Walk Away? Never.
March 4th, 2009 - 5:58 pm
The most severe “underwater mortgages”—mortgage loans that are 125% or higher than the value of the property—are in five states: California (723,000), Florida (432,000), Nevada (170,000), Michigan (128,000), and Arizona (122,000). Underwater homes are of serious concern because for some homeowners there is little incentive not to walk away and allow the home to fall into foreclosure. Foreclosed homes drag down the prices of neighboring properties, possibly dragging more homes underwater. (source)
I continue to not understand the “walk away if underwater on mortgage” approach. Two years after we bought our house, all the properties in the area were revalued much lower than they had been, and we found ourselves holding a mortgage on a house that was now worth $20k less than what we were paying for it. The thought never crossed our minds to walk away, even though the housing bubble was beginning to burst, and we knew our property value might get worse yet. Walking away never crossed our minds for the simple fact that we still need somewhere to live, and that meant paying at least as much as our mortgage payment to rent something of the same size. Might as well make the mortgage payments and eventually actually own the place rather than buying a landlord a new Cadillac every year, right?
So why do people who find themselves with mortgages worth more than the property being bought even consider walking away? I seriously do not get it. They will still need somewhere to live, and since they defaulted on a mortgage, they won’t be getting another one any time soon, so that means renting. As long as they can make the mortgage payments, it seems silly to take the credit rating hit and waste money renting when they have a perfectly good house to live in that will, in fact, one day be 100% theirs and may actually someday be worth more again than it is now.
If this kind of thinking was applied to automobiles, people would walk away from those loans five minutes after driving the shiny new car off the lot, because cars lose value as soon as they are bought and continue to depreciate every month they are in existence. One year after buying my truck, it was no longer worth the amount of the loan we bought it with, so maybe we should have just walked away from it? Doesn’t that seem like silly thinking to anyone else?
We didn’t panic when our property value dropped. In fact, we were somewhat pleased, as it meant lower property taxes right at a time when we needed bills to be smaller. We still made the mortgage payments, which were (and are) equivalent to what we’d be paying in rent for something smaller, we still had a house to live in, and there was always the possibility that by the time we would be in a position to consider selling, the property value would have increased again to at least what we paid for it … which has already happened (plus some). While some of our neighbors agonize every year on the valuation of their property, we just don’t think about it. Of it goes up … fine. If it goes down … fine. The same roof is still keeping the rain off of us, and the same amount of money goes to the bank. Nothing really changes except for some numbers on a paper.
I have to assume these people walking away were ignorant when buying and bought far more house than they could actually afford, rather then being sensible and buying a smaller piece of crap house like we did that we’ll be able to afford in just about any doomsday scenario, and now they can’t afford the payments. But that many people really buy too much house? Or are people just panicking because they see their home as an investment rather than a roof over their heads that will someday be all theirs? Could someone please explain this seeming stupidity to me?!
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5 Responses to “Walk Away? Never.”
Those people bought on the advice of mortgage brokers who told them the smart thing was to buy too much house, so that when the appreciation kicked in it would be proportionately higher. They didn’t tell them that it also kicked up the sales commission. Americans are flattered when someone in a business suit pretends to be friendly.
Also, most mortgages in the last six years were non-conventional, gimmick loans with no principal for so many years, or adjustable rates with ridiculously low initial payments. People thought they were rich (and smart) and bought a lot of big ticket consumer crap with second mortgages which were peddled as ‘home equity loans.’ When the balloon payment came due or mommy got sick or daddy got let go, it all went to hell inside a week or two.
The average first grader has a one in two likelihood of finishing high school, and along the way most kids tune out and snooze through all that middle school math about compound interest and fractions and percentages. It’s not that Americans are different from other people, but that the people who own this country very much prefer that as little thinking as possible take place. They’ve concluded that ‘the dumber, the better,’ when it comes to managing the herd. Since they’ve seen this train wreck coming a hundred miles off, they’ve positioned themselves to avoid the downside, and many to even profit.
It’ll never change; gullibility is in our DNA. We’d rather be robbed repeatedly than be excluded from the fellowship of our NASCAR nation.
I get people who find themselves unable to pay what they are supposed to pay walking away. In most cases, they were stupid and bought too much house. They got conned and/or were greedy. But there are people who can still afford what they have, and the only reason they walk away is because they are pissed off that their house is now not worth what they are paying for it. “Screw it, my investment isn’t going to pay off. Let’s leave.” It’s completely dumb.
