A growing number of homeowners who are "upside-down" on their mortgages - owing more on their houses than the homes are worth -- are considering walking away from their obligations, even if they can actually afford the monthly payments, according to CBS MoneyWatch.com Editor at Large Jill Schlesinger.
Such "strategic foreclosures" have come under fire from moralists and lenders (see Schlesinger's blog post on this), but many homeowners are willing to do it anyway -- with what they see as good reason, Schlesinger says.
Is it something you should consider? And is it a trend we'll see continue this year?
It's not as uncommon or unwise as you might think at first, Schlesinger observes. And it's legal. Of course, it destroys your credit rating for about seven years, hindering your ability to buy anything again in the near future. But, if you're currently paying $3,000 a month for your mortgage when you could be paying $1,000 to rent in the same area, it really might be a sensible way to go, as long as you're properly advised.
WE'RE SEEING GLIMMERS OF IMPROVEMENT IN THE ECONOMY. DO THE LATEST FORECLOSURE NUMBERS REFLECT THAT?
Not yet. When you read that foreclosure filings fell 10 percent in January from December, don't get too excited. RealtyTrac says foreclosure filings rose 15 percent in January from a year ago, hitting about 316,000 total, and there are more than 4 million homes in the foreclosure pipeline, which shows no sign of abating. Also according to RealtyTrac, 88,000 people had their homes repossessed in January, up 31 percent from January 2009. And while many of these 4 million homeowners really can't afford to stay in their homes, there is an emerging group who can afford their payments, but are making a strategic decision to walk away from their homes. These so-called "strategic foreclosures" are financial decisions that homebuyers are making because they believe it's in their best long-term interest to do so.
IS THERE A FORMULA FOR KNOWING IF THIS IS SOMETHING TO CONSIDER?
Bankruptcy lawyers honestly say that, if you are more than 20 percent "underwater," it makes more sense to walk away. So that means, if your home is worth $200,000, and you owe $240,000, this may be something to mull. The decision to walk away must be made with care and guidance. I spoke with a bankruptcy attorney who said that she needs to demonstrate to her clients with clear numbers how walking away and/or declaring bankruptcy can repair a family's financial situation in the long run. Otherwise, the clients usually balk at the idea.
HOW COMMON IS IT TO WALK AWAY FROM A HOME?
It's hard to pinpoint the numbers, but lawyers for mortgage companies have told me that they are seeing the trend more and more. Homeowners are doing it because the monthly nut to carry the loan is often two-to-three times the comparable rent in the neighborhood. These homeowners believe they would be better off walking away and losing their down payment, because it might take a decade just to get back to even. Many of these people see financial institutions walking away from their obligations in the name of a "smart business decision" and wonder why they shouldn't do the same thing. That is exactly what happened with Stuyvesant Town just recently in New York -- the biggest example of a "strategic default." The company that owned the buildings was out billions of dollars when the economy crumbled and decided to walk away. For a long time, everyone has thought there is a moral imperative to stay. But it's just not that cut-and-dry any more. These so-called "strategic foreclosures" are financial decisions that homebuyers are making because they believe it's in their best long-term interest to do so.
HOW DANGEROUS IS IT?
Make no mistake -- walking away will TRASH your credit for seven years. If you ever want to be able to buy a home with a mortgage in the next seven years, you should think long and hard about walking now.
IS IT PRUDENT IN SOME CASES?
Morality aside, many people made a terrible decision when they purchased their home in the first place. These people may be better off reducing their monthly nuts, paying down other credit and rebuilding their nest eggs. If you are currently paying $3,000 a month in mortgage, and could be renting in the same area for $1,000 a month, it may be something to think about.
HOW MANY PEOPLE ARE "UNDERWATER" IN THEIR MORTGAGES?
The New York Times cites data from First American CoreLogic that showed that almost 4.5 million homeowners were upside down on their mortgages, "with their home value dropping below 75 percent of the mortgage balance."
IS THIS A TREND THAT WE ARE GOING TO SEE RISE OR DECLINE IN 2010?
Strategic Foreclosures are likely to persist as long as the employment situation remains weak. So get over it and get used to it. The foreclosure mess will continue to wreak havoc on the housing market, which brings us to the cure: (1) lenders must ultimately lop off principal balances and (2) the bar should remain high to purchase a home. I know people don't like either solution, but the first will clear out the mess quickly and the second will prevent future foreclosure fiascos.