Ordinarily, I'd say no, you shouldn't walk away from your mortgage. It's bad for your neighbors, bad for your credit, and bad for the economy. And besides, you're a moral person; you'd feel icky. However, I've also seen countless friends and acquaintances run through their retirement accounts and their kids' college funds and finally their emergency savings to hold on to properties until eventually they went into foreclosure or were short-sold. The owners ended up with trashed credit, no property, and no money. Some of these people are now 55 years old with no savings or investments to show for it. Retirement is looking pretty bleak.
So, What's the Right Choice, the Best Decision for You and Your Family?
Brent White, a University of Arizona law professor, feels that it's unfair to hold homeowners to a higher moral standard than the companies that lend to them. Wall Street banks, after all, make make decisions to strategically default on obligations routinely. Morgan Stanley, for example, recently quit making its payments on several San Francisco office buildings. The buildings were purchased by a Morgan Stanley fund at the height of the real estate boom, and their value is a fraction of the liens against them. Yet no one in the government or the Mortgage Bankers Association has characterized Morgan Stanley's decision as immoral.
But the average American homeowner is supposed to honor his or her debts if at all possible, according to the mortgage industry and the President. It's ironic that former Treasury Secretary Henry M. Paulson Jr., who enjoyed a 32-year career at Wall Street giant and speculator-extraordinaire Goldman Sachs, claimed that "any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator--and one who is not honoring his obligation."
What's the True Cost of Walking Away from Your Mortgage?
Your decision to default would not be without consequence. If you live in a state other than the non-recourse states--Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington, or Wisconsin--the lender can come after your other assets if the property doesn't fetch enough in a foreclosure sale to cover the outstanding mortgage balance. Expect major legal hassles or even being forced into bankruptcy if you have assets--and presumably the reason for defaulting strategically is to keep from running through all of your cash in the first place.
In addition, there are serious repercussions to your credit. If it's already trashed, that's less of a problem. But the total hit from a series of late mortgage payments and a foreclosure could be as high as 300 to 400 points. Plus, it takes seven years for a foreclosure to disappear from one's credit report entirely. In short, be prepared to have bad credit and mortgage problems for years. "A default will have a serious negative impact on a consumer's credit score and make it more difficult to obtain future credit," said Barrett Burns, president and CEO of VantageScore Solutions, a scoring company created by the three national credit bureaus, Experian, Equifax and TransUnion. But that's not all--bad credit can keep you from getting a job, not good news in today's tight job market. It also affects your ability to get insurance--insurance underwriters know that bad credit often equals a bad risk, insurance-wise.
The Decision: Ask These Questions.
Can you afford the mortgage without hitting up your savings, especially your retirement accounts? If you can, it's probably best to continue paying and wait out the housing slump.
How far underwater is your property? If you owe $500,000 on a $100,000 house, it could take decades to come back. If you live in a non-recourse state or have relatively little to lose, defaulting may be a sensible business decision.
Have you spoken to your lender about a modification? The more underwater you are, the more leverage you should have with your lender. Give it a chance to work with you before pulling the plug on your mortgage. Lenders today are showing more willingness to reduce the principal balance on your loan as part of your modification.
Do you already have bad credit? If your credit is already bad, you have less to lose, credit-wise. If it's good and you plan to make use of it, for example, you are self-employed and need credit to run your company, a strategic default could put you out of business.
Have you spoken to a bankruptcy attorney? Once a lender understands that you are serious about cutting your house loose and possibly avoid a mortgage defiency, you are far more likely to get a mortgage modification.
The Boat Everyone's In
No one--lenders or borrowers--expected to see the housing hysteria that's taking place. And there's no reason to become destitute trying to keep a home. But if you need help paying your mortgage, give your lender a chance to help before walking away--it could be the best outcome for both of you.
