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Is ‘walking away’ from a home justified?
May 15th, 2009, 3:00 am · 27 Comments · posted by Mathew Padilla
Randy Johnson, president of Independence Mortgage Co. in Newport Beach, author of “How to Save Thousands of Dollars on Your Home Mortgage” and a mortgage broker since 1983, answers questions…
Torn in Huntington Beach asks:
Q. I have excellent credit and I have few tax deductions, so I pay a good percentage of my income to the government. My daughter and her husband returned to California and bought a tear down at the height of the buying frenzy. They weren’t able to build from the ground up so little by little they have remodeled their home. They have two interest-only loans and I know one of the loans is 9%. Does it make sense for them to walk away from their home and to have me buy them a better home and rent it to them? I could buy their home and rent it to them, but their home, as well of several of the neighboring homes, has been burglarized.
A. I am not in favor of telling people to walk away from obligations, but I can understand that, if they don’t have any equity, why they might wish to. Before they do that, however, they should exhaust all options with the lender. A 9% loan probably falls in the predatory category and they may have more resources than they think. Perhaps the lenders would reduce the interest rate and/or principal balance to something acceptable. Have them do it themselves. Don’t hire a “negotiator.” That’s probably a rip off.
That’s it. If you want Johnson to answer a question, email it to Mathew Padilla at mapadilla(at)ocregister.com. Include your name or nickname and the city you live in — that information will be published with your question.
Johnson will answer up to three questions each week, so keep checking back for a response. If many questions are submitted, it could take a while to get a response, or he may never get to it. Also, readers keep submitting variations on the same question, which has already been answered: what to do when you can no longer afford your mortgage. I have decided not to publish most of those questions, because they are repetitive, although I appreciate the difficult situation many homeowners are in these days.
Read prior questions and answers by clicking on the headlines below…
- Real estate investors get no sympathy
- The case for buying a home now
- Bigger home loans coming to O.C.
- A complicated mortgage that could fund retirement
- Loan doors open for serial housing investors
- Forget dodging refinance fees
- No job, no refinancing
- Avoiding a rate hit on an investment property
- Who qualifies for Obama’s mortgage refinance plan?
- Paying off a mortgage vs. refinancing
- Mortgage problems of the wealthy
- The skinny on 40-year mortgages
- Refinancing questions and answers
- How to buy with little money down
- Do banks renegotiate mortgages for ‘good’ borrowers?
- Is it time to buy a rental property?
- Caution urged on mortgages that fund retirement
- Refinancing can be tricky if your home was recently for sale
- Shopping for lowest rate is dumb way to get a mortgage
- Speedy mortgage payoffs could cost you
- Paying your mortgage may be the best use of your money
- A ‘good’ borrower these days is someone who…
- When insurers kill your mortgage application
- Mortgage insurance companies not giving breaks
Find out more about: MORTGAGE ANSWERS | MORTGAGE RATES | FORECLOSURES | HOME PRICES | INVENTORY | RENTS | FED |
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It’s a moral dilemna people are facing: quality of life could improve dramatically, but can I walk away from an obligation?
For some reason institutions aren’t held to the same standard. JP Morgan bought Bear Stearns with a non-recourse loan from the Fed. For some reason, no one expects JP morgan to pay the loan back.
I wonder if the mortgage discussed above is with Chase?
Go ahead and keep paying, the banks who screwed everybody needs some martyrs. Maybe you can flog yourself with the payment book.
No…NO…and NO!! Homeower who walks away should be prosecuted for fraud! They bought houses that they can’t afford or used their house as an ATM machine, so they SHOULD be held responsible.
This is backwards thinking. The debtor and the bank entered into a business arrangement. The debtor agreed to pay the loan or they would give up the property. The bank decided that the house was sufficient collateral and made the loan. If the debtor decides to default on the deal and give the house back it’s perfectly ok.
