I have dwelt on this topic before and my post is still on this blog. However, this is an evolving matter and needs continuous discussion. As you know, your homes in Nevada is continuously depreciating and losing its value and it is also decreasing your emotioal attachment with this home. You have plenty of company in this matter as millions of people have lost their value in their homes. In 2009, Reecon Advisors released a national survey indicating that nearly one out of 10 homeowners, 9.2% or 7.4 million, would likely choose to default if they were in that situation. More and more people are seriously thinking of walking away from their home and they call it “strategic default” on their mortgages.
First American Logic did a recent study that suggests when a home falls below 75% of the amount owed on the mortgage, the homeowner begins to think about walking away, even if he or she can pay the mortgage.
However, a recent study just concluded by a financial survey which indicates that people generally have priority on their credit payments in some order. Mostly, people maintain car payments as their first priority credit cards as second and mortgages last. The national average for 60-day delinquent auto loans was 0.81% for the third quarter of 2009. For credit cards, the national 90-day delinquency average was just a bit higher at 1.1%. But for mortgages, the national 60-day delinquency rate was six times higher at 6.25%.
Okay, I never suggested anyone to walk away from their homes? These are my reasons not to walk away.
1. This is your contractual obligations to continue this contract. You are a signatory to this contract and this was an arm’s length transaction. Just ignore the TILA, RESPA violations for a moment.
2. You like this home along with you spouse and children.
3. You have decorated this home tastefully afterall.
4. You have many happy moments in this home.
5. Your children can walk to nearby schools.
6. You get tax break because of this home.
7. If you leave this home, you are going to stay in some home. You don’t contemplate staying on a tree upside down. What guarantee you have that the next place would be a perfect abode? Loud music of neighbors, a nasty kid destroying your peace next door, people parking cars in front of your home.
8. Why destroy credit for something unknown.
9. No one lives in their home for 30 years, and you certainly would not live 30 years so to bother thinking of principal mortgage which you never would pay anyway.
What Can Be Done When Million Underwater Homeowners?
This is the crux of the problem when so many million homes are under water. First American reports that by third-quarter 2009 an estimated 4.5 million homeowners reached that point. A rought estimate is that if prices continue to fall as they have been in the past, this number may exceed 5 millions which of course is very very high.
We had stated in our many posts that the sole panacea to handle this crisis is to reduce arbitrarily everyone’s mortgage to 2% for five years, and all documentation which is creating too much havoc with loan modification should be waived.
Who Should Be Blamed?
There is no single entity, however, it is a collaboration between banks, lenders, mortgage agencies and loan officers along with undying appetite of builders to continue construction unabated without any dire necessity.
Short Sales Not Easy
For many in the hardest hit areas, working out a short sale is frequently not an option when the home value is so low that a buyer starts considering walking away. That’s because the banks are often not willing to accept a low enough offer.
Stricter guidelines from the Treasury Department may get the banks to make a faster decision and put short sales back on the table as an option. Always check with your bank to discuss your options before thinking about a short sale or walking away.
Just a Business Decision?
While many people may think a borrower has a moral obligation to pay the mortgage even if the home is $100,000 or more underwater, but walking away is just a financial decision and not a moral decision.
People who are stuck in a home that doesn’t have a chance of regaining its value in 10, 20 or maybe more years, get guidance on how to strategically default, but the site does advise people to work with an attorney in their home state. Each state has different laws that can make strategic default easier or more difficult.
Credit Scores Can Recover
Essentially when people strategically default, they stop paying their mortgage and instead put all their cash toward paying down other debt, such as car loans and credit cards. Since in many states foreclosures take 12 to 16 months, this gives people a significant amount of cash to pay off their other debts.
Yes, it’s true the borrower’s credit score will be harmed initially but homeowners will eventually gain all those lost credit score if they continuously pay all their bills.
Oh Yes, There Are Many Risks
So what are the risks? You do face the possibility that a bank will try to collect any shortfall on the amount due on your mortgage. But if you work with an attorney, you may be able to minimize the likelihood of being chased for the money.
The big question for many will be: Can I ever buy a home again? Surprisingly, yes. Some financial institutions even specialize in “mortgage repair” loans.
If you’ve defaulted on a loan and would like to take advantage of some great foreclosure deals out there, look for similar mortgage repair programs in your state. Also, now that millions of people have defaulted on their mortgages, it’s likely that when the economy recovers and banks are ready to start lending again, the stigma of a foreclosure stemming from the housing bubble will likely fade. But in today’s economy, most banks won’t agree to lend to someone who recently foreclosed.
While I wouldn’t advise anyone to strategically default, it is an option you may want to consider if you’re stuck in a home with a huge loss that you don’t expect to ever recover. This can be especially helpful in these tough times if you live in a area where there are no jobs and you need to relocate in order to work again.