Underwater mortgage : stay or go?

[radhak]

A friend of mine is seriously considering this, and I am interested enough to want some insight of my own. Any comments or info/links welcome.

He bought a single home 3 years ago for $410k with 10% down and 2 mortgages. Outstanding loan now is around $340k. According to zillow.com his house is worth $240k now. So he says if he walks away from it, he takes on a credit hit, but avoids paying for an underwater mortgage that may never come up to par.

He is capable of paying : his job is the same for the past 4 years. Then, his wife was working at almost-minimum wage, and now she doesn't have a job, but that the difference is small that it may not count as an 'inability' to pay.

He says he has two options - (a) rent, or (b) a much more convoluted approach - buy a second home from foreclosure (so it'd cost him at or below fair price), make it his primary residence and claim he cannot bear the burden of the current home (making a valid case for foreclosure).

Apart from the ethics of it, is either of the options viable? Can he foreclose even if able to continue paying? I am guessing he must have access to some cash for downpayment towards that 2nd house, or is he hoping for 2 mortgages again?

whaddya say?

Additional note : this came up when he was checking his options against what is offered by the govt now : his monthly payment is exactly 31% of his income, so he cannot avail any help; the value of the house precludes any refinancing...

[MikeMcCoy]

That could easily backfire. A couple in my subdivision walked away from a house and moved into a house they had as a rental. The mortgage company sold the house for considerably below market and managed to get a lien on the rental house for the difference in value of the forclosed house.

[dbhost]

There is no aside from the ethics of it...

What you are proposing is FRAUD.

From a moral stand point, he owes the money. We've all seen the government stepping in to bail out banks that get the shaft when somebody does what you are talking about. If he has the ability to pay, he should be a real man and honor his obligations.

Sorry, I find it hard as sin to feel sorry for somebody going boo hoo over their lost home value in this economy when what they want to do is a BIG part of what got us here in the first place... So what if his home value went from a drastically overinflated 410K to 240K... That is the risk you take.

I had a friend that walked from a mortgage, but his reasoning was far more serious than financial. The state of Oregon let his violently insane psycho stalker father out of the state mental hospital and was threatening him, his wife, and his kids... No privacy on state real estate records, but there is SOME privacy protection for rentals and other records...

[jackellis]

I think Mike has a point. Your friend could end up losing both houses. Besides, who says his house won't ever be right side up?

Apart from the ethics of it

So he essentially speculates, he's lost the bet and now he wants the rest of us to pay for it? Oh ****, gotta find a bandage for my (figurative) bleeding tongue...

[radhak]

Mike, that is news to me, did not know that was the way it worked; his premise was that 'primary residence' cannot be attached to address foreclosure on non-primary residences.

db, like I said, the ethical aspect is not even under question; this is not even the 'gray' area wherein the borrower is overwhelmed beyond control. But then, when has morality defined anybody's actions ? When I brought it up he looked at me as if I was the weirdo in the room !

[Mr__Bill]

If ethics are not a factor I am surprised he does not just burn it down.

Foreclosure will always be with him and the story will be seen by everyone who looks at his credit history. He has to remember in tight credit it's not just the FICA score that is used but the real history with lenders checking his past. He may never get another mortgage again and the next job interviewer may look at it for an example of his ethics.


Bill

[LinuxRandal]

A friend of mine is seriously considering this, and I am interested enough to want some insight of my own. Any comments or info/links welcome.

He bought a single home 3 years ago for $410k with 10% down and 2 mortgages. Outstanding loan now is around $340k. According to zillow.com his house is worth $240k now. So he says if he walks away from it, he takes on a credit hit, but avoids paying for an underwater mortgage that may never come up to par.

The loan is now, so the second is paid off?

He says he has two options - (a) rent, or (b) a much more convoluted approach - buy a second home from foreclosure (so it'd cost him at or below fair price), make it his primary residence and claim he cannot bear the burden of the current home (making a valid case for foreclosure).

Apart from the ethics of it, is either of the options viable? Can he foreclose even if able to continue paying? I am guessing he must have access to some cash for downpayment towards that 2nd house, or is he hoping for 2 mortgages again?

whaddya say?
.

How is he going to buy a second home? With what money? Downpayment? What bank is going to want to give him a loan? (for the foreclosure)
Was the first house, bought to live in? Rental property is what is considered an investment, a primary residence, is not. It is HIS business, not yours, unless your planning on bailing him out. As your a little late teaching him the responsibility he has with money, toward his family. IF he were able to get another mortgage, and buy the second house, who could say he would be able to keep that one up, or that it would be worth more then he owed on it? That is all speculation, that the property values would go up, and that he would keep his job.

If he has the money to buy a foreclosure, pay it towards the principle on his mortgage, OR towards paying off the second mortgage.

EDIT: BTW, WTH is zillow.com? How do they get their information? Going by a website, on local home values, may not be the most accurate way to do it.

[LCHIEN]

all these people betting with other people's money. Sigh.
He knew the risks, he lost, now he want to get out at the banks expense.
So the Gov't is bailing out the banks. So Basically he wants me to end up paying for it.
Words fail me at this point.

