should everyone with negative equity just 'walk away'
Is there any reason for a person with negative equity in their home to keep making payments (even if they can afford to)? If you can rent an equivalent, or better, home for less than the cost of your mortgage payments you would be better off just letting your credit get trashed and taking the savings.
Of course, you would have to verify with a lawyer that your particular mortgage didn't allow the lender to come after more than the house (some state laws actually prohibit lenders from taking anything more than the house). But if a lender couldn't pursue any other actions against you, then it would seem to be a no-brainer, to just give the keys back to the bank if you had negative equity.
As I think about this it almost seems as if one would just be foolish to ever make a down-payment if there were lenders willing to offer 100% financing for reasonable interest rates. If the real-estate market turns down you can just walk away and prevent further losses. If the house appreciates you get to take advantage of a nice windfall. Why put your precious capital at risk with a down-payment that will only tie your hands if the house depreciates?
Of course, you would have to verify with a lawyer that your particular mortgage didn't allow the lender to come after more than the house (some state laws actually prohibit lenders from taking anything more than the house). But if a lender couldn't pursue any other actions against you, then it would seem to be a no-brainer, to just give the keys back to the bank if you had negative equity.
As I think about this it almost seems as if one would just be foolish to ever make a down-payment if there were lenders willing to offer 100% financing for reasonable interest rates. If the real-estate market turns down you can just walk away and prevent further losses. If the house appreciates you get to take advantage of a nice windfall. Why put your precious capital at risk with a down-payment that will only tie your hands if the house depreciates?
Comments
A lender is not always in a position to accept what you're describing, which is called a deed-in-lieu of foreclosure. Doing so limits a lender's options in the event of, say fraud. For example, if a consumer commits mortgage fraud, that lender might decide to foreclose on the home judicially, by going to court instead of foreclosing via an auction. The lender might want to pursue a deficiency judgement against the homeowner.
There are many options for a homeowner with negative equity who, for whatever reason, can no longer make their payments. That person is better served by obtaining legal advice and by visiting a HUD approved housing counseling agency that specializes in default counseling.
Well, like I said earlier, a person really would need to check with a lawyer about their specific case before choosing to default. However, if a lawyer concludes that there is no way a lender can pursue any additional assets (beyond the house), then I can't see any good reason to keep making payments.
The only reason I can think of to keep making payments on a house you have negative equity in is if your mortgage contract and state law allow the lender to sieze additional assets and/or income. But in cases where the lender doesn't have such recourse (which does happen, particularly in states with favourable laws), then just "walk away". Even if you can easily afford the mortgage payments. Don't throw good money after bad.
Not saying it's imposssible, but my just concluded adventure finding another place in-city after being condo-converted out was not fun. I have great credit and 17 years of solid long-term rental history in Seattle. Been using nearly all my spare time and then some looking since the end of May. What you are put through now makes racial profiling and Homeland Security paranoia look tame. It makes a mockery out of what little Landlord-Tenant laws and reasonable risk management practice used to be. You would very conciievably be jumping from the frying pan into the fire
NO ONE I spoke with would take a "risk" on a tenant with major dings on their credit record. That goes double for any potiential roomates, even if one can carry the burden easliy. Forclosure is the equivilent to bankruptcy in a Landlord's mind. You might have to search long and hard finding a landlord who is actually reasonable.
When we start getting waves of foreclosures in the Seattle area (like Florida, Phoenix, Las Vegas, and San Diego are seeing) the rental situation will become much easier and landlords won't be able to be choosy.
The Seattle area rental market is tight right now because we are right at the peak of the real-estate market. Demand for rentals is increasing since increasing numbers of people are deciding not to buy the outrageously priced homes (or they can't qualify for mortgages), yet we haven't yet seen the masses of defaults start to throw rental inventory on the market. The good news is that this is just a temporary phase of rental stress just like Miami, San Diego, etc, experienced. A year from now Seattle area landlords will be begging for good renters, and be willing to give great deals to the best quality sort.
As far as a foreclosure "ding" goes, it's no big deal. Just look at California today. LOTS of people are moving into rentals after being foreclosed upon. The foreclosures are so prevalent that it has lost all stigma.
In all, I was thinking more about the people who are forclosed upon in the next year or 18 months, not farther out in the future. I don't underestimate how long flippers and specuvestors will hang on to high prices before they throw in the towel.
For those people, life will be hard.
Simple.
