CHESSNOID

There was a recent CNN article about people underwater in their mortgages, their personal situations, and the reasons why they will walk away or stay.  I don’t think it is an honest assessment of what most people will really do.  They seemed to try to sway the reader that it is always better to stay for moral reasons.  Personally, I don’t buy into that argument because of what the government has done and is attempting to do.

First, the government is trying to keep people in homes by punishing investors and force them to reduce principal amounts and lower interest rates and possibly eliminating their mortgage altogether.  That makes no sense to punish investors further on their already losing investments.

Second, the government is using tax payer’s money to bail out the mortgage companies and banks that made the bad loans.  These companies should be allowed to go bankrupt and fail.  It makes no sense to buy worthless assets which is what they are trying to do and re-inflate the bubble that burst.  We have the FDIC ready to take over failed banks.  All that bailout money spent (trillions of dollars) could have instead been funneled into the FDIC for real benefits instead of paying CEO bonuses.

Lastly, why should people who are paying on time not be allowed to receive the same benefits as those who are in default.  That makes no sense what so ever.  The argument that values of houses around them will fall is detrimental is an argument against capitalism.  We had a bubble and now the recession is adjusting the values of those assets to its true worth.  If we are going to punish those who pay on time and reward those who don’t, then why even have a credit reporting system.

Example 1:

My wife, Tara, and I live in Pass Christian, Miss. We began building our `dream home’ in mid-2007 in one of the nicer, new subdivisions on the Coast. Halfway through construction, the house appraised for about $835,000.

In June 2008, we moved in and sought a permanent mortgage on the house. We owed $640,000 on the construction and had a loan-to-value ratio (the amount owed versus the value of the house) of 76.6% until the bank’s re-appraisal came in at $575,000. This put us underwater. We owe $65,000 more than the house is worth. We seriously considered walking away from the house and letting the bank take it.

But doing this is not in my nature. I borrowed the money. I built the house. I owe the money. As long as I have the means to pay it back, I plan to do so. I believe it is sad that people see an easy way out and simply do not lie in the bed they made. I believe I am a classic case for a walk-away, but what’s `right’ about doing that? I could have easily walked away and contributed to the economic mess we are currently in. This would have helped my family out financially but it’s not the right thing to do.

In this case, he says he will stay as long as he can afford it.  Then he says people should lie in the bed they have made.  That type of argument says all those people who can’t afford their house should be foreclosed on.  I don’t know what this person does for a living, but chances are if his business goes down he will be ready to give up this custom built home.  This is the situation for most people.

Example 2:

I have no reason to keep my place whatsoever. I bought my condo five years ago for $290,000 and it’s worth about $130,000 now. I’ve been trying to move up into a single-family home for three years now. Conditions have only gotten worse, so I’ve made plans to walk away.

My credit score is 795. I have very little debt. I can afford the mortgage, but I’m willing to take the hit to move my family into a better home.

I’ve contacted my servicer on multiple occasions – only to get the same response – that I have to miss payments to be considered for an assistance plan. My servicer – IndyMac – was seized by the Federal Deposit Insurance Corp., so you would think they would have more options available.

I’ve also contacted Hope Now. They told me that I have a $400 income surplus and that I should stay in my home or find somebody to rent it. But the average rent for my complex is nowhere close to monthly expenses I pay.

Drug dealers have invaded the complex; I’ve seen drug busts. I’m worried about my credit score if I walk away, but I worry about my son more.

In this example, this person could just miss his payments on purpose and fall behind 3 months, then the company would reward him by reducing his principal and lowering his interest.  That doesn’t make sense, but that is what the company will do.  Is that fair to the borrower who is making his payment on time.  If you are going to lower interest rates and reduce principal balances, then you should do it across the board.

How ironic that the bank is bailed out or taken over by the FDIC which is paid by taxpayer money, and yet when the consumer who gives this business timely payments will not get the same benefits as the consumer who can’t pay on time.

Example 3:

As a first-time homebuyer, I bought a condo in West Los Angeles. I worked hard and put 20% down on the $465,000 price and took a 30-year fixed mortgage. My credit score is 700 plus. I’m a lender’s dream – you would think.

