It is, for many, a last resort, the decision that comes when the accounts are depleted, the bills long overdue, the choice unavoidable. Foreclosure.
But with 20 percent of U.S. homeowners owing more than their house is worth, according to new data this month, more are being tempted to walk away before they have to.
Would you?
Some in the mortgage industry call it "jingle mail" - keys in an envelope from a homeowner who's had enough. No statistics are available on how many foreclosures come from people who beat their lenders to the decision - or don't see their homes regaining value. But more financial and real estate experts are saying it's not a bad idea.
It's better to go into bankruptcy while you still have assets to save, the argument goes. Don't tap retirement accounts to pay minimum balances on bills that eventually will smother you anyway.
Walking away from your home, however, comes with a stigma - as it should, says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling.
Cunningham, who has been working in the credit industry for more than 20 years, says willingly walking away from an obligation violates the culture of responsibility critical to the country right now.
"You signed on the dotted line, and a contract is a contract," Cunningham says. "It needs to be treated as such."
Abandoning that contract comes with a penalty, of course: foreclosures ravage your credit rating for years. Cunningham's recommendations: Call your lender to see if anything can be worked out. Research stimulus and housing programs to see if you can qualify for assistance. Certified credit counselors also can help you find your best options, she says.
Sometimes the best option is foreclosure. "There are people who are in such a bad situation that we tell them a home is not going to work out for them," Cunningham says. "They are in such a bad situation."
Is it smart to walk away before you get there? Tell us what you think.
If you're facing that decision, tell me about it.
Your Morning Edge:
The Observer's Eric Frazier reports that Mecklenburg private school parents are worried about upcoming tuition.
Volatility has hit prepaid 529 college plans, the Wall Street Journal reports.
Another sign of tough times - legal aid for the middle class, the L.A. Times reports.
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18 comments:
Walk away from your responsibility - that's the ticket. Very sad to be considering such a notion. Irresponsible. But hey - today it no one's fault for anything isn't it?
What makes me crazy is when people like Michael Vick or Toni Braxton declare bankruptcy when you know darn well they have money socked away somewhere..then next year, they are both mega rich again and the country got screwed out of millions yet again!
Ultimately, defaulting on one's mortgage is a breach of contract. There is such a thing as efficient breach. There is a reason that the law does not impose punitive damages on breaches of contract, and that is, of course, that the common law and the legislature has long ago recognized that there are situations where breaching a contract makes more sense than fulfilling the obligations of performance and as a matter of public policy, in those situations, it is inefficient from an economic standpoint to continue to perform when an efficient breach is more advantageous to one of the parties to the contract than performing.
This is absolutely not a moral issue nor is it an issue of personal responsibility. Contracts/mortgages are arms length business transactions. If it ceases to make sense to perform, then so long as one understands the consequences of breach (i.e. the non-breaching party has a right to receive what he expected from the contract) then breach away.
Caveat to above--he has a right to what he expected...and a right to try to collect it...in the mortgage situation, obviously the bank receives the security he bargained for (the property) and then is able to sell it (which is what he was planning to do if you defaulted) and then he can get a judgment for the deficiency (which may or may not be collectable).
If that is the right move, then breach away. If not, then its not an efficient breach anyway and perhaps performance would be the better alternative.
"....nor is it an issue of personal responsibility." Yes, it is a personal responsibility. You sound like a lawyer. Irresponsibility of homeowners buying too much house for their amount of income is part of what got us all in this mess. Now you and I have to carry the load of those who are walking away from their "breach of contract".
I disagree with the previous comment that this is not a moral issue. Signing a contract replaces what used to be a handshake in the past. And not fulfilling that promised I'm sure was very dishonorable. Furthermore, by walking away from a mortgage, especially when the homeowner is able to make the mortgage payment, that person chooses to hurt others. Namely those who make their mortgage payments and whose property values decline because of the foreclosure. It has become so accepted to not pay back mortgages/loans/credit cards, it's no longer a big deal. I almost think we need to bring back debtors prisons, like it used to be when paying back a debt used to be the right and honorable thing to do.
