Plain Old Petunia
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Post by Plain Old Petunia on Feb 9, 2011 17:41:10 GMT -5
Supposed to be a lot more foreclosures hit the market. I've read that the majority of real estate puchases right now are cash only. Also think about it, 10,000 boomers hitting age 65 a day, 75% have mortgages. With SS how many do you think will be able to keep them? I see millions more coming on the market over the years, how can housing recover in a situation like that? Those people aren't going to be moving up, likely barely hanging on. I have read several places that more foreclosures should hit in the next year. It would really be something to go to such lengths and then see values fall further!
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Plain Old Petunia
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Post by Plain Old Petunia on Feb 9, 2011 17:42:28 GMT -5
Petunia, I think, doesn't entirely believe it is solely an economic decision. She knows and we know that she absolutely would save money by walking away. The subject was covered extensively on the old boards. If it had been simply an economic decision, it would have been a done deal already. She just wants, and I am surprised by her, to ease that last little niggling, uncomfortable stirring of conscience that is telling her it is wrong So, go ahead. Walk. You won't be any worse than a lot of other people. Lex Luther will be proud of you, even. Just remember, you will give up the right to expect anyone else ever to keep any promise they may make to you in the future. They have to look out for themselves, after all. I am very sorry for your loss. I think that's a little over the top, Achelois. I appreciate your point of view that "walking" is a moral no-no.
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Plain Old Petunia
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Post by Plain Old Petunia on Feb 9, 2011 17:43:36 GMT -5
It is an economic decision that can impact many areas of her life...much like buying a house. Do people come on here asking advice about buying a house because they are looking for moral guidance? No, so why would assume she is asking our thoughts because her conscience is bothering her. It is a big decision even if you don't feel it is a moral issue. Petunia - I talked to a real estate agent about foreclosing/short selling. I was told I could try to short sell, but until I stopped making payments the banks wouldn't even consider it. Even then, it may not happen or may take a year to go through the process - especially because I have a 2nd on the house & both lenders have to approve the deal. I was also told in my situation the banks would not likely accept a deed in leiu of foreclosure (an option you may want to look into). So, that would leave me the option to stop making payments & expect to live in the house anywhere from 6-12 months during the process. I don't live in a non-recourse state, so it would be possible for the banks to come after me. But, given the number of foreclosures & my assets, it would be unlikely & I was told I could declare bankruptcy should that happen. I would suggest finding a real estate agent who specializes in these sort of transactions & have them explain the process in your state & lay out your options. Thank you, Angel D. I think talking it over with a professional is an excellent idea.
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Plain Old Petunia
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Post by Plain Old Petunia on Feb 9, 2011 17:57:58 GMT -5
How can it be such a big decision if it is a good economic one that will save her money. She lives in a nonrecourse state--so they cannot come after her, no big decision there. Impact her credit score a couple years, she will already have a new house and she has a car--no big purchases to finance, so no worry there. Boyfriend will still have a good credit score if they really need to finance something unexpected and she also has some cash and will free up some monthly with the walk. Nah, it is no big decision just economically speaking. Oh, I don't want BF to finance anything for me. The buying a house together suggestion was a joint investment suggestion and a solution to our combining living spaces. (My house is small by his standards. What I am finding is that he wants a more upscale home than I am comfortable buying. So for now, we are continuing our semi-long distance status.) I don't know what it is like to navigate through life with bad credit, never having done it before.
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resolution
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Post by resolution on Feb 9, 2011 18:12:37 GMT -5
If you get the new house and let the old one go, will that reduce your options to live with BF in the future? Would he be content to move into the new house, or would he be able to solely purchase the house he wants to live in with you? If you do this, I doubt you will be able to do the joint purchase with him for quite a few years should your relationship move in that direction. Not to say that you should make your decision based on your BF but you had sounded pretty interested in a joint purchase a few months ago.
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achelois
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Post by achelois on Feb 9, 2011 18:36:03 GMT -5
People go through life with bad credit all the time. You will have all your big purchases covered and your credit will recover in a couple years.
