Would like your thoughts....hypothetical situation. You buy a house

[Thickasabrick]

during the housing bubble. You still have a job, can afford the payment but when housing prices start to fall you realize you made a bad investment and you are "underwater" on your mortgage.

Should you walk away and stick the bank with your bad investment? I am not talking about sub prime here. I'm talking about a normal 30 year mortgage at a reasonable interest rate.

[NightWatcher]

1. keep paying on it. We're all sitting in homes where the value has dropped

[flvegan]

2. Stick with the investment.

First, it's just wrong to "stick the bank" on your "bad investment". You're getting the same use out of the house that you were on day one. Values will, at some point, return.

[hedgehog]

13. I'd probably stay in the house if I liked it and I had a job in the area BUT

while everyone is down on people who "bought houses they couldn't afford" I have yet to see anyone ask who financed the housing bubble. There would have been no bubble if banks had refused to write mortgages for buildings that were overvalued. The banks were very happy to finance the bubble because they were making money hand over fist. They are no way innocent victims in this situation. in fact, they bear major responsibility. Would small, home town banks and S&Ls have allowed prices to run up like this?

[notadmblnd]

3. You have to ask yourself; why should I have any scruples....

Everyone else gets away with it?

[Uben]

4. You took the risk.....

....you have to eat the over-valued part. Keep payin. Buying a house is a long term investment for most of us. I bought a house in 1980, paid a 9.875 interest rate for 15 yrs, and sold it for what I gave for it. Bad investment, but I llived up to my end of the agreement.

[quiller4]

5. I wouldn't walk away if I was happy living in the house.

Over time housing values will rise again. If I were a younger worker with time to wait, I'd keep my house, stay current on my mortgage and protect my credit rating. In the long run my house will slowly appreciate.

Alternatively, I might seek to refinance under one of the options that would allow me to renegotiate my loan at the current market value of my house with conventional financing at today's market rate. That option is part of Obama's housing plan and I just heeeeard Orman explaining it on CNN.

[Skidmore]

6. We continue to pay as long as we have income and

wait for the market to return.

[sandnsea]

7. That's why there's money for this

in Obama's mortgage plan. When all the details come out, look and see if there's something to help you. If there isn't, after it all shakes out a bit more, call the Foreclosure Department of your mortgage company and try to get them to negotiate your mortgage down. There's programs through FHA that are already doing that, they can drop your mortgage 10% iirc.

[Parker CA]

8. Why would you walk away from a good rate, a mortgage you can support, and in the process completely

destroy your credit for most of the next decade? Walking away, in my opinion should be the last resort option, especially if you're locked into a solid rate at 30 years.

[DJ13]

9. If you walk away you'll lose any chance you have to buy on credit for years

[BR_Parkway]

10. 2 problems - if you walk away, you probably owe income taxes on

the difference unless very specific rules are followed.

But the second problem is actually the biggest one. We're still referring to our homes as 'investments' - a very major underlying thought process which bought us the bubbles in the first place.

You have a place to live, you can afford to pay for it and presumably, you like living there. At some future point, you won't have to pay anything to live there beyond taxes and insurance. It seems to me that we went way off course with housing when we started focusing more on the 'value' rather than the quality and affordability of it with a long term goal of having the security of having a roof over our heads that's paid for.

[SmileyRose]

11. This is about accounting, not morals.

If you buy a stock and you later realize it's a dud, you drop kick it before you lose your shirt AND your pants. If you buy a car, it turns out to be a lemon and your state has lemon laws, then you dump the problem back on the dealership or manufacturer. Your mortgage company has PROFESSIONAL underwriters that are responsible for assessing the value of the collateral for the life of the loan. These underwriters clearly did not do a good job. A professional knew it was a bubble that could not be sustained for 30 years. You also have to consider the fact your bank would steamroll over you in a heartbeat or less on pure financials. So this is my logic for telling you this is a financial question, not a moral one.



