

Let your mortgage go? - siculars
http://www.nytimes.com/2010/01/10/magazine/10FOB-wwln-t.html?hp=&pagewanted=print

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angelbob
An excellent point.

People who treat their homes as investments should remember that, should the
investment completely lose value, it's reasonable to cut their ties and take
the loss, not continue to take losses on it indefinitely.

That is to say, it _is_ an investment, and should be treated appropriately as
one.

If your house is a home rather than an investment, you can ignore this
suggestion ;-)

Disclosure: I have a mortgage, but it's not underwater and is doing just fine.

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cschneid
Right, there are non-investment related values to a house for most people.
Kids friends in the area, nice neighbors, the landscaping you did last year,
etc. So even if you couldn't sell and recoup your mortgage, doesn't mean the
value of your house is worth walking away from.

On the other hand, investment properties are almost entirely dollar based.
Which is why (in theory), banks require a higher down payment on them - to get
you invested.

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wisty
This might not apply for new homes, and those are the ones that are
underwater.

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hugh_
The article says that fears of damage to your credit rating, if you do this,
are "overblown". But surely the damage to your credit rating among rational
creditors should be _really_ severe?

If I were a bank and I found out a borrower had walked away from a previous
loan leaving their creditors holding the bag, there's no way in hell I'd lend
them a single cent, ever.

~~~
ajross
They'll have trouble getting another mortgage, that's true. But that's
surmountable if you're happy with renting and/or can find a co-signer for your
loan. Similar things are true for automobile loans.

But generally when people talk about "damaged credit", they mean an inability
to get a credit card. And there, I'm willing to bet there are plenty of banks
willing to do business with people with foreclosures on their records. The
revenue model for credit cards is based on fees, not loan risk.

~~~
wisty
I wonder if credit card companies prefer people with a slightly dodgy credit
rating, as they are more likely to get hit with late fees?

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petercooper
Just in case anyone knows.. why are mortgages in the US structured in this lax
way? In the UK, if you don't pay your mortgage, you're still entirely liable
for the debt even after handing the keys back. If you can't meet the
difference between what they make on a quick sale and the owed amount, they
will, and do, bankrupt you over it.

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pmichaud
The system you describe puts 100% of the onus of appraisal onto the borrower.
It's in the bank's best interests to inflate the value of the home as much as
possible and get a borrower on that inflated amount, because now, regardless
of what the property is actually worth, the borrower is on the hook for the
full amount.

The bank is normally the one who approves the appraiser, which is a clear
conflict of interest. In our system, ideally everyone is best served when the
appraiser is neutral and competent because the borrower doesn't over pay, and
the bank isn't exposed to much risk since the collateral can actually cover
the obligation.

The system you describe has a huge loophole because lenders hold all the cards
and could easily collude on the sly with appraisers to drive prices up at the
expense of the individual. It wouldn't even need to be an explicit collusion
-- sort of like the default swap stuff, no individual player (who could see
that the system was a sham) had any incentive to bring it down. On the
contrary, they had incentive to keep up the bullshit in order to make their
numbers. A similar pressure could result with laws that heavily favor the
lender.

~~~
axod
Lenders typically lend up to a maximum % of the purchase price - 90% is
typical.

So if you default on the loan, they'd have to sell it for less than 90% of the
value for you to owe them anything on it. If you default though, it's their
home, they're free to sell it for whatever they like.

As far as the actual house sale goes, the bank/lender has little/no power in
the UK. If they don't want to lend the money on the house there are others
that will. The price is decided by the seller/estate agent, and the obviously
the buyer. The main critera the bank has is that you pay a % of the purchase
price - they'll lend typically only up to 90%-95% or so.

I like the UK system personally. I think it's responsible. Not to mention the
silliness of yearly home tax?! in the US and other craziness.

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ghshephard
As my father (A Real-Estate Developer/Mortgage Broker/Car-Hock moneylender)
used to tell me:

"A loan that isn't backed with readily liquidated collateral should be
considered a gift with no expectation of return"

Money lenders aren't stupid. They realize that anything that isn't covered
with collateral is money that they have a 90% chance of losing. It's is
utterly beyond them why _any_ borrowers would not consider walking away from
an underwater mortgage once the ROI hit the sweet spot (Credit Record Hit, and
possible law suits being two costs factored in)

The NYT article was an excellent summary of the issues though.

