Walk away from your mortgage?

If you’re deeply underwater, this WSJ columnist says you’d be a chump not to.

How widespread is this? More than 11 million families are in “negative equity”—that is, they owe more on their home than it is worth—according to a report out this week by FirstAmerican Core Logic, a real-estate data firm. That’s a quarter of all families with mortgages. And for more than five million of those borrowers, the crisis is extreme: They are more than 25% underwater—the equivalent of having a $100,000 loan on a property now worth just $75,000 or less. That’s true for a fifth of mortgage holders in California, nearly a third in Florida and an incredible 50% in Nevada.

Are you in this situation? Are you still battling to pay the bills each month, even when it may make little financial sense to do so?

It’s time for some tough talk.

Stop trying to chase your lost equity. That money is gone. Don’t think like the gambler who blows more and more cash trying to win back his losses. That’s how a lot of people turn a small loss into a big one.

And do the math. Even if you hope the real estate market is near the bottom—it’s possible, but by no means certain—it may still take years to see any meaningful recovery. If you are 25% underwater, your home will have to rise by 33% just to get you back to even.

Is that likely? And over what time period? Even if home prices rose by 5% a year from here, that would still take six years. And during that time you could instead be building fresh savings elsewhere.

If you are reluctant to give up on “your” home, realize that it isn’t “yours.” If you are in negative equity, it’s the bank’s home. You’re just renting it. And right now you may be paying way above market rates. You need to be ruthless about your cash flow.

Are you worried about the legal consequences of walking away? Certainly, you should check with a lawyer before doing anything, but the consequences will probably be more limited than you think.

In “non-recourse” states, the mortgage lender may have no right to come after you for any shortfall. They may have no option but to take the home, sell it and eat the loss. According to a survey last year by the Federal Reserve Bank of Richmond, such states include negative-equity hot spots California and Arizona. Even in “recourse” states, lenders may have limited ability to come after you. Often they’d have to jump a lot of legal hurdles, and it’s just not worth it for them. They’re swamped with cases anyway.

“In my experience, right now they’re not really going after anyone,” says Richard Nemeth, a bankruptcy attorney in Cleveland. “They just don’t have the resources.”

If you’ve taken smart steps to protect your money, you may be safer still. For example, money held in a 401(k), Individual Retirement Account or pension plan is sheltered from creditors.

22 Comments

Filed under Uncategorized

22 responses to “Walk away from your mortgage?

  1. Greenwich Ex-Pat

    Says it all for me. Short, concise, and to the point. Loved his comments about the American middle class, which is being played for a bunch of schmucks.

    As someone who sold out just at peak (which, in the South, doesn’t mean as much as it means in Greenwich and other areas) and decided to rent until the mess settled, I used to feel disgruntled about homebuyers who ran up the market and some of whom laughed at me when I said it was a bubble that would pop. And when someone got into trouble, I must admit to a bit of schadenfreude and had visions of paying a drastically deflated price for a good property while the clowns were burdened by heavy debt. I wanted to say to someone “Who’s laughing now?”

    Except it’s not that simple (largely due to idiotic government intervention) and I’m not laughing now and if people want to walk, go ahead and walk. I won’t judge. I have a buddy who is going to walk one way or another from his property, even though he could pay. It’s no cakewalk. It’s complicated and involves sheltering other assets, consulting with attorneys, safeguarding bank accounts, etc. It also involves other members of the family. It sucks. He may get out from under the debt, but it’s gonna cost him, in time, money, moving, legal fees, angst, uncertainty, etc. Anyone who thinks a person who walks from a mortgage is getting off home-free, so to speak, is dreaming. I wouldn’t want to go through it.

    • christopherfountain

      But if, as he’s threatening, Obama effective places a moratorium on foreclosures this spring, how much of a chump will an ordinary mortgage-paying homeowner feel? I suspect that if that happens, we’ll see defaults soar.

  2. Greenwich Ex-Pat

    And, so ends a couple of centuries’ worth of contract law in the US. It was headed that way, anyhow.

    Laws? We don’t need no stinkin’ laws.

  3. pollyann's

    maybe Ruth Jones can comment on this subject.

  4. Greenwich Ex-Pat

    In a way, I hope it happens. Anything to reach bottom and recover ASAP. The foreclosure moratorium is most likely some sort of democrat election tactic. It’ll backfire big time, just as you say.

  5. Greenwich Ex-Pat

    I’m just curious, how many folks saw the bubble and knew it couldn’t last? Anyone? Anyone? Bueller? Bueller? And how many were afraid to bring the subject up among friends who were making idiotic decisions with regards to buying property? Anyone get laughed at, like me? Heck, I even got laughed at by a smarmy little twit who worked as a staffer for one of my Senators.

    • christopherfountain

      I didn’t, Ex-Pat. I mean clearly, 20% run ups each year had to stop or, as I once mentioned, only Bill Gates and Warren Buffet would be able to buy afford houses in town, and how many would they need? But I expected prices to level off – I’d watched prices appreciate since 1954 and it never occurred to me that we’d see a 30- 50% fall in value. Color me stupid, but I had company.