Now what is criminal is the govt giving money to banks who made these bad loans. The banks and investors should lose their money. They gambled and if they lose they lose.
Chris is correct. A mortgage is simply a cold, hard business contract and you should feel no shame in exercising your options as agreed upon by both parties as spellled out in these contracts. Donald Trump does it all the time.
If you are seriously upside down and are facing years of impoverished lifestyle teetering on insolvency only to save your credit score … walk away now!! Make sure those loans are non-recourse first, otherwise that debt can follow you and bankruptcy would be a worst case option for debt relief. Life is short, why waste your precious resources on a lost cause. That burden will affect you and your family in so many negative ways.
If you are barely upside down and want out, you should sell it. Interest only loans can explode in your face in the future. If you want to live there, you will be better off to refinance into a 30yr fixed rate loan and pay it off to save your credit score. If you can’t refinance, you need to sell it. If you can’t refinance and cant sell, walk away!!!
Just a word of advice if they walk away and do a DIL not only will their credit be massively messed up but they will be liable for taxes on the loan that they got.
I would advise them to seek advice from a lawyer on the consequences of such an act. A lot of people are surprised when they get audited or do their taxes and find out they have to pay massive income taxes because they did a DIL for a property they couldn’t afford.
Not only that, but a lender might still go after you for the deficient amount after a foreclosure or short sale if it’s clear you still have assets. Imagine that… still getting collections calls AFTER you’ve handed the property back. It’s happening folks. Walking away is not as easy or simple as it gets portrayed.
http://online.wsj.com/article/SB124104990739271023.html
As prices go down further and further and the negative equity position gets larger, walking away becomes the best financial decision. When you run the numbers, a short term credit hit easily out ways the cost associated with repaying an overpriced mortgage. This is simple math. Why pay off a $600k mortgage on a $300K home? When, you can wait (and rent) for a few years and buy back in at the lower price. Total cost of repaying a $600k mortgage over 30 years = $1.29million. For a $300k mortgage = $647k.
This is not a moral dilemma. People have to make the best financial decisions for their future and their families. The moral dilemma was breached by our government regulator and the Ponzi financiers of Wall Street that allowed the real estate bubble take over our economy.
Go ahead and walk away. Bad move if you like food. Other than the local car wash, no one will hire you after that shows up on your credit report. Furthermore, no one will hire you after it is determined you were a lifetime renter.
but how many employer will check your credit history? never once in my life have i had an employer check my credit history(well, at least not that i know of). WHat the govn’t should do is EXTEND the ‘bad credit’ record on the person’ record. People need to learn from their mistakes!!!
Most financial jobs will run a credit check and some other industries do as well. I know some defense contractors will pull credit. It’s a way of judging an employee’s reliability and responsibility.
You got more people walking away then paying.
You know, if I was a millionaire, had substantial property holdings, and no need for credit, and thus, hadn’t used credit of any sort in 10 years, I’d have zero credit. Would I be less of a person because I had no credit? Credit is just your ability/credibility to become a good slave to someone else. If you knuckle your brow and say Yas’suh real good, they give you a nice score.
Why do you need credit at all? I can think of only one legitimate reason: buying a house. Houses take a long time to save up for otherwise, perhaps longer than is really worth waiting. Cars, just save up cash and buy WHAT YOU CAN AFFORD!
Don’t buy things you don’t need with money you don’t have to impress people you don’t even like!
It’s a crazy concept, but some of us are intelligent enough to understand it.
Judging from the TV commercials, if you have a bad score you will be either working in a seafood restuarant, living in your mom’s basement or a host of really bad things
They talk about credit scores like your oxygen supply. Does anyone care about money in the bank? The banks and credit card people have their drones trained.