You are sweating the small stuff.
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Deleted
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Post by Deleted on Feb 10, 2011 2:36:51 GMT -5
"If you get the new house and let the old one go, will that reduce your options to live with BF in the future? Would he be content to move into the new house, or would he be able to solely purchase the house he wants to live in with you? If you do this, I doubt you will be able to do the joint purchase with him for quite a few years should your relationship move in that direction. Not to say that you should make your decision based on your BF but you had sounded pretty interested in a joint purchase a few months ago."
Petunia, I think this post is important. <Exhalts Kari>. It doesn't sound like you and DBF have made up your minds on what to do. Buying another house that you don't think is suitable for the both of you is a real red flag.
If it were me I would rent a bigger house with DBF for a year or two before I commit to buying anything with him.
As to your concern you're going to miss out on the tax window with the foreclosed homeowner act. I believe you are misinformed. When I researched the matter a couple of years ago I came to the conclusion that a non recourse foreclosure has no tax consequences. By the nature of the non recourse loan there is no mortgage debt forgiveness because you don't "owe" anything after the foreclosure-the bank only has the property as its security. If there's a loss the bank has to write it off. It would be different with a cash out refi or home equity loan. So my point is that you don't have hurry to take advantage of the act. But you should research the tax angle with a CPA who has dealt with these issues, not take my word on a message board. I wouldn't even ask the question over at the tax board. Go to a local CPA because I'm sure given what's going on locally they should have plenty of experience!
I also want to address another point you made in an earlier post. You were budgeting $100/mo for garbage, water and something else (sewer?) as part of your negative CF. As a long time LL I never pay for my tenant's utilities for a long-term (vs vacation) rental. Even if the charges are on your tax bills, I break them out and charge the tenant. Trust me, a tenant won't conserve if s/she isn't paying the bill themselves. I do however pay for a gardening service so that the tenant won't wreck the investment I've made in landscaping.
So my take on your situation is that you and DBF should rent a house together for a couple years and see if you two are compatible. Rent out your house; sounds like you could handle a $200-$300 negative for a long time. If the relationship doesn't work out you can always move "home" or proceed with what you're thinking about. If prices have moved up, oh well you still like your house and its gone up in value. If prices decline further then you didn't over pay for another house and the decision to walk away is even clearer.
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whoisjohngalt
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Post by whoisjohngalt on Feb 10, 2011 8:53:06 GMT -5
Yeah, but then you have that pesky hassle of moving all the time. I think doing it every 3-4 yrs is a better option. At least you had time to unpack and remodel the kitchen.
Lena
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sesfw
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Post by sesfw on Feb 10, 2011 11:03:23 GMT -5
'It is my personal residence, so no tax consequences on the foreclosure.'
Be very, very careful about your tax consequences. The IRS has a nasty habit of considering cancellation of debt as ordinary income, and there is a good chance it will be taxed.
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Post by hawkeyes2001 on Feb 10, 2011 11:47:28 GMT -5
"Don't buy property with someone that you are not married to. You're asking for trouble there."
I disagree. DBF and I own our home together. We also have shared bank accounts (gasp!). It's owned in joint tenancy with rights of survivorship. Which means we own it equally. Even though I provided a bigger part of the down payment (gasp!). I think it depends on your mindset. If our relationship were to end before we were legally married I am okay with either selling it and the two of us splitting any profit/debt or letting him buy my half out. I am not too worried about getting screwed financially. I'll be okay.
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Angel!
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Post by Angel! on Feb 10, 2011 11:47:34 GMT -5
I hate when people say this, just because you don't think the consequences fit the action doesn't mean there are no consequences. She will trash her credit, be unable to get certain loans for several years, risk getting higher insurance rates, risk getting turned down for jobs. These are all ramifications for her actions. Maybe you would rather she get thrown in jail as an appropriate consequence, but that doesn't mean there are no ramifications at all.
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Angel!
