Should I walk away from my home?

[nobody_u_know]

I bought my first home back in 2005 for $270,000 with an 7-yr interest only first mortgage ($216K). The 2nd mortgage (then $54K) is a 7 year ARM as well, but it includes principal and interest). My neighborhood has plummeted. My neighbor down the street just bought their home for less than $200K. Our house is the most expensive house in the neighborhood since we bought it around the height of the housing boom and nobody else bought any homes after us until of course the whole neighborhood went into foreclosure. Not only that, but I have since learned how awful our suburban city really is. It is starting to turn into the worse part of the metro area.

So, I have less than 2 years on this mortgage. The bank won’t let me refinance it. I don’t qualify for any programs because I’m not poor enough and my mortgage is a conventional loan. I know that the housing industry still hasn’t bottomed, and even if it has, it’s going to take many more years for me to break even.

So, I’ve been seriously thinking that I should just walk away and go back to live in apartment. If we do that, then we would save about $800 a month, $9600 a year and $48K in five years. I say five years because that’s how long it will take us to pay off other debts that we have. If we do that then, in five years we will finally be debt free and will have some savings. Right now, we have zero savings and little in retirement funds.

What is the worst that can happen if we do walk away? The only thing I can think of is that it will tarnish our good credit that we worked so hard on. Will the bank try to come after us? I’m thinking of finding and then renting the apartment first, then work with a real estate agent to sell our home as a short sale. From what I read, I can’t do the short sale until I default on the loan anyway.

I don’t want to keep paying for something that was a bad investment to start with especially since the bank doesn’t want to work with us.

[jIM_Ohio]

Contact an attorney

[disneysteve]

Can you afford the house? If you can, you stay. If you can't because your financial situation has changed since you bought the place, you sell it and move on. Yes, your credit will get trashed, but if you can't afford it, you really don't have much choice.

[littleroc02us]

What!!! I cannot believe I'm reading this. You wanted this house, the bank offered you a loan, you agreed to the terms and now that you have lost on the value of the house, it suddenly the banks fault. So the Bank should suffer because of your dissatisfaction in the market. Man up! Where are your your Ethics? Ethics are considered the moral standards by which people judge behavior. Ethics are often summed up in what is considered the “golden rule”—do unto others as you would have them do unto you.

[DrSavin]

What!!! I cannot believe I'm reading this. You wanted this house, the bank offered you a loan, you agreed to the terms and now that you have lost on the value of the house, it suddenly the banks fault. So the Bank should suffer because of your dissatisfaction in the market. Man up! Where are your your Ethics? Ethics are considered the moral standards by which people judge behavior. Ethics are often summed up in what is considered the “golden rule”—do unto others as you would have them do unto you.

It must be easy to remain upon a high horse when you aren't in their situation, fool.

How bad is the neighborhood becoming? Is crime on the rise? Like was said before, if you can swing it, you should probably remain in the house until your mortgage is up. Then you can sell the house, even though it would be a loss, you would have a large sum of money to work with toward a house elsewhere. If you absolutely cannot remain, then the choice has already been made.

[littleroc02us]

It must be easy to remain upon a high horse when you aren't in their situation, fool.

H

Since I don't communicate with others in kindegartenish terms, I will try to remain mature. First of all you don't know anything about me. I was near bankruptcy in 2003 after I was laid off my job for the second time due to 911 the first time and the second time state aid was low. I didn't take the low road and give in. I had 50k in debt from previous mistakes that I had signed up for myself, but instead of giving up I worked 3 jobs and paid off all of the debt in about 4 years. I am very proud of what I have accomplished, but I am appalled at people who can afford their mortgage and because the investment went bad they want to hurt the bank that was so nice to lend the borrower the money. If we all had this mentality than the next time I take out a mortgage I will inform the bank that if the property over a 2 year period doesn't appreciate that I will voluntary foreclose on the property.

[DrSavin]

Forgive me then.

Still, it appears your past has influenced your opinions. I feel like you should attempt to be more objective in your advice giving.

This person went into this deal with an expectation, and when their expectation wasn't met they wanted to give up on the deal. This might seem irresponsible, but they have mentioned the decline of their neighborhood. Living a rough city myself, I sympathize with their desire to leave if their neck of the woods is becoming unsafe. If walking away from their loan is the only way to escape then so be it. The bank will still have the house in the end at worst, the bank isn't completely up a creek.

[snafu]

We lack sufficient information to offer advice; your income and expenses. There is no suggestion of job loss or drastic loss of income. You knowingly bought the most expensive home in your neighborhood and it still is! You bought a home to live in...you didn't buy it as a flip or short term investment. You may be underwater on your mortgage now but the possibility for change remains in the long term and homes are purchased for the long term.

You have the option of moderating your spending, earning more income and paying down all other creditors.

[littleroc02us]

DrSavin, did you mean more subjective? My advice is pure objective. He signed the loan, according to his post he can afford to pay his mortgage, but doesn't want to because the return on investment wasn't as good as he wanted, so I told him that his responsibility according to the contract he signed with the lender is to pay on the loan. How is that not being objective?