If I made$ 50k a year and someone and rented an apartment and someone lent me $500k to put my family in a home, I would be all over it. Most average Americans making median income don’t understand how debt financing works. All they know is how much they can afford on a monthly basis. They don’t have the financial wherewithal to understand that the immense levels of debt that they were receiving could never be repaid with their income. This was the job of the lenders! The reality is that they lent 10x earnings to a stated income, zero money down borrower. They made a high risk loan and this is the result. The only ones that are pushing the moral issue are the holders of the notes. How about the morality of making a loan to borrowers you know cannot repay it and will have their lives turned upside down when the Ponzi scheme ends and the bubble pops?
Good point, King. Also I find it interesting that Barney Frank (Congressman) went on record in 2003 saying “we need to be doing more to make more people able to buy a house.” Then he was pushing DEregulation. GOP members happily went along, with a few exceptions (McCain, etc). Now that the bubble has popped, this same Congressman (still in office, probably till he dies without term limits) derides banks as greedy and predatory because they loaned money to people who would never be able to pay it back. Looks like he found a way to win on both sides of the coin!
Wrong Jimmy 2
I have a friend making 400K who bought a home that is now worth half of what he paid for it. He has enough cash and enough income to buy the other home without renting the first out.
He is currently shopping for a new home and as soon as he buys it he is going to walk away from the first. Feels bad but why pay back 300-400K in lost home value.
You’re asking a mortgage broker if you should walk away from your mortgage?
That credit hit will last a few years and matters less than you think. Those loan payments will keep you impoverished MUCH longer than that. That’s a lifetime setback in your life and lifestyle. Which pain will end sooner?
Don’t walk away. Run.
Just an example of how low our society has sunk to. If you couldn’t afford the payment you shouldn’t have bought the home speculating on future appreciation and draining the equity to live off of as tax free income. These underwater buyers should be held responsible for their greed. Most of them fully understood what they were doing. The fact that they got all of the luxury goods, clothes, cars and vacations and got to keep them while shirking their responsibilities infuriates me.
It isn’t the banks fault you were greedy and arrogant. When banks falsified income statements then they are partially to blame, but the buyers are the ones who signed on the dotted line. Banks are going belly up and our country is in ruin because of the greed of these housing speculators and their lack of morals. Everyone who walks away hurts the banks more which in turn hurts the taxpayer who has to pay to bail the banks out. It also hurts retired people and any other person with money in savings and CD’s earning low rates or at risk of being lost if all of the banks fail due to the low amount of money the FDIC actually has. Thanks for killing our country with your lack of responsibility. Our grandchildren will remember your legacy of greed and hopefully not repeat it.
Very good statement zacksmon. You hit it right on. Greed is ugly.
zacksmom, I’m curious to know what you think of Six Flags “walking away” from its debt by filing BK on Saturday? Or how about GM, Chrysler, Johns-Manville or that paragon of virtue, Donald Trump? All these people/companies “walked away” from their debts to live and profit another day. It is perfectly legal and has been since the founding of our country. So what is it about individual homeowners that you believe should be the exception? Why should they not walk away while business people can and do walk away every day from excessive debt.
Zacksmom - I agree that financing your lifestyle and living beyond your means is irresponsible. But this is human nature, not to mention the American way. All these shows called “Fast Money” and “Mad Money” brainwashing us into making risky investments with our life savings. Not to mention the advent of new vocabulary like “Cribs”, “Bling” and “Dubs on the Escalade”…..I could go on and on.
On the flip side, it is the lenders responsibility to underwrite risk. The lenders knew fair well what they were getting into. They have actuaries that can calculate this stuff down to the pennies. But, it didn’t stop them because they were making money hand over fist originating these loans and selling them to the Chinese in the form of mortgage backed securities.
It is irresponsible behavior across the board that is detrimental to our society. And the worst part of it all is we are now encouraging the irresponsible behavior by providing loan modifications to overextended borrowers and bailouts to banks that made bad loans. So how do you expect people to behave? When we encourage this type of behavior and provide zero consequences this is what we get.
This is not a moral issue, though those with a vested interest would have troubled homeowners see it that way.