Being able to make a payment and walking away is totally different than someone who was laid off and can't sell the house in this terrible market.
When the bills are stacking and the money can't be made, the last option is to walk away and live the rest of your life with a large stain on your credit.
Unlike those who can make millions on a song, or a superbowl win, the majority of us don't have that luxury.
Those who face forclosure, review your options, don't fall into scams, keep in touch with the lender, and as a last resort; walk away or get kicked out by the lender. I would rather walk away than load my stuff on a u-haul when my stuff has been in the rain for two days.
Bust the myth. Home ownership is greatly overrated and a losing money trap. Property values will continue their descent into hell where they belong as banks and feds continue seizing property by the trillions.
Homes are a bottomless money pit. There is always something to fix and nonstop spending on upkeep maintenance heating ac bills taxes etc etc. Its a bottomless pit of nonstop blood sweat and tears hard labor just to keep up. Its all a fallacy. Tax collectors love housing bubbles and banking crisis pretending not to be affected raping taxpayers at will as nothing is selling and auctions everywhere. Homes in Detroit sell for 5 bucks. Real estate in Charlotte deflating like a hot air ballon. Its everywhere.
The American dream of home ownership is an American nightmare. The mythical concept of monsterous debt of 90% interest and 10% principal for 30 yrs to pay for overpriced real estate fancy cars furniture etc is a joke. Gluttons and excess never had it so good. Irresponsiblility on buyers and bankers is equal.
Its all a lose lose. America is now but an authoritative fascist corruption riddled conglomerate of eternal red ink excess with up 75% taxation and debt as much as 100 trillion collectively sinking to hell even Obama continues piling on trillions of debt.
Recovery? What a joke. Humpty Dumpty has fallen and cant be put it back again. Its all over but the crying. Americas finished and will split soon. Prepare for a 50% lower standard of living and a disorderly breakup as world experts including the famous Russian professor predict. All empires none excluded have split up throughout world history including Persia, Rome, Britain, Germany, USSR, etc. The soon to be late great American Empire is next up. Fear chaos calamity and uncertainty will reign supreme very soon.
http://online.wsj.com/article/SB123051100709638419.html
The banks use fractional reserve banking to make money that isn't there - and then they get real assets when a home forecloses. No one has a moral obligation to the banks. Borrowing money should be free. Check out "Money as Debt" on google video
I have to make this decision in the near future. With new out-of-pocket medical expenses that now take up over 80% of my monthly income, making any payments to any creditor is impossible. I don't want to lose the house. But what other choice do I have? I'd like the mortgage companies to just add what I owe each month to the end of the loan, and in time, when this expense is no longer needed, I would just resume the monthly payments without penalties or fees. Their response is that I should make more money, and bring in people I don't know to rent the empty bedrooms for an astronomical rate.
Years ago I would have said it was a moral issue -- but the banks and credit card companies are so cutthroat and evil that I would have no qualms if in that situation. Years ago I prepaid my mortgage by 6 months. In the interim it was sold and the old company did not tell/pay those early paymetns to new lender so we got sent a foreclosure notice! So I got a taste of what these folks go thru and boy it is not pretty! although we enventually prevailed, if we had not we would have had to go into "forebearance" to keep our house -- which means they add on the equivalent of a house payment in fees for every house payment missed, plus the missed payment, plus the regularly scheduled payment. So imagine if you are laid off and miss few payments - the only way to save your house is to then start making almost TWO payments for every one payment missed, plus your regular, upcoming payments. If you could not make one house payment a month I'm pretty sure you won't be able to make 2 and a half. It was a shocking glimpse into a world most of us have no comprehension of when we blather on about "debtor's prison". For example, alot of folks who were able to get refinanced thru the recent government program have found that their payments are in fact HIGHER than they were before due to all of the fees. Some help that is! That would be like the fire department showing up to the fire with Gas in tehir hoses instead of water!