  6. KT

    I love Ruth’s about page with her standing between her high-end MB and Bentley

    http://ruthjoneshomes.com/about-us/

    I wonder if she’s making the car payments, haven’t seen anything on those in the Commercial Record, just the mulitple properties

  7. foobar

    If you want to walk, walk. If the bank lent to you on a secured, non recourse basis they simply have to suck it up. Those are the rules of the game.

    For crying out loud we have already footed the bill for billions in write-downs and bonuses in the banking sector, who cares at this point if some poor bastard feels the need to walk away from his home. I see little to cheer about from the homeowner’s perspective. I doubt he is doing cartwheels over the whole thing.

    And yes, if you walk you will have the credit history following you around for at least seven years – but if you can’t afford the mortgage, have no job, no prospects, well, you gotta do what you gotta do.

    I totally agree with the concept that, especially in a non-recourse situation, you are a complete fool to continue paying for a significantly underwater house when there are significantly cheaper options available. Do you think for a minute if the tables were turned the guys holding the mortgages, the bankers, wall street sharpies and hedgies, would hesitate for a minute to do the same? Come on, give me a break.

  8. Greenwich Ex-Pat

    Being in one of the “sand states”, it was incredible to see what went on. No WAY it was ever going to be sustainable. I love this quote from 2005:

    “In Miami, Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors, predicted that a limited supply of land coupled with demand from baby boomers and foreigners would prolong the boom indefinitely.

    “South Florida,” he said, “is working off of a totally new economic model than any of us have ever experienced in the past.”

    Bwahahahaha!

  9. out looking in

    G Ex-Pat,

    I saw it coming (was living in Miami) and knew the end was nye when my receptionist picked up her fourth condo with no money down….however, was pre-Pollyanna…just too early, like tech bubble, and had to watch many jokers rake in nice gains before being whacked upside the head by Mr Market….sold out in late 2006…poor sucker who bought our house was foreclosed on and the next buyer bought at a 35% discount from our sales price (and yes, it still has a way to fall)…

  10. Greenwich Ex-Pat

    “(was living in Miami)”

    My sympathies, out. I’ve been there.

    All kidding aside, though, you were darned fortunate to get out when you did. I predict South Florida is going to become one major hell-hole and stay that way for a while. Orlando, too. I think Tampa and Jax will have their troubles, but they’ll survive.

  11. Greenwich Ex-Pat

    BTW, we’re predicting 1994 prices for Florida. May take a couple of years, but it’ll get there. Perhaps it’ll get so ridiculous, they’ll be paying people to live in some properties.

  12. Martha

    Ex-pat, Florida is our (well, my–I am stupidly sick of the cold weather!) second choice if my husband’s NYC transfer doesn’t work out (unlikely at this point). Does your prediction apply to all of Fla? Our long term plan involves a second home in the Keys (Ocean Reef Club–which is a little enclave that seems to be more insulated)

  13. foobar

    Marthe – Ocean Reefs is a great place, and if it has also dropped 50% in price I would jump at it.

    I watch foreclosure activity in Florida as well as locally. In the Deltona area houses that once sold for $200G are selling on the court steps for $50-80G.
    There are plenty of willing buyers at those levels.
    Buyers are mainly developers planning to fix the properties (they are generally well dented) for resale or rent, or pensioners, both US and foreign.

    The activity and price collapse suggests we have finally reached a floor, even in Florida, though any appreciation from these levels is unrealistic in the 5 year time frame, maybe even ten years, due to the constant supply coming on.

  14. Martha

    Thanks for the input, foobar. Ocean Reef doesn’t seem to be down 50% by any means, but activity appears to be extremely slow…

  15. out looking in

    G ex-pat,

    1994 px is very aggressive…i was just there and am still waiting to repurchase..agree that prices have much room to fall…but nominal values at ’94 levels? even after post-Andrew pop, which peaked in 1994, and acre in Pinecrest with a decent 3k sq ft house was selling at $270k….can’t imagine that level again (that would prob put 95% of all borrowers under water)….will be paying $300k!!

  16. foobar

    martha, best strategy in these times is to put in a bid and see what the response is. You never know….

  17. foobar

    actually martha if I have it right Ocean Reef is a membership by invite only, not sure how you buy in.

  18. foobar

    martha, i found an interesting site with listings

    http://www.cspor.com/listings/Residential.aspx

    260 listings out of 1800 properties sure sounds high. Prices should fall some, I would think. Best of luck

  19. foobar

    martha I just zillowed the area, it appears much like greenwich, plenty of obscene offers BUT the deals getting done appear to be 50% below peak levels. Probably a good time to be looking.

  20. Martha

    Foobar, thanks for the link and all the info! I’ll definitely take a better look–so far I’ve just “perused” you know? My family has membership there, but only social not equity. If you buy a property, it you also have to purchase equity membership, which is about $200k if I’m correct. Sometimes this is included in the property price, but not always. I guess it depends if the owner is leaving membership, or already has another property with equity. In that case I suppose they’d plunk it into the ask.