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February 01, 2010

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I completely agree that family comes first and would never starve my family so that I can honor my promises.

In the above example that began this discussion, the family above is not starving, they make sufficient income to pay their mortgage. It was suggested simply because the house has declined in value that they should simply walk away from their obligation, even stay in the house for a year without making payments until the foreclosure process has been completed. That to me is wrong. By the numbers it might be the best thing for them and they would not be breaking the law. But just because it's legal, doesn't make it right. How would someone in this situation be able to teach their children good values, other than when things don't go your way, exit stage right.

About 2 years ago, I had to take on a second job to help make ends meet. It was a part-time job stocking a supermarket during the graveyard shift on the weekends. I did this because my primary job was commissioned based and when the economy turned in 2008, so did my pay. To the tune of about 60% cut. Unfortunately, I'm not quite in FMF position and needed most of the income. My wife is a SAHM with our daughter who is now about 27 months old. I was hoping things would turn around, but my emergency fund quickly evaporated and I needed to bring money in the door. I have since found a new salaried job and have been there a little over a year now. How I was able to get a new full-time job in December 2008 still surprises me. I am comfortable with the salary I am making now and quit the second job early in 2009. Much to the joy of my family. It would have been much easier during that time to simply stop paying my mortgage and walk away. I choose a different way. I know many people won't.

I will never let my family go hungry to pay a mortgage but I will never let it get that bad before I do something about it. Since I am aware of my financial situation, I will take necessary steps to provide for my family first and try to honor my obligations.

I know people will not agree with me and that's ok. Because of the decisions I make, I might not end up with the largest net worth that I possibly could during my lifetime and that too, is ok with me.

Sorry for the long rant, couldn't figure out a way to make it short.

Before you walk away, take a look at this recent article on CNN:

http://money.cnn.com/2010/02/03/real_estate/foreclosure_deficiency_judgement/?hpt=P1

Just something to consider...

Just found a very timely article on the money.com website in which lenders may come after you when you walk away or have foreclosure.

http://money.cnn.com/2010/02/03/real_estate/foreclosure_deficiency_judgement/index.htm


Obviously, state laws vary.


@Troy
I am glad there's at least one person out there that agrees with me. It would be interesting to hear more about your background, you seem to be a lot more knowledgable about financial matters than many. You also understand "Risk", not too many people do these days. The principal reason that I am where I am today is that I do a risk assessment on everything involving money before making a decision. The reason that the financial software that I wrote back in the early 90's was so popular (and successful) with the users of the proprietary mutual fund database that I subscribe to was that I programmed in statistical quantities that measure risk. When you use "Risk analysis" in selecting which funds to buy you can do two or three times better than people that take the easy way out and invest in a broad market index. Incidentally my software is no longer for sale since it runs on MS-DOS.

The crux of the matter under discussion is dependent upon whether you live in one of the 14 states that ONLY use Trust Deeds. There are also 15 other states that use both Trust Deeds and Mortgages. Trust Deeds are non recourse loans - a third party, the Trustee (a Title Company) owns title to the property on behalf of the lender.
In a Trust Deed state, if the lender is reckless and greedy enough to loan someone $259,000 to a borrower that has no equity in the collateral he is the one taking the huge risk, not the borrower. This mortgage also adjusts this year, another risk. If the borrower instead has a mortgage things get a lot more complicated since a Judicial Foreclosure is needed to break the contract. Then things are in the hands of the legal system with judges and attorneys involved and you need legal advice before ending your contract.

I also thoroughly agree with you about the Marriage Contract. I am personally disgusted with the decline in morals since the advent of the birth control pill fifty years ago. At the age of 75 I feel fortunate that I grew up in a much earlier era and in a country with a very homogeneous population - it made picking a lifelong partner much more certain. In my childhood I never heard the word "Divorce" mentioned, nobody in our family had ever been divorced and I didn't know anyone that had been divorced. We have been happily married for 53 years and I feel fortunate that our love has grown stronger with time.
One of my daughters has been divorced twice (almost three times) and the other daughter once. My son is still married to the same woman. It bothers me but it's a fact of life these days that a marriage contract is a worthless piece of paper. A divorce is the quickest way I know of to instantly lose 50% of your net worth and potentially ruin your financial future and especially your retirement.

Troy,
When did I say that people should starve before walking away from their mortgage?! That's the second time that was brought up. I simply think people should live within their means and not waste everyone's time and resources getting into a contract that they have a good chance of breaking.

I do listen to Old Limey. Financially, he's the bomb. I was just debating that personal accountability means something even in the financial aspects of our lives.

