March 7, 2009
@ 03:18 PM
Comments [24]
Some thoughts on being an 'underwater' home owner and walking out on a mortgage

Below is a chart of home prices in my zipcode taken from Zillow 

We bought our house around the peak of that chart. According to Zillow our home seems to have lost about $50,000 in value since we bought it. That seems high on the surface but I know of at least one house in our neighborhood that just sold for $60,000 less than what the owners paid for it around the same time we bought our house.

I don't expect that the recently announced home owner rescue plan by the Obama administration (which is covered in a great Q & A in the New York Times blog) will have any effect on us given that we can afford our house and aren't in dire financial straits. Unless I end up one of the 3,600 waiting for the other shoe to drop and can't find a new job. At least I'm no longer an H-1B so I don't have to worry about needing to leave the country within a week or two if laid off.

I expect house prices to drop even further before we hit the bottom. This is a rational expectation when you look at the following chart

None of this would be a concern if we plan to live here for the next 20 – 30 years. However I have a horrible daily commute and as a new dad I'm not enamored with the schools in the area. 

So I punched some numbers into Pay Or Go: Walk away from your mortgage calculator and the result was a recommendation to walk away if we don't expect the house to appreciate back to the price we paid for it in the next 5 – 7 years. Given the historical chart above, I don't.

Articles like Silicon Valley 'underwater' homeowners: Should I stay or go? point out that the biggest consequence of walking away is having a blemish on your credit score for up to seven years. This implies to me that if moving to a neighborhood whose schools I feel better about is important then it makes sense to take the credit hit now, rent a place and put away the cost savings over the next seven years so we can have a great down payment when we want to move to that house in the great school district when Nathan will be about 7 years old.

On the one hand, I feel like I'm shirking some financial responsibilities even thinking about this but on the other hand I want to do what's best for my family. What do you guys think?

Note Now Playing: Bob Marley & The Wailers - Redemption Song Note


 

Categories: Personal

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Saturday, 07 March 2009 17:14:51 (GMT Standard Time, UTC+00:00)
I'm in the same boat in Kirkland but down ~$20-30k on my condo. I don't have a family so I plan to stay put for the next 5+ years until values come back up (hopefully). If I were in your shoes I'm not sure what I would do either, but it feels like walking away right now might be too soon. I'd wait a year and see how the recession and housing bust play out.
Tony
Saturday, 07 March 2009 18:50:17 (GMT Standard Time, UTC+00:00)
Have a look at Felix Salmon's blog http://www.portfolio.com/views/blogs/market-movers/, he knows an awful lot and just a couple of days wrote about walking away. Also well worth search his blog for other things he wrote on housing/credit etc, I remember that he had some general rules on when to rent/buy etc a while ago as well.
davidacoder
Saturday, 07 March 2009 21:28:01 (GMT Standard Time, UTC+00:00)
In my moral system, walking away from a contract you can afford to pay, even if legal and beneficial, is immoral.

I say either sell your house, take the bath, and move to another neighborhood, or stick it out where you are.

(I'm a home owner who is likely to be underwater too, just for reference.)
Bill Mill
Saturday, 07 March 2009 21:33:45 (GMT Standard Time, UTC+00:00)
Excuse me? Do I misunderstand or are you actually talking about just not paying your mortgage, letting the lender take the property and suffer the loss? "we can afford our house and aren't in dire financial straits" but you'll let the lender's other customers cover your loss? You knew that booms and busts happen, that over many years of property ownership you'd experience this, that you made an agreement with your lender. If you can afford it, you take the hit. It hurts but to do otherwise is immoral and antisocial.
Given the intelligence you usually display here I suspect you're not serious about this but are trying to elicit views. I do hope so.
Alan
Saturday, 07 March 2009 21:56:57 (GMT Standard Time, UTC+00:00)
Nothing in my moral code would prevent me from doing best by my family within the bounds of the law. My own opinion is that morality does not apply to a contract made between you and a corporation.

