If your mortgage was too far "underwater", would you ever consider a "strategic default"? (San Francisco: foreclosures, good credit)

[mateo45]

Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgage than their homes are worth. They can't sell the home they have, and they often can't refi or buy another. Meanwhile, other comparable homes nearby (including repos) are selling for much less.

Deutsche Bank has recently estimated that nearly 50 percent of all residential mortgages in the U.S. will be underwater by 2011, as house prices continue to drop. In some CA counties, like San Joaquin, 67% are "underwater". The continued drop in house prices has also been driving the continued increase in bank repo homes, as borrowers walk away from their underwater mortgages ("strategic defaults"). Once negative equity exceeds 25 percent, or the mortgage balance is $70,000 higher than the current property values, statistically, owners begin to default with the same propensity as investors.

For example, Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, is relinquishing five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market. And in residential markets, economists estimate that it will take about 14 years for California homes to reach 2007 values again.

At what point would you ever consider a "strategic default", aka "giving your house back to the bank"? If so, would that make you any more inclined to consider other options, like Bankruptcy, for dealing with any remaining debt (credit cards, etc.)?

[cdgoldilocks]

The only way I would walk away from my mortgage is if I were to become financially destitute and had no other option. I firmly believe in keeping a good name and good credit for myself, but if I got sick or lost my job and simply couldn't pay my debts, what other choice would I have? I don't have some rich uncle to help me out. And If I were financially destititute, I would do whatever I could do to free myself of debt, such as bankruptcy.

[steelstress]

What cdgoldilocks said. I'd try to hold on to it, but if it ever gets to a point that there is no other option (illness, job loss), I'll leave the keys under mat and pack my car.

[mateo45]

Originally Posted by cdgoldilocks

The only way I would walk away from my mortgage is if I were to become financially destitute and had no other option. I firmly believe in keeping a good name and good credit for myself, but if I got sick or lost my job and simply couldn't pay my debts, what other choice would I have? I don't have some rich uncle to help me out. And If I were financially destititute, I would do whatever I could do to free myself of debt, such as bankruptcy.

Well, even being of the "retired" persuasion myself, am surprised lately how many folks in my age group are virtually "stuck" in their current homes due to "underwater" values, although otherwise they could afford to relocate to another climate, closer to their kids, etc., as they had once planned.

I can think of at least one example where they simply "walked", especially when comparable homes nearby began selling for so much less than the mortgage they were servicing. But they also accumulated a fair amount of credit card debt along the way, and after defaulting and damaging their credit, it wasn't such a big leap to just file for bankruptcy and start over. I have the suspicion this might be a growing pattern, in addition to the recent surge in foreclosure rates, now at a 5-year high (and growing), with Cali high on the list.

[00molavi]

I have heard of people buying a "second" home in the same neighborhood that is larger than the 1st and paid less for it. They move in it and then default on the 1st home. I asked one about their credit, seems like they are okay for another 7 years. These seem to be people that don't have any trouble paying their mortgage, just PO'ed on the price decline and not wanting to be left out of any bail out program.

[Narfcake]

I would be hard pressed to walk away. Since I bought my house, the area has since increased in value (LTV is nearing 50% now) and my PITI is still cheaper than rent.

Even if prices dropped (never say never) and financially it all becomes upside-down (losing all equity gain and downpayment), I can't in good conscience simply walk away. I'm not religious, but I still have morals.

[Narfcake]

Originally Posted by 00molavi

I have heard of people buying a "second" home in the same neighborhood that is larger than the 1st and paid less for it. They move in it and then default on the 1st home.

Those are the strategic defaults - gaming the system for their own personal benefit. On one hand, I can see why they're doing it, though the reality is that it hurts everyone.

One does have to be in the position to do such, however; getting a loan these days means actually qualifying for it, so if they didn't make enough money, such a practice is a moot point.

[NewToCA]

Originally Posted by 00molavi

I have heard of people buying a "second" home in the same neighborhood that is larger than the 1st and paid less for it. They move in it and then default on the 1st home. I asked one about their credit, seems like they are okay for another 7 years. These seem to be people that don't have any trouble paying their mortgage, just PO'ed on the price decline and not wanting to be left out of any bail out program.

I'm seeing some of this up in Sacramento too. They buy a second home at a significantly lower price and have a "rental agreement that covers the mortgage on the home".

Then a few months later they walk away from the first house and just live in the more recent purchase. Having their credit rating ruined is kind of a marginal issue for them, they already made their big purchase.

As far as my own view goes, no, I wouldn't do a strategic default.

[jmw1]

I have 80% equity in my house. But yes I would do it if my circumstances were different.

It's only business. FICO doesn't pay the bills. FICO doesn't matter much if credit is very tight.

The government allowed liar loans and no money down schemes which caused prices to go way up to tulip bulb levels. The banks participated in this as well. And I know a few who have done strategic default and gave them two thumbs up.

[EscapeCalifornia]

Originally Posted by jmw1

I have 80% equity in my house. But yes I would do it if my circumstances were different.

It's only business. FICO doesn't pay the bills. FICO doesn't matter much if credit is very tight.

The government allowed liar loans and no money down schemes which caused prices to go way up to tulip bulb levels. The banks participated in this as well. And I know a few who have done strategic default and gave them two thumbs up.

Yep. The banks took extraordinary risks and were quite pleased to make lots of money off it but the risks caught up with them. I don't feel sorry for the banks, especially considering their role in creating the bubble in the first place. As the old saying goes, nothing personal, just business.