26% of Mortage Defaults Are Intentional

[jeffrey]

Up to 26% of U.S. homeowners who stop paying their mortgage may be doing so intentionally, not because they can't make the payments but because they don't want to put money into a house that's worth less than what they owe. That finding, from a paper by economists at the University of Chicago, Northwestern University and the European University Institute, raises some doubt about the approach the Obama Administration has taken toward stabilizing the housing market. The current approach focuses on whether or not homeowners can afford their monthly payments, and largely ignores the fact that some 20% of homeowners owe more than their house is worth - a situation known as negative equity, or being "underwater," which, according to the paper's findings, may itself trigger default...

Mortgage Defaults: Many Are Intentional, Study Finds - Yahoo! News

[wincrasher]

This is a monumental change for our culture. Intentional default on contracts - unthinkable just a few years ago. What will that do to our future if you can't depend on people honoring their commitments.

People used to go to the greatest lengths to keep thier homes - making sacrifices, doing whatever it takes. Now they are letting their homes go, but preserving thier credit cards. Sad.

[disneysteve]

Can someone explain this to me? I don't understand what the current value of the home has to do with whether or not you continue making your payments. When you buy a new car, it is worth less than you paid as soon as you take possession and drive it off the lot. I don't hear about anyone stopping the payments and letting the bank repossess the car because they have negative equity. Why should a home be any different? If you can't afford the payments because you lost your job, that's different, but if you have the money, what benefit is there to stopping the payments?

[wincrasher]

It's simple really,

People are greedy and short sighted.

They see the bank bailouts and stimulus spending and say "where is mine?"

Damn the country, damn the future. It's all about me, damnit!

[wincrasher]

BTW,

It is interesting if a default is contracturally triggered by a negative equity situation. I've never heard of that before and wonder if it's buried somewhere in the fine print of my new mortage.

[LivingAlmostLarge]

Because DS, if you were my Friend who did this, she owed $500k on her home. She had $100k in the bank. But the home was worth $450k and $30k closing costs to sell. So instead she walked away with $100k cash in the bank and she lived rent free for about a year until foreclosure!

Lovely right? Even more money saved, none out of pocket and she won.

The rest of us suckers lost, but hey she walked away pretty much scott free.

[elessar78]

This article tells a similar story about a person who walks away from their loan, maybe out of necessity.

http://www.nytimes.com/2009/05/17/ma...andrews&st=cse

[disneysteve]

Originally Posted by LivingAlmostLarge

Because DS, if you were my Friend who did this, she owed $500k on her home. She had $100k in the bank. But the home was worth $450k and $30k closing costs to sell. So instead she walked away with $100k cash in the bank and she lived rent free for about a year until foreclosure!

And then what happened? She couldn't buy another house because her credit was wrecked. She couldn't rent an apartment because her credit was wrecked. Where did she go from there?

I don't see the upside of doing this. The current value of the home is totally irrelevant if you are continuing to live there. The value only matters if you have to sell the place.

[Radiance]

I agree that being underwater is not a reason to default on purpose.
Some valid reasons might be:

Loss of jobs.
Monthly payments skyrocketing and the rate was variable (this is a risk people knowingly took, but it doesnt make payments more affordable).
Separation - This is me, havent default yet but I am on a loan mod.
Medical Bills.
Other changes of income or changes of monthly payments.

Now, I do not agree with the idea of making ANY sacrifice to keep the house:
I would not get on credit card debt to try to save the house, that only lasts until I max them out.
I would not use up my savings trying to keep the house (this I did, again not sustainable, I didn't have unlimited savings, that was very silly of me, it only lasted 2 months)
I would not get a second job, I need to be able to have family life, I would get sick if I had two jobs. To feed my baby? yes, two, three jobs, whatever it takes. To keep the house? no.

If I have to abandon my house, I wouldn't live rent free, I would rent immmediately before my credit goes down so I can rent on a decent place with good schools.

I am not my house, my house is not necesarily my home. There are several benefits to renting. We'll see what happens but I am not loosing sleep facing the possibility of losing the house.

[wincrasher]

We're not talking about default because of life circumstances.

We're talking about walking away because your "investment" didn't pan out.

You end up hurting yourself, your neighbors and your community.
It's disgusting, and in my view, immoral.

[Radiance]

oh, yes, sorry, I agree.
People should be asked to prove they are unable to make the payments.
Judges could also ask for people on this situation to take personal finances classes.

[alandolfo]

That's insane. People walking away from their mortgages is definitely a big problem we are having. This is why people who plan on paying their mortgages off properly get screwed.

[disneysteve]

Originally Posted by alandolfo

That's insane. People walking away from their mortgages is definitely a big problem we are having. This is why people who plan on paying their mortgages off properly get screwed.

I don't feel I'm getting screwed in any way by doing the right thing. I feel a bit sorry for the folks who are walking away and trashing their credit, but it is their own choice. In the meantime, I've got my house, I make my payments, as I agreed to, and I have excellent credit. That's fine with me.

[Radiance]

Well, I did get affected through the HOA.

Paying folks like me had to come up with two 'special' payments of 345 and 300 to cover association expenses deficit caused by abandoned homes.

Also, with abandoned homes on my neighborhood, particularly the bigger ones, home values came down even faster and deeper.

Still I wish I never refinanced my original mortgage, I would be ok even with the consequences caused by other.

But they say acceptance if giving up on a better past...

[wincrasher]

Don't quite understand how your HOA can just assess you for the other's that don't pay. They should be filing a lein on the person's property so that the HOA eventually gets the money back. Then you would get some benefit from these repayments.

Are you sure they didn't just bully you into voluntarily paying?

Special assessments should be for things like a new roof on the common areas or repaving the street or parking area or resurfacing the pool.

[Radiance]

Nope, it seems to be "standard" procedure, maybe here in Florida?, many of my co-workers and friends got the same. Mines where actually low, I have a co-worker who had to come up with 1200!!

Basically the HOA can not operate on Liens, it needs cash.

[disneysteve]

Originally Posted by wincrasher

Don't quite understand how your HOA can just assess you for the other's that don't pay.

Originally Posted by Radiance

Basically the HOA can not operate on Liens, it needs cash.

Yep. The HOA needs to pay the bills no matter what. If there are vacant units in the complex, they need to spread those expenses out among those still living there. They can file a lien, but that doesn't help them pay the bills. The money has to come from the people still there.

[Radiance]

Correct,

This is why even if I have to give it up, I plan to keep on making my HOA payments until the bank assumes property. This I can afford and it will save me on late fees and lawyer fees.

I also need to continue putting the 300 aside to pay my taxes for the house.

The only thing I would stop is setting aside money for 2010 home insurance.
I think that should be ok... hmmm I need to check on this.