Anyone "walk away" from from their home mortgage?

At the risk of sounding callous, this is what happens when people spend money they don't have. We have grown to believe that we "need" stuff we cannot afford, and we justify going into debt on this basis. Debt becomes an integral part of the way we manage our lives and our lifestyles, until we begin to view it as a normal aspect of life, rather than a short-term remedy for a temporary cash-flow shortage.

A small amount of debt won't kill anyone (all things in moderation!) but when debt begins to seem like something you just do without too much thought, we shift from using a little debt in times of cash shortage, to using debt to allow us a lifestyle that is fundamentally beyond our means. This is a recipe for disaster.

And in the extreme, we use debt to finance gambling. This is what happened in the 1920s, when people speculated in stocks on margin.

If you take on debt you can afford to pay off, in order to buy a house, and your payments are comparable to the rent you'd otherwise pay, your debt is moderate, and, as above, moderation is unlikely to hurt you. But if you take on debt to buy a house you cannot afford because you are sure you can sell it later for more, you are gambling on borrowed money. Some people feel the need to buy a house in an inflated market, but that's a kind of gamble in itself. The real estate agent tells you: "Your house payments will be less than your rent would be; and home values can only go up; so you cannot lose." I do feel sorry for the person who believed that line. But the fallacy lies in the fact that when you buy a house you are making a long-term commitment, whereas when you rent you can walk away on a month's notice, or at the end of a year's lease. The real estate agent's line above assumes that you can treat a mortgage like a rental lease and just walk away from the mortgage.

Our nation has so much debt, private and public, that our economy is fundamentally unsound. The present crisis is the result of criminal activity (a large volume of loans made to people who the loan officers knew full well could not make their payments, and a gargantuan quantity of derivative trading on the part of people who knew it was a Ponzie scheme) but the stage was set by the untenable amount of debt in our economy, and a fundamental acceptance of debt as a means of living at a higher standard than people can afford.

 

Thats a tough situation. I do know the market it Vegas is VERY bad. Its one of the markets most effected by this run up and deflation we're experiencing.

Normally what you would do in a situation is contact a real estate agent that is experiencied in short sales and pre-foreclosure situations. They will negotiate with the bank to sell the property and accept whatever is realized from the sale less the agent's fee as payment in full for the loan. The buyer walks away with nothing, but they walk away. Short sales hurt your credit, but less and for less time than a foreclosure.

The issue is if they have the assets to pay off the mortgage the bank won't do the short sale, they have to disclose all their assets to the bank to ensure that they can't satisfy the debt on the loan. They'd have to hide those assets somehow...which would obviously be fraud.

My suggestion? Rent it out...if you can. Generally the rental market improves when the sales market slows down (people gotta live somewhere) but this situation is different depending on where you are if a lot of the homes in trouble are rentals that are vacant.

Even if they walk away, the bank will come after them for the debt. Walking away doesn't work if people have assets, the banks will get judgements against them for those assets.

 

Is there a reason why the housing bubble was worse in Las Vegas? Did people really want to live among the casinos and easy driving from the legalized brothels? I visited Vegas once, to see Cirque du Soleil, and the shows were really good, but I've never visited another place that better merited the phrase "okay to visit but I wouldn't want to live there."

 

I don't know. I'm with you, Vegas is cool for a weekend but I don't see any appeal whatsoever in living there, especially when you get off the strip and see what a depressed city it really is. My business partner's brother just moved to Vegas from Albany, NY, he's an attorney and what attracted him was that they have a relatively high pay rate...but a low cost of living.

I think it probably had to do with the massive amounts of people that work for the casinos and the tourism industry buying houses, a lot of them work on tips and commission with hard to document income making them prime targets for stated income/asset loans and inflated incomes? Who knows.

I do know that gambling revenues in Vegas are down...

I remember driving up the interstate there and looking at the homeless tent cities up on the hills. Pretty grim.

 

I'd be surprised if it is easy to hide tips in a large corporation in a regulated industry that has received a good deal of IRS scrutiny. The scrutiny is on the worker, not the corporation.

 

At least as I see it, there's really two parts to this problem:

1. The whole mortgage mess.
2. A huge glut of new/empty homes and little to no demand for them

These problems aren't unique to Las Vegas, it's just that Las Vegas is one of the poster children for the overall housing crisis. Other candidates are some communities in southern California, the Bay Area, and south Florida. However, the media likes to point to Las Vegas as it's an easy example of excess.

In any event those two problems I was talking about have a synergistic relationship, feeding and driving each other. It seems that everyone decided to ignore that when they decided to let growth get nearly cancerous. That type of uncontrolled growth appears to be characteristic of the places hardest hit: increased growth rates caused a need to sell more houses, that led to at best questionable lending practices to push sales through, which in turn caused demand to appear higher than it really was, which in turn caused more growth; rinse and repeat until the whole overloaded system collapses under its own weight.

So in a sense, the question of whether people wanted to live there never really entered the picture. It started because someone could build there and fed on itself. Note: I'm sure that is a gross over simplification. While I agree with you, I wouldn't want to live in Las Vegas, I do know people who think it would be a pretty neat place to live. Many of them are retired and I guess that they see the same attraction to it as others see in places in Arizona or southern California. It all come down to different strokes for different folks. It's just unfortunate that no one actually considered the actual demand before they built huge numbers of houses....

