I was looking through my Blog community and this article by Jon Maddux and the debate that is looming for many of us is simple poetic. You need to read this and WATCH the video attached. It brings to light a real moral and dilemma of historic proportions.
Here is the link to the HousingStorm article: Click here
The issue that faces many of us, myself included, is this. If I let my house go now, since I am in excess of 300K undervalue for what I paid in 2005. Then I recover and let my credit recover after the foreclosure or maybe a deed in-lieu, then in approximately 2 years +/- I could rebuy the same property if not a better property for less than what my current property would be worth, through appreciation, in the same period of time given the estimate recovery time.
So here is the question. What is really going to happen? Only time will tell. Do you have an opinion, tell me what you think. Is it a moral question or a shrewd business decision? You are the only one that can answer the question for yourself.
Chris Curtis
January 23rd, 2010 on 5:46 pm
True Story: We have friends that recently moved back to Oceanside California. Their timeline for moving is similar to ours. The purchased a house in the early 2000s and “flipped” it when they moved here in 2004 or 2005. They banked the profit and moved into an ocean front home on base in Kailua. Last year, summer 2009, they moved back to Oceanside and looked to buy in the same neighborhood. Well, they were actually able to buy their old house, which they loved, for approximately the same price they originally paid the first time!
Therefore, I see it as a strategic business decision. If we can celebrate the person who is able to flip the house for a big profit, why not celebrate the person who is able to sell the house and not have to pay the total loss? And isn’t celebrating the big gains the thing that led us down this path in the first place?
We bought overvalued homes that didn’t follow the fundamental market rules of the right price and the right time, and the truisms of real estate “location, location, location” because we were pressured into home ownership by society. Oh yeah, and the only reason anybody could “afford” an overvalued home was because the lending institutions were giving out ARMs and interest-only loans to “owners”.
I have been wondering the same thing recently. If we were able to sell our home in Florida for a loss, we would pay at most 25% of the amount we are short in taxes. However, why are we continuing to pay on a property that has lost it’s value? We could sell it and turn around and buy something else for less in the same area, but get the same amount in rent.
The moral decision for me is that we are smart people. We knew what we were signing and we knew we had to accept the market ups and downs. If we sold the house, we should come up with the money to cover the entire loss. But if the bank accepts a short sale, then we pay the difference that we owe in taxes and move on.
So Chris, I ask you: Is your house really worth the extra $1800 a month (assuming $300K at 6%) you are paying on it? And is any of that money going to the principle?
January 23rd, 2010 on 6:36 pm
Well sis, that is a good question. My difference isn’t all loss. Yes I lost my down payment, plus a bunch more. The question for me is that I love my house and where it is. I need a roof over my head, as does my family of 5. So, for me, I agree, I knew what I was getting into. What I am concerned about is the required refi or recast that I will experience in 2011. That is when I will have to roll the dice. Hopefully rates will still be low and I can pay some of the spread. I plan on owning the house through the recovery and for me it is a integrity and ethical issue. I am doing what I said I would do, pay my mortgage.
What is interesting to think about is the risk seems to be a bit like insurance and as a consumer, we always seem to lose.
It is what it is. The goal is to take measures to insulate yourself from risk, which is never easy.
Yes, to me the house is worth the extra amount I am paying for it. To me, you need to take the good with the bad. Over time and as always, real estate is intended to be a long term, non-liquid investment. We have fooled ourselves into thinking that 10+% year over year appreciation is “normal”.
Thanks for the comment~
January 23rd, 2010 on 7:23 pm
Thanks for listening to me rant. Your question was almost rhetorical because we both know that neither one of us would do something that we consider the slightest bit unethical.
The reasons you listed for keeping your current house are the right reasons for buying a home in the first place: you need a roof over your head and you love your neighborhood, community, and the house itself. If you think you want to stay there for the next 15 years, stay and enjoy. I
As you know, you can never “time” the market if you consider selling. While getting out of an inflated mortgage might be good now, by the time you could buy again the market conditions may have changed and you may end up in the exact same situation.
The reason we purchased our home in Florida was to have a place to move into if Greg got stationed there again and to have a place to sell when he retires and we move else where. However, if we do move back there, it would be at least 6 years from now before we sell and MAYBE our house value will be back to where it was when we purchased it.
As you know, now is a good time to buy while the interest rates and home prices are low. Maybe buying a slightly smaller rental house in a great neighborhood would be a good investment for you and Cathy. It could be your “retirement home” when you are ready to downsize in 15 or 20 years. Rent it out the entire time and have the mortgage payed off by the time you move into it!