Now, you have a house not worth the paper on it. Your first question is regarding the historical appreciation rates for your local market over the 10 years prior to the bubble. If your house is old enough, look at appreciation rates for the lifetime of the home. You also have to factor in inflation in the past and what is expected over your projected lifetime in the house. An appraisal agent and accountant can help you with that. If you determine you can eventually sell the house for it's inflated price tag and you like the house, and you like and want the house for your personal enjoyment then that will influence your choices.

I would also investigate any provisions in the stimulus (the new laws) and existing local and state laws that may benefit you. What is there that will allow you to renegotiate your loan based on the actual current value of your home? Is there anything that will allow you to give deed in lieu of foreclosure? What impact will this have on your credit history and are you willing to take that hit?

You have a lot of financial information to gather in order to make a sound financial choice on this house. But make no mistake about it, this is a mainly a financial decision. Your personal wants also have to be considered, but IMHO this is mainly a financial decision.

BTW - your home should never be an investment. It is the most cost effective way to keep a roof over your head most of the time, but very seldom does appreciation of residential real estate outpace inflation and ownership costs.

[Fresh_Start]

12. I'm gonna be the outlier

You need to assess what the house is worth to you versus what it will cost you.
You might be underwater but net-net, you could still better off than the alternatives.

When you walk away from the mortgage, you still need a place to live. What will it cost you to live versus paying the mortgage. Consider the tax shelter impact of the mortgage and real estate taxes while you do this.

People here are correct that while you could mail in your keys, you will owe substantial income taxes since the lender will writeoff the debt and submit a 1099C to the government. Their losses is treated as your income for income tax purposes.

You need to consider the impact to your credit. Once you do this, you will pay 'subprime' rates for credit for 5 or more years. Cars, credit cards, insurance, utilities will all make it more difficult for you. And their are jobs which you will not be able to hold due to bad credit.

How far underwater are you. If its a matter of 5-10% of the home value, that may well be recovered in the next 5 years. If you are 50% underwater, much less likely.

[SoCalDem]

14. We have been in the same house since 1982, and have been upside-down many times

It's NOT unusual for markets to fluctuate, but the ridiculous run-up over the last 5 years is a lot , so the people who bought at the height of the bubble, may be S.O.L.

[Thickasabrick]

15. Thank you everyone! Such excellent points and thoughtful advice.

It's not me that is pondering this but a friend is and I didn't know what to tell them. There is no way I would have though of all these great points!!

:yourock:

[ThomWV]

16. Even with the recent drops in prices our place is still worth 7~10x what we paid for it

[customerserviceguy]

17. Compare this to a new car

Whenever you buy one with less than, say, a 20% downpayment, from day one, you're "underwater" on it. It's going to be worth less on the wholesale market than you owe on it until probably the last year of the payments.

But you bought that car for the use of it, it gets you to the job that you use to pay for it, and it provides you with convenience in shopping (you'd have fewer choices if you just used the bus), and you may well save some money by being able to shop around for lower prices. It also provides a cheaper way to get recreation than by using other forms of transportation, such as a train or an airplane.

In the end, after ten or fifteen years (on average) the car will eventually be scrapped, but your house will not be unusable after that time. Even if it does not rise one penny in value from what it is today, it will still have the value of its utility. And you will have enjoyed certain freedoms in that time, such as what color you want the walls to be, or what plantings go in your yard. You won't have to worry about a landlord displacing you to put in a family member.

In short, without resorting to discussions of 'moral hazard' or things like that, you can justify continuing to make the payments on the terms on which you agreed. The reward will come down the line, a LOT of people taking the easy way out are going to see a hit in their credit scores. And I guarantee you that interest rates will be higher when the economy prospers again.

[Warpy]

18. Take a look at what the rental cost of an equivalent house is

If it's as nutty as California was, with rentals often going for 50+% less than a mortgage payment, then you might consider trying to get out from under.

However, if you're in a reasonably sane market where rents are at least 75% of your monthly payment and likely to rise, look at your payment as a hedge against rising rent and stay put.

Yes, you will spend a lot more time trying to build any equity in the place, but you'll be able to deduct your mortgage interest from your income, which you can't do with rent, and your payment will stay flat except for taxes and insurance, things which typically rise more slowly than rent does.

Every market is different and knowing yours well enough will tell you how to proceed.