Not that I am advising anyone to walk away from their mortgage, but those thinking of it as a possible desperate option should know all the facts. I just read an article on CNN about unforseen ramifications from walking away from a mortgage. You may still be liable for the amount owed if it the home goes into foreclosure or short sale. Article is at:

http://money.cnn.com/2010/02/03/real_estate/foreclosure_deficiency_judgement/index.htm?hpt=Sbin

Excerpts:
Former homeowners may still be on the hook if there's a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these "deficiency judgments" are ticking time bombs that can explode years after borrowers lose their homes.

It can even happen to people who got their bank to approve them selling their home for less than it is worth.

Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there's a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could haunt them.

"Once they have a judgment, they can pursue you anywhere," said Richard Zaretsky, a board-certified real estate attorney in West Palm Beach, Fla. "They can ask for financial records, have your wages garnished and, if you fail to respond, a judge can put you in jail."

In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms.

Some states, such as California, are "non-recourse" and don't allow deficiency judgments. But, even there, if the if the original loan was refinanced, some or all of it may be subject to claims.

Check the foreclosure rate in your state
Deficiency judgments on short sales and deeds-in-lieu can happen in many more places. In these cases, extinguishing the debt is often a matter of negotiating with the bank.

But even when lenders are willing, many borrowers may not be aware that they have to ask for release. So, if you are pursuing a short sale, be sure your attorney asks the bank to release you from any further obligation.

"People shouldn't have a false sense of security that a deficiency judgment may not be later sought," Zaretsky said.

He expects many will be filed over the next few years, based on the fact that banks have sold many of these accounts to collection agencies and other third parties, at discount.

"The parties who bought those notes wouldn't have paid money for them unless they had the intention of acting," Zaretsky said.

Ticking time bomb
What can be scary is that the judgments don't have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.

Lenders may release property liens in order to facilitate short sales without releasing borrowers from their obligations to pay under the promissory notes. The secured debt can convert to an unsecured one after the sale.

Lenders are also very inconsistent. One of Zaretsky's short-sale clients was ready, willing and able to pay, but the bank did not even ask; another lender always reserves the right to pursue the deficiency.

Strategic defaults
Sometimes lenders go after borrowers walking away from their homes if they have other assets, according to Florida real estate attorney Larry Tolchinsky.

"Banks are pulling credit reports to see if it's a strategic default," he said. "If you're behind on all your other payments, you're okay. But if you're not, they'll come after you."

Old Limey, you didn't care that your son helped defraud the system with a corrupt bank rep, but you do care who adults sleep with and if they stay married?

Crystal, I was thinking the same thing.

Also, the birth control pill didn't lead to a higher divorce rate. Women having equal rights and the ability to make their own money led to a higher divorce rate. It's tough to get out of a bad marriage when society doesn't support it.

This is coming from a happily married woman who will continue to work to stay that way, but your judgements surprised me. Even my grandparents don't care what other people do in their relationships...they wish them the best and concentrate on their own problems.

Interesting article on CNN.Money today about short sales, foreclosures and obligations in a mortgage.

In many states, if the bank forecloses and you lose the home, they can still come after you. They can file for a judgement up to five years afterwards, and can attempt to collect for 20 years. Apparently, their strategy is to wait until you have got back on your feet financially and then start proceedings. Also - some lenders look specifically for "strategic default", i.e., people who choose not to pay versus those who honestly cannot pay.

And even in some so-called non-recourse states, they can come after you if you ever refinanced.

This applies even in the case of a short sale, where the bank agrees to let you sell for less and hand over the title. I guess there will be some nasty surprises down the road for some people who thought their bank let them off the hook when they sold for less than they owed.

@Crystal
I was not happy when I later learned that the realtor entered phony income on the loan application that my son's wife signed but they wanted the house badly and there was no other way to get it. I helped a little with the down payment but that was all. I also wasn't happy when several years after the fact my son disclosed that he had filed for bankruptcy because of credit card debt. Now I manage all of their money and they are great savers.

My two daughters were little angels but he was one of those kids that was very wild in his youth. At one time he formed his own Heavy Metal Rock & Roll band and they played the clubs on Sunset Strip in L.A. hoping that one of their records would be a big hit but it never was. He was quite a sight in those days with jet black hair down over his shoulders, thigh length, high heel, black boots with metal studs, a Michael Jackson style uniform also covered in metal studs and lots of makeup. I never saw him perform, just photos. When he left home, he left behind boxes of interesting letters from all the Groupies that admired him.
Today he is very square, highly paid, and is the top salesman in the USA for a German company that makes very specialized Mass Spectrometers used in medical labs - he never did go to college, he was always more interested in cutting school to go Surfing and playing Baseball and Football. After leaving school it was Sky Diving, Racing powerful boats and finally powerful cars. I could go on about his three Pit Bulls and the wild women in his life (I met a couple of them) but that's another story. My early life was a total contrast I used to be a complete Nerd.

