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Personal Finance -
Mortgage
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Written by Ahmed Amr
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Friday, 18 December 2009 10:21 |
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Page 2 of 2
My point, and I've been saying this to a lot of people, is that strategic defaulting was bound to happen. This is not a morality play - this is what people do when they find themselves in a rough spot. So spare me the preaching - people do what they have to do. And once they make that decision - let's hope they do it right and understand the consequences.
If you are going to default strategically, make sure your state will limit the bank to repossessing your home and prevent them from going after your other assets. If you're in California or Arizona - you should be alright but don't ever take legal advice from a humble scribe; check with a lawyer and do some research on how your state law treats strategic defaults. Be prepared to rent for the next five years unless you can buy your next house with cash because your credit will make it next to impossible to secure another loan. Foreclosures stay on your record for seven years and you'll have to pay higher interest on every dime you borrow on credit cars and car loans.
Now as to the magnitude of the potential problem - take in these figures: "5.3 million U.S. households have mortgage balances at least 20% higher than their homes' value, and 2.2 million of those households are at least 50% under water."
I read that one sentence in the WSJ article and it made my jaw drop. I knew there was a problem out there - but that's a whole lot of houses and a whole lot of temptation to walk away.
The way I figure it - a lot of people are going to do whatever is in their family's interests. From a simple financial standpoint, in many cases it's an economically rational decision to walk away. Consider the temptation of walking away from $200,000 in negative equity plus the annual interest one has to pay versus living with ruined credit for 7 years. Given that it takes nearly a year to foreclose on homeowners in many states, defaulters can build up quite the cash position before being forced to move out. Most families aren't able to put away two hundred grand in a lifetime let alone in 7 years. Sure, you could make an argument that the house might regain its value over that period of time, but as we discussed in 5 Bulletproof Reasons Real Estate Won't Be Climbing to the Sky Anytime Soon, it's not very likely.
Even more harrowing is the suspicion that many people opting for a strategic mortgage default saw this coming and did serial cash refinances. If they invested that cash instead of using it to live beyond their means, many of them could walk away from the house and buy the next one straight up with cash. Putting aside any judgement about the morality of going down that path, the strategy obviously worked in their favor. If it's a deliberate strategy, it's obviously reprehensible but you can't argue that it was financially savvy and completely legal. While the rest of us rode the wave up and down, the cash-out crew took their chips off the table at the peak. Ruined credit for 7 years is not much of a price to pay when you have hundreds of thousands of dollars in cash.
For the most part, most of the folks that decide on doing a strategic mortgage default got in at the peak of the housing bubble and are just trying to extract themselves from a financial bind. For them, walking away from their homes probably means they won't be eligible to get back into the housing market for quite some time. So go figure out this equation - more distressed inventory combined with fewer eligible buyers - what will it mean for the housing recovery? You don't have to be an economist to understand which way the wind is blowing. Housing prices aren't heading north anytime soon.
http://online.wsj.com/article/SB126100260600594531.html?mod=rss_Today's_Most_Popular
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