As the downturn picks up speed more people will decide to go into shared housing situations (e.g. stay at home with the parents instead of going to their own apartment, roommates, etc). Second, the downturn itself will create an increased supply of rental housing. Investors/flippers who can't sell their homes or condos for the price they want will wind up putting them on the rental market to stop the bleeding. San Diego is a brilliant case in point, as many of the appartments that were initially pulled from the rental pool from condo conversions eventually came back on-line as the conversions were either cancelled, or the individual condo owners started renting out.
Supply and demand in real-estate are far more elastic than many people realize. It's not as simple of an equation of just dividing the population by existing inventory. Demand can change dramatically as people change their living practices, and supply can change as units are moved from the ownership to rental pools, depending on market conditions.
And I don't see a foreclosure on one's credit record as being so commonplace that "everyone's doing it." Your credit report can be pulled for a handful of reasons, such as applying for a job, insurance, and applying for new credit. Think about the long term consequences of "just giving up" such as higher interest rates on your credit cards or on that car loan.
Some employers are now checking credit as part of the pre-employment screening process. It would really suck to get turned down for a great job that you are qualified for if they didn't like the fact that you walked away from your house (payments).
Now if you have zero (or negative) equity in your house and will have to bring $$$ to the table at closing, can move in with other family members or relatives, and work under the table, then it may make the best financial sense (but keep living there until somebody makes you move out). And I have no doubt that for thousands of homedebters out there (nationally), this is exactly what they will do. Can you say 'jingle-mail?'
Oh yeah, Tim, that's another term to add to the glossary.
Jingle-Mail - The term given to walking away from a house and mailing the keys to the primary loan holder (the keys jingle inside the envelope).
Sure, these are "honourable" things to do. However, they aren't necessarily in your financial best interest. Taking on a renter would even lower your living standards. Why take on a renter in a house you don't like (i.e. which you only bought because it was all you could afford at the time) when you can now find nicer homes available for rent at a lower monthly payment (which is a situation many Phoenix and Las Vegas home-owners find themselves in right now)?
Yes, you do have to consider the impact of a black mark on your credit rating. However, if you are already gainfully employed that might be a rather small cross to bear if you are able to save a significant amount every month by giving up the house.
Also, while it may be true that some employers run credit checks, most don't, and those that do are mainly in particular industries like defense or finance. Almost no tech employers run credit checks, for example.
Further, it's not as if a foreclosure is a scarlet letter. Eventually it comes off your record. Hey, there are LOTS of people who have lost homes in foreclosure who get right back up and buy another home in the years ahead.
Just do the math: if you would have significant savings by renting instead of making your existing mortgage payments, could live in an equivalent (or better) quality rental, and have confirmed there is no legal recourse from your lender if you default, then get your tongue out and start licking stamps for that envelope with the house keys you are sending to the bank.
Just so people know, these industries do not run checks to find past bankruptcies or foreclosures. They don't even care about your credit rating.
What they are looking for is risk that the employee might use their job as an easy (illegal) way out of substantial debt. Here's two cases. First, a homeowner, he has substantial debt on his home and is living off his credit cards while making minimum payments. Second, someone who foreclosed, he has a low credit rating but essentially no debt and pays off his rent at the start of each month. Who is a greater risk of stealing my money if I'm a bank? It's the first guy.
I just wanted to get that straight, so people wouldn't read this and think they can't get a job if they foreclose.
Seconly, you only need a credit rating if you need credit. I find that landlords also pay attention the the way you dress and present yourself. I suspect that credit rating is only a decision maker when other info isn't making the decision already.
Finally, Sniglet is right: it doesn't matter what the moral implication is, we're not trying to "get" anyone to walk, but just from a financial gain/loss risk/reward perspective, it seems clear that lenders made loans that are worth walking out on because the loans didn't properly put anyone's skin in the game other than the possibility of future appreciation. Once that possibility seems dim and the payments go up ... no incentive other than the moral ones, and we should not predict that people will stay for that, even if some will.
think about who is going to get hurt when the homeowner walks. not a the homeowner (at least not enough to keep him from walking). not the loan originator who wrote a bad deal (even if they are still in business, they sold the loan, after bribing the rating agency to label crap AAA investment grade).
the people getting hurt are people who have saved in their 401k or pension plan. think about it. if we encourage people to walk, all the bad actors (the loan originators, Wall Street, the dumb borrowers) are fine, and the fiscally prudent (at least those who put there money somewhere other than their mattress) get burned.
There are no innocents in the unwinding credit debacle, and I have NO sympathy for the people who stand to lose money in their 401K or pension fund. In fact, it is these very passive investors who wanted no responsibility for managing their savings who are the root cause of this mess.
How many people select the funds in their 401K based on recent performance scores rather than safety? The fund managers have only been delivering what the market (i.e. the individual investor with the 401K) wanted.
