Has anyone ever gone through a "strategic default" on their home?

[AlmiraGulch]

You know, I don't think the :glare: is fair when you yourself write things like...

 

 

 

And I think it's pretty snarky to say things like...

 

 

 

when no one knows the shoes others among us have walked in before, the challenges that have been faced, the decisions that have been made, the losses that have been experienced. Some of us don't change our feelings on moral issues when "actually living the reality." Just because it is hard to do the right thing doesn't mean some of us don't do it anyway.

 

The argument about the banks having a hand in it just goes to prove the adage that two wrongs don't make a right. I am responsible for my own behavior and decisions, period. Trying to identify a scapegoat so I can act counter to my conscience? No.

 

To be clear, I'm not talking about people who truly have no choice due to lay-offs, health care problems/bills, etc.

 

To which I would respond.....I don't really think it's a "moral" issue at all. Plus, your morals are likely different from mine, which are likely different from someone else's. My comment is as "fair' as everyone else's. It goes against my being because I have always paid my bills as long as I was able, and it's a foreign concept to me to do anything otherwise. That does not mean it's the RIGHT thing to do in the case, and by "right" I mean for my family. In fact, it could be "immoral" to continue to pay more than I should, to continue to operate in a contract that I can legal get out of, it doing so means that I could better provide for my family, for my college-bound children, for my elderly parents, for my own retirement.

 

So, yeah....I get may get a little snarky myself when others push their own moral standards onto me (or anyone else) when there is more than one way to view the issue. And yes, I realize that by posting this subject here at all I opened myself up to that, which is fine. But I also have the right to respond. And I respectfully disagree with you here.

[TranquilMind]

They have the money to pay their mortgage but choose not to. They walked away. Their home is in foreclosure and they are currently renting it out. The poor renters will be out their cash (first and last) when the lender finally gets around to taking the house. It is immoral.

 

That's really a crappy thing to do to tenants. Because of people who do this, tenants are far less trusting of those of us who are good landlords today. I make sure I tell every applicant who asks that they are able to check ownership records and that we are indeed current on the mortgage and are not in financial trouble or going to do anything that will have an adverse affect on them, insofar as it is possible on our part.

[Catherine]

Not necessarily. Why can't we see it as a good business decision, as banks do? It's good for my bottom line to maintain good credit, to own real estate, to meet my financial obligations. When people find themselves, through no fault of their own, in a property that is worth far less than they owe on it, why should they, out of morality, make what amounts to a bad business decision to honor their original commitment? Would a bank make a decision like that?

 

Honoring commitments to individuals would fall under my own personal category of "moral obligation" to repay. I'd think twice, myself, after this financial crisis, which has been partly caused BY banks, before I classifieds banks in the same moral category as individuals.

[Alte Veste Academy]

--

 

Broke my own rule about posting on issues that make me angry. Having a cat for an avatar is making me catty. I'm going for a swim...

Edited May 22, 2012 by Alte Veste Academy

[TranquilMind]

I would only if I felt the long term results were worth it.

 

It's a standard business decision that companies have to make every day. Is X investment paying off or not? If it isn't, how can it best be either made profitable or loss reduced?

 

Have you considered asking them to forgive the deflated difference and refinances with you? Can't hurt to ask?

 

At the least, I would try to refinance if it is worth the cost.

 

I would even consider bankruptcy.

 

Otherwise, keeping a bad investment is just bad financial planning. That's money better used for your children's education or your retirement fund.

 

There is no moral imperative to keep a bad investment.

 

Talk to your lawyer about all your options and what the long term affect is likely to be for you.

 

I agree with you about investments, but a home is NOT an investment. A home is an asset or a liability, but not an investment.

 

Yes, people unload stocks that aren't paying well or switch their bonds to something new by selling them, taking what they can get, and moving on with lessons learned. But it isn't the same at all to walk away from an agreement to pay money back that you have borrowed.

 

If that money can be better used, sell the house for whatever you can get, attempt to structure a deal with the lender to pay off the rest, get forgiveness, or whatever you can work out and move on. That is the honorable way to go, in my view.