However I would be concerned about the repercussions of a low credit score. This will impact your ability to get a credit card, maybe even open savings accounts, and probably affect the landlords you can lease from. Being the super paranoid person I am, I would also want to know exactly how long my credit record would be affected - seven years seems was cited as an average time but who knows what the upper limit is?
Dan Takk
Saturday, 07 March 2009 23:01:03 (GMT Standard Time, UTC+00:00)
Geez, people. I don't get this "immorality" argument at all. There is a contract -- I get the money to buy a house, you can take the house if I don't pay back. That's all there is to it. It does not say anything about "ability" or "willingness" to pay. The house is the only collateral on the loan, which is convenient for the borrower (in Australia, for example, the bank can go after ALL your assets if you default on a mortgage). When the bank signed on the dotted line, they should have thought about what happens if the borrower defaults. If they did not -- that's their problem.

What should be considered carefully, is the risk of serious inflation (which some people consider to be quite high, especially after all the trillions of dollars being printed now percolate trhough the economy). If there will, in fact, be inflation on the order of 10-20% a year, then owning a house would become benericial rather quickly.

The second thing to consider is the hit to the credit score. I don't quite understand why one would NEED a credit card -- all you really need is 6-12 months worth of living expenses in cash, and a debit card. Which leaves the problems with renting a place (or even getting employed) because of the low credit score. These concers, if true, would be serious.

And finally, it might be worth exploring the loan modification anyway. Cases where lenders simply reduce the principal of the loan to match the current value of the house are not unheard of (even if the borrower is able to pay the current mortgage)
max
Saturday, 07 March 2009 23:31:22 (GMT Standard Time, UTC+00:00)
@Dan that seven-year number isn't an estimate or an average, it's the law. Nothing can appear on a credit report from more than seven years earlier.
Doug
Saturday, 07 March 2009 23:51:35 (GMT Standard Time, UTC+00:00)
As Doug states, 7 years is the maximum. Things on there can actually float off earlier. I'm not sure about walking away from a mortgage. Before doing anything, I'd talk to a lawyer. I don't know what the law is in WA, but in other states (southwest and southeast I know) can allow the lender to come after you for the money if they can prove you aren't in financial distress. So I'd find out if WA is also one of those states.

Secondly, I agree with other people about the contract. It is a contract. Not a blood oath. Not a declaration of undying loyalty. While there is an emotional and nostalgic cost, the financial cost is well known.

I'm currently in the same boat. There are 3 houses in my neighborhood who are doing short sells. There are 3 others that were just walkouts (I live near Boeing, and they got caught up in the strike, layoffs, etc.). The neighborhood has stepped up and started cutting the grass, weeding, etc. to keep the prices from being hit too hard. But reality is, it doesn't matter. All the equity I had is gone. I'm not underwater yet, but it's getting there.

Luckily, no kids on the way or planned. And my wife loves the house. So I won't leave. But if at any point this house becomes a burden on my family, I'd try to sell (since I'm not underwater), but I'd consider ditching it.

Luckily (unluckily?) I worked for years in Atlanta, GA that has much worse traffic than WA. So a 60 to 80 minute commute for me over 37 miles is nothing. I used to have a 60 to 80 minute commute in Atlanta going 15 miles. Plus I'm on a bus now :) I get an extra hour of sleep.
Justin Rudd
Sunday, 08 March 2009 17:53:36 (GMT Standard Time, UTC+00:00)
I am surprised to read this. Life is not always about profiting. If everybody filed for bankruptcy at the first hint of any loss, I am sure it will have a really big impact on the world. And, how many times are you going to do that? Compared to all those poor souls who are trying to keep their homes and not go bankrupt, don't you have a nice education, cushy job and a decent income? Are you really that hard up financially or is it that you are so much more clever than everybody else?