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Post by Angel! on Feb 10, 2011 11:49:28 GMT -5
'It is my personal residence, so no tax consequences on the foreclosure.' Be very, very careful about your tax consequences. The IRS has a nasty habit of considering cancellation of debt as ordinary income, and there is a good chance it will be taxed. Currently personal residence cancelled debt is not taxable due to some of the changes Obama put through. This act does expire though & I'm not sure of the ramifications of non-recourse loans & taxes after that point. I thought it would still be taxed regardless of the recourse/non-recourse status, but it is something to research & keep in mind.
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Plain Old Petunia
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Post by Plain Old Petunia on Feb 10, 2011 11:51:47 GMT -5
"If you get the new house and let the old one go, will that reduce your options to live with BF in the future? Would he be content to move into the new house, or would he be able to solely purchase the house he wants to live in with you? If you do this, I doubt you will be able to do the joint purchase with him for quite a few years should your relationship move in that direction. Not to say that you should make your decision based on your BF but you had sounded pretty interested in a joint purchase a few months ago." Petunia, I think this post is important. <Exhalts Kari>. It doesn't sound like you and DBF have made up your minds on what to do. Buying another house that you don't think is suitable for the both of you is a real red flag. If it were me I would rent a bigger house with DBF for a year or two before I commit to buying anything with him. As to your concern you're going to miss out on the tax window with the foreclosed homeowner act. I believe you are misinformed. When I researched the matter a couple of years ago I came to the conclusion that a non recourse foreclosure has no tax consequences. By the nature of the non recourse loan there is no mortgage debt forgiveness because you don't "owe" anything after the foreclosure-the bank only has the property as its security. If there's a loss the bank has to write it off. It would be different with a cash out refi or home equity loan. So my point is that you don't have hurry to take advantage of the act. But you should research the tax angle with a CPA who has dealt with these issues, not take my word on a message board. I wouldn't even ask the question over at the tax board. Go to a local CPA because I'm sure given what's going on locally they should have plenty of experience! I also want to address another point you made in an earlier post. You were budgeting $100/mo for garbage, water and something else (sewer?) as part of your negative CF. As a long time LL I never pay for my tenant's utilities for a long-term (vs vacation) rental. Even if the charges are on your tax bills, I break them out and charge the tenant. Trust me, a tenant won't conserve if s/she isn't paying the bill themselves. I do however pay for a gardening service so that the tenant won't wreck the investment I've made in landscaping. So my take on your situation is that you and DBF should rent a house together for a couple years and see if you two are compatible. Rent out your house; sounds like you could handle a $200-$300 negative for a long time. If the relationship doesn't work out you can always move "home" or proceed with what you're thinking about. If prices have moved up, oh well you still like your house and its gone up in value. If prices decline further then you didn't over pay for another house and the decision to walk away is even clearer. Thank you, Bonnap, for your usual level-headed take. You're right, I really haven't made up my mind firmly on a number of topics. I didn't realize non-recourse debt might not be taxable at all times. I will look into that for future reference. Most likely, I will do nothing at all besides continue to fence sit and mutter "hmmmm".
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Plain Old Petunia
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Post by Plain Old Petunia on Feb 10, 2011 11:53:40 GMT -5
I guess the best advice is to just buy a new house every couple of years, don't pay for it and continually walk away. Apparently there are no ramifications either legal, moral, or ethical, so why not have a new house every 2? I realize that was tongue-in-cheek, but you couldn't walk every 2 years. You would have to wait a good 5 - 7 after the first walk to qualify for another mortgage.
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Plain Old Petunia
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Post by Plain Old Petunia on Feb 10, 2011 11:59:03 GMT -5
'It is my personal residence, so no tax consequences on the foreclosure.' Be very, very careful about your tax consequences. The IRS has a nasty habit of considering cancellation of debt as ordinary income, and there is a good chance it will be taxed. The Mortgage Forgiveness Debt Relief Act of 2007 applies to tax years 2007 - 2012 and provides that mortgage debt forgiveness on acquisition debt of a principal residence up to 1 million (2 million MJF) is excluded from income. www.irs.gov/individuals/article/0,,id=179414,00.html
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Plain Old Petunia
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Post by Plain Old Petunia on Feb 10, 2011 12:01:48 GMT -5
Thanks everyone for your input, I appreciate it.