[garddwr]

I agree with those who say you promised to pay, you should keep your obligation. Turn the situation around--if you had loaned the money to someone to buy a house, how would you feel about them defaulting because the house decreased in value? YOU would now be out $65,000 + real dollars that you loaned to someone. I'm sorry you've taken such a hit--it's tough! But I think my personal integrity is worth more than $65,000--if I give that away, I can't get it back.

Edited May 22, 2012 by thegardener
fix typo

[TranquilMind]

I do not understand why it would be better to walk away, ruin your credit, just to turn around and pay a landlord instead.

 

The house at least has a chance of coming back up to similar to what you paid (even if it is in 10-20 years) for it...a rental does not.

 

Don't forget that bad credit hurts you in many ways including interest rates on loans and car insurance. It can cost you for many years to ruin your credit.

 

Yes, all this must be taken into consideration. Not following the logic of staying in a house, not paying until ousted by the Sheriff, and then attempting to find a landlord who will accept you and paying again on something on which you never have a chance to recover your money.

 

Not to mention that future landlords would take a dim view of this as well, because if you don't pay one entity who is extending credit to you, chances are you won't have any qualms not paying another.

[AlmiraGulch]

This is fun! I really do love the conversation.

 

I even love more the people who have been kind enough to PM me because they know if they post here they'll be flamed!

 

I can take the heat, though. In fact, I used to say the EXACT same thing that many of you here are saying to me. "You borrowed the money, you have to pay it back"....blah, blah. It's not so simple to me anymore. I believe the banking system in this country reneged on their end of the bargain when their corrupt lending practices led to this horrible real estate situation we're in now. I also still think that many of the people who took out those horrible loans are partially to blame, because no one forced them to borrow the money they knew going in they could not afford to pay back. But then here we are now with the rest of us, who did everything by the book, put the money down, made sure we could make the payments (barring unforeseen circumstances, like those unfortunate enough to have been in extended unemployment after the economy collapsed due in large part to said corrupt lending practices) left holding the bag, and you know what? I'm tired of holding it. I can LEGALLY get out of this contract, knowing and willing to accept the repercussions, and I MAY choose to do so.

 

I love my house, really. I love the school district. I don't really WANT to move. Ultimately, I may decide it's the right thing to do anyway. And all of you who are saying that "people like me" (not exact words) are sticking it to the rest of you who choose to stay.....well....you have the same legal rights as I do. In the end, we may end up making different choices. I don't know yet. It's a big decision, but it's mine to make for me, and yours to make for you.

[NoPlaceLikeHome]

Although many view their house as an investment, a mortgage isn't an investment. It's a contract between the lender and you that allows you to live in the house when you can't afford to buy it outright.

 

If it were an investment, like a stock, you would sell it at the reduced price and realize the loss. In this case, you would be sticking someone else with the loss. Try doing that with an investment like stocks, bonds, or mutual funds. Good luck getting your broker to take over your losses on unsatisfactory investments.

 

I generally agree that one should pay one's debts. However, IMO I believe many banks and brokers were not completely innocent in the housing debacle. I believe that many houses were appraised much higher and banks knowingly approved of these appraisals and loans. I believe many banks and brokers knew they were making "bad" loans and only wanted their share of the fees and immediately passed the "hot potato" of a loan to the next sucker bank:glare:

[AlmiraGulch]

I agree with those who say you promised to pay, you should keep your obligation. Turn the situation around--if you had loaned the money to someone to buy a house, how would you feel about them defaulting because the house decreased in value? YOU would now be out $65,000 + real dollars that you loaned to someone. I'm sorry you've taken such a hit--it's tough! But I think my personal integrity is worth more than $65,000--if I give that away, I can't get it back.

 

I understand your point of view, but i'm not sure I view it the same way.

 

A personal loan would be much different, for me anyway, than a business one. And also, perhaps you missed the post where I said that B of A would still be making quite a profit on me even they were to have to foreclose, or even agree to a short sale. It's not an integrity issue, to me anyway. It's a business decision, whatever I decide that decision will be, and it's also a decision to do what is best for my family.

[TranquilMind]

Martha: There are many people just scraping by that could seriously better their own and their children's future if they were ale to create some breathing room in their finances.

 

Well, sure. This is true of lots of people who bought too much that was too expensive for them and do not live within their means.

 

 

 

Yes. Walking away in some form or another is part of every contract.

