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Mortgage - Walk Away?
Ganluan
Registered User regular
Registered User regular
So, a little while ago I posted about the massive amount of negative equity we are currently sitting on with our house. We've lived here over 2 years and right now we are at -35%.
It appears that it has gotten so bad that some people are literally just dropping their mortgages completely, even though they can afford them. We can buy a house next door to us, right now, and cut our house payment almost in half. Obviously this is a massive hit on credit, but we can't be pursued for the deficiency under AZ law. Right now we have virtually perfect credit, although we never use credit cards and just keep them for emergencies.
Has anyone done this, or heard much about it? I am going to talk to a real estate attorney but was wondering if anyone here had experience with this. We could theoretically stop making payments for a few months during proceedings, saving even more money.
It appears that it has gotten so bad that some people are literally just dropping their mortgages completely, even though they can afford them. We can buy a house next door to us, right now, and cut our house payment almost in half. Obviously this is a massive hit on credit, but we can't be pursued for the deficiency under AZ law. Right now we have virtually perfect credit, although we never use credit cards and just keep them for emergencies.
Has anyone done this, or heard much about it? I am going to talk to a real estate attorney but was wondering if anyone here had experience with this. We could theoretically stop making payments for a few months during proceedings, saving even more money.
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CUZ THERE'S SOMETHING IN THE MIDDLE AND IT'S GIVING ME A RASH
Also, it's true you should look at house as equity, but that's not all it is. The housing market is likely to rebound, just not to as much as it once was because of shortsightedness.
I guess there's also the issue that you'd be unlikely to be able to get a particularly high value percentage mortgage, if you could get one at all, so even if the house next door could be bought on the cheap the bank probably isn't going to lend you anywhere near close to the value of the house (especially if it looks like prices are on the decline) so would you have enough capital to cover the difference if you could only get a mortgage for, say, 25%-50% of the value of the house?
First off, it would mean renting for a few years. To qualify on a loan for a second home, lenders expect the borrowers to be able to carry both mortgage payments at once, regardless of whether or not the first home will become a rental property. We are well within normal ranges now, but I doubt we could qualify for both at once.
Of course this means losing the deductions for mortgage insurance, property taxes, etc. but that would be more than offset by monthly savings. I expect the housing market to start rebounding late next year, but suburban AZ was one of the hardest hit areas for home value drops, and we could stay there 5 or 6 years and not see it even break even.
I guess it comes down to living with shitty credit for a few years and being forced to rent (which I am not a big fan of) or losing roughly $1000 a month in mortgage payments. Our current situation also means we will never be able to get a HELOC or refinance.
Bad credit certainly will effect you; future loan will have higher rates, some current loans can reset to higher rates, some employers run credit checks on new employees.
Though it is ultimately a numbers game...
I'd ask the attourney with whom you consult about these kinds of possible outcomes. I've witnessed people do incredibly stupid things and hurt themselves credit-wise for a long time because they "heard about" this or that.
Edit: OTOH, MyFico says a foreclosure is a single event and so long as you keep your other credit obligations in good standing it may take a lot less than 7 years to repair. I've got to think that given this real estate bust, a creditor would be loth to loan 6 figures to someone who had a foreclosure unless they could put 20%+ down and had otherwise perfect credit.
Yep. Realize the value of the house will go back up in a few years, just pay the mortgage and don't screw everything up for the rest of us.
According to current tax law, discharged debt is being forgiven by the IRS (the Mortgage Debt Relief Act I believe it's called).
The lender's rights depend on the state - in Arizona, unless you have a VA loan they do not have a legal recourse to pursue deficiency judgments.
Like I mentioned talking to others and researching myself isn't enough, so I will talk to an attorney at some point.
Golded for true value.
Without having to write a thesis on the subject, what the OP is suggesting is a very bad idea.
He's going to have massive credit problems (basically all that good credit he's worked so hard to establish is going to go up in smoke), he's going to have legal problems in the form of a foreclosure action being filed against him, and when the judge sees that he could have paid for this mortgage and choose not, he's going to be pissed (people who walk away from mortgages do so as a last resort for a reason, son), he's going to have tax problems and he's going to have logistic problems in terms of even being considered for a new loan right now.
Especially if you are in a state where they can not pursue any lost value from you, I'd recommend talking to a financial consultant over this. At the least, you can look into short selling. Just walking away from the loan is a bad idea, likely, but so is continuing to pay on it where you will get less than a quarter of your money back.