[jackellis]

I stand corrected. It's possible that under Florida law, you cannot be thrown out of your primary residence if you declare bankruptcy and that's the loophole we're discussing.

But then, when has morality defined anybody's actions

I'm not a saint, but I also don't go looking for ways to defraud others.

[os1kne]

all these people betting with other people's money. Sigh.
He knew the risks, he lost, now he want to get out at the banks expense.
So the Gov't is bailing out the banks. So Basically he wants me to end up paying for it.
Words fail me at this point.

+1 Great summary!

[gjat]

What people don't realize is walking away from a house because you're upside down, further reduces the prices of everyone elses's house. They're costing people who are staying in their homes a significant amount of equity. It's not just the banks or a few people who get hurt.

If he walks on his mortgage, the empty house sitting there on foreclosure, will depress the price for anyone else in the neighborhood. For example, what if his neighbor down the street lost his job and had to sell his house and it was worth a little more than he owed. Then your friend walks on his mortgage when he didn't absolutely need to, dumping a cheap house on the market, causing his neighbor to be screwed.

Your friend can pay for the house, he should remain. It was worth $X amount per month when he bought it as far as livablility, etc. That hasn't changed. He's only speculating that it may not be worth what he owes IF he HAD to sell it. How would he like it if the bank came to him during the boom years and said "You owe me $250,000 on the home that has now appreciated $100,000. You put 20% down so 80% of that equity belongs to the bank. Give me my money. Sell your house for market value and we'll share the profit." Now that it's lost money in market value, he wants to sell his house and have the bank absorb all the loss, which ends up being paid for you and I in our taxes or loss in our home values. I don't know him, but I will dislike your friend if he pursues that.

[radhak]

If ethics are not a factor I am surprised he does not just burn it down.

- but I'm sure he's worried about legality... !

So Basically he wants me to end up paying for it.

And me...and he's discussing it with me !

I'm not a saint, but I also don't go looking for ways to defraud others.

Sorry, no offense meant - nowadays I'm a bit extra cynical; that remark was not specifically directed .

The loan is now, so the second is paid off?

No, the sum total of two mortgages is $340k

How is he going to buy a second home? With what money? Downpayment? What bank is going to want to give him a loan? (for the foreclosure)

He claims that he'd buy it before foreclosing on the first, and that given his great credit history he should not have problem.

Was the first house, bought to live in? Rental property is what is considered an investment, a primary residence, is not.

His primary residence; been living there all along.

It is HIS business, not yours, unless your planning on bailing him out. As your a little late teaching him the responsibility he has with money, toward his family. IF he were able to get another mortgage, and buy the second house, who could say he would be able to keep that one up, or that it would be worth more then he owed on it? That is all speculation, that the property values would go up, and that he would keep his job.

Absolutely, nothing to do with me - I am not even attempting to teach him anything, or argue (with him) the merits/demerits of his thoughts or actions. For me this is sorta informational - I am just trying to ascertain if the process of foreclosure had such a big loophole as to allow this sort of shenanigan.

If he has the money to buy a foreclosure, pay it towards the principle on his mortgage, OR towards paying off the second mortgage.

EDIT: BTW, WTH is zillow.com? How do they get their information? Going by a website, on local home values, may not be the most accurate way to do it.

He's not wanting to pay off his loan; he wants to take advantage of the low RE market to buy a house on the cheap, and then, take advantage of the foreclosure process to get rid of his 'mistake' committed 3 years ago.

I feel the former (buy low) is a great idea (if one has the money), the latter (offload a toxic asset) is just cheating. But he says if all big institutions are allowed to, why not him.

Zillow is just indicative, but could be pretty accurate. They do what any appraiser is supposed to do : compare a house with recent sales of other 'similar' houses and estimate the fair price. Anyway, the main discussion does not change even if he gets an estimate from a paid, licensed appraiser. The principle remains the same.

[pelligrini]

I don't know about Florida, but the primary residence thing is called Homestead here. It also takes a full year of ownership in order to make that claim too.

Walking away from an upside down contractural loan if you can pay on 3 for a year is just wrong.

[paintandbodtman]

Redhak

Your friend's lack of accountibility and responsibility for his own bad judgement is a prime example of why we need to bring back "debter's prisons" throw his a$$ behind bars and work the He!! out of him from sunup till sundown instead of passing his debt to the rest of the country to have to pay.


Wayne

[Kristofor]

Is there even the slightest doubt in anyone's mind who is reading this board that any bank or business would hesitate to do exactly what this guy is proposing regardless of the ethics if it’s not actually illegal (it may be, I have no idea)?

People used to stick with their employer in hard times because they knew the goodwill would be reciprocated. Likewise they would keep paying on debt that it was rational to walk away from because it is the “right thing to do” and would likely expect those they do business with (be it a bank, a supplier, or on a personal level their neighbors) to operate the same way.

Those days are gone. This has lead to more “efficient and rational” organizations but at a cost to decency and ethics. I’m still not saying it’s right to walk away from your obligations, but if he does that he’s just playing by the same rules as the major players in the system.

Kristofor (whose house is still worth 20% more than he paid for it in 2002, and thus might be speaking out of his butt on this one…)