 

A penalty for doing so is involved. It is not expected. Fulfilling one's obligation one undertakes is the expected course of action.

[*Michelle*]

My one caveat would be to vacate the home at the same time you stop paying. Line up a rental and move first. I wouldn't squat.

[AlmiraGulch]

Well, sure. This is true of lots of people who bought too much that was too expensive for them and do not live within their means.

 

Not sure if this part was directed toward me or was just a general statement, but this is not my circumstance. I did not buy too much, nor something that was too expensive, nor do I live outside my means.

[TranquilMind]

We tried to do that - lender was awesome, totally willing to work with us - but it will. not. sell.

 

.

 

Have you tried in the last couple of months? Sales are up 18% this month in my local city.

[*Michelle*]

Well, sure. This is true of lots of people who bought too much that was too expensive for them and do not live within their means.

 

 

 

 

 

A penalty for doing so is involved. It is not expected. Fulfilling one's obligation one undertakes is the expected course of action.

 

But they do expect it. That's the crux of the whole debacle. They took high-risk loans, chopped them up, tranched them, then sold them off as low-risk investments.

[TranquilMind]

Not sure if this part was directed toward me or was just a general statement, but this is not my circumstance. I did not buy too much, nor something that was too expensive, nor do I live outside my means.

 

It was a general statement.

 

But if what you say is true, you can pay for the affordable house in which you live, even if your return won't be great for many years (barring illness, catastrophe, etc). You will eventually recover.

[AlmiraGulch]

My one caveat would be to vacate the home at the same time you stop paying. Line up a rental and move first. I wouldn't squat.

 

That's what I thought, but I have two friends who are real estate attorneys and they said just the opposite. They both said that if I go this route that it's important that this remain my primary residence through the entire period leading up to the foreclosure, or short sale, or whatever. That way, assuming the Act that is set to expire at the end of this year that relieves you of the requirement to pay the taxes on the forgiven amount is extended, I would protect myself in that way.

 

And this is why I have an appointment with an attorney.

[TranquilMind]

My one caveat would be to vacate the home at the same time you stop paying. Line up a rental and move first. I wouldn't squat.

 

This, definitely!

[*Michelle*]

That's what I thought, but I have two friends who are real estate attorneys and they said just the opposite. They both said that if I go this route that it's important that this remain my primary residence through the entire period leading up to the foreclosure, or short sale, or whatever. That way, assuming the Act that is set to expire at the end of this year that relieves you of the requirement to pay the taxes on the forgiven amount is extended, I would protect myself in that way.

 

And this is why I have an appointment with an attorney.

 

Ah. More unintended consequences. That makes sense.

[TranquilMind]

Catherine: If I owed money to an individual, I'd absolutely see it as a moral obligation to pay it back. It's so much harder for me to perceive banks the same way because the needs of real individuals are not supposed to be a part of their business equation. Why then should individuals accord them the moral status of an individual?

 

Banks consist of individual investors.

 

As long as organizations operate in a moral vacuum, it seems wrong that people should be bound by moral arguments to treat them as they would another person.

 

So two wrongs make a right? One only needs to be as responsible or ethical as the organization is?

 

We are all screwed.

[TranquilMind]

It is easy to think of "the banks" as some faceless entity which is not going to be hurt by practices like this.

Actually, there are people just like the people on this board who entrust the bank with their savings to invest and grow. It is these people whose money paid for your house. It is these people who are going to be hurt because the bank can not return their promised investments. Not some institution. People who invested for retirement or for college.

 

Exactly.

[TranquilMind]

"As long as organizations operate in a moral vacuum," it's OK if we as individuals operate in a moral vacuum?

 

Yeah, right?

 

Boggles the mind.

[Mrs Twain]

Personally, I think the moral and character issues are most important here. However, leaving that aside, I think you ought to consider whether it is really a good business decision to throw away your name for only $65K or $95K. In the grand scheme of life, that money is really not a large amount. If you lose your good name, you may never get it back.

 

Just because you don't see many negative consequences in the deal today doesn't mean that there won't be others down the road. Laws are always changing. If I were you, I wouldn't roll the dice on this deal for such a relatively small amount of money.

 

Besides, you mentioned that home sales have gone up quite a bit in your area. Your property value should also be going up as well.