I easily lost 10 times as much in my home and stock portfolio. But I am not trying to figure out how to shirk my fiduciary responsibilities and bolt from my obligations.
PhilM
Sunday, 08 March 2009 17:55:10 (GMT Standard Time, UTC+00:00)
Maybe it is time you changed your tag line :)
PhilM
Sunday, 08 March 2009 19:16:54 (GMT Standard Time, UTC+00:00)
@PhilM -- life IS about profiteering. Read my lips: "This country is driven by greed". This is cold, hard fact. The reason banks were giving these mortgages without any thinking is because they were greedy (stupidly so, it turned out, but that's another story). Now is the borrower's turn to get greedy, and do what's best for them. Some hypothetical "poor folks" don't have anything to do with me or you. They make their own decisions, you make yours, and I make mine. In my opinion walking from a house is a business decision, moral has nothing to do with it.
max
Sunday, 08 March 2009 20:08:53 (GMT Standard Time, UTC+00:00)
Check with a lawyer, but assuming you live in a "no recourse state" (and I think you do, you may wish to consider buying a second home first at today's lower prices and interest rates, then walking away from the first home. This assumes you're reasonably comfortable with the idea of living in the new home for 7+ years.
Elliotte Rusty Harold
Monday, 09 March 2009 00:25:25 (GMT Standard Time, UTC+00:00)
I'm with Bill and Alan. Either sell the house and take on the debt for the difference - possibly having to rent for a time in the new neighborhood - or stay where you are. You can afford the payments that you agreed to and nothing is forcing you to move (i.e. Military commitment).
BobM
Monday, 09 March 2009 04:20:30 (GMT Standard Time, UTC+00:00)
I hope you are not serious about actually proceeding on this train of thought. We have a serious problem with the world, national and regional economy that requires that we all stand together to keep it from getting worse.

Quite simply, you are asking whether you should contribute to the problem or to the solution. If a significant number of people in your position decide to pursue the former path, then is just makes the problem worse. More folks witl slip into your position as it will create yet lower prices for all homes.

We got into this mess with poor decisions made by a massive number of people in government, banking, finance, insurance, mortgage, real estate and all walks of life. Everyone thought there was a free ticket to fast-track prosperity. Apparently you think the decision you face is a free ticket out of a problem, but we all pay. The big giant government debt building up is the cost. Your kids will be paying that.

Be part of the solution!
TMC2K
Monday, 09 March 2009 08:34:49 (GMT Standard Time, UTC+00:00)
It's difficult to tell because I'm not clear exactly what 'not enamoured with schools' means - I don't think you've a moral imperative on you to not walk out, but I do believe that parents have a duty to help improve their local schools if that's possible. I don't suppose you could rent your current place out, rent somewhere cheaper than your current mortgage payments (or even buy a second home in a preferred district), and make up the difference yourself?
CS Clark
Monday, 09 March 2009 14:47:48 (GMT Standard Time, UTC+00:00)
You agreed on the price and you signed the papers promising to pay back the amount owed. Like any other contract (even marrage) you take the good times with the bad and do what you can. Sometimes you cant fullfill your promises, but you should do everything in your power to do so. Walking out on a mortgage is a bad idea.

A lot of people are upside down right now. My home is worth less than i bought it for, but I have paid so much extra every month that the value is still more than what i still owe, but if were to sell it, i would take a lose.
Dan Rigsby
Monday, 09 March 2009 14:53:39 (GMT Standard Time, UTC+00:00)
Zillow is crap. People reference zillow when it validates what they want and dismiss it when it doesn't.

Your arguments for walking are weak at best. Before you purchased you should have:
* understood the impact to your commute
* looked at the local school system

Don't like your commute? Sell your place and move. Don't like the schools? Do something positive to improve them, or provide other opportunities for your children to learn.


I would expect that walking out is a lot more detrimental that just damaging your credit score. Legal fees alone could turn the whole thing into a disaster. But by all means, go for it, I'd love to read about the aftermath.
Steve
Monday, 09 March 2009 15:19:56 (GMT Standard Time, UTC+00:00)
What happens if you walk out and your home value levels out or even starts to climb back up, your family is stuck in an apartment paying a rent that will probably be more than your current mortgage, your credit is ripped up, now inflation is starting to set in and the last place you want to be is sitting in a rental property and not owning real estate since real estate rises with inflation? This is all because you can afford your current mortgage but the "experts" say that your home is going to lose even more value? These are the same "experts" that were probably telling you its the best time to buy a home a few years back. I wouldn't take that risk, an apartment is not the best place to raise a family.

