Let your mortgage go?
nytimes.com
nytimes.com
People who treat their homes as investments should remember that, should the investment completely lose value, it's reasonable to cut their ties and take the loss, not continue to take losses on it indefinitely.
That is to say, it is an investment, and should be treated appropriately as one.
If your house is a home rather than an investment, you can ignore this suggestion ;-)
Disclosure: I have a mortgage, but it's not underwater and is doing just fine.
On the other hand, investment properties are almost entirely dollar based. Which is why (in theory), banks require a higher down payment on them - to get you invested.
If I were a bank and I found out a borrower had walked away from a previous loan leaving their creditors holding the bag, there's no way in hell I'd lend them a single cent, ever.
And people are complaining that the crash was caused by under-regulation? How about first removing all the laws which force banks to lend money to folks who are unworthy of credit?
The general idea of these laws is that 7-10 years is a long-enough window into a persons financial state and habits to determine their current credit-worthiness and limiting this look-back window prevents lenders from subverting the purpose of US bankruptcy laws. There are no laws that force banks to lend money to people, only laws that limit the duration of certain items on your credit record.
This is actually one thing that I've never been able to make people from countries that have socialized medicine believe.
The sheer _concept_ of an illness wiping you out financially is typically beyond their comprehension. Most people in the United States without that experience also have a tough time understanding it as well.
Suggesting people can never get a reasonable loan because of a bankruptcy, and therefore likely because of an illness, is a little much.
You do maintain a running credit record that should accurately reflect your (illness free) creditworthiness.
(Disclaimer: I'm a Canadian working Silicon Valley with excellent medical insurance who has never had a hospital stay or need to call on said-insurance (knock-on-wood))
Not so fast.
The "study" that supposedly found that actually didn't. At most, it found that folks who went into bankruptcy had medical bills. They also had car payments, house payments or rent payments, and so on.
When you're going broke, bills for everything start piling up.
But generally when people talk about "damaged credit", they mean an inability to get a credit card. And there, I'm willing to bet there are plenty of banks willing to do business with people with foreclosures on their records. The revenue model for credit cards is based on fees, not loan risk.
When they took out the mortgage, they were debt-free and had a mortgage equal to the value of their assets (the 1 million dollar house balances out the 1 million dollar loan), giving them a net worth of essentially $0. Now the house is worth $500,000 (but they still owe $1,000,000), so their net worth is essentially -$500,000.
Under these circumstances, it makes sense that the credit card company doesn't want to issue a card to someone that they know is worth negative a half million dollars, even if he did pay all his bills on time and can make the monthly payment on the amount he owes.
The building they are in was built in late 2005 in downtown San Diego. It doesn't take an appraisal to know that it's underwater - there are many short sales and foreclosures of identical units that can attest to that fact. If anything it's easier for the credit card company to see the mortgage balance then it is for them to see someone's income as that does not go on the credit report.
It's the _balance_ on their mortgage (the amount they owe, not the amount of the mortgage originally) - that is the problem.
I've frequently wondered what impact having all my bills sent to Paymybills/Paytrust at Box 14814695, Sioux Falls, South Dakota for the last 10 years has had on my credit profile. :-)
Any legal eagles around to explain how this is possible?
The homeowner protection laws are the same kind of thing. As a society, we decide that home ownership is worth encouraging (whether that's true or not is an interesting side question), so we implement policy designed to encourage it.
The bank is normally the one who approves the appraiser, which is a clear conflict of interest. In our system, ideally everyone is best served when the appraiser is neutral and competent because the borrower doesn't over pay, and the bank isn't exposed to much risk since the collateral can actually cover the obligation.
The system you describe has a huge loophole because lenders hold all the cards and could easily collude on the sly with appraisers to drive prices up at the expense of the individual. It wouldn't even need to be an explicit collusion -- sort of like the default swap stuff, no individual player (who could see that the system was a sham) had any incentive to bring it down. On the contrary, they had incentive to keep up the bullshit in order to make their numbers. A similar pressure could result with laws that heavily favor the lender.
As long as the market is rising the borrower can point to the increased valuation since the property came on the market and use that to 'pass the hot potato' to the next sucker.
Plenty of people made tons of money in this way in the '96 to 2000 period, especially in larger cities where property prices tend to go up out of proportion.
That happens here in the US. Appraisers I've talked to have been pressured to raise the value of the property, so the transaction will happen. The seller wants to sell it for X. The buyer wants to buy it for X. The two agents and the bank want the house sold for anything at all.
Buyers and sellers should choose and pay for their own appraisal, even if the bank requires the buyer to pay for an appraisal for the bank.
So if you default on the loan, they'd have to sell it for less than 90% of the value for you to owe them anything on it. If you default though, it's their home, they're free to sell it for whatever they like.
As far as the actual house sale goes, the bank/lender has little/no power in the UK. If they don't want to lend the money on the house there are others that will. The price is decided by the seller/estate agent, and the obviously the buyer. The main critera the bank has is that you pay a % of the purchase price - they'll lend typically only up to 90%-95% or so.
I like the UK system personally. I think it's responsible. Not to mention the silliness of yearly home tax?! in the US and other craziness.
CA's exception only applies to the purchase mortage. If you refinance, that lender can go after you for the difference.
Note that you owe federal income taxes on forgiven debt. I suspect that most states with income tax do the same.
"A loan that isn't backed with readily liquidated collateral should be considered a gift with no expectation of return"
Money lenders aren't stupid. They realize that anything that isn't covered with collateral is money that they have a 90% chance of losing. It's is utterly beyond them why _any_ borrowers would not consider walking away from an underwater mortgage once the ROI hit the sweet spot (Credit Record Hit, and possible law suits being two costs factored in)
The NYT article was an excellent summary of the issues though.