Limey:

My background is varied just like many others.

When younger, if it could be screwed up I was involved somehow. Always looking for a way to beat the system.

Earned multiple degrees, including an MBA, but still the light wasn't on. I saw finance just like everyone else.

Then an opportunity 15 years ago presented itself and I jumped. Fresh out of Grad school I started my own Financial Services company with nothing and little knowledge of the business I was entering. I didn't even have a bed. I literally slept on the floor...for nearly a year.

I had nothing to lose...It had mostly already been lost the previous 5 years prior. I didn't even have one nickle to rub.

15 years later it is a multi million dollar statewide financial services enterprise. And I and my family have very comfortable beds.

Dealing with thousands of individuals finances... both their assets and liabilities, investmens and loans... allows for unique insight into general behavioral trends. And what I have found has helped shape my perspective. The readers on these blogs are an extremely small minority.

Most people know very little about finance, and don't want to. Most are drowning in debt, and have little in the form of liquid cash. This is true for even high six figure earners.

A vast majority of people have little savings.

And very few are concerned with actually getting out of debt. They live through their credit cards and have zero understanding of risk.

They don't change their behavior yet are surprised when their situation remains unchanged as well.

Those that are in control pay attention totheir finances. They understand risk. They don't borrow money often, and they are liquid. The live with purpose and are deliberate.

And they also understand that finances and emotion rarely mix.

They understand that only cash in the bank is like cash in the bank. That home equity is phantom money and that calculated risks are the only risks to explore.

They understand that transferring risk or liability to themselves needlessly is foolish. That there is a difference between paying down and paying off a debt.

And over time it rubbed off. I admire self made people, regardless of how made they are. People that take ownership of their situation, and do something about lifes speedbumps.

Most importantly I learned the basic money principles. Understand and control your money and investments. Stay out of debt. Take risk into account. And KEEP THINGS SIMPLE. Financially complicated instruments generally only benefits the person selling it, not you.

I think the comparison to marriage contract is an interesting one.

In the right situation I think it makes sense to default on a mortgage. In the right situation I think it makes sense to get a divorce.

Theres arguments againts defaulting on a mortgage: What about the impact on your neightors? WHat about the promise you made to the bank? What about the imapct to American society? etc.

THeres plenty of arguments made against divorce: What about the impact on the children? What about the promise you made when you got married? What about the impact that divorce has on American society? etc.

Today we generally seem to view divorce as acceptable. We seem to be more judgemental about someone walking away from a mortgage than someone walking away from a marriage.

50 years ago if you were getting a divorce you would get a much different reaction by society. Maybe in 50 years we'll view mortgage defaults differently.

It makes more financial sense to pay down a mortgage. The "risk" associated with paying down the loan can be lessened by having a solid emergency fund - liquid assets. If you have a thick cushion, paying down a mortgage saves you interest.

It's not that I don't understand risk, I just choose to manage it and take advantage of savings when I can.

Troy:
I recognized right away that you were not the typical poster and that you had a lot of firsthand knowledge about investing. I was immersed in producing software for analyzing solid propellant missiles for most of my working career but retirement turned out to be a new adventure for me. I soon found out that the mathematics involved in market analysis was child's play after complicated problems in structural dynamics, thermodynamics and aerodynamics, and I was off and running, building my own financial software. After two years of non stop programming with scarcely time off to eat my wife came into my office one day with a hammer in her hand. She was frustrated with being ignored all the time and was ready to smash my computer. The ultimatum was "Stop giving it away in return for small gifts - finish it and sell it, or the computer goes!".

I always had placed a counter in each version of my software so that it would die on a certain date, so it was an easy matter to e-mail all of my customers that the days of free software were almost over and that as of a certain date they would need to buy the final version. I finished the development, had a 4 figure number of 300 page manuals printed and just about every user bought a copy, including many financial advisors. Actually my users helped me design the software because they knew what they wanted - a few of the smartest investors became beta testers and gave me great ideas (they got free copies).

My wife and I were then quite busy every day for several years stuffing manuals and CDs into packages, mailing them not just within the USA but to people in many other countries as well, and of course the best part, depositing checks. They all got to know us at the P.O. as we brought in boxes and boxes of packages every day until the orders eventually dwindled.

