4 ms·

Let your mortgage go?

32 points by siculars 17y ago

angelbob 17y ago
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.
- cschneid 17y ago
  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.
  - wisty 17y ago
    This might not apply for new homes, and those are the ones that are underwater.
petercooper 17y ago
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.
- dschobel 17y ago
  Yeah, I'm actually surprised you can walk away from a mortgage (a legal contract) without also declaring bankruptcy. Any legal eagles around to explain how this is possible?
  - trjordan 17y ago
    As the article noted, mortgage contracts in the US stipulate the penalties for walking away, and those penalties go no further than surrendering the house.
    - ajross 17y ago
      Exactly. And as the house is the collateral for the loan, that makes perfect sense. If the bank was dumb enough to write a loan that they can't get back by selling the collateral, why should the borrower be expected to bear the burden? Frankly, I like the US system; it places the burden of analyis and risk management on the party most able to do that competently.
      - petercooper 17y ago
        Except that's more like a hire purchase agreement than a loan. If you take a bank loan to pay for a car/boat/to fund your startup/whatever and you can't pay it, you're still on the line for the loan if the assets purchased can't match the capital owed. Mortgage loans seem to be treated as a special case in the US.
        ajross 17y ago
        True, though there are loopholes there too: startups are almost universally corporations or LLCs, generally for the express purpose of insulating the owners from the liabilities of the business. And banks routinely write off uncollectable car loans by selling them to collection agencies; they aren't large enough to bother with enforceable legal action. The homeowner protection laws are the same kind of thing. As a society, we decide that home ownership is worth encouraging (whether that's true or not is an interesting side question), so we implement policy designed to encourage it.
hugh_ 17y ago
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.
- ars 17y ago
  Federal law limits how long you are allowed to do that. 7 or 10 years I believe.
  - hugh_ 17y ago
    Really? Wow. And people are complaining that the crash was caused by under-regulation? How about first removing all the laws which force banks to lend money to folks who are unworthy of credit?
    - jeromec 17y ago
      Do you apply your indignation to bankruptcy to all cases? After all, bankruptcy is used strategically in business situations by everyone from General Motors, to airlines, to Donald Trump who usually come back with even larger undertakings, and often with more profits.
    - evgen 17y ago
      Yeah, and let's bring back debtors prisons while we are at it... The general idea of these laws is that 7-10 years is a long-enough window into a persons financial state and habits to determine their current credit-worthiness and limiting this look-back window prevents lenders from subverting the purpose of US bankruptcy laws. There are no laws that force banks to lend money to people, only laws that limit the duration of certain items on your credit record.
    - ghshephard 17y ago
      Prior to 2007, the majority of Bankruptcies in the United States were a result of medical bills. Without socialized medicine, and a leaky private insurance system, getting seriously ill in the United States basically wiped you out financially. This is actually one thing that I've never been able to make people from countries that have socialized medicine believe. The sheer _concept_ of an illness wiping you out financially is typically beyond their comprehension. Most people in the United States without that experience also have a tough time understanding it as well. Suggesting people can never get a reasonable loan because of a bankruptcy, and therefore likely because of an illness, is a little much. You do maintain a running credit record that should accurately reflect your (illness free) creditworthiness. (Disclaimer: I'm a Canadian working Silicon Valley with excellent medical insurance who has never had a hospital stay or need to call on said-insurance (knock-on-wood))
ghshephard 17y ago
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.

32 points by siculars 17y ago

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.

cschneid 17y ago
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.
- wisty 17y ago
  This might not apply for new homes, and those are the ones that are underwater.

petercooper 17y ago

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.

dschobel 17y ago
Yeah, I'm actually surprised you can walk away from a mortgage (a legal contract) without also declaring bankruptcy. Any legal eagles around to explain how this is possible?
- trjordan 17y ago
  As the article noted, mortgage contracts in the US stipulate the penalties for walking away, and those penalties go no further than surrendering the house.
  - ajross 17y ago
    Exactly. And as the house is the collateral for the loan, that makes perfect sense. If the bank was dumb enough to write a loan that they can't get back by selling the collateral, why should the borrower be expected to bear the burden? Frankly, I like the US system; it places the burden of analyis and risk management on the party most able to do that competently.
    - petercooper 17y ago
      Except that's more like a hire purchase agreement than a loan. If you take a bank loan to pay for a car/boat/to fund your startup/whatever and you can't pay it, you're still on the line for the loan if the assets purchased can't match the capital owed. Mortgage loans seem to be treated as a special case in the US.
      - ajross 17y ago
        True, though there are loopholes there too: startups are almost universally corporations or LLCs, generally for the express purpose of insulating the owners from the liabilities of the business. And banks routinely write off uncollectable car loans by selling them to collection agencies; they aren't large enough to bother with enforceable legal action. The homeowner protection laws are the same kind of thing. As a society, we decide that home ownership is worth encouraging (whether that's true or not is an interesting side question), so we implement policy designed to encourage it.

hugh_ 17y ago

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.

ars 17y ago
Federal law limits how long you are allowed to do that. 7 or 10 years I believe.
- hugh_ 17y ago
  Really? Wow. And people are complaining that the crash was caused by under-regulation? How about first removing all the laws which force banks to lend money to folks who are unworthy of credit?
  - jeromec 17y ago
    Do you apply your indignation to bankruptcy to all cases? After all, bankruptcy is used strategically in business situations by everyone from General Motors, to airlines, to Donald Trump who usually come back with even larger undertakings, and often with more profits.
  - evgen 17y ago
    Yeah, and let's bring back debtors prisons while we are at it... The general idea of these laws is that 7-10 years is a long-enough window into a persons financial state and habits to determine their current credit-worthiness and limiting this look-back window prevents lenders from subverting the purpose of US bankruptcy laws. There are no laws that force banks to lend money to people, only laws that limit the duration of certain items on your credit record.
  - ghshephard 17y ago
    Prior to 2007, the majority of Bankruptcies in the United States were a result of medical bills. Without socialized medicine, and a leaky private insurance system, getting seriously ill in the United States basically wiped you out financially. This is actually one thing that I've never been able to make people from countries that have socialized medicine believe. The sheer _concept_ of an illness wiping you out financially is typically beyond their comprehension. Most people in the United States without that experience also have a tough time understanding it as well. Suggesting people can never get a reasonable loan because of a bankruptcy, and therefore likely because of an illness, is a little much. You do maintain a running credit record that should accurately reflect your (illness free) creditworthiness. (Disclaimer: I'm a Canadian working Silicon Valley with excellent medical insurance who has never had a hospital stay or need to call on said-insurance (knock-on-wood))

ghshephard 17y ago

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.