[Amy in NH]

Keep in mind that tax assessed values are often quite different than market value assessments. Many times, the tax assessed value will be substantially more than the actual market value of a home. The town could reassess all of the properties at a lower rate, but then the tax rate will go way up to keep the level of revenue steady. Perhaps your town wants its tax rate to look good and so chooses to assess properties at unreasonably high values?

[Kari C in SC]

Well, if you plan on renting anyways.....why not just stay there since you can afford it? You at least get a bit off you taxes for the motgage interest, and it is your place to do what you want with it! I can not imagine going back into a rental after owning my home for so many years.

 

I do not understand why it would be better to walk away, ruin your credit, just to turn around and pay a landlord instead.

 

The house at least has a chance of coming back up to similar to what you paid (even if it is in 10-20 years) for it...a rental does not.

 

Don't forget that bad credit hurts you in many ways including interest rates on loans and car insurance. It can cost you for many years to ruin your credit.

 

:iagree:

 

If I am getting this correctly - you don't care to ever own again. You will be throwing away rent money each month. At least currently you are actually paying down a loan and as the market changes - you will build equity and eventually own something. If you walk away and rent forever - you will never potentially own anything. It makes absolutely no sense to walk away and rent another place imho.

[AlmiraGulch]

Personally, I think the moral and character issues are most important here. However, leaving that aside, I think you ought to consider whether it is really a good business decision to throw away your name for only $65K or $95K. In the grand scheme of life, that money is really not a large amount. If you lose your good name, you may never get it back.

 

Just because you don't see many negative consequences in the deal today doesn't mean that there won't be others down the road. Laws are always changing. If I were you, I wouldn't roll the dice on this deal for such a relatively small amount of money.

 

Besides, you mentioned that home sales have gone up quite a bit in your area. Your property value should also be going up as well.

 

I suppose it is relatively small over the very long run, but I would like to retire at some point, and I'd like to maximize the amount I have with which to do it.

 

I don't think I would be losing my "good name" at all, so I disagree with that. And i think it was someone else saying that home sales are going up. Home sales in my area are not going up. Well...short sales are up. Values continue to decline.

[cassiemc]

We just got our tax notice. Our tax value has gone down by half in the 5 years that we have owned the house. It's terribly depressing since we have put a lot into this house and we should have equity, but we don't and who knows when/if we will. We are staying here as of now. We are planning to more than likely buy a bigger place in a few years and rent this house. The two houses on either side of us have foreclosed and were bought by an investor who is renting them out. We do not like the idea of having renters on either side of us :( We also do not want to rent a house from someone else, so we will stay here.

 

I do not believe that someone who walks away from their home is an evil person, especially these days.

[AlmiraGulch]

:iagree:

 

If I am getting this correctly - you don't care to ever own again. You will be throwing away rent money each month. At least currently you are actually paying down a loan and as the market changes - you will build equity and eventually own something. If you walk away and rent forever - you will never potentially own anything. It makes absolutely no sense to walk away and rent another place imho.

 

Yeah, a lot of people feel that way. I don't. And if I change my mind, I could always buy again in a few years. I can rent a much larger home for what I pay now in mortgage (or even less) without the extra expenses of home ownership. I could rent the same size or slightly larger than what I'm in now for considerably less. A lot less. A stupid amount less. There would be huge cash savings there that would benefit me more through investment than by keeping it tied up in this money pit I'm in now. (Except I really do like my house, so....there's that).

[AlmiraGulch]

We just got our tax notice. Our tax value has gone down by half in the 5 years that we have owned the house. It's terribly depressing since we have put a lot into this house and we should have equity, but we don't and who knows when/if we will. We are staying here as of now. We are planning to more than likely buy a bigger place in a few years and rent this house. The two houses on either side of us have foreclosed and were bought by an investor who is renting them out. We do not like the idea of having renters on either side of us :( We also do not want to rent a house from someone else, so we will stay here.

 

I do not believe that someone who walks away from their home is an evil person, especially these days.

 

Not only are we in the same boat, we're also in the same County. :)

[Catherine]

It's just not persuasive to me that I should uphold some high moral standard toward a bank when I know perfectly well that the bank would foreclose me at a moment's notice if it served their shareholders' interests. Repayment of money is not the same, morally, as honoring a marriage commitment or a promise to a person. I've made no "promise" to the bank-I've made a contract. I have a legal relationship with them, not a personal, moral one.