If you want to blame anyone for the credit implosion, go protest to the little old granny who wasn't happy with the return on Treasuries and decided to put her money in a "safe" high-yield bond fund instead.
Sniglet--you are really stretching here. Come on, blaming people who are trying to save for their own retirement??? You do realize that most 401K plans offered by employers have very limited investment selections, right? And contributions to your personal tax-free retirement account are limited if your company offers one. And with most companies offering matching funds, you really are stupid to turn down that 'free' money.
When you have crooks running most major corporations (each making HUNDREDS of millions per year now) who don't give a dang about the long-term viability of their companies, how in the world are you supposed to wisely invest your money these days? What is safe? The banks? Hide it inside the mattress, where inflation will eat it up?
There's a lot of blame to go around, but I don't think that much of it trickles down to the individual invester (other than the fact that everyone has the capability at all levels of the system to be motivated by greed).
In fairness to Granny, she wasn't happy with the return because she knows her savings are being inflated away to nothing. I'm not sure where you get off blaming her: there is risk in everything you can choose, thanks to how fucked up our economy and monetary system is. Granny doesn't WANT to take on higher risk, but letting bernanke silent-tax you to death isn't "risk free", either, and Granny is old enough to remember that from the 70's.
I don't have sympathy for anyone who gets burned from speculators to lenders to idiots, but I actually do think it is sad that the taxpayer will probably "pay" for it. The upside is that it will be "paid" in worthless debt issuance and the only real loss to the taxpayer is the loss of value for their savings. But that was already a done deal, so there is no new reasons to feel bad for someone in all this.
Just how, exactly, does the taxpayer bail out the taxpayer?
Something tells me this might end up where Joe Six Pack and Spencer White Wine Spritzer pony-up the money to make the big NY banks whole.
Americans are showing that they are incredibly stupid. We have learned absolutely nothing over the past few bailouts.
Some of you obviously have not tried to rent recently. This is the most draconian market I have ever seen. You also may be turned down for a job by sketchy credit, and not know it. The Fair Credit reporting Act only applies to loans, and credit apps, last I checked. In WA St, you could be placed high-risk or turned down for insurance without notification until very recently (kudos to Kriedler) without being told it was due to a credit report (even with a spotless driving record).
They do pay attention to other factors as well, but savings do not necessarily negate bad credit. Look at the some of the leases. The Rental Housing Association of Puget Sound is the largest landloard association in the Northwest, and one of the largest in the country. Their leases are horrendous, and I'm very surprised they have not been challenged in court. I will NEVER deal with anyone who is a member of the RHAPS again.
Back in June, I was dealing with a potiential landlord/couple who were RHAPS members, and they emphatically stated that they would not rent to anyone with bad credit, no matter what. I went on a 3 week time-wasting roller-coaster with the wife. On my own, I could easliy get her "blessing." Then, I decided to try for an unrealated roomate with bad credit. BOTH of us were rejected, because we were forced to co-apply, even though I could easily handle the rent on my own. So, I went back to just myself, and tried to negotiate some minor details and were verbally agreed upon/offered by her and missing from the lease.
I was then rejected for even trying to negotiate, and for daring to get them to put in writing what they verbally offered. This is NOT atypical for the current market, and those who think they are going to find a normal, reasonable landlord are very likely to be wishfull thinkers.
I just moved into a in-city, Norht End triplex over the weekend that was more reasonable, but still uncomfortable lease-wise for me. The owners live in California, and I need to do work on the place in exchange for a more "moderate" lease and rent.
I do rent, and I know that the Puget Sound rental market is tight right now. However, by the time we have lots of Puget Sound area home-owners facing the dilemma posed by this thread (i.e. owning a home that is worth less than the mortgage) the rental situation will undoubtedly have changed dramatically.
The thing that has been keeping the Seattle area real-estate market floating is the fact that prices are still appreciating. However, once the depreciation stops (or, heaven forbid, goes negative) many many local home-owners will be in a difficult spot.
This is exactly what has happened in other parts of the country once real-estate stops appreciating, removing an escape valve for equity starved home-owners. Sure, rentals were really tight in San Diego and Phoenix a few years ago. Now, however, a flood of rentals have hit the markets in these once booming locales as struggling home-owners attempt to stop the bleeding by renting out.
We will see the same thing happen in the Puget Sound over the next couple years, and we will move from a market where landlords can be picky to a situation where they have to take whatever, and whoever, they can get.
Ironically, the tight rental conditions in the Puget Sound right now are a flashing indicator that the real-estate market is about to tank. It's a renters market while a bubble grows (i.e. because everyone wants to buy instead of rent) and on the way down (i.e. as home-owners struggle to stop the bleeding on homes they can't sell). Things are only bad for renters right at the peak.