Homeowners in trouble should look at the problem as a business decision, period. A cost benefit analysis of all the issues and of possible decisions and their ramifications should be done. And then a rational decision should be made.
Businesses end deals going badly all the time. When one of Donald Trump’s businesses goes badly, it declares bankruptcy. It’s an accepted, normal part of business. No one is saying that corporation was behaving in an immoral manner, or at least no one who is taken seriously.
Mortgages are non-recourse loans for a reason. Those extending loans are supposed to be prudent and only extend loans reflecting the asset value. That did not happen, and now they have to bear some of the pain.
Mistakes and greed happened on both sides of the mortgage contract. But somehow only mortgage companies, brokers, banks, etc., are supposed to be the only parties to the contract who can walk away ( declare bankruptcy, hire lawyers to try to have contracts declared null, whatever?) And only the homeowner has the ‘moral’ responsibility to fulfill the contract? That makes no rational sense, and is a story being fed to troubled homeowners to get them to accept a life marred by debt slavery.
Don’t be fooled by bogus moral arguments. Buying a home is a business decision. Act accordingly, do what’s best for you, your family and your life.
I see we are recycling topics on the blog now. It was a similar topic over a year that started me posting here. Nothing has changed in my mind: IF you CAN afford it, it is your responsibility to pay rather than WALK AWAY! I define “WALKING AWAY” as no longer paying your mortgage when you HAVE the ability to continue paying it and living at the property for free or vacating the premises while the months tick by until the foreclosure sale. This is what a LOT of the scum of the Earth “Lottery hopefuls” did from late 2006-mid 2008. If you looked at your home as a lottery ticket, you lost! Instead of screwing the bank, your neighbors, and your COUNTRY by stopping your payments to the bank and “WALKING AWAY” ask for a loan modification (especially the new Home Affordable program) OR sell it yourself WHILE CONTINUING TO PAY YOUR CONTRACT…your mortgage! Again, IMO this applies to people who CAN afford the mortgage. You can afford it but CHOOSE not to you are human scum….deal with it and WEAR it if this is you. I feel people that do this should be thrown in prison for theft….you are no better than a liquor store robber. He made a “BUSINESS DECISION” too….the liquor store had money and he needed it so he made his own TRANSACTION to withdraw the liquor store’s funds. Scum bag walk-away home owners who care ONLY about themselves and that robber are one and the same in my book. Try to justify your actions all you want…you are immoral and a worhtless human being if you can afford to pay money you were LENT and say “SCREW YOU” just because the value of your hoped for “lottery ticket” dropped.
The equation changes IF you truly can’t afford your mortgages as is the overwhelming majority of people in trouble these days due to job loss, income cuts, divorce, death of income earning spouse, etc. You can’t afford it and no amount of modification or temporary pmt reduction can help, still try to sell but if you only have money for the bare necessities, what can you do BUT default? It’s awful but there are hundreds of thousands in this position today….most of them because the “Scum-bag” types that couldn’t cash their lottery tickets chose to “Walk away” with the resulting carnage to the financial system and economy over the past 2 years.
I’m renting now and enjoying living in a gated community by the beach.
The stress of calling x lender daily and being jacked around by idiots that don’t have a clue how to modify a loan is gone.
Yes, your almighty FICO score will be in the toilet but you’ll no longer be a debt slave either.
You can buy another place in about 3 years when prices will really have bottomed….we have ways to go with all the foreclosures in the pipeline especially in O.C.
File ch. 7 to clear all your debts and start over.
Believe me it’s easy to pay cash for items you need …I have a good career and I’m not working in a restaurant….
People need to realize it’s best to clear the decks….business decision…black and white.
Businesses do it everday w/out the “judgemental lashing”.
hahahaaaaaaaaaaaaaaaaaaaaaaaaa are u a joke or what!!!!!!!!!!This is soooooooooo funny!!