[Catherine]

It's just not persuasive to me that I should uphold some high moral standard toward a bank when I know perfectly well that the bank would foreclose me at a moment's notice if it served their shareholders' interests. Repayment of money is not the same, morally, as honoring a marriage commitment or a promise to a person. I've made no "promise" to the bank-I've made a contract. I have a legal relationship with them, not a personal, moral one.

[justLisa]

I have a neighbor who's home was for closed on, then went to the auction and bought it back. Apparently he was the only bidder I'm not sure what to think of that LOL. Or how a bank would loan money to someone just for closed upon, but it is absolutely true. I'm not one to judge, but the kids all attend THE most expensive private Christian school, and they had a 4th child just after this. It seems a bit ....I don't even know what the word is.

 

We have lost some on our home. We bought when the market was going down, and no one knew it would further tank. I have neighbors who purchased their home for over $100,000 -$150,000 more than recent selling prices here.

[Jen500]

What I don't understand is why people were buying houses at such obviously inflated prices in the first place. I watched it happen in my neighborhood--flabbergasted at people paying double the cost that the houses sold for a few years earlier.

[Carrie12345]

Thanks for all of the feedback, even from those who decided to tell my how incredibly immoral I am for even considering backing out of a business deal that no longer suits my needs. :glare:

 

Most of the advice has been very good food for thought, and I appreciate it. I'd still love to know if anyone has actually done this, or gone through a short sale, or is in the same situation (VERY far under water on the mortgage) and made the decision to stay (and why).

 

We are staying.

We owe almost 50% more than our current market value. Our payments are completely reasonable, though. We purchased at a fair price with a decent fixed interest rate.

We'd prefer to sell and buy a larger house, but that's clearly not going to happen for quite some time. Yes, I'm kind of miserable over it, but not enough to destroy our future buying potential or ruin other credit dependent situations.

[Carrie12345]

What I don't understand is why people were buying houses at such obviously inflated prices in the first place. I watched it happen in my neighborhood--flabbergasted at people paying double the cost that the houses sold for a few years earlier.

 

In 2005, there was nothing inflated about our price. Our value actually went up for a few years. We're upside down because our area has a huge foreclosure problem now. The people walking away are driving my market value down. Who is going to pay a fair price for my house when the bigger, prettier one down the street is up for pennies on the dollar?

[TranquilMind]

What I don't understand is why people were buying houses at such obviously inflated prices in the first place. I watched it happen in my neighborhood--flabbergasted at people paying double the cost that the houses sold for a few years earlier.

Yeah, I thought that was nuts. Perspective helps, though. If you are young and have been told to buy a house as soon as possible, and you didn't do your homework, you probably didn't realize the immense inflation in the few years prior. The bubble burst was inevitable. Everyone was gambling that they would get out before it did. Some won. Some lost.

 

The ones who "lost" are now trying to unload their losses on everyone else, because you can bet risk is spread widely. This is what is annoying about all of it. Not talking about the ones who lost jobs and could not find another, or had catastropic illnesses or simply realized they bit off more than they could chew and returned the house to the bank and moved out.

 

But there is something intrinsically dishonest about deciding to live there free until ousted by the Sheriff in a foreclosure.

[TranquilMind]

The people walking away are driving my market value down. Who is going to pay a fair price for my house when the bigger, prettier one down the street is up for pennies on the dollar?

 

Those people who walked away have set the current value for your house.

 

Where's George Bailey when you need him...

[Kari C in SC]

Yeah, a lot of people feel that way. I don't. And if I change my mind, I could always buy again in a few years. I can rent a much larger home for what I pay now in mortgage (or even less) without the extra expenses of home ownership. I could rent the same size or slightly larger than what I'm in now for considerably less. A lot less. A stupid amount less. There would be huge cash savings there that would benefit me more through investment than by keeping it tied up in this money pit I'm in now. (Except I really do like my house, so....there's that).