 

To the OP:

I'd recommend waiting it out. They say that one sure thing in this world is that housing prices will always go up. Well, as people (like your friend) are realizing, that's not necessarily true in the short term - housing prices fluctuate just as much as anything else. In the long term, however, we've seen unprecedented levels of growth for the human population, and it really shows no signs of stopping. With more and more people in the world, land increasingly becomes a valued commodity. In the long term (measured in terms of decades), housing values will go up just because there are so many more people trying to occupy the same amount of land.

All that said... Walking out on a mortgage is a really desperate act, and shouldn't be done as anything other than a last resort. By last resort, i mean you don't have a job, can't market your skills, and are moving into your mom's basement while working drive through at the local McDonald's. A bad credit rating will follow a person for a very long time. If a bad credit rating hurt your interest rates in good times, what do you think it would do now?

it sounds like your friend made a bad decision a few years ago, and compounded that by entering into an ARM. Unfortunately, sometimes you have to live with the consequences of your mistakes. It's much easier to live with making mortgage payments than have to live with an inability to obtain credit for the rest of your life. You stated that "from a strictly business and financial (not emotionally or morally) stand point walking away would be the right decision". I have to strongly disagree with this statement, as it seems very short sighted. Yes, in the short term your friend would be able to have a little more money on hand than if he sold the house and paid off the debt. In the long term, your friend would find it extremely difficult, if not impossible, to obtain credit for anything. Rent? I hope he likes seedy parts of town, because respectable renters perform a credit check and won't accept someone with a bad credit history. Buy? think again... If you can get a loan for a house after walking out on one loan, you'd better believe the rates will be horrible. Buy a car? I hope you have cash on hand, because you'll even have trouble getting a loan for that.

Daniel made a great post highlighting the difference between "good" and "bad" debt. Good debt enables you spread out payments on an item you can afford. bad debt allows you to buy something you can't afford. After walking out on a mortgage, your friends credit rating will be so trashed he won't even be able to get "good" debt.

 

I'm not saying they hide tips...I'm saying that tip income is variable and its specifically the type of income...like commissions...that people tended to inflate when they applied for loans. "I make $300 in tips some days...I'll just say I do that every day" I made $12,000 in commissions last month, I'll say I do that every month"

But if you look at the raw data, Vegas is one of the places like the other areas you mentioned that are worse off...in general...than the rest of the country when it comes to this issue.

 

My brother moved to Las Vegas soon after graduating law school in California, it was where the job took him...and 30+ years later...he is still there. God only knows why, I only visited him once there.
Anyways....the home/housing situation....
My son has a similar problem (he is 20 yrs. old) and chose to buy a small home in Florida instead of renting, it was cheaper. Now, deciding not to continue with school, and move on...he can't. He has a house to sell that no one wants to buy. Over 450 homes on the market there (within the same zip code). He also now has a car that he cannot sell, no market for Audi's at the present time. He was thinking of just handing over the keys to the bank. He was also thinking of handing over the keys to the house as well. He is young, he can take the risk of a bad credit for many years before he decides to settle down again. God help us all, that is all I can say.

 

A lot of places are checking the credit histories of potential renters. I hope he can think long-term.

 

Honestly though, I've helped people buy houses 5-6 years after a foreclosure...and bankruptcy and they'll be able to rent they'll just have to pay a higher security deposit and they'll probably have to rent from a rental complex instead of from a private owner.

The issue is does the person have assets the bank can go after...because they will.

 

I disagree; walking out on a mortgage should never be an option. Walking out on a mortgage is the same as stealing. If you owe someone money you pay them. If you can’t afford to do that and stay in the house, you cut a deal for a short sale and work out a payment plan for the rest.

This is not about credit ratings, or future interest rates or making bad decisions. This is about paying your debts.

 

Vegas has been one of the fastest growing cities for the last few years. The rate at which houses were being built in the burbs was phenomenal. I think it had a lot to do with the very low taxes due to the states gambling revenue. You could get a nice big house for cheap, good schools, and lots of jobs from companies taking advantage of the same low taxes, cheap building and available work force.

In many ways we've seen the same thing here in Phoenix's suburbs. Phoenix has been growing at a rate of ~100,000 per year, and houses are springing up everywhere. Often by the hundreds or even thousands in a single subdivision. Still demand outpaced supply, and from '05 -'07 prices more than doubled or even tripled in many areas. New subdivisions sprang up as far as 30-40 miles from the metro center. Now prices are below their pre '05 levels. The further out the harder they've crashed. Not a problem if you bought before '05, but if you bought in '06-'07 as between 15,000 and 24,000 people did every month, you're pretty screwed. Home sale inventory is now over 60,000, more than LA county which has more than 3 times as many people in it. That doesn't even start to reflect the reality, as we know a whole lot of people who would like to sell don't even have their houses on the market because there's no point. Average Days on Market is about 150, up from 25 during the boom. In some parts of town its 200-300 days average. Last week came news that there were more foreclosure notices filed that week (~2200) than sales (~2000).

Rob

 

You're right, you've seen a lot of the same things in Pheonix.

Thats a very idealistic view, but unfortunately in the real world sometimes it just doesn't work out that way. We have bankruptcy and foreclosure laws and regulations for a reason, sometimes people get into trouble through their own fault or the fault of someone else and they have no choice but to default on their debts.

You have to look at these things in a pragmatic way sometimes.

 

At least every other year, the IRS toys w/ the idea of holding relief of debt as taxable income. Why not? If you get to keep something worth 100's of thousands that you don't have to pay for? ... isn't that the very nature of "income"? Said debt relief is a big part of Donald Trump's protfolio ... so why not the rest of us? Other than that thought? This thread blows me away ... w/ the exception of kow, never have so many non-attorneys offered up banko advice.

 

tulips