Sign of the Times

Raising Farrahzona did everything right, but is now way upside down on her mortage.  She’s wondering if it wouldn’t be better to just walk away.  A lot of people are in this situation right now.

I would have a hard time walking away, even if I could accept that I’d be financially better off.  Just because something would seem vaguely wrong about sticking the bank with my problem.  But really, there are two people who take a risk when property is purchased with a mortage.  You, and the bank.  The bank has every incentive to keep a homeowner in their house.  If they walk away, the bank is stuck selling the property at a significant loss.  The bank might we willing to negotiate, and I think I would try to come to an agreement with my bank before walking away.

My home value has been falling as well.  I purchased in 2004.  The value is still higher than what I paid for it, but a few more months of this and I’ll be at the price I paid for the house.  Because I put 10% down, and have another 10% in a seperate home equity loan, It’ll be a while before I’m actually underwater.  I have the cash to pay off the equity loan if the bank demands it because of falling prices.  I’m in a far better position than a lot of folks, but Pennsylvania hasn’t gotten soaked as much by falling prices as other places.

6 thoughts on “Sign of the Times”

  1. If you can wait for the duly corrupted idiots in Washington to be turned out (and they seem to be working hard at guaranteeing that even the Republicans can defeat them in 2010), and perhaps a year or two beyond that, we can fix this. But defaulting on a mortgage not only screws the bank, it does horrible damage to your credit rating. And worst of all, it isn’t just a black mark. In theory (and sometimes in fact), the bank can come after you for their losses. It isn’t just walking away from the loan payments.

  2. Considering how much debt the .gov is incurring right now, and the speed at which we seem to be increasing the money supply, I think the subsequent inflation we’ll get when we actually start to recover should take care of any nagging concerns about the value of your house. I’ll be surprised if 2.5% inflation holds during the recovery. I think we’ll have another nasty recession to stop the inflation caused by getting us out of this one.

  3. Several people questioned my decision to pay off my mortgage when I had the opportunity. Most of them now state that, looking back, it was a good idea.

    What pisses me off is that lots of people who were fiscally irresponsible by buying homes way outside of their means are being rewarded by the gov’t for their irresponsibility and I’m going to end up paying for them as well.

  4. My concern with her situation is that she was foolish enough to pay way more than her condo was worth. Sure, she keeps referring to comporables. Thats fine and dandy, but any fool with half a brain knew real eastate prices were unsustainable and out of wack for the last decade.

    And so, paying top dollar at the top of the market in a market that would be just marginal (or even worse) in a down market seems like way too much of a risk for me. But then, I wasn’t in her situation and don’t understand all the consideration she had to make. Still, if I had a choice (and it seems she did) I would have chosen to rent at that point (and thats the advice I gave people) because it was just so clear what was happening (I mean, there were a dozen shows on at any given time about getting rich flipping houses. Of course the entire ponzi styled US economy was about to crash)

  5. I agree with Countertop. She made a bad gamble. So did thousands of others, but she agreed to the mortgage she has. She needs to pay it, or suffer the consequences of not paying.

    As far as I know, signing a mortgage doesn’t automatically guarantee the property will be worth more when the mortgage ends.

  6. She made a contractual obligation to pay for the condo. I would never had paid 240K for a condo, but I do not know where she lives. In NYC that would have been cheap. Since she can pay the mortgage and not behind the lender has no reason to change it’s terms. She is not a hardship case.

    If the expense of the mortgage was reasonable compared to renting and she is still getting the tax deduction then she is in the same situation she were before the drop in housing. The difference is that if she had to sell now, rather than a gain she would have a loss. Her losses are paper losses and not real losses until you sell. The chances that housing will increase in a few years is great.

    Normal appreciation is 10 % a year. The 3 years is went up 30-40% a years was inflationary bubble and was not reasonable. That was not the time to buy. But since she did she has to live with it.

    Her financial record will be damaged if she walks out since her trustworthiness on credit would be shot and she chose to renege not due to curcumstance she could not control. Borrowing and lending is based on trust and if she decides deliberatly to walk away then no lender will trust her again.

    Homes should not always be considered an investment. It is housing and if the cost and benefits of ownership compared to renting is good, it does not matter if you are in a rising or falling market.

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