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Firebird
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Post by Firebird on Feb 10, 2011 12:10:30 GMT -5
I hate when people say this, just because you don't think the consequences fit the action doesn't mean there are no consequences. She will trash her credit, be unable to get certain loans for several years, risk getting higher insurance rates, risk getting turned down for jobs. These are all ramifications for her actions. Maybe you would rather she get thrown in jail as an appropriate consequence, but that doesn't mean there are no ramifications at all. Agreed. Well said, Angel. And if you take a step back from the moral indignation for a second, you would realize that very few, if any, consequences "fit" the crime. Someone kills a mother of two, maybe they get sent to prison, maybe they even get the death penalty. Does that death cause the same trauma and suffering that the murder did? No, it does not. Does it bring back the kids' mother? No, it does not. Does it change anything for anyone? No, it does not. Ergo, even a punishment "equal" to the crime isn't really equal. IM (NAAH) O, getting outraged at the consequences for breaking this particular law is a little immature and naive. They are what they are, and there are so many more egregious example of injustice out there.
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Firebird
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Post by Firebird on Feb 10, 2011 16:00:19 GMT -5
I guess it depends on how one chooses to live life. If I sign a contract, I live up to the terms of the contract and the financial obligation. If I made a bad contract or lose money in fulfilling the contract, such is life. But, that is how i operate. Again: By letting the bank take the house back to do whatever they will with it, you are "living up to the terms of the contract and the financial obligation." Suppose the bank held onto the house instead of selling it, and waited for the market to turn, and they made money on it in the end. That would have been your money, except that you gave the house back and thereby sacrificed YOUR claim to any profit it might eventually yield.
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Lex Luthor
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Post by Lex Luthor on Feb 10, 2011 17:30:21 GMT -5
Petunia -
This is LexLuthor from the old boards, and I strategically defaulted in 2009. I have been occassionally dropping by here to see what's been going on and this is the first thread I have seen where I think I can be of some use.
This is what I understand. You are at 140% LTV or somewhere around $50-$60k underwater. And based on comparable rentals in your area, you believe you could rent your home for about $200 less than what your current PITI is (I'm ignoring the water/sewer/trash, etc because that should really be the renter's responsibility). Have you considered the possible tax benefits to you from the home's depreciation and rental losses? It's possible that you would be closer to break-even if you chose to rent the property out.
You also think that you might want to buy another primary residence for $140-$150k and would need to put 20% down to do so. And you believe this new mortgage would be $400 per month smaller than your current mortgage. Have you considered the tax benefits from the interest deductions for the higher mortgage? Even though the mortgage payment is smaller, there are benefits from the higher interest deductions. Also, are the taxes comparable between the two properties?
I have been in exactly your shoes in regards to this house. It's a tough place to be. And from the info you have provided it's not a clear-cut decision to me. For me to be able to agree that someone should strategically default, there really has to be three conditions being met:
1. Your loans are non-recourse or you can declare bankruptcy to avoid a deficiency judgement 2. You will not be paying taxes on Debt Forgiveness Income due to the Mortgage Forgiveness Debt Relief Act (which by the way was institued under Bush) 3a. You will make a substantial amount of money by either renting or owning an alternative residence OR 3b. Your alternative equivalent cost residence is giving you a substantial amount of intangible personal gain (significantly better school systems, drastically reduced commute, much safer area, etc)
I am having trouble with #3, and here's why: -You are going to lock up $28-$30k in a new residence to maybe get about $400 per month in return. That's about a 16% annual return. You could instead leave the money invested in your IRA and average 10% over the long-term. The difference between the two is not a substantial enough difference (to me personally) to justify walking away and enduring all the consequences and uncertainty that comes with that. -You have also said that you've spent a time/money making your current home just right for you. There is value in that. -Of course you can also consider any possible gain from home appreciation in that decision. Let's say homes appreciate at 3% per year and you look at a 7-year time horizon. In that amount of time you would be about break-even on your current house OR be able to sell the new house (after selling costs) for a profit of $40k or so. On the flip-side, home prices could go nowhere in that time-frame (maybe they continued to go down after your purchase and then came back up later) and you would have $0 profitability after commissions on the new house OR now only owe about $25k more on your current house than your loan amount. I personally think the second scenario is more likely.
