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September 18th, 2010

New research: Majority says “walking away” still unacceptable

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As the economic crisis wages on, I’m curious to know if your thoughts on strategic defaults have changed. Late last year we divided the walking away argument into two categories: emotion and logic. While some borrowers felt as though they had a moral obligation to keep paying their mortgage, others felt as though the decision to walk away is a business decision, nothing else.

The results of a recent survey from the Pew Research Center reveal a similar divide in sentiment. While the majority surveyed still feel that it’s “unacceptable” to walk away, 36% said it was acceptable to walk away, “at least under certain circumstances”:

Nearly six-in-ten (59%) believe it is wrong for homeowners to deliberately stop paying their mortgages and surrender their homes to the mortgage lender, according to the survey of 2,967 adults conducted May 11-31.

But two-in-ten (19%) say it’s acceptable and an additional 17% volunteer that it depends on the circumstances.

Are you considering walking away from your mortgage? If so, I wrote an article a little while back titled “The Pros and Cons of Walking Away from your Mortgage.” The article looks at 10 different considerations for walking away — five for and five against.

Two reasons borrowers walk away

You’re underwater: The number one reason borrowers strategically default on their mortgage is because they are underwater. Given the substantial drop in home prices over the last few years, an estimated 25% of all homeowners have negative equity in their homes. According to a recent Federal Reserve study, “the median borrower does not strategically default until equity falls to -62 percent of their home’s value” (e.g. your home is worth $124,000 and the mortgage outstanding is $200,000). Given how far some borrowers’ equity has fallen, the underwater problem will be with us for years to come. Recently HSH.com ran some numbers and determined that a significant portion of borrowers wouldn’t even reach 0% equity until 2015.

The same home, or more, for less: While many homeowners may struggle with the moral dilemma of not paying their debt, walking away from your mortgage is a business decision. Whether you decide to walk away from your mortgage or refinance your mortgage, the ultimate goal is to significantly change your financial situation. According to the Wall Street Journal, some borrowers have successfully been able to walk away from underwater homes and rent similar properties in the same area for half the cost of their mortgage. The decision to walk away is all that much easier when you can keep your surroundings, lifestyles and neighborhoods intact and find a house that meets all of your needs for far less money each month.

Two reasons borrowers shouldn’t walk away

You’ll kill your credit: Walking away from your mortgage is one of the quickest and easiest ways to kill your credit score. Money Magazine says a borrower with a credit score of 780 who decides to walk away will see their score drop by up to 150 points. Given the widespread use of credit scores today, a drop in your credit score could prevent you from getting a new job, renting an apartment and will increase your interest costs now and well into the future.

You can’t own again for years: Strategic or not, if you default on your mortgage it will take years before you can get another mortgage. Foreclosed borrowers can expect to wait anywhere between two and five years before they are eligible to get a new mortgage. Borrowers who voluntarily walk away may have to wait twice as long. Fannie Mae recently announced their plans to lock strategic defaulters out of new loans for seven years! However, in an attempt to encourage borrowers to work with their lenders to produce less-costly outcomes, as of July 1, 2010, Fannie Mae cut in half the amount of time short sellers have to wait to become owners again. Borrowers who sell their homes via a short sale will only have to wait two years.

Click here to continue reading “The [5] Pros and [5] Cons of Walking Away from your Mortgage.”

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2 Responses to “New research: Majority says “walking away” still unacceptable”

  1. brid the bellingham wa homes guy Says: September 18th, 2010 at 10:50 pm

    Hey I’ve just entered the real estate arena in the past few months and I have a friend who’s considering walking away from his mortgage. Most of his questions were answered in this post as well as the 5 pros and Cons of Walking Away from your mortgage. One of the questions he had as well was if the gov could garner wages? Can that happen? Thanks

    Briddick

  2. Tim Manni Says: September 21st, 2010 at 9:04 am

    Briddick,

    Thanks for commenting and I’m glad you found our article helpful. If your friend friend lives in a recourse state then his/her lender can go after their other assets to help pay off the loan. The IRS doesn’t look fondly upon those who walk away. They see it as added income.

    Let me know if you have any other questions, and thanks again for commenting,
    Tim

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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