 

FWIW, I am a landlord. We have bought 3 houses in the last year that were either shortsales or forclosures. We also own our house in FL that we simply could not sell. We were actually told to walk away from our FL house because we had bought the home we live in free and clear with equity from our FL house. In other words, we could have defaulted and still had an entire house to live in paid for. We chose not to do that because we believed it was very wrong. On the side of a landlord, if I saw what you made and knew where you had lived and realized you were walking away from your house just because you didn't want to stay in it - not that you couldn't afford it - I would not rent to you. I would review your income, your liabilities and I would go as far as to look up the purchase price of the home you left. It wouldn't take me very long to see that you had the means to pay for your obligation, but you chose not to. I would believe that if you could walk away from this obligation, then you would walk away from our lease. I realize there is always somebody who will rent, but I would not. I have turned people away for not paying their cell phone bills or cable bill. I would not want to take a risk on this at all.

[JumpyTheFrog]

First of all, some states are recourse states, where the bank can sue you for the difference between what was owed and what the house sold for at auction. If you live in a recourse state, your proposed plan wouldn't benefit you.

 

Secondly, let's say you line up the rental while your credit is still good and then give the house back. What happens if you need to move out of the rental house (it needs major repairs, job loss, move to a safer area, or any other reason) and you can't find another good rental because your credit is bad? Or you find a rental but they charge extra for the credit risk? It may not save you the money each month you thought it would.

 

Others have already pointed out how your credit report is used in setting insurance rates and in background checks for jobs. I had a credit check run on me just to be able to rent a car in the fall. Also, some credit card companies have what is called a "universal default" clause, where they raise your interest rate if you are late on payments to any other creditors, even if all your CC payments to them have been paid on time.

[Murphy101]

It would be a bad thing for the country to have that much value go up in smoke and end up affecting quite a bit up and down the line...

 

Everything is already going up in smoke.

 

However, I wasn't clear in my pp. I meant that having home prices go down to a level that people could afford to buy them might not be entirely bad.;)

 

I agree with you about investments, but a home is NOT an investment. A home is an asset or a liability, but not an investment.

 

Yes, people unload stocks that aren't paying well or switch their bonds to something new by selling them, taking what they can get, and moving on with lessons learned. But it isn't the same at all to walk away from an agreement to pay money back that you have borrowed.

 

If that money can be better used, sell the house for whatever you can get, attempt to structure a deal with the lender to pay off the rest, get forgiveness, or whatever you can work out and move on. That is the honorable way to go, in my view.

 

And note, I suggested I wood do all those things first if that were better long term for my family.:)

 

then here we are now with the rest of us, who did everything by the book, put the money down, made sure we could make the payments (barring unforeseen circumstances, like those unfortunate enough to have been in extended unemployment after the economy collapsed due in large part to said corrupt lending practices) left holding the bag, and you know what? I'm tired of holding it. I can LEGALLY get out of this contract, knowing and willing to accept the repercussions, and I MAY choose to do so.

 

You sure aren't alone in that sentiment.

 

Well, sure. This is true of lots of people who bought too much that was too expensive for them and do not live within their means.

 

A penalty for doing so is involved. It is not expected. Fulfilling one's obligation one undertakes is the expected course of action.

 

This isn't just about people over extending themselves tho. Many people have not over extended themselves. They played by the old school wisdom and got just as screwed.

 

A penalty is involved and the penalty is created to be such a blow as to reasonably assure neither parties want to go that route except as a last resort. I think it is very telling about how horrid the banks and the borrowers are that those penalties are no longer much of blow compared to keeping the contract as it is. When the penalty becomes a better deal than the contract, then yes, banks should expect them to be used by the borrowers.

 

But they do expect it. That's the crux of the whole debacle. They took high-risk loans, chopped them up, tranched them, then sold them off as low-risk investments.

 

Yes. If they didn't expect it, then they were idiots.

[AlmiraGulch]

FWIW, I am a landlord. We have bought 3 houses in the last year that were either shortsales or forclosures. We also own our house in FL that we simply could not sell. We were actually told to walk away from our FL house because we had bought the home we live in free and clear with equity from our FL house. In other words, we could have defaulted and still had an entire house to live in paid for. We chose not to do that because we believed it was very wrong. On the side of a landlord, if I saw what you made and knew where you had lived and realized you were walking away from your house just because you didn't want to stay in it - not that you couldn't afford it - I would not rent to you. I would review your income, your liabilities and I would go as far as to look up the purchase price of the home you left. It wouldn't take me very long to see that you had the means to pay for your obligation, but you chose not to. I would believe that if you could walk away from this obligation, then you would walk away from our lease. I realize there is always somebody who will rent, but I would not. I have turned people away for not paying their cell phone bills or cable bill. I would not want to take a risk on this at all.