[DrSavin]

DrSavin, did you mean more subjective? My advice is pure objective. He signed the loan, according to his post he can afford to pay his mortgage, but doesn't want to because the return on investment wasn't as good as he wanted, so I told him that his responsibility according to the contract he signed with the lender is to pay on the loan. How is that not being objective?

You are correct, what you just said was objective, and without influenced emotion.

What!!! I cannot believe I'm reading this. . . . Man up! Where are your your Ethics?

This is not objective. Both posts say the same thing, but your original wasn't being very kind. We can't know what this individual is going through and thus should post accordingly. I'm sorry for my immaturity and insults as well. Let's drop it.

If OP would give us more info we would further be able to help him.

[thekid]

Will the bank try to come after us?

Why wouldn't it?

The bank didn't limit it's recourse to the house. They have a security interest in the house, meaning they can take the house in payment in priority to other creditors, but have a right to full payment and can act on the whole of your other assets which aren't exempt from seizure or pledged as security to another lender (pari passu with your other unsecured creditors) to satisfy such payment. If you have any other significant assets, they will come after those. If the whole of your assets is not sufficient, they can put you in bankruptcy.

[Slug]

First impression is for you to walk away. You entered into a business contract with the bank where you agreed to pay a certain amount or give them your house. You both agreed on a value for the home. Now, you no longer want the house, you don't enjoy living in the area, and you have other debts that need to be addressed. So, based on the limited information shared, the ethical decision is to walk away. Let the business contract between you and the bank play itself out and then work on rebuilding your credit and making more fiscally responsible decisions going forward.

[DrSavin]

I think the big issue here is we don't know whether or not he can afford the home.

If you can afford it, stay.

If you can't afford it, you don't have another option but to leave.

[disneysteve]

You entered into a business contract with the bank where you agreed to pay a certain amount or give them your house.

So, based on the limited information shared, the ethical decision is to walk away. Let the business contract between you and the bank play itself out

That is an interesting way to look at this. You are correct. When you take any secured loan, be it a mortgage, a car loan, or any other loan with collateral backing it up, you are essentially agreeing that if you fail to pay the loan as agreed, the lender has the right to reposess the collateral.

Personally, I never thought of it as a choice on the borrower's part. It isn't if I decide not to make the payments. It is if I become unable to make the payments. As long as I am able, I feel it is my obligation to do so. Maybe that isn't the legal answer based on the contract, but it what I personally feel is right.

I don't think what happened to the value of the home is a factor. If OP bought a home that he liked at a price he thought was fair and with a payment that he could afford, he should continue to make that payment for the life of the loan. If he is being forced to move due to a job transfer, family issues, drop in income, etc., that is different, but I don't agree with simply walking away because the home isn't worth as much as when he bought it as long as his own circumstances haven't changed.

[thekid]

First impression is for you to walk away. You entered into a business contract with the bank where you agreed to pay a certain amount or give them your house. You both agreed on a value for the home. Now, you no longer want the house, you don't enjoy living in the area, and you have other debts that need to be addressed. So, based on the limited information shared, the ethical decision is to walk away. Let the business contract between you and the bank play itself out and then work on rebuilding your credit and making more fiscally responsible decisions going forward.

That wasn't his contract with the bank. His contract with the bank was a loan agreement whereby the bank loaned him money and he obliged himself to pay it back with interest.

That is the extent of his obligations. This is not to be confused with the security he granted to provide further comfort to the bank that he was going to honour his obligations.

So, if he defaults, the bank has every right to demand complete and full payment right away (as the loan will accelerate as per its default clauses). Should he fail to do so, the bank can act on the whole of his assets (not jut the house).

Now, why did the bank take a security interest in his house? To get first dibs on that asset before any other creditor, in order of registration of their interest (ie. your "first" mortgage bank gets paid first from the asset's proceeds, the "second" mortage bank gets paid second...that's why second mortgages are more expensive...they carry a higher risk to the bank as they get access to the asset only after the first lien creditor gets paid in full).

Now, what happens when a secured creditor doesn't get paid in full after exercising his security interest (as would be the case here)? He gets to act on all other assets of the debtor other than asset which are exempt from seizure by law or those that have been granted as security to other lenders (as those lenders get first shot at those assets).

Now how do other creditors protect themselves from a debtor's assets all going to payment of one creditor towards whom the debtor is in default? They include a cross default provision in their loan documentation. That is, a clause that says that you will be in default towards me should you be in default towards anybody else. That way they can alo accelerate the whole loan and claim their part of the assets before they are all gone.

Now what happens when all (or many) creditors declare default and the debtors assets arent suffiient to pay them all off in full? He goes into bankruptcy proceedings where he either reaches a deal with his creditors or has his assets sold off to pay off his creditors.

The "mortgage" is just an inter-creditor rank on an asset. Not a limitation of a creditor's recourse to that specific asset.

If he has ay other significant asset, the bank will come after that. And if the bank does that, so will his other creditors.

Prepare to go into bankruptcy should you default on your mortgage.