Are you willing to walk away from your mortgage and suffer the damage to your long term credit and future prospects? Weigh the facts!
Watch: 60 Minutes http://tinyurl.com/35wkqj7
You’ve done the math: Your house is worth less than you paid for it. You can afford to stay and keep making your payments. But you feel sick about your home’s depressed value. You feel like a chump for paying too much for your home. What do you do?
Morley Safer explores the new phenomenon of homeowners who are opting for ‘Strategic Default’ and walking away from their homes. These are people who can afford to pay their current mortgage-- people who are frustrated with the devaluation of their homes compared to how much they owe on them. NOT people in financial trouble. Their banks are saying ‘no deal’ to reducing their loan balance. A lot of people are making tough decisions about staying in homes now worth 40% or less than they paid for them. It may be logical to walk.
But is it ethical? After all you did borrow the money to buy your home. The seller is long gone. Where else can you hand something back to the person you borrowed the money from to buy that item? You signed a contractual agreement to pay them back over time. Certainly some of the loan products and contracts were flawed and you do have recourse if you were steered into a predatory or toxic loan. But these folks interviewed in the 60 Minutes Expose are not people who were duped or who can't afford to pay their loans. They feel cheated because their homes have lost value.
Is your home value loss temporary? More than 11 Million homeowners across the country are estimated to be ‘underwater’ and this number could double in 2010. Underwater means you owe more than your home is currently worth. It’s a bit like owning a major stock and watching it’s value drop overnight as many witnessed last week when Dow plunged dramatically in 16 minutes. The next day it regained most of the loss. Imagine those who sold stock at the bottom in panic mode. Having sold and taken a loss, they now have no way to recover that loss.
Why sell or abandon an investment at it’s lowest value point? Isn’t that the time to invest or and bide your time until its value recovers? Not everyone agrees on this point. It’s a good theory for investments: but applying this strategy to your home in which you have invested your life goals is very different from a stock you hoped to profit from. You can’t live in a stock!
The decision to ‘walk’ is not clear cut: Asking for mortgage reduction if you are not in financial trouble elicits a big fat “nice try” from your bank. The programs designed to help homeowners with demonstrable problems and hardships don't apply to you. Let me tell you the people who do get help from their banks seriously earn it. Loan modification is a very humbling experience. These folks have no where to walk to. Do you begrudge those in need being helped? Have we become that self centered?
The pitch to walk: Let’s say you walked away from your home in May 2007 when values first began to plummet. Let's say you had maintained a good rental and credit history for three years. While foreclosure has a very bad effect on your credit score, by demonstrating mortgage worthiness for three years hence, you could qualify for an FHA or VA loan. You could theoretically buy back your own home for the new lower value. Ironic? The nice folks in the 60 minutes episode who help people walk away will help you 'feel better' about defaulting for a modest fee.
At the risk of being seen to promote this comany--which is not my intention-- this calculator is a quick read on the 'financial benefit' of keeping your current home mortgage vs. renting. http://tinyurl.com/cjvtob
Consider the downside: First, I would never recommend you walk away from your home or any financial obligation. You have invested time and money and often sweat equity. Your home is a reflection of your life goals and that commitment to yourself and your family and community. The moral issue for many people has become secondary to the financial decision. If enough people do walk, their banks would be forced into greater losses in their portfolios by the cascading drop in values caused by more foreclosures, eroding the value of entire suburbs and towns. Naturally a foreclosure, short sale or deed in lieu process has an extremely damaging effect on your credit for up to ten years.
Programs designed to stem foreclosures are new. If your home value is underwater by more than 25% of your loan, the new Principal Write-down provisions may be offered. This is new. A few of the largest banks will subscribe to this program starting in July 2010. Naturally they are finding a way to be paid for their trouble via your tax dollars. At some point soon it is becoming apparent that we can't keep paying banks for their losses. At what point do we stop paying banks to help us? When enough people leave their homes? That is a very big question that could spell big trouble for our already fragile economy. The Banks who took so much TARP money should be shouldering at least some of the loss for their mistakes--but so far our congress just keeps forking money over to their side of the table.
I would urge anyone considering walking away from their home to reconsider all these points before jumping on the bandwagon. I imagine that there will be unseen repercussions for those who walk away based on pure economics and not actual hardship. Your neighbors will struggle to maintain their safety and values on a street littered with foreclosure signs. While I can fully understand the desire to be relieved of your financial woes: is it really the right thing to do? Do we want our local economies to fall like a house of cards? These are serious questions. Maybe, just maybe it would help to get some of neighbors together and find out how they are doing. Take a pulse and find out if others are willing to stick it out or take a group stance.
It's true that homeowners who can afford to pay are out of luck. Their banks and the Fannie Maes, Freddie Macs, FHAs and VAs of the world say you have an obligation to pay back the money you borrowed. Homeowners who in trouble are being helped in many instances by the Making Home Affordable and HAMP programs. Is it fair? Life isn’t fair. In case you forgot, the person who is in fear of losing their home and is struggling with foreclosure or loan modification has other real problems like loss of income, family illness, death or other setbacks. They need help just to survive.
The inequities of this situation are not lost on banking and real estate professionals. They don’t want people who can afford to pull their weight to default. A sudden drop in values presents a conundrum to which there is no easy solution. Too much inventory kills demand and the cycle spirals downward quickly. Banks don’t want to go on record about strategic defaults (none agreed to be interviewed on 60 Minutes). Investors are really really nervous. If their GOOD customers walk what will their entire portfolio of mortgages be worth?
Before you decide: why not go on record? Write or call your representatives and tell them your story in order to support stronger consumer protection legislation. It is our both right and our responsibility to speak up and be part of a solution in our democracy. Our lumbering government will only maintain the status quo if we let them. Our elected officials were hired by and are paid by us to officiate for us. Not for big banks. Our representatives are accountable to their constituents. At this stage, the creation of a Consumer Protection Agency with independent legal ability to actually hold banks accountable is a dim hope, struggling in committee.
In fact, I can recall at least three banks in Washington state subjected to criminal fraud proceedings by the State Attorney General: the first was against Household Finance Corp for inflating home values for the purpose of selling predatory loans. More recently Countrywide and Washington Mutual were found guilty of predatory lending and financial damages were levied via several class action suits. These actions have challenged the hubris of large banks to think they can act with impunity toward the borrrowing public.
Be a citizen and speak up. Click this link and plug in your zip code: http://www.congress.org and email, write or call your representatives or the entire financial services committee in the House and Senate. They need to hear from you. Your stories, your concerns, your ideas.
Remember: for every action, there is an equal and opposite reaction. You may feel very relieved if you walk away now and easily forget what you left behind. But rest assured: your city, suburb and most certainly your neighbors will be financially affected if you choose to leave and let your home become another sad statistic on their street. Think about it. The DOW’s slide of 1000 points in an hour may seem like chump change if the entire housing market collapses.
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