The other day I was reading an interesting article by Liz Pulliam Weston on MSN Money in which she talks about whether or not “underwater” homeowners should simply walk away from their mortgage.
For those of you who have never heard the term “underwater” used in housing, basically it means that a homeowner owes more money on their mortgage than their house or property is worth. For example, if you owe $250,000 on your mortgage but your home is worth only $200,000, you would be “underwater” by $50,000.
Considering how far and how fast real estate prices have fallen in the past three years, it’s easy to see why so many home owners with a mortgage – nearly 25% according to a recent poll – are in a situation like the one described above.
In Weston’s article, she references a paper written by University of Arizona Law professor Brent T. White in which he asserts that if you’re underwater, you should walk away from the home and mortgage, even if you are able to make the monthly payments.
White argues that underwater borrowers would be better off financially over the long-term, not to mention the fact that the current system isn’t exactly set up to provide much help to those who need it.
White also asserts that the morality regarding walking away from a home and mortgage shouldn’t be taken into consideration as this is purely a financial decision.
Weston, on the other hand, argues to not walk away from your obligations, and to try everything possible to make your payments.
She states that aside from the fact most of us believe we have a moral obligation to continue making payments, letting your home slip into foreclosure will ruin your credit score, and will continue to foster the downward spiral in the real estate market that our country is trying so hard to pull out of.
Weston ends her article by recommending that troubled borrowers attempt to work with their lenders and considering all options prior to deciding to simply walk away.
So, in which camp do you fall? Should underwater borrowers walk away from their home and mortgage because it’s better for them financially, or do they have a moral obligation to stick it out regardless of the financial impact? Let me know what you think by leaving a comment below!
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Lenders aren’t interested in working with borrowers. They already have bets against you in the form of CDS default insurance which has an open spigot to TARP and the Fed to cover anything via the AIG bailout. Working with you involves them taking on a higher risk than zero risk offered by bailouts. They aren’t stupid even if they are immoral.
90% of anyone who attempts loan refi, loan modification or short sale will be summarily rejected and their precious time wasted. There’s no upside for banks to cooperate beyond the political token degree. The NPV of any of these alternatives are better than the auction price of a foreclosure sale but not better than the insurance payout if you default and foreclose. Foreclosure is what banks want because of the bet against you. It’s really the only reasonable thing anyone should consider. Don’t waste you time – just let it go. You actually don’t need it as it owns you more than you own it.
Also file for bankruptcy if you have non-recourse loans – otherwise the agony won’t let up as they will still come after you for those and you still won’t be any more able to afford to pay them. If you can, do a full Chapter 7. Statistically most recent Chapter 13 filings eventually become Chapter 7 filings anyway because of the precarious position most folks are already in in terms of job security, medical care security and debt load. The cost of a Chapter 13 is far higher and you’re still likely lose it all anyway in a Chapter 7 down the road. Cut your loses and avoid the needless and inevitable headache!
Until you see folks from Wall Street facing criminal indictment, you have not a single moral or ethical reason to fell even a twinge of guilt about deep sixing it all. Not even a twinge.