When Should You Walk Away From Your House?
The video is my appearance on Channel 12 News story on September 24, 2009 about the infamous “Buy and Bail.” Surpisingly enough, they cut the most important pieces of what I said. . . .Or, not surprisingly.
What they didn’t show of our 45 minutes of talking were these controversial and critical points:
The “Buy and Bail” is not the problem; it’s a symptom of the problem. A problem that occurred years ago when the market was at its height when the legislators, realtors, lenders and builders didn’t act ethically in their own rights; A negative equity problem that is currently not being addressed by our government.
They’re focused on the monthly payment issue when it’s much more widespread than that. The tiny percentage of people who actually qualify for a loan modification, don’t make up the masses. The primary problem is being overlooked: Negative Equity. This problem is going to perpetuate and ail the housing market for years to come.
Why are people bailing?
3-5 years ago, builders sold new homes to investors while having buyers sign off on documents promising they weren’t an investor. Some of these communities ended up having 50% or more investor population. What does that mean? They did zero upgrades, never lived in the home, and didn’t landscape the back and/or front yard. That sure doesn’t help the value of a property, especially when the investors were the first phase of bailing on properties because they couldn’t find renters and couldn’t afford to keep them.
3-5 years ago, what were the lending guidelines? Face it, there were none. If you could sign your name, you got a loan.
The current system has a gaping hole in it. The government is handing out money right and left to the crooks in corporate America, the unfortunate population that has become victim to the economy, and to the people who over-bought on homes and abused their credit.
But, WAIT! What about the huge percentage of the population that did all the right things? The people who are making good incomes, have high credit scores, saved and put 20% or more cash down on a home, got into a conventional mortgage, spent wisely and did not abuse their credit cards and rack up debt throughout the years, and yet are down hundreds of thousands of dollars in equity? I’ll tell you what. They’re left holding the bill for all the neighbors who have abandoned their homes for whatever reason, and the new people who are buying the same house for hundreds of thousands of dollars under what these people paid. They’re the people being scoffed at and called unethical.
This population of homeowners who put tens of thousands or hundreds of thousands cash down and in upgrades has been accused of being immoral for walking away as if they’re not losing anything. When you look at the history of the housing market over decades, you see that the value increases that we saw a few years ago will never happen again in our lifetime. That’s right, NEVER again will we see a home increase 100% or more in one year. With that factoid in mind, then how will these homeowners recoup $300,000 or more in equity? They won’t. Therefore, it can be a good financial decision to cut your losses short and start over. Are they supposed to feel good that they’re paying on jumbo mortgages when all of their neighbors are paying teensy weensy mortgages for the same house? Just because they can pay, doesn’t mean they should have to.
Everyday, I hear things like, “We didn’t plan on spending this much for a home. The lender told us we could” …… “I knew we couldn’t spend this much, but they gave us the loan!”………. “We had no idea how we would make these payments, we just thought we’d figure it out as we go”……… “I have $20,000 in credit card debt and am leasing a brand new BMW. I can’t afford this house payment!” Many of these people were given a free ride and walked away and looked upon as someone with financial “hardship”. Hey, I have all the sympathy in the world for the people who had true financial devastation hit from something bad like losing a job or divorce, but not because they were spend thrifts.
You know as well as I do that there are masses of people who created their own financial hardship, and they’re being rewarded for it. How is that right?
I’ve said it for the past 2 years and I’ll say it again. The people who are 200% or more down in equity and purchased their homes with good credit, money down and have not abused credit cards NEED a SOLUTION or the Buy and Bail will continue because it just plain makes good financial sense. Do the math. “You’ll ruin your credit” they all cry out. What did good credit get them? A swift kick in the a–.
Why don’t they come up with a solution modeled after the Mortgage Forgiveness Debt Relief Act of 2007 – which was extended to 2012 for a reason! If you bought a primary residence between 2003-2007, you put cash down, you can show income, you have good credit and you’re more than 40% down in equity from the mortgaged amount —- you qualify for a principle reduction of xyz…. Now that makes more sense then letting all these properties foreclose, doesn’t it? Reward the people that DID THE RIGHT THINGS.
** You should always consult your realtor, CPA and a real estate attorney to decide what options you have to make a financial decision about your property. There are tax ramifications to consider. This is in no way intended to give advice or suggest people should walk away from their homes and mortgages. If you make a decision, whatever it is, you’re the one responsible. Don’t try to blame me and this article!
Many people are asking me if now is really a good time to buy a home or if they should wait. Times are uncertain in the economy, so the answer is in the questions. Sit down with a qualified mortgage professional, a realtor and possibly your CPA to go over your financial situation and your goals.