I just don't think these savings or possible gains are substantial enough to be life changing. But I don't know much about your life.
With this said, I also watched the bottom continue to drop like a sky-diver with no parachute when I was just 25% underwater. In the span of about 6 months, comparables went from about $160k to $125k. And that is when I reached 45% or so underwater and when we decided to walk away.
The result of that decision was that we purchased a slightly smaller place, in the same area, where we used a down payment of $25k to achieve $1200 per month (post tax considerations) in savings. We forced the bank into a short-sale by simply listing it for sale and refusing to pay the mortgage (The difference between rents and our PITI was $900 or so per month so renting was out of the question). The bank didn't want to spend the money to foreclose or maintain the home, so we were able to essentially strong-arm them into a short-sale. I live in AZ, also a non-recourse state so no deficiency judgements. I know some people said that perhaps the non-recourse status of the state would determine whether the loan forgiveness would be taxable, but I find that hard to believe. The non-recourse status is a state law. It just means that a company can't pursure you for a deficiency judgement in your state, I don't think it precludes the federal government from pursuing you for taxes on that loan forgiveness. I received a 1099-C in the amount of $99k that I had to report on my tax return...it is the Debt Forgiveness Act that made it so I didn't have to pay taxes on that amount, not the state law.
We are about a year and a half after that decision and I will tell you that home prices in my area have continued to drop. The house I bought for ~$100k now has comparables from $75k to $90k. So you should also consider that in the short-term you might lose your down payment in a new house.
I don't think you buy and bail at this point. If you did decide that you didn't want to hang on to this house, I understand and I would do a short-sale. But I wouldn't buy a house either....why not just rent one....for $200 less than your current mortgage. In fact, I bet you could get a smaller place to rent that would save you that $400 per month you are looking for without putting $28-$30k as a down payment into an uncertain housing market....and into a house you are uncertain you want to buy.
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Post by debtheaven on Feb 10, 2011 17:51:37 GMT -5
I have a stupid question (I no longer live in the US). I think you have a child in early HS.
Would a strategic default have any impact on the amount of financial aid or / or loans he and / or you could get when he goes off to college? In other words, could your decision to strategically default impact your child negatively in any way when he goes to college?
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Lex Luthor
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Post by Lex Luthor on Feb 10, 2011 18:03:32 GMT -5
Yes, I think Petunia mentioned earlier that there was a 15-year old.
Federal Stafford Loans for students do not consider credit scores. However, a private lender will certainly consider a credit score before giving a loan.
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Post by debtheaven on Feb 10, 2011 18:05:01 GMT -5
Thanks LexLuthor for your response.
So depending on whether or not she or her son may need to borrow from a private lender for his college tuition, that too may (and probably should) influence her decision.
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Angel!
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Post by Angel! on Feb 10, 2011 18:20:36 GMT -5
Good post Lex
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Angel!
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Post by Angel! on Feb 10, 2011 18:23:59 GMT -5
I guess it depends on how one chooses to live life. If I sign a contract, I live up to the terms of the contract and the financial obligation. If I made a bad contract or lose money in fulfilling the contract, such is life. But, that is how i operate. Again: By letting the bank take the house back to do whatever they will with it, you are "living up to the terms of the contract and the financial obligation." Yep - now if you stopped making payments & refused to let the bank take back the house (not sure how one would manage that), then you aren't living up to the terms in the contract.