But the value of the condo has dropped 20%, which isn’t terrible. I’m still slightly on the plus-side, supposedly, but there’s no market; no one is buying. Meanwhile, my income – I’m an executive recruiter – has dropped 75%.

The kicker is that banks won’t refinance my loan. My savings are almost exhausted, and I’m considering walking away. It’s interesting that I can’t get a refi from my original lender

I’ve always been a hard worker, paid my way through college and scrimped to save for a downpayment. If I could get a refinance to lower my interest rate – I’m paying 6.25% right now – and extend the term out to 30 years (I have 27 years left on my mortgage), I could save $400 a month.

If I walk away, I would look at it as a business decision. But I also look at it from a responsibility viewpoint, and as long as I can afford my mortgage, I’ll pay it.

This consumer doesn’t know or isn’t aware that all he has to do is stop paying his mortgage for 3 months and then he will qualify for even a lower rate and principal reduction. He asked for it while he was on time and automatically refused. Lending companies want to maximize revenue and don’t want to give it up unless they have to. Again, all he has to do is become late for 3 months and instead of being punished he will be rewarded with even better terms than what he wants. He won’t even have to pay points or fees to modify his loan like he normally would if he formally refinanced!!

Example 4:

My wife and I have a condominium in Denver. I purchased in December 2005. I was a young bachelor with meager income, poor credit and no down payment. I had not intended to purchase at that time, but because the loan qualifications were so minimal and the prospect of rebuilding my credit so attractive, it seemed like a smart decision at the time to pay a high interest rate for two years and then refinance.

I drastically improved my credit – and married my beautiful wife. When the time came to refinance, I did not have enough equity to qualify. The appraisal at the time of purchase was $106,000, and my loan was only for $100,000. Now I would be lucky to get $85,000, so refinancing without bringing $13,000 plus closing costs to the table is unrealistic.

Our family, we have a daughter, has simply outgrown the condo. We can’t lease it without losing hundreds of dollars monthly, and we can’t sell without bringing thousands of dollars to the table. My wife is not on the loan, so if we were to just say “forget it” and walk away, only my credit would be damaged. I’ve spent four years being financially responsible and have excellent credit now, but that’s not what has prevented us from walking away. While it seems like the government is only helping the irresponsible folks who are able to stay in their homes while not paying their mortgage, families like mine are equally affected but our moral standards don’t allow us to not send out that monthly check.

If the current trend continues, we may have to put morals aside in order to do what’s best for our family. So the question is: Do we continue to be responsible and stay in a situation that will take us years to get out of, or just walk away like so many other Americans?

This is no longer a question of morals. They paid on time and again if they decide to just stop paying 3 months, they could get a modification and then actually consider leasing it. At this point, why shouldn’t they be given the same options as those who are delinquent 3 months.  Again, it just doesn’t make sense.

Example 5:

I have been in my house for five years, and I paid $82,000. The house next door just sold at auction. It was listed for $55,000 and sold for $51,000. The houses selling here in South Dallas are all foreclosures.

I’m sure I’m underwater, but I would never walk away due to the damage that would do to my credit score. I will be looking at whether I can refinance under the president’s plan. I would like to free up more money each month.

I have a first mortgage, a 30-year fixed at 6.5% and a second; the total payment is $745 a month. I also have credit card debt and a car loan. If I could refi down to a 5% or so, it would give me more money to spend.

He won’t be able to refinance unless his loan is 70-80% of that value ($51,000). In this case, that would be approximately $40,000. Since he is underwater, he simply won’t qualify. However, he doesn’t need to walk away, just miss 3 payments. Again, why don’t they just give everyone the same deal.

Seriously, it doesn’t make sense to pick and choose who gets the benefit of the taxpayer sponsored bailouts. To be fair, it should be applied uniformly and include everyone regardless if they pay on time. Just so you know, I don’t believe or support the bailouts and stimulus packages, considering they are financed with FEDERAL DEBT ( which means we are financing the bailouts).