 

 

I also understand and appreciate that, too. Given the vast number of people who have rented after foreclosure or short sale or other bad-credit situations, I'd have to say there are many landlords that would have another opinion. Still....that does weigh on me, knowing that many landlords feel the same way as you (justifiably so). From a pure risk perspective, at least.

[AlmiraGulch]

First of all, some states are recourse states, where the bank can sue you for the difference between what was owed and what the house sold for at auction. If you live in a recourse state, your proposed plan wouldn't benefit you.

 

Secondly, let's say you line up the rental while your credit is still good and then give the house back. What happens if you need to move out of the rental house (it needs major repairs, job loss, move to a safer area, or any other reason) and you can't find another good rental because your credit is bad? Or you find a rental but they charge extra for the credit risk? It may not save you the money each month you thought it would.

 

Others have already pointed out how your credit report is used in setting insurance rates and in background checks for jobs. I had a credit check run on me just to be able to rent a car in the fall. Also, some credit card companies have what is called a "universal default" clause, where they raise your interest rate if you are late on payments to any other creditors, even if all your CC payments to them have been paid on time.

 

I'm aware of all of this. GA is a recourse state, but it's rare. I'm not worried about finding another rental. And I understand credit reports and credit ratings. Nothing in your last paragraph is applicable to me at this point. Also, I can tell you from working in the industry I work in for as many years as I have, very few private employers pull credit reports for jobs unless it is applicable to the job itself, and mine would not be applicable.

 

I do have to decide if the adverse action on my credit report would be worth it. That's probably my major concern right now.

[Murphy101]

All discussion about walki away from a mortgage aside-

 

I do not consider renting to be a waste of money. In many ways it's great for certain demographics. In exchange for paying a bit more than one would for a mortgage, you have zero major maintence expenses. No new roof to buy. Ever. When something stops working or gets broke throu no fault of your own - it's nothing out of your pocket. When we rented we always treated the house with as much care as our own, but we're very glad we didn't have to spend our limited income on unexpected house stuff. The only thing I hated was the white walls. I don't think I will EVER own a house with white painted walls again. And pets. We'd miss them.

 

As far as I'm concerned, if I have no plan to pay off the loan, aka own the house, or at least get enough equity to eventually put towards another house - then there is no financial reason to own instead of rent.

[Annie G]

I suppose it is relatively small over the very long run, but I would like to retire at some point, and I'd like to maximize the amount I have with which to do it.

 

I don't think I would be losing my "good name" at all, so I disagree with that. And i think it was someone else saying that home sales are going up. Home sales in my area are not going up. Well...short sales are up. Values continue to decline.

 

Can you explain how the housing market tanking has made a difference in how much money you'll have to retire? I'm assuming you planned to stay in the house until it was paid for, but unless you were counting on it appreciating an enormous amount and then selling it and living off the proceeds, I don't get it.

 

My daughter's friend walked away from her house when the value plummeted. They stopped paying and walked away, renting a place that was larger but the same price. Financially they are doing fine. But they were doing just as well before.

[hsmamainva]

We have considered it! I won't lie about that.

 

We bought in 2005 -- height of the housing market free-for-all.

 

We are now $175,000 underwater on our house.

 

Our neighborhood is small -- 22 houses. Of those 22 homes, 14 homeowners have gone into foreclosure over the last 5 or 6 years. Most have walked away. Some had purchased the homes as investment properties and never really lived in them and just let them foreclose.

 

But Virginia is a recourse state, so they could come back in several years and sue us for whatever the difference is between what we owed and what they sold it for at auction.

 

My niece lives in North Carolina, which is a non-recourse state, and they walked away from their house 2 years ago. They have no regrets...but then they're young (in their 20's) with one young child and no pets. They just went into an apartment and are thrilled to be rid of the house....but they couldn't get the credit to buy a pack of gum. So they know that they won't be able to purchase anything on credit for years to come.

