard look at agreements around collateral and see if it’s worth it.

    Some people didn’t buy a house as an investment, they bought an emotional attachment to a home, freedom to do as they want in their own place, or peace of mind in making their own way. Those persons should not consider this a business arrangement at all, because to them, it’s not. It’s personal.

    Robert in SF

  7. If there is an agreement in a loan contract allowing for the bank to take repossession, then utilizing that provision is not “immoral”. You are only using an agreed upon option to minimize your financial losses/damages.

    Tyler

  8. Just to give you further infor on me. I am not underwater (upsidedown) on my mortgage. Here is the math. I am going to retire in 3 years. I currently pay $1700 a month housepayment. $1700 x 36 months = $61,200. The question is if I walk right now I save $61 grand and in 3 yrs I don’t think I will recoup any of the $61k (Don’t include rent as I have a small cabin in the Mtns thats paid for and I can live there almost free)and put the $61k in the bank.

    Marke

  9. Marke,

    If you’re not underwater, than why don’t you sell instead of walking away? You may not care about the credit hit, but it seems to me that if there is no/little money at stake, then there is an obvious moral imperative to live up to your mortgage agreement.

    Chris

  10. If I tried to sell the house, I owe $260K. Thats about what its worth and selling costs would be around $25k.

    Marke

  11. “if I was $600,000 underwater? I’m not sure”

    There are many aspects to this storyl. Was the buyer just flipping houses (speculating) or is this the buyers first home in which he intended on living in.

    If you ask me what is immoral is the incorrect appraisement the buyer received before purchasing the house. This appraisement was directly related to the banks being able to bundle up these mortgages and pay off other appraisers to label them with AAA ratings, even though a large number of these mortgages were worthless. Then they sold these AAA rated bonds to investors who thought they were buying the safest bonds out there.

    So if you ask me would I walk away?
    The answer is in a heartbeat. I also dislike people who are not truthful enough or can’t put themselves in other peoples shoes and sidestep the answer to whether they would walk away FROM 600,000$ DEBT!!!! Be real.

    And I don’t own, I rent. I can put myself in some of these people’s shoes though.

    Al

  12. Whatever someone chooses to do in a financial situation of being 600K underwater is their choice. Everyone has their own belief system about what to do and trying to convince one of the morality or the business side of any decision can lead to a lengthy argument.

    Personally, for me, I cannot say what it feels like to be that much upside down on my mortgage. I’d have to be able to live with the consequences – having a devalued home or paying for it later with a bad credit score and even higher mortgage payments on the next home (if I even get approved for another mortgage).

    I believe I would stay in the home. I committed to pay the mortgage, and I value my credit score even more.

    Kristine

  13. We found urselves in dire straits 4 years ago. We moved a state away and renter out the house. We are now in the process of selling to our next door neighbor. It has been difficult and our credit is totally trashed. We will be renting for the next 2 years. But I would do it again. Losing a house stays with you. My aunt and uncle lost a house and never got over it. Twenty years later they still bring it.

    Just my 2 cents.

    Amy

  14. We have been trying to sell our old house for over 3 years now. We’ve been renting it as much as possible, but the property is mostly land with a small cabin, so rent only covers 1/4 – 1/3. Our second loan is completely underwater. We’ve tried short sales but they aren’t accepted because we’ve done all we can to stay current. This is timely, as I think we will be defaulting soon. There doesn’t seem to be a good answer here, and HAFA won’t help because our old home is no longer our primary residence.

    Sue

  15. More bad news on the forclosure front.

    http://www.msnbc.msn.com/id/35.....gton_post/

    Marke

  16. I agree with many people on here that if you purchase a house responsibly (i.e. at a price and interest rate you can afford) then I do think there is a moral obligation to pay if off even if it loses value. However, if you did that and then had a change of circumstance where the “afford” value changed (i.e. a loss of job) then walking away might make sense.

    What is often not mentioned is that the current housing environment is a product of the financial market as a whole. With employment rates going up – what people could afford 5 years ago, may not be what they can afford now even if they were reasonable in their purchase. Many who are laid off now are not having an easy time finding another job and may not find one at the same salary. In those cases walking away makes sense and I do not think is immoral.

    I would have to say that I have little to no sympathy for people who bought more than they knew they could afford just because a bank was willing to lend them the money. Or those that used interest only loans. I qualified for much more than I used in my mortgage, but I bought at a rate I knew I could afford. I paid the higher rate to get the 30 year fixed mortgage. I just hope they remember that if it seems too good to be true it probably is…

    By the way, how many people are really $600k upside down on their mortgage? At that point, they can probably afford it. I agree at maybe 50% of the value it would be a hard decision, but I don’t think I could walk away. Would be partly my fault for choosing a neighborhood that could decrease that much in value.

    Jenny

  17. What a great discussion!

    I should add that the $600,000 was an arbitrary amount I picked. I was trying to make it an amount that I thought would be easier to isolate emotion and finances.

    Madison

  18. Some more good news on the forclosure front. this article shows how really bad it is today, what about tomorrow?

    http://finance.yahoo.com/real-.....ng-markets

    Marke

  19. In financial sense, I may consider the $600,000. We know that finance as it may be a pure consideration. But when it is mixed with emotions, it will depend on the weight of emotions we have invested on a particular house.

    Victorino

  20. I am around $100,000 underwater and YES I would walk away. In fact I am 5 months into not paying my mortgage.

    I lost 30% of my income since the recession and my wife lost her job. If I continued paying the mortgage it would be 50% of my income. NOT GOING TO DO THAT! I didn’t cause the economy to tank, but I’m saving my butt and walking. I could rent a bigger house for less than what I pay now.

    Consult with an attorney to protect yourself and WALK if you are seriously underwater. You’ll be better off financially. I don’t worry about my credit score much. I still have over $20,000 in cash so I can cover unexpected expenses. Plus I save $2,000 in cash each month by not paying the bank(I mean crooks). I have at least 6-8 months left here payment free. That’s another $16,000 saved!

    Rob Williams

  21. I would say that contracts are binding to the extent of their terms. My purchase to buy my home is a contract and it spells out what happens if I pay, and what happens if I don’t. There is no moral element to paying or not.

    Doug French has written an excellent book on this – “Walk Away: The Rise and Fall of the Home-Ownership Myth” which I read fairly recently. For those who insist that private borrowers have a moral obligation to pay no matter what, there is much to consider in the book.

    One example is given of a lender that itself feels no obligation to repay its debts: Morgan Stanley, which bought several office buildings in San Francisco in 2007 and announced its plan to return them in 2009 “to get out of the loan obligation” (Alyson Barnes, spokesperson for Morgan Stanley).

    Companies are praised for walking away, but try to guilt the rest of us into hanging on. The government helps with the guilting as well.

    Jay


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