Walkin’ away

The latest craze to sweep the nation is walking away from your mortgage.  Yep, just walking away from paying your mortgage.  Homeowners who are employed have decided to stop paying because they owe more on the house than it is worth.  The question is, is this prudent?

Ten years ago I bought a house.  I paid $85,000 for a two bedroom, 1,100 square foot house in Warwick, Rhode Island.  It was small, but it was mine.  I prided myself in making the monthly mortgage payments.  At that time, the payments were $986 a month including taxes. Year after year, my house was going up in value 25%.  The house was a “fixer upper” when I bought it, and after careful consideration I had decided to sell it after four years of ownership.

I didn’t have a clue the amount of money I could sell it for.  It needed a roof, and so many little things I was thinking $125k.  I was surprised when the real estate agent told me she was going to list it for $185,000.  The house sold in four days.  The person who bought it was masquerading as a single dad, but i later found out he was a real estate flipper.  And, after a year of owning the house he sold it for $225,000.

He wasn’t alone.  So many people were taking advantage of the boom of the housing market, and if I had the balls I would have done it too.  There was so much money to be made in “flipping”.  Another anomaly was the amount of people in the market for homes, and anyone who knows anything about supply side economics if the supply for houses is low and the demand is high that means people will shell out big money for a house.

People put down deposits for their homes, signed the papers and were pretty happy–then–the economy fell off a cliff.  Many speculate that the booming housing market was to blame, and they are right.  You see, something sinister was going on.  Lenders were lending people with poor credit money to buy these homes.

Alright, enough of the history lesson.  let’s flash ahead to the present time.  The rate of foreclosures is on the rise., and that is to be expected due to the high rate of unemployment.  But, in those cases the homeowners simply couldn’t afford to pay the mortgage due to losing a job.  In some cases, they were victims of high-interest A.R.M.’s.  In the end, they were sad.  tears were shed, and some had a feeling of being a dead beat.

Now, as previously stated, the latest craze is a homeowner who is making enough money to pay their mortgage but have decided to stop paying.  Thereby, walking away from their obligations and responsibilities.  The reason? They refuse to pay because they owe more on their house then it is worth.

For example. a person buys a  3 bedroom, 2 bathroom condo in Glendale, California for $200,000 5 years ago.  After 1 year of ownership they see a 20% spike in value so they take out a $40,000 second mortgage.  Mommy needs a Mercedes.  Life is good, just as long as they have their prized piggy bank  (their house).

Well, the market tanked and that same house is down as much as 70%.  They decide that it doesn’t make sense to pay more than the house is worth so the walk away.  What is funny is that they know in order for a bank to start foreclosure proceedings they have to be at least 3 months in arrears.

So–they decide to stop paying their $$2,500 a month mortgage.  So, if a person stops paying in January and the bank doesn’t start the foreclosure proceedings…that translates to $7,500 in savings in 3 months.

Is it really worth it?

For starters, your credit score will plummet.  That will make buying a car hard.  Also, you will pay more in auto insurance, because they run a credit check and determine prices based on credit score.  Also, you want cable TV in your next place–you’re going to pay more.  Same rule applies for getting a cellphone.  Oh, and if you see a classified ad on a job posting of your dream job..forget about it.  Most employers run credit checks on potential employees.  You know who else runs credit checks?…apartment complexes.

So, go on and shirk your responsibility.  What you are doing is not against the law, but what you are doing is selfish.  And, selfish people eventually do not see what they will eventually get.  In four years time, when the housing values go up, you will quickly realize that all that glitters isn’t Gold.