Let your mortgage go?

http://www.nytimes.com/2010/01/10/magazine/10FOB-wwln-t.html?hp=&pagewanted=print

by siculars • 17 years ago

32 36 17 years ago

angelbob• 17 years ago

An excellent point.

People who treat their homes as investments should remember that, should the investment completely lose value, it's reasonable to cut their ties and take the loss, not continue to take losses on it indefinitely.

That is to say, it is an investment, and should be treated appropriately as one.

If your house is a home rather than an investment, you can ignore this suggestion ;-)

Disclosure: I have a mortgage, but it's not underwater and is doing just fine.

cschneid• 17 years ago

Right, there are non-investment related values to a house for most people. Kids friends in the area, nice neighbors, the landscaping you did last year, etc. So even if you couldn't sell and recoup your mortgage, doesn't mean the value of your house is worth walking away from.

On the other hand, investment properties are almost entirely dollar based. Which is why (in theory), banks require a higher down payment on them - to get you invested.

wisty3• 17 years ago

This might not apply for new homes, and those are the ones that are underwater.

petercooper2• 17 years ago

Just in case anyone knows.. why are mortgages in the US structured in this lax way? In the UK, if you don't pay your mortgage, you're still entirely liable for the debt even after handing the keys back. If you can't meet the difference between what they make on a quick sale and the owed amount, they will, and do, bankrupt you over it.

dschobel• 17 years ago

Yeah, I'm actually surprised you can walk away from a mortgage (a legal contract) without also declaring bankruptcy.

Any legal eagles around to explain how this is possible?

trjordan• 17 years ago

As the article noted, mortgage contracts in the US stipulate the penalties for walking away, and those penalties go no further than surrendering the house.

wisty3• 17 years ago

They are not breaching the contract. The contract says they can walk away any time, but they lose their house. A full recourse mortgage (where you don't have the option of walking away) must be illegal, otherwise the banks wouldn't put such a clause in their contracts. (I don't know, I'm not a legal eagle).

pmichaud• 17 years ago

The system you describe puts 100% of the onus of appraisal onto the borrower. It's in the bank's best interests to inflate the value of the home as much as possible and get a borrower on that inflated amount, because now, regardless of what the property is actually worth, the borrower is on the hook for the full amount.

The bank is normally the one who approves the appraiser, which is a clear conflict of interest. In our system, ideally everyone is best served when the appraiser is neutral and competent because the borrower doesn't over pay, and the bank isn't exposed to much risk since the collateral can actually cover the obligation.

The system you describe has a huge loophole because lenders hold all the cards and could easily collude on the sly with appraisers to drive prices up at the expense of the individual. It wouldn't even need to be an explicit collusion -- sort of like the default swap stuff, no individual player (who could see that the system was a sham) had any incentive to bring it down. On the contrary, they had incentive to keep up the bullshit in order to make their numbers. A similar pressure could result with laws that heavily favor the lender.

jacquesm• 17 years ago

There is a possible upside to the borrower for an inflated valuation too.

As long as the market is rising the borrower can point to the increased valuation since the property came on the market and use that to 'pass the hot potato' to the next sucker.

Plenty of people made tons of money in this way in the '96 to 2000 period, especially in larger cities where property prices tend to go up out of proportion.

nfnaaron• 17 years ago

"The system you describe has a huge loophole because lenders hold all the cards and could easily collude on the sly with appraisers to drive prices up at the expense of the individual."

That happens here in the US. Appraisers I've talked to have been pressured to raise the value of the property, so the transaction will happen. The seller wants to sell it for X. The buyer wants to buy it for X. The two agents and the bank want the house sold for anything at all.

Buyers and sellers should choose and pay for their own appraisal, even if the bank requires the buyer to pay for an appraisal for the bank.

axod• 17 years ago

Lenders typically lend up to a maximum % of the purchase price - 90% is typical.

So if you default on the loan, they'd have to sell it for less than 90% of the value for you to owe them anything on it. If you default though, it's their home, they're free to sell it for whatever they like.

As far as the actual house sale goes, the bank/lender has little/no power in the UK. If they don't want to lend the money on the house there are others that will. The price is decided by the seller/estate agent, and the obviously the buyer. The main critera the bank has is that you pay a % of the purchase price - they'll lend typically only up to 90%-95% or so.

I like the UK system personally. I think it's responsible. Not to mention the silliness of yearly home tax?! in the US and other craziness.

rsheridan6• 17 years ago

It depends on the state. In most states the bank can go after you in court. But California is an exception, and it also happens to be the state that had the biggest bubble.

anamax2• 17 years ago

> It depends on the state. In most states the bank can go after you in court. But California is an exception, and it also happens to be the state that had the biggest bubble.

CA's exception only applies to the purchase mortage. If you refinance, that lender can go after you for the difference.

Note that you owe federal income taxes on forgiven debt. I suspect that most states with income tax do the same.

hugh_2• 17 years ago

The article says that fears of damage to your credit rating, if you do this, are "overblown". But surely the damage to your credit rating among rational creditors should be really severe?

If I were a bank and I found out a borrower had walked away from a previous loan leaving their creditors holding the bag, there's no way in hell I'd lend them a single cent, ever.

ars• 17 years ago

Federal law limits how long you are allowed to do that. 7 or 10 years I believe.

hugh_2• 17 years ago

Really? Wow.

And people are complaining that the crash was caused by under-regulation? How about first removing all the laws which force banks to lend money to folks who are unworthy of credit?

ajross3• 17 years ago

They'll have trouble getting another mortgage, that's true. But that's surmountable if you're happy with renting and/or can find a co-signer for your loan. Similar things are true for automobile loans.

But generally when people talk about "damaged credit", they mean an inability to get a credit card. And there, I'm willing to bet there are plenty of banks willing to do business with people with foreclosures on their records. The revenue model for credit cards is based on fees, not loan risk.

wisty3• 17 years ago

I wonder if credit card companies prefer people with a slightly dodgy credit rating, as they are more likely to get hit with late fees?

nwatson• 17 years ago

Many have and will continue to have their homes foreclosed during this recession, and they will have "bad credit" for a long time. If/when the economy turns around in a few years, any bank that decides to not fund these same peoples' mortgages the next time they shop for a house will miss out on a huge piece of the market. The banks won't stick to this policy. They'll follow the credit card companies who are very eager to issue new cards to those who just finished their bankruptcy proceedings.

beaker4• 17 years ago

The funny thing is that folks who are deeply underwater on their mortgages are _already_ screwed with regards to credit - even if they have a good credit history and are up to date on all payments. I know someone who has high 700s credit score that was recently turned down for a credit card, the reason given was that the balance on their mortgage was too high. That was the straw that broke the camel's back for them and they have decided to do a short sale on their property.

ryanwaggoner3• 17 years ago

That makes no sense. Being underwater doesn't mean that your mortgage balance is too high, it means that it's higher than the value of the house. A credit card company would have no way of knowing the value of the house unless they had an appraisal done. What they likely meant was that either the balance or the monthly payment (or both) was too high for his income.

ghshephard3• 17 years ago

As my father (A Real-Estate Developer/Mortgage Broker/Car-Hock moneylender) used to tell me:

"A loan that isn't backed with readily liquidated collateral should be considered a gift with no expectation of return"

Money lenders aren't stupid. They realize that anything that isn't covered with collateral is money that they have a 90% chance of losing. It's is utterly beyond them why _any_ borrowers would not consider walking away from an underwater mortgage once the ROI hit the sweet spot (Credit Record Hit, and possible law suits being two costs factored in)

The NYT article was an excellent summary of the issues though.

Let your mortgage go?

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