Monday, January 11, 2010

Walking Away

Not from your job.

From a house or condo that is underwater (i.e., worth way less than the loan):

John Courson, president and C.E.O. of the Mortgage Bankers Association, recently told The Wall Street Journal that homeowners who default on their mortgages should think about the “message” they will send to “their family and their kids and their friends.” Courson was implying that homeowners — record numbers of whom continue to default — have a responsibility to make good.

... Some [Americans] are making a calculated decision to hang onto their money and let their homes go. ... Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with ...

I bring this up here because I've gotten questions from members about what they should do with loans they can't afford and houses that are worth less than they paid for them.

In every case, I tell them to analyze the financial pros and cons of getting out from under, and if walking away from the house and loan is the best road to take financially, then don't think twice about it. Because despite the moral lectures from the bloodsuckers in the mortgage and banking industry, there is no "morality" involved.

You default on the loan. The bank -- which sold your loan to somebody else five minutes after you signed the papers -- gets the house. Simple.

I bring this up here because I don't want artists -- who are often a bit too idealistic and trusting -- to screw themselves over trying to live up to some bogus altruism preached by the Bankers' Association -- which spits on the concept every chance it gets.

Do what's best for you. Period. And remember the words of every flinty-eyed executive I've ever met: "It's business."


g said...

What about the message they are sending when they pay themselves those ridiculous six figure bonuses thanks to the goverment bailouts?

People are sedated.

Where's the protests?

Anonymous said...

Regardless of what moral platitudes might or might not be in question the truth is that if you do walk away from a mortgage you are never going to be able to buy another. Keep in mind all the banks work together and if you screw one of them another will never take a chance on you once you've detroyed your credit. I doubt even credit unions will work with you unless you can find a loophole like buying under your wife's name or a company name, etc.
If you've got somewhere to go and stay and don't feel you will ever want or need to buy another house or condo...go for it, but understand it's not about morals it's about credit.

Anonymous said...

the truth is that if you do walk away from a mortgage you are never going to be able to buy another.

That is COMPLETELY untrue. I don't know where you got your information, but it couldn't be more wrong.

The reality: if you walk away from an underwater mortgage, your credit will be dinged pretty hard. However, if you make good decisions, pay all payments on time from then on, your credit will recover in about 3 tto 4 years.

In 5 years (or possibly less), you can qualify for another loan--you can even qualify as a first-time home buyer! If everything else about you checks out, your prior mortgage-ditch won't count against you.

Anonymous said...

You tell that to the next mortgage company you go to and let us know how that works out for you.

And where are you going to live in the meantime? GOing back home and live with your parents?

Anonymous said...

No. You find an apartment BEFORE you walk away. If you need a car loan, you do it beforehand. That's why it's called a strategic default.

There are plenty of people who have done this in the past, and have still been able to get another home mortgage after a certain period of time (~5 years).

g (the original one) said...

Whoever this "g" is, he's not the one who posts here normally, because thats me, and I didnt write that.

Anonymous said...

In this day and age, where people constantly move from project to project and city to city, is even a 15-year mortgage a good idea? Can anyone safely bet they'll work in the same area for 15 years?

My dear dad worked at the same place for 30+ years. A fixed-rate mortgage made sense for him and worked out great. Me...I'm not sure where I'll be working three weeks from now, much less fifteen years.

Still renting...

Anonymous said...

Yes, don't get too hung up about your credit rating. It is a big decision, but like an above poster said above, you can claw your way back eventually. A house is just business. Banks default ALL the time on their obligations. After all, the only leverage you ever have in this life, and this goes for anything, is the ability to walk and not look back.

Anonymous said...

You can also try to renegotiate with your lender. They don't want your house; they want your money. There's no guarantee it'll work, but it's another option before you walk away.

Anonymous said...

Sure get a new car loan or apply for another apartment while you're in over your head in debt with a mortgage....

Good planning. You really thought this out.
Let me know who is willing to make that loan or rent that apt to you so we can all go to those places.

Anonymous said...

@Anon 7:47
The way I've worked it out is to have a home base away from the high-price land of Cali/New York. It takes some pressures off of job hunting (where will I live next? finding a job in the same city as your current place).

Animation may not pay enough to afford a $400,000 shack in LA, but it is enough to afford a $125,000 3 br house in a smaller town in another state (near family in my case) or even further inland in Cali. When I'm on a job I rent a small room/loft locally that lets me live minimally. You pretty much only have time to sleep at the place during crunch time anyways. When the job's done I pack up and head to the home base where I can relax for a month, get away from the stresses of the industry, work on personal projects, spend time with family, maybe teach at a local college, and look for jobs in any city that has them. In some cases the mortgage payment on good houses in other states is 1/2 the price of rent in Cali. Heck, if you are really lucky you can find a temp job that actually pays for housing too.

Sure, this doesn't work easily if you have a family or rooted significant other (although in some cases it works better for them than dealing with your crunch absence while living in a big city). But it is a better option than trying to buy an overpriced house in a large city which you may not live in in 6 months.

Anonymous said...

And I thought my life sucked...ugh!

Anonymous said...

I think the point of the article is that if more people walk away from their houses, the banks will start to talk to the lenders. Right now the banks won't talk to lenders who are making their payments. You have to be delinquent for them to even talk with you.

If it makes economical sense walk, but talk to a lawyer first. Frankly I hope a lot of people walk, it's the only way to reset home prices.

Anonymous said...

Talking to an attorney involved in real estate, he said if a person let the lender know he was going to stop paying, the lender could be motivated to negotiate a private auction.

People have leverage if they choose to use it. In CA, banks don't go after non-payers much it at all.

Anonymous said...

sounds like that's a good deal for the bank but did your 'attorney' tell you what would happen to your credit if you did that?
My understanding that if your house sells in auction for less than what is owed you could still owe the balance.

Anonymous said...

Re: anonymous at 1/12 8:02 AM,

I've heard other stories like this along the same lines, even from those who have longer term employment in the Bay area. Even with longer term employment in San Francisco, it isn't possible for most in the industry to buy a home there, so others have also decided to buy homes elsewhere as anonymous 8:02 am has, and commute by airplane on weekends. It must be particularly tough for those with families. But it can be a cost-effective alternative to renting for the rest of one's life.

Anonymous said...

Just an FYI, California and Arizona have anti-deficiency laws that prevent the banks for going after you for any money they loose after selling your house in auction. All they can take is your house, they can not send creditors after you. But if you refinanced they might be able to go after you for part of the money. Either way you should seek legal advice before doing anything.

There is also a website called "You Walk Away" that may help.

As far a morals go, I want to strangle the people who are saying it's immoral, a lot of home owners are struggling and suffering. Sure there may be a few taking advantage of the system, but those are few. Think about this, your contract says that if you don't pay for your house then the bank takes your house. That means by walking away you are not breaking contract your fulfilling the contract. Where's the morals/ethics in that?

If your worried about the economy think about this, there are an estimated 25 million people underwater:
"If 5 million underwater homeowners saved an average of $10,000 each by becoming renters, this would free up $50bn a year for additional spending. This would have the same impact on the economy as a $50bn tax cut. If we assume a multiplier of 1.5 on these savings, the 5 million walk-aways will generate close to 750,000 jobs."

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