January 24th, 2010 on 2:40 pm
Paying a mortgage is not an ethical issue. It is business. You made a contract with the bank that if you made the payment in a timely manner the bank will loan you enough money to buy the house. If you fail to pay the mortgage, the bank takes your house. There is no clause that says it is your moral obligation to pay. It is a contract that clearly delineates what happens for payment and non-payment.
Morgan Stanley just walked away from five commercial properties in San Fran. It wasn’t because they couldn’t afford the mortgage. The properties lost so much value they no longer saw the need to keep the properties. So why do the banks try to make us feel morally bankrupt if we fail to pay our mortgage? Didn’t they violate their ethical duty when they incorrectly appraised the property initially? if that wasn’t unethical, rather it was poor judgement, shouldn’t they suffer a portion of the pain for that misjudgement? With the silly ethical argument, the bank makes a mistake and loses nothing.
Homeowners not only are down in the equity in the homes. They also are paying interest on the equity that no longer exists. So it is really costing homeowners double since most amortization schedules effectively double the cost of the home.
If you look at the decision from a business perspective, you will make the better decision.
January 24th, 2010 on 3:31 pm
Kirk is dead on. I am tired of people in this industry talking about moral and ethical obligations. I am sure with just a little effort I can find quotes from 2006 and on where these same agents have argued why people should buy, even though they have no economic forecasting skills.
“As you know, now is a good time to buy while the interest rates and home prices are low.”
You dont know how much further prices will fall and this isnt the bottom.
January 24th, 2010 on 10:41 pm
The banks ruin people’s lives. We are a nation of debt. What would the real values of homes be if we didn’t finance them? Maybe $15,000 On paper the majority of Americans are bankrupt. It will be a slow and long decline for the U.S.
February 3rd, 2010 on 11:07 am
Marissa said,”..Rent it out the entire time and have the mortgage payed off by the time you move into it!.”
That sounds so easy. I own 3 rentals and let me tell you in the last 5 years I had:
1 Eviction. Lost 2 months rent. Repaired damages, repaint.
1 late paying tenant – hassle and cash flow problems.
4 HVAC major repairs.
2 H2O heater replacement, 1 repair.
1 Exterior repaint.
1 Gutter replacement
Numerous gutter cleaning
Numerous sprinkler repairs
2 Dishwasher replacement
Numerous toilet/faucet/fan/lock repairs
Numerous fence/gate repairs
I did all the work myself, I am retired. If I hired people to do the work I would be broke by now. Oh I bought these house before year 2000. Meanwhile costs go up, rent go down.
February 4th, 2010 on 5:54 pm
Kirk and Kirby, the fact that you two apparently believe that a mortgage lacks moral obligation is single-handedly the most ludicrous thing I have ever heard. I read blogs and discussion forums online daily but have never felt compelled enough to respond until today. Your attitudes, like so many others, are going to lead this nation into a much darker place than it is currently in. Just because Morgan Stanley did it, doesn’t mean that it is right. I’m going to give my little story so you two can tell me how stupid I am. I’m sure you will.
I bought a home in 2002 when I was 21 for $123,000 at 6.5% interest with zero down on a 30 year fixed mortgage. I was single, barely out of school, and was raised by parents who lived on financing. It really didn’t seem like a bad move at the time. Five years later my lender took posession of my home. I tried my hand at running and owning a business that simply didn’t work. It took almost two years from the time I was late on my first house payment, to the eventual transfer of ownership. In that time I tried with every fiber of my being to revive my loan. I would work extra hours, get caught up and get slapped with(not exaggerating here) $450 dollar late fees. When it was all said and done I was behind 7 house payments over a 22 month period. I lived in my home for nearly five years. My house payment was $1000. I wrote $53,000 in checks to my lender. To make my loan current at the time of sale I would have needed to pay $137,000. That isn’t with a re-fi to suck equity out and buy a car a take a trip. I didn’t walk away at the first sign of trouble, I kept trying. My pride wouldn’t let me give up. If you have questions about pride and how it works feel free to post a reply. I’ll do the best I can to help. I also do not feel that I was treated all that unfairly. The morality of my mortgage and how the foreclosure was carried out, I think, a little questionable. But was laid out before me in documents that I signed. The fault was mine for making the choices that I made. I am embarrased and rarely talk about it. This is the correct way to do it guys. Just handing over the keys “IS” immoral. If more people were as passionate about their pride, 30% loss in value or not, maybe this country wouldn’t be in the state that it is.