I would stop worrying and focus on paying down other debts and your mortgage because then the worst case scenario would be you and your family living in a paid for home and your child is attending a private school (assuming the current school district still does not meet your expectations). Unfortunately, your commute will still be lousy but that should really only affect you and not your family. At least you won't be paying a mortgage and worrying about being underwater!

On a side note, that Pay Or Go site is a commercial for a personal injury attorney. I would be very wary of financial advice from an attorney. They will destroy your credit just to bill you for a few hours of work.
Steven
Monday, 09 March 2009 20:16:11 (GMT Standard Time, UTC+00:00)
This is a classic tragedy of the commons problem, and if you can afford to keep your house I would hope you would do so for the sake of your community, your state, and your country.

But if you do decide that you really want to walk away, you should first have an honest conversation with your bank about having them take a write-down on the principal - given that they will take a loss if they repossess the house and then have to sell it, you may be able to convince them to write down an amount roughly on par with the loss they would be facing, and you wouldn't have a black mark on your credit. Plus you'd have a lower payment and if prices do ever go up you'll have more equity.
Andrew Shebanow
Tuesday, 10 March 2009 04:12:28 (GMT Standard Time, UTC+00:00)
You bought high. That was a mistake, and dumping the consequences of that mistake on others - is another mistake. Grow up, suck it up, and take your loss. Maybe next time you'll make a better choice. You bought into the get rich quick scheme of the real estate bubble, and offing that responsibility onto someone else is childish, irresponsible, and a horrible example to your child. People like you have caused the problems that we're facing right now. Just stop, please. Pay your bills and give up on the lifestyle. You can't handle it.
nikki
Tuesday, 10 March 2009 15:52:53 (GMT Standard Time, UTC+00:00)
Do what's you feel is right for your family. The banks in the transaction are not victims. They're experts, paid handsomely to assume the risk of a borrower defaulting. You've already no doubt already paid them more than the loss in your down and mortgage payments. There's no real ethical dilemma here. Any money not spent on your overpriced mortgage will be spent in your local community, investments or taxes.
Mike judge
Tuesday, 10 March 2009 18:51:54 (GMT Standard Time, UTC+00:00)
This is pretty funny. It's basically a "I bought my home hoping to profit from the bubble, my plan fell through, and now I want to stick it to the bank -- besides my toddler needs a better school"

LOL. Great post!
Sunny
Thursday, 12 March 2009 02:42:10 (GMT Standard Time, UTC+00:00)
I don't understand why fawning over "contracts" and "obligations". Especially when the other party involved in this are greedy banks who will happily stab you in the back if it makes them an extra buck.

Quit the sentimentality please. It is a business deal. Sure he probably bought the house to profit off the boom, where does it say you cannot scrap this, take a hit and restart?? The banks are currently doing the same thing with all the bailout money floating around and even those who do not support bailing the banks (or detroit) out say they should allow them enter bankruptcy (which essentially discharges debts and obligations that cannot be met). All the while the board probably still paying themselves obscene bonuses.

If I were in your shoes, I'd definitely consider walking out - let the bank hold the bag.
Boom
Friday, 13 March 2009 19:10:59 (GMT Standard Time, UTC+00:00)
I guess the point some people here are missing is the fact that you are what would now be called a 'responsible' borrower. You probably made the decision to buy a house once you reached a certain level of financial stability in your life and that in itself separates you from all those who made the same decision when they really should not, or could not have. Of course, I completey sympathize with all those who had no way of foreseeing job loss or other financial duress. Anyway, my point is, why should you have to sit out a devastating loss on your investment when the whole reason for that loss is a combination of profit seeking corpoorations (which I dont blame, profit is the sole objective of a corporation) and truly irresponsible borrowers who did not, or chose not to, plan what would happen to their mortgages once their ARM periods ran out. Your moral obligation and responsibility were satisfied when you made the decision to buy a house KNOWING that you could afford it.

And for the benefit of opinions contrary to mine, please know that I AM in the same exact situation as the blog author - only my house has lost about $200,000 in value - and it makes me very, very mad that this is happening to me when I have never missed a single payment and bought my house at a point in my life when I could afford to. I truly believe that I would not be in this situation if it werent for rash borrowing ( and lending ).
vik
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