Ok... I was going to snip this to a single sentence, but you seem to not like periods.
I just wanted to point out he already has a massive financial problem. It is not necessarily a credit score problem, but owing large sums of money to a debt that is underwater is a massive problem. I do not suggest walking away from the loan, but definitely approach your bank and see what options they are willing to give you.
Do you expect the value of the house never to reach it's value again after 20 years? Homes aren't 4 year investments, homes are just like investing in the stock market, to a degree with the ups and downs. Jumping ship because it's on a downward spiral with cutting off 30% of the original value is retarded, especially after looking at the long term investment of 20+ years when it might surpass the original value.
Also, the complications that are likely to follow as CoJoe says because he's a smart cookie.
What if I told you that housing wasn't always this "increasing equity" situation that caused the problem today? Would you still want to buy a house? Theoretically all assets depreciate, just with houses the value of land goes up (and unrealistically went up in the past 15 or so years). Your house will come back to it's value, but it's going to be a while for the market to recover. You'd be stupid to abandon it and take on all that horrible stuff.
Well, here is another question for you.
Would you prefer that more of your finances were going into a bucket that you had access to at some point in the future to help pay for rising costs associated with the entire family?
Realize, that this could mean someone pays upwards of 500000k for a house worth only 175k. That means over the course of 30 years, you are asking this person to lose 320k of money. If they were to walk away right now, they would only cause the bank to be "out" about 75k. (After all, the bank would have the house at its current value.) (I'm assuming a 250k house at a 30yr fixed of a decent 6% rate (and assuming for some reason it does not rise from the 30% drop.))
It'll come back.
I agree, but that is exactly why I said to see a financial consultant. Saying that people that can afford it should just stick to paying for their mortgages is just as bad of an idea as the whole concept that houses are investments. That is to say, it sounds like the first mistake was buying in the first place. Do not necessarily follow that up with another possible mistake. Find all of your options and follow the best one. (This likely does not include "walking away," but that is an answer you will need a lot more information to answer.)
More simply put, if you had a car loan on a vehicle that was destroyed in an accident an didn't have good enough insurance to cover it, would you just suck it up and pay it off, or see if there were any other options?
If you had a single stock (which is effectively what you have) that had dropped 30% and shows signs of dropping up to 50%, would you hold on to it, or try to adjust that money to some other place?
He stated he is in a state where he can not be sued. They can take the house back, but they can not pursue him for any loss of value.
Edit: And you are honestly saying you would not look to see what other options you have?
I very much doubt any local or state government would absolve owners of debt if they abandon a property. Seems shady at best. I could be wrong.
Unless the bank can get the full mortgage back of the sale of the house, that difference is your new debt.
What you might want to do, is sell the house yourself, pay off the mortgage (including the fines you usually pay when you cheat the bank out of long-term interest.)
Then take out a new mortgage (with your credit still intact) and buy a cheaper house...
Depending on the terms of the loan he has, they may not be able to come at him for the difference. (Depends heavily on if he is correct in his post.)
As for fines and such. If you signed a loan where you have prepayment penalties, you need to work harder at getting a loan next time.
If you really want to be rid of the house, do it legally in a way that won't mess up your next loan. I really hope this was a whim.
Also, maybe it's been a while since your last experience with this, OP, but renting sucks. You will go from having shitty equity to flushing your money down the toilet for however many years you do it. And if lending doesn't recover, you won't be able to get a loan for a new one when you want to even if your credit is AWESOMESAUCE.
Basically, NOW IS NOT THE TIME.
So here are some questions you need to find answers to beyond the touchy-feely questions others have listed:
1. How much was your house worth in 2000 (or, if it was built after 2000, how much did it sell for then)?
2. How much more than the answer to Q1 did you pay in 2006 when you purchased your home?
3. How close is the answer to Q1 to the current value?
4. In your housing market, expressed as a ratio, what is the current cost of a home compared to the cost of renting it for a year?
5. In 2000, what was the contemporary cost of property compared to the cost of renting a comparable home for a year?
The more you understand about your market's history, the better an idea you'll have as far as where the prices of your house will eventually adjust to when the market finally stabilizes. That will help you figure out how much you overpaid by. The answer to number 4 will also tell you how realistic it is to purchase versus rent currently in your market. At that point, you'll have a better idea what you would potentially be walking out on, and you can perform a more-realistic cost/benefit analysis of your current financial situation.
