Sacramento Real Estate Views

Underwater Mortgages: Should You Walk Away?

Over 1/3 Of California Mortgages “Underwater”

I was surfing some of my favorite blogs today and ran into an article by Lori Turoff from HobokenRealEstateNews.com.

Lori does an excellent job on her site and I’ve gotten many great ideas from her and used them here.  Go by and visit sometime.

The article, from the NY Times Online, click here,  is about how it used to be a moral question as to whether or not a homeowner, hopelessly “underwater” on their mortgage, should walk away from their home or continue to pay on an asset with little or no hope of recovering equity in the near term.  (The term “underwater” means that the borrower owes more on the home than the home is worth.)

The Scenario

It’s 2005 and you’ve been looking for a home in the Rocklin / Roseville area and finally settle on something in the $450,000 price range in Rocklin.  You were able to get in with 10% down and financing at about 6%.  You move in and through 2006, while things suddenly don’t look as rosy as they did just a year earlier, your value is holding..for now.

Fast forward to January, 2010.  You’ve just contacted your friendly Realtor for a home value estimate and the numbers don’t look good.  Your home, purchased in 2005 at $450,000, is now worth $250,000 and you owe $405,000 as you were able to keep your payments down with a 10 year interest only loan.  You’re 5 years into that loan.

You are now underwater.  You owe $155,000 more than your home is worth.

Your Realtor tells you, while she has no crystal ball, that it’s unlikely that the difference between what you owe and the value of the home will come back for a minimum of 8 years as the situation that caused this house to sell for $450,000 in 2005, which originally sold for $250,000 in 2000, won’t be repeated.  A sharp run up in value is unlikely to happen, as it did to 2005, again in your lifetime.

The job market locally is not good.  Banks have been the major home seller’s in the Sacramento region for the past 3 years and they aren’t moving up into nicer communities like Rocklin, unless they’re foreclosing.

The demand is low and recovery for the area isn’t expected for another 2 years and, according to some, that’s looking on the bright side.  Appreciation in the Rocklin market may not even start until 2012.

To top it all off, your home is still losing value!  So what does this homeowner do?  Let’s look at options!

Moral or Smart Financial Decision?

First off let’s start by saying that financial institutions seldom make the “moral” choice in financial dealings.  As stated in Lori’s article,  Morgan Stanley stopped making payments on 5 office buildings in San Francisco and is giving them back to their lender to the tune of a $2.43 billion loss, the largest real estate deal in San Francisco history.  (Click here for the original article)

Is this a moral decision or a smart financial decision?

This entire downturn was created by Wall Street greed and from what I understand was expected to occur, maybe not to the degree that it has, at some point.  Was it a moral decision to cause such an incredible, once in a lifetime recession costing Americans millions?

The synonyms of “moral” in Merriam Webster’s online dictionary are: ethical, virtuous, righteous and noble.

Do those words invoke happy visions of corporate America now or anytime in our most recent past?  Corporate America does what’s best for corporate America, no one else.  Even if it means stiffing someone for $2.43 billion.

The homeowner in the scenario above can walk away from his home, rent a nicer home for significantly less than what is being paid on the mortgage and purchase again in 3 to 5 years with his down payment and equity secure.

If she stays in the home, she may not even break even with the mortgage for 10 years.  By walking away, in 10 years, the homeowner will have perhaps 30% more equity in the new home purchased 5 years earlier.

Would this be a moral decision or a smart financial decision for the homeowner?

Understanding of course that walking away from his/her home is NOT consequence free.

If you’re thinking that it would be a bad moral decision, my question to you is this:

Why is the general public, middle class working people held to a higher standard that what is expected of our financial institutions?  Why are companies like Morgan Stanley not held to a higher moral standard?

Why is the homeowner expected to act better than the “experts” making financial decisions that affect millions of Americans?  Who has the greater responsibility?

Why is it “unethical” or “immoral” for the homeowner to make a sound financial decision and walk away from a non performing investment, a commodity just like any other?

The government and our financial system want the middle class working people to think that it’s a moral decision to walk away from or stay in their home.  They don’t want us to think that it’s a financial decision because if we did, the decisions of the middle class, who economically run this country, could bring it to it’s knees.

If the middle class began making good financial decisions, as the financial institutions do, the financial institutions would not benefit.

Good financial decisions like managing your own securities portfolio.  You know, the one that lost 40% in the trust of “moral and ethical” corporate America?

Expect to see in the very near future policies enacted by the government penalizing those who walk away from their non performing assets.  Penalties that won’t apply to Morgan Stanley, you know the people your tax dollars have gone to bail out?

Please don’t think that I am recommending anyone walk away from their home.  I think whatever financial situation you’re in, you’ve got to make the most sound financial decision for yourself.  Whatever that might be.

Thanks for visiting!

(Disclaimer: The author of this article is not suggesting anyone walk away from their obligations in any way, shape or form.  This article is opinion for entertainment purposes only)

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Tags: market commentary

This entry was posted on Wednesday, January 13th, 2010 at 9:42 pm and is filed under Real Estate Market Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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