 

As for us, we're currently going through the loan modification process to see if we can refinance at a lower interest rate (ours is high -- 6.5%). We just started the process and we've been told it will take 60-90 days until we know if we've been approved.

 

We don't want to leave the house -- although we'd love to be rid of the albatross around our necks -- because we have 2 dogs and 2 cats and it would be very hard to find a rental home that would allow us to have that many pets -- not mention 4 kids and my husband works from home.

 

We're stuck and just waiting for it all to run its course.

[Bluegoat]

I find my self really torn by the moral questions around this issue.

 

What I find flabbergasting and bizarre is the idea that banks or other businesses, whose purpose in life is, we are told, only to make money, are doing the right thing when they make decisions based only on the financial outlook. INdividuals on the other hand supposedly have any number of moral obligations to live up to, though why that is is not clear.

 

If the purpose of business is to make money, why isn't that also the purpose of individuals? If individuals have other moral obligations, don't the businesses owed and operated by individuals have those moral obligations as well? (If you decide to incorporate yourself and have the corporation buy the house, does it then become moral to treat it only as a business issue?)

 

And who says the purpose of business is to make money anyway - money is only an abstraction of value. Value is a service or a resource or a product which humans want or need for a better life. From my perspective, the purpose of business is to improve human life, for individual owners and customers and for the community. And that definitely has a moral component.

 

I think we do actually have an obligation to be moral in many ways in business. But if businesses - in this case banks - are allowed to operate as if making money was their only real moral obligation, where does that leave those who are dealing with them as individuals? Practically speaking such a situation means that the businesses could totally take advantage of people who will try to do the right thing no matter what the business interests do.

 

My inclination is to think the only real moral option is to refrain from being involved in business transactions with those kinds of institutions in the first place. It seems extreme but there are any number of religious and other communities that have come to that conclusion and I think it has tended to be a healthy decision.

 

Unfortunately, OP, that doesn't help you with your decision. THough I think that feeling of "dammed if you do, dammed if you don't", contributes to people's desire to get out of having a mortgage altogether, even if it means renting.

[Renee in NC]

First of all, some states are recourse states, where the bank can sue you for the difference between what was owed and what the house sold for at auction. If you live in a recourse state, your proposed plan wouldn't benefit you.

 

Secondly, let's say you line up the rental while your credit is still good and then give the house back. What happens if you need to move out of the rental house (it needs major repairs, job loss, move to a safer area, or any other reason) and you can't find another good rental because your credit is bad? Or you find a rental but they charge extra for the credit risk? It may not save you the money each month you thought it would.

 

Others have already pointed out how your credit report is used in setting insurance rates and in background checks for jobs. I had a credit check run on me just to be able to rent a car in the fall. Also, some credit card companies have what is called a "universal default" clause, where they raise your interest rate if you are late on payments to any other creditors, even if all your CC payments to them have been paid on time.

 

We've been able to rent twice with really bad credit. Neither place was in a bad neighborhood or otherwise undesirable. This was also with 7 dc, 2, dogs, and 2 cats.

 

I will agree that the other issues with a low credit score are real. We've been denied insurance for bad credit, my dh denied a job, and it is likely to play some part in what kind of job I end up with.

[hsmamainva]

And if I change my mind, I could always buy again in a few years.

 

It will be more like 7 - 10 years before your credit would recover enough from a strategic default before you'd be able to get another mortgage.

[Renee in NC]

It will be more like 7 - 10 years before your credit would recover enough from a strategic default before you'd be able to get another mortgage.

 

Where did you find that number? I am interested because I have read 3 for financial reasons and 5 for strategic defaults. We just hit 3 years, but we won't buy anytime soon.

 

ETA: How could it be 10? Credit is reported only 7 years past last active date.

[Murphy101]

It will be more like 7 - 10 years before your credit would recover enough from a strategic default before you'd be able to get another mortgage.

 

I don't know anyone who has ever had to go more than 5 years before buying a home after bankruptcy. Strategic default might be worse or not. It would really depend on the buyer in question. In some ways a bankruptcy might be better.

 

Again. Speak to the lawyer about all the options and all their likely repercussions.