Hopefully by the time we have swatted the dust of this mess off our boots, folks like Anon 9:08, and 10:30 will be busy unloading trucks of OUR foreign aid in their new homes of some yet to be named third world country where they subscribed to the doom and gloom that the rest of us Americans got tired of listening to before demanding a return to the moral, and righteous path our forefathers created this country upon. It wasn't, nor will ever be a perfect plan or scenario, but it works when followed.
Shame on all you folks that assume that the mess we have now is the end all. All you doom suckers should move to Iran, or China, or border towns inside Mexico.
Why not? Rich people declare bankruptcy all the time and don't feel bad about it one bit. Take for example "Mr. Fired" Donald Trump. What's good for the Wall Street is good for the Main Street. :) The fact is that bankers want to you to honor the crappy high interest contracts that they are sucking you with. If your house is "underwater" and you don't have much into into it and it costs cheaper to rent the same house - it makes perfect sense.
I feel sad as I read many of these comments. Folks with an ax to grind making outrageous statements containing no value, while folks like "Kevin" facing real hardships. My advice is that people should make an honest assessment of their situation, and if keeping the house is unrealistic, they should try to sell it themselves. Only if this doesn't work out should they consider turning over the keys. If the mortgage holder is realistic and knows that receiving the keys is their alternative, they will allow a deficit sale and release their mortgage. They know that the house will never bring as much in foreclosure as even a distressed owner's sale will bring. Even if the owner faces a deficiency in this situation, it will be less than a voluntary (or worse, forced) forecloseure deficiency.
Also, anyone doing this who can afford to stay in the house is being shortsighted. Particularly with the government involved in so many of these situations, lenders will be forced to seek deficiency judgements and collect on them. The government will insist on this to protect the taxpayers. This means that walking away does NOT absolve the homeowner of the debt; it just delays collection efforts until the deficiency is calculable.
""The American dream of home ownership is an American nightmare. The mythical concept of monsterous debt of 90% interest and 10% principal for 30 yrs to pay for overpriced real estate fancy cars furniture etc is a joke."""
I second, third, and fourth that. Sure, I would love to walk away from my mortgage but I won't. Partly it's my fault that I bought a condo with no sunlight and I just don't like living there and paying 48% of my takehome pay on housing, and that does not even include the maintenance and upgrades. The HOA fee keeps going up every year by 3%. Property values have fallen. In a Seller's market right now I could sell it and probably make a little money. Right now I think I may take a hit if I tried to sell now. I would love to be renting an apartment now. To all renters--my advise is, if you decide to buy now, don't get a mortgage more than "twice" your annual gross salary. Because when I look at my amortization schedule I want to cry--all the money I spend on interest every month and only a tiny fraction goes towards the principle.
To Anon 10:30 who said "Home ownership is greatly overrated and a losing money trap."
My question is - how is renting any less of a losing money trap? At least when you make payments on your mortgage you can end up with an asset down the road. When you rent you get nothing - you just help your landlord get rich.
To the question of walking away from your home. I can see that in some cases walking away might be the only option. HOWEVER, good luck ever getting credit again. And I would imagine it would be difficult to even find an apartment that will rent to you. Where do these people live when they leave their homes? The other issue I see is that if these people have any equity in their homes they will lose it. This economy is pretty scary. I hope we get some more positive news soon.
I'm still employed and have not been in this dilemma. I do know that most banks dont' deal with people until they are already late on their payments. I don't know that it makes sense to do it that way. The two foreclosures on my street that the bank is selling for $50k less than everyone else's home will hurt us if we decide to sell. I can understand the families moving. The banks should realize though that the value depreciates more without a family in the property. If my credit was going to be ruined anyway and I knew I was out of a job and could not pay, maybe I would walk away so they could try to sell and get someone in there that can pay. The problem is homes are sitting empty which makes no sense.
The notion that one has a moral obligation to keep the banks whole is silly. If your home is worth less than half of your mortgage you should walk, either through short sale, foreclosure or bankruptcy. Of course, you have to be prepared to take the hit to your credit but if you have a job and can start over again, why not? Businesses do this (and much worse) all the time.
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