We have friends walking away from mortgages. In some cases, they bought too much, had a crappy loan, and now find themselves in tough financial straits. In some, they are just bothered that they could get a house exactly like the one they have for less now, and why bother keeping the one they have … even though they can afford it, like it, and it’s a good house to live in and exactly what they wanted (and thought it was worth what they were paying when they bought it). I remember all too clearly the reaction these friends had when we bought the house we bought. They laughed at us for buying a crappy house in a crappy neighborhood, instead of buying a half million dollar home out on the lake. They thought we were crazy and foolish, and that we’d regret the decision. We even lost friends over it, because who wants to visit us in the urban slums. “Eeeeeew. You live there?!?!”
I said it back then, quietly to my husband, that we would have the last laugh. Well, who still has a home and can still afford to live in it? Whose property values are going up and not down? We did a lot of research before buying, and so far, all our predictions have been coming true. Though we never thought of the house as an investment, which I think is most of these people’s problems. We thought of it as a home, a place we could live as long as we liked without the rent going up every six months, where we could put nails in the walls and paint anything we like any way we liked … our place to be. If it happens to pay off in the end, great. If not, we will have still had a good life in a home of our own. That’s worth something.
And both real estate agents and loan officers tried to oversell us as well. I laughed out loud when they suggested we could afford an $850k home (ten times more home than we were looking for). We then told them we would let them know which houses we wanted to look at and they could stop showing places that were, in more ways than one, too much house for us. We had to fight them tooth and nail every step of the way to get the house and the loan we wanted, but I’m glad we did. We have a house, and barring a major life catastrophe, we will continue to have it for a very long time.
I could see it if you planned to move anyway. You could either sit on the house for months still paying the mortgage and leave at the end with a decently big debt, or you could walk away the same day, move into rented accommodation and get on with your life quicker.
It’s the kind of important life decision I prefer not to think about.
I don’t understand how many others fail to see why it makes so much sense to in fact walk away. I agree that it would be dumb to walk away over $20k… What many are failing to realize is that MANY people in places like CA are 200-300k upside down. The market here bubbled so badly and almost no one realized it. I bought into a house I could afford, but I’ll admit it was a bit of a stretch. Unfortunately I actually believe if I didn’t buy now I’d forever be priced out of the market. Considering I make a good amount more than the median income I probably should have realized it wasn’t true, but apparently I was an idiot.
So back to the math. In my case my house has gone from $375,000 to $175,000 in the past 24 months since I bought it. Every economist I’ve ever heard speak on the matter thinks this area will drop another 30% from current prices meaning the house will be worth around $120,000 in another 18 months. After that point they expect housing to go back to normal appreciation of 4% a year. At $120,000 it will take around 25 years of that kind of appreciation for my house to be worth what I paid.
If I walk away I will be saving about 30k during the process of foreclosure which thanks to non-recourse laws the bank won’t ever be able to touch. I will be able to rent a place for $1500 a month less than I am currently paying. $1500×12 = $18,000 a year. I figure I can put in another 2k to make an even 20k a year. In 5 years I’ll save up $130k potentially more if I invest it intelligently and the market does recover at some point. In Year 5 I’ll see if I can get a loan to buy a house, but if not I’ll pay cash and have no house payment other than property tax and insurance.
Now look at the math if I stay. If I stay in 5 years I won’t be able to save any money because it will all continue going to my mortgage. In 5 years I’ll still owe $355,000 because I’m on a 40 year loan(fixed). Even at that I wouldn’t be able to sell the house for at least 15 years without owing a ton of money. I say lets get the pain over with now and do what makes financial sense. I realize this is an unpopular sentiment, but I don’t see how you can argue with how beneficial it is given my math. I also was one of lucky ones who put $0 money down and realistically anyone who put nothing down between 04-06 should walk if you live in CA.
Sorry for double post, but one more comment. The Vehicle analogy is really getting overused and especially stupid because it has no relevance. When you buy a vehicle you expect it to lose value. You also pay all the taxes upfront which gives you more vested interest in keeping it. Generally speaking it is never cheaper to walk away from your car and go rent the same car for half the price. There is also an expectation that a vehicle loses 20% of its value the day you drive it off the lot. This has never been the expectation with housing. It is a horribly stupid analogy that I have seen way too many times and people need to stop using it.