To This We Have Been Reduced – Your Own Personal Bailout
December 21, 2009 By: Kvatch Category: Commentary, Finance, Society
…and no I don’t mean the kind where the government decides to throw a little of that fat bailout cash at you. No… I mean the kind that you really should be considering for yourself if you’re seriously underwater on your mortgage.
This report from the University of Arizona College of Law does a good job of summarizing how American’s who owe more on their homes than their homes are worth should really consider just walking away—that the financial well-being of one’s family may depend on it. Consider this example (emphasis added):
Unfortunately for Sam and Chris, the housing market began to collapse in 2007. Though they still owe about $560,000 on their home, it is now only worth $187,000. A similar house around the corner from Sam and Chris recently listed for $179,000, which, with a modest 5% down, would translate to a total monthly payment of less than $1200 per month – as compared to the $4300 that they currently pay. They could rent a similar house in the neighborhood for about $1000.
Assuming they intend to stay in their home ten years, Sam and Chris would save approximately $340,000 by walking away, including a monthly savings of at least $1700 on rent verses mortgage payments, even after factoring in the mortgage interest tax reduction. The financial gain for Sam and Chris from walking away would be even more substantial if they took their monthly savings and put it into an investment account. If they stay in their home on the other hand, it will take Sam and Chris over 60 years just to recover their equity – assuming, of course, that they live that long, the market in Salinas has indeed hit bottom, and their home appreciates at the historical appreciation rate of 3.5%.
Underwater and Not Walking Away, Page 10
The report goes on to discuss the many factors that cause individual homeowners to decide not to take a step that so many companies seem willing to take, even willing to build their business models around—In other words, government indemnification against losses.
It’s a sad fact that so many Americans are in this state, even more sad that they seem to be unable to do the one thing that makes imminent financial sense.
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December 21st, 2009 at 4:45 pm
On the other hand, walking away from a mortgage can so decimate one’s credit that doing so may make it so purchasing another house at any time in the next twenty years impossible.
December 21st, 2009 at 6:31 pm
What a tragic situation especially when it was caused by the greed and stupidity of bankers, etc who are now enjoying their Xmas bonuses.
Perhaps it’ll be enough to cause the American people to rise up and run the capitalists out of town on a rail!
December 21st, 2009 at 6:39 pm
Thomas… Surprisingly, and the article goes into some detail about this, if one takes steps to plan one’s “default” a lot of the damage to one’s credit rating can be avoided. A house? You’re right, probably out of the question, but for many owning a home no longer makes financial sense anyway.
Perhaps it’ll be enough to cause the American people to rise up and run the capitalists out of town on a rail!
David… Wouldn’t that be something? Never happen though. The US is in full blown “kleptocracy” mode, and until it collapses, nothing is really going to change.
December 21st, 2009 at 10:41 pm
I would be willing to wager that when the whole economy collapses, it won’t matter too much if you do have a foreclosure on your record, you still won’t make enough money to buy anything any way.
December 21st, 2009 at 11:16 pm
all the news is so, so depressing anymore!
December 22nd, 2009 at 7:41 am
Lew… Probably true, but that’s not very comforting is it. Maybe everyone needs to walk away and put what they have left in gold? ;-)
Liberality… And we thought with Obama’s taking over that things would get better…
December 22nd, 2009 at 9:40 am
You know if people truly start doing this that they’re just going to resurrect debtor’s prison.
December 22nd, 2009 at 2:19 pm
Gold, kvatch? I knew it, you’re working for Beck! ;-)
December 22nd, 2009 at 2:41 pm
Hiya Froggy!!:-D
I’d say that walk away is a good strategy, but first folks should check with a lawyer. In many cases, in the process of merging loans into securities the banksters have destroyed the underlying documents supporting the original loan.
December 22nd, 2009 at 8:38 pm
I wouldn’t be surprised if the banksters offed the authors of the study.
December 23rd, 2009 at 7:22 am
Randal… Would that be Glenn Beck? Or Beck…uh…Beck?
TomCat… Wouldn’t the absence of documents make it easier to get away with fewer consequences?
Libhomo… Now there’s a grisly idea.
February 16th, 2010 at 7:57 am
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