Patience.
http://www.assetprotectionbook.com/washington.htm
Unfortunately, it looks as if Washington state doesn't offer as much statute protection from creditors if you walk away from a house as other states. There is a $40,000 homestead exemption, and life-insurance is safe, but that's about it.
Nevertheless, people with homes that are worth less than the mortgage still might be able to walk away relatively unscathed if their particular lending agreements limit the lender's ability to pursue assets other than the house. It is certainly worth talking with a lawyer to see if one can avail themselves of the opportunity to just give the keys back to the bank (which is by far the preferred strategy if your home is "under-water").
With marriage law in Washington, you can essentially buy property under just husband/wife name. Default and rent with another name.
Yes, however, often when renting, a landlord will ask the question on the application: "are there any other names you use?"
sniglet,
"giving the keys back to the lender," also called a deed-in-lieu of foreclosure is not slam dunk. Lenders are under no obligation to accept a deed-in-lieu and this still shows up on the credit report as a "foreclosure."
Now on the flip side, people who end up with a foreclosure on their credit record during this historic time could just simply use the victim scenario as an excuse when explaining their poor credit rating. "I was a victim of the subprime meltdown" and slowly work on rebuilding their credit.
There are long lasting consequences of foreclosure. Homeowners ought to seek out legal counsel (free legal aid is available for people in financial distress through the state bar assoc wsba.org) or at minimum, seek out a HUD-approved housing counseling agency and ignore the signs by the side of the road promising that an angel on earth will rescue them from foreclosure.
I definitely agree that turning the keys over to the lender is not a "slam dunk". It really depends on the laws in your state and the specific terms of your mortgage contract. As you suggest, one should really consult a lawyer.
However, if it turns out that your state laws and/or mortgage contract really do restrict the lender from persuing anything other than the house then handing over the keys is very likely the best choice for anyone who's home is worth less than the mortgage.
Yes, it can take a long time to get the black mark of a foreclosure off of one's credit rating, but weigh that dillema against how much a deeply under-water home might be destroying your financial future. Is a tarnished credit rating worth saving $50,000? $100,000? There is likely a point at which ANYONE would decide a trashed credit rating was worth getting out from under a dead asset.
There are a lot of sharks out there skimming newspapers and public records looking for notices of default. They will knock on your door offering to help make the problem go away, and sometimes will try to squeeze up-front money out of troubled folks. Don't fall for it.
True, struggling home-owners should be very wary of offers to "solve" their problems. However, the good news is that most home-owners who's homes are worth less than the mortgage will be immune from many of these scoundrels. Most of the scam artists rely on their being at least a wee bit of equity left in the house for them to loot.
But that has nothing to do with your spouse's credit. Unless landlord really tries, your husband's bad credit shouldn't have effect on you renting under your name.
I know of husband and wife having very different credit scores, though they have been married for decades.
Your bad credit together as a marital unit, is your bad credit, for better or for worse.
When you jointly F*ck up credit-wise, it effect both spouse's credit rating.
Maybe the couple that you know, have each applied for and use credit under their own names and do not own any joint credit accounts. However, that's not necessarily the way many married couples operate.
The idea that you're painting is a good one; especially if a person is getting married to another person with an awful credit history.
I think your experience in credit rating is limited. Applying under only one spouse's name is common, in fact I encourage it. This is to avoid credit mess up by divorce or anything of such. You can also buy houses using only one name, but of course you have to qualify for it.
Joint credit is not smart nor recommended, I don't know why anyone with knowledge of credit would do such thing.
My experience in the industry spans 25 years.
I agree with you that establishing separate credit accounts is a good idea, I just don't agree with you that this is the norm out there in the average American household across the U.S.
For example, many married couples open joint credit accounts because one spouse has good credit and the other spouse may not, or the other spouse is working on establishing a credit history. The joint account serves a good purpose, which is why married people go down this path.
Being able to purchase or rent a house under only one spouses name is not the norm for the vast majority of married American homebuyers.
But it sounds like it works fine for the couple you know.
So if I'm a homeowner with a purchase loan, and I have some assets (401k, other property, etc.) I'm in a much more favorable position to do what Sniglet is suggesting and walk away from the house. On the other hand, if I've refinanced, I've got to worry about further legal action from the lender.
If this logic holds, it is another reason why a troubled borrower should meet with an impartial HUD housing counselor. They can provide a neutral assessment. Lenders, on the other hand, might refinance someone into a temporary fix with long term consequences (potential deficiency judgment).