Back to the macroeconomics that I said I was going to leave alone: you will be completely fucking over every other homeowner in your market because once you walk out on a negative equity mortgage, it drives down the appraised value of every other home in the area, which will undermine their equity. While you're doing your cost benefit analysis, ask yourself if you can live with having fucked over the rest of your neighbors who are likely struggling with the same decisions.
This is so out of touch with how banks operate in Europe that i don't think i can even argue against it.
You better believe that a collateral, executed below it's value because payments were behind, results in a remaining debt for the person/household/company that took out the loan.
Also all banks have fines on mortgages, unless they sell such shitty mortgages that the interest is not even calculated in your downpayments at all (so they screw everybody, not just the ones paying their mortgages off early), but i highly doubt that.
Banks expect to get a certain ammount of interest when they sign a mortgage. It's part of the deal. No bartering is going to make them give that up.
I guess it works diferent over there.
And..... renting is a MUCH better option than paying for negative equity. Not only should he be able to get a much lower payment, but the value of the building is no longer a concern. Realize that ALL money the OP has put into the house so far has gone down the toilet. ALL OF IT. This is basically the falacy of sunken costs. Just because you have paid a certain amount into something, is not a great reason to continue to do so.
Again, I am not saying you should just walk away. I think it that is a very risky move without having a ton more information.
As to whether you are protected in your state from being sued, I did find this on a 10 second googling. It looks like this will depend on your specific lease. And this just strengthens that you need to approach a consultant and then the bank to see what your options really are.
If you talk to a couple lawyers and a financial adviser and they all say laws are currently fucked up because the government wanted to grant relief from "harsh penalties" to people who bought homes just before the bubble burst and it is possible to walk away then its something to consider.
Also, it may be worth going to the bank and trying to renegotiate your mortgage. If all that happens if you walk away if that you get a bad credit rating (best case scenario and rather unlikely) then the bank would certainly have an incentive to lower your interest rate or something in order to get you not to default. It could easily be in your best interest to stick with a low interest loan and your negative equity over renting for a couple years and then getting a high interest loan on a shittier house.
I kind of assumed the OP had already done this, but if you haven't yet, dude. Go talk to your bank. If you're conceivably going to default on a loan with that much negative equity, they're going to be better off keeping you in your house than letting you walk away and trying to fire-sale it to build capital they can use to issue a new loan. Even if they can chase you down for bad debt and force you to file for bankruptcy, they'd still lose a lot of money on the deal.
Not much different, but with the introduction of CDOs and other "financial magic" most lenders cared less about the actual interest. They were able to cash out the value of the loan within a few months of making it, as it were, so they don't receive any lost value if the buyer pays off early. This will likely change, but even then, they usually just introduce more into closing costs. (Basically, you prepay a portion of the interest up front.)
Who said it was illegal? I hope you're talking to someone else
That is to say, I am going to end up paying for a small portion of your house if you do this.
This is a much better stated version of what I have been trying to say. I would leave out the emotional part, as I do not believe it should factor in too much. That is obviously your call, though.
I am 100% sure about AZ law saying that you cannot be pursued by deficiency judgments. It does seem odd, for sure, but it does give some power to the borrower when negotiating with the lender - if they know they will lose their ass, they will be more willing to negotiate. California and other states have similar laws when using purchase money loans, but AZ covers them all.
I did not see a stupid advertisement or anything like that - I actually spoke with a banker (off the clock) who works for one of the largest banks in the country, and he actually brought up the idea. I didn't even realize it was something people actually did, but after discussing it with neighbors it has been happening everywhere.
I plan to call my mortgage holder sometime soon and see if they have some proactive help, as I would certainly like to continue in the house we already have. They were completely resistant to any modification last time I talked to them; in fact, they only help people who have already gone into default, either purposely or accidentally.
As well, this isn't just about what the house's value is "on paper". This means we have no option of ever selling the house and not taking a huge loss, unless it's many years from now. If I had to relocate, or the schools go downhill, etc we're without options. As it is, we will lose a massive amount of money overall unless we look very, very long-term, and it's possible the home will never rise to its 2006 value again.
Even after this we may just decide it's not worth it emotionally to move, regardless of monetary gain.
I was referring to ceres.
I probably should have just left it off, as I do believe the stress was more in the rest of that sentence. Ah well...