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Firebird
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Post by Firebird on Feb 10, 2011 19:17:51 GMT -5
If you trashed the house or otherwise made it more difficult for the bank to sell it, I'd also consider that to be out of compliance with the terms of the contract. If you're going to walk away, at least have the courtesy to maintain the property and make it a viable resale (even at a loss), the way LexLuthor did with his property.
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Post by debtheaven on Feb 10, 2011 19:39:37 GMT -5
We signed for a loan just yesterday for a rental property. I have to admit I did not read all the nitty-gritty (this is our fifth time around so kill me, now I just skim). But I DID read enough to know that there IS a clause for the eventuality of non-payment, and to be assured that the RENTAL property is collateral for the loan, not our own home (because I refuse to use our home as collateral, if only on principal).
So as much as the idea of "walking away" displeases me, something has to be said for the fact that the banks include that eventuality in their own paperwork.
I personally could never do it because I value my sleep too much LOL. This said, I have never been in a position where I needed to. I would only allow myself to judge the OP after I walked a mile in her shoes, but that's just me.
This said, I agree with Bonnap in that you don't really know where you are going yet, so why do it?
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Firebird
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Post by Firebird on Feb 10, 2011 19:42:23 GMT -5
So as much as the idea of "walking away" displeases me, something has to be said for the fact that the banks include that eventuality in their own paperwork.
Bingo! I mean, anyone would be stupid not to demand collateral for such a huge loan. But the fact that the contract spells out that possibility and what the bank considers to be a satisfactory recovery in the event of it should tell people a lot. I have no idea why so many people miss this fairly obvious fact even when it's spelled out for them.
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Post by debtheaven on Feb 10, 2011 19:58:03 GMT -5
I have no idea why so many people miss this fairly obvious fact even when it's spelled out for them.
Firebird I think it's because it must be so incredibly stressful and anxiety-provoking to get to that point. If the people want to "work with" the bank, from what I read / hear they can't, the bank won't even take their calls, unless they haven't paid their mortgage in X months.
Given that most people are probably behind on everything else in an effort to keep up with their mortgages, it must be very scary to finally come to the conclusion that it is better not to pay their mortgage, despite zero contact with their lender.
Again, that is NOT the OP's situation.
But if these provisions are made in the contracts, it's that the banks are willing to take these risks on.
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achelois
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Post by achelois on Feb 11, 2011 4:57:20 GMT -5
I guess my code of conduct just isnt that flexible. I am old, after all.
I base my actions on what I believe to be right or wrong, not what someone else may or may not do.
If I borrowed a large sum of money from someones grandma, with the same kind of contract, but decided not to pay her back even though I could--would it be ok?
Or does it make it ok because the mortgage company is richer than grandma or because they are faceless strangers or because some have not always been ethical either?
What makes it ok? The fact that they take some measures to recover some of the money in case the people to whom they lend money default?
When you borrow the money to buy a house, you sign a contract to repay the money. That is the promise. The mere fact that the lender tries to protect itself from complete loss of very large sums of money doesnt mean it is ok to just decide you dont want to pay anymore.
But if it makes you feel better to think so, go ahead. It sounds really good as an excuse.
Do you do the right thing only when it is easy, profitable financially and if the other party does the right thing?
Or do you do the right thing because it is the right thing to do?
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Post by Deleted on Feb 11, 2011 8:55:15 GMT -5
My problem with some of these scenarios, like the OP, is "strategic default" is not always about inability to pay the mortgage. For people who have to walk away, I feel nothing but sympathy even if the situation is partially (or entirely) a consequence of their own choices. But having to walk away and choosing to walk away because you've done some mathematical calculations that computes profit and loss . . . well, that's where I think people's own honor comes in.
The OP never thought for a minute that everyone was going to say, "What a great idea!" This issue has been done before. Lex did it more seriously and thoughtfully than many; he definitely has insight into the issue. But the rest of us should quit stirring the pot . . . me, included.
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