Interestingly you quoted the CREDO that my software was based upon and the way I have always tackled problems, I call it the KISS principle - Keep It Simple Stupid - it works.

Crystal & Mike S,

Like it or not we are all paying for and will be paying for the bailout of the banks. Why should the person also have to be stuck in an underwater mortgage with rising payments? It makes perfect sense to default in this situation. I don't understand the personal ethical dilemna here.

For me it's like paying your taxes. I would like to be legally compliant in paying my taxes but pay the minimum amount possible. That seems to be the socially acceptable statement to make as well. From your argument it would be like saying by paying more taxes you would be more ethical than somebody who looks for every legal loophole and deduction. I don't see that to be the case at all.

The law is the law and if you comply to this with taxes or in contracts then I don't see how the issue of personal ethics comes into play.

-Mike

Old Limey --

I'm always smiling. ;-)

Mike Hunt-
The difference in this situation is that the person has the ability to pay. According to the post, they take home $7100 a month. That to me is where the problem lies. Simply because someone else says the value of their house is now $200K and not the $325K they thought it was worth when they bought it, they should walk away from their obligations? That's not right. I was raised that if I made a promise to do something and I can do it, to fulfill that promise. They have the ability to pay, but some are advising them to simply walk away.

Just because something is legal does not make it right. If people simply followed the law in this country, I believe we all would be much worse off.

I like Jim's points above about how the foreclosure affects more than just the individual homeowner, but also the neighbors. Their values have also now declined. Should they walk away too if they are underwater? It's financially the best option right?

MikeS:
"Just because something is legal does not make it right. If people simply followed the law in this country, I believe we all would be much worse off."

Excuse me, that's baloney.
This whole country would be FAR, FAR better off if all people in the USA followed the law.
Don't you ever read the newspapers and the accounts of the mayhem created by drunken drivers, drug users, and the wanton use of guns and knives killing people in some of our worst neighborhoods.

I realize foreclosed properties can be a huge blight on neigborhoods but how can you blame people for doing legally what's best for them. Survival is man's strongest emotion, and in the case of under water mortgages many have to do what's best for them regardless of their ability to keep making payments to the bank. If it wasn't for that great American President, FDR, who created FDIC insurance, what would bank depositors, like every single one of us, be getting when their bank failed? ZERO!

Mike S,

As long as the gov't is trying frantically to prop up home prices as a priority (as Pres. Obama said in the SOTU address) then yes, I think everyone should strategically default and allow the market to properly correct.

People are still paying too much for houses when measured against income to value levels, and mortgage to rental levels. This is particularly true in the Coastal markets, I realize that in some parts of the mid-West and Texas homes are actually affordable and am not referring to these areas. Within the expensive areas, and in typical Gov't speak, the 'Making homes affordable program' tries to mimic sub-prime techniques of very little money down and tax credit incentives to get people to stretch and over leverage to buy a house. Something that will place undue hardship on them if they lose a job or interest rates go up.

Besides income to price levels, I think that people shouldn't be able to own a home unless they put 20-30% down. That way there would be very little incentive to walk away as they will lose substantial equity. Of course implementing a sensible rule such as this would crash the market so will not be considered by the FHA and that alone tells me the market is overvalued. The answer to overleverage and excess debt is not doubling down and taking on more debt... I wish I could get that message through to Washington! At least people on this site get the message.

Indeed one could argue that the people who walk away are the ones who can help bring the market back into balance by their collective actions.

I do realize that more than 50% of Americans are home owners and do understand the compound problem of falling home prices. One of the big mistakes the administration made with the federal stimulus program was they told states that they need to freeze spending at 2005 levels to be eligible for federal stimulus. Of course 2005 was the peak of the property bubble and caused record inflows from property tax and by maintaining that level of spending the states are ensuring their way into bankruptcy. There is another story here but the high asset prices of the housing market are a contributor to this mess.

I think house prices need to come down to become truly affordable and a mechanism to do that is to strategically default. People who have a lot of equity in their homes or who fully own it will see the 'value' of their property go down but if you are really living in your place for shelter reasons then it doesn't matter so much. And even if prices go down assuming this happens uniformly then one can move into a similar level house or trade up without any hardship.

In the situation listed here the person has the ability to pay today but foresess hardship as rates reset and realizes that housing will consume more of the budget. If this individual doesn't mind a bad credit score, is able to rent, and can consult an attorney to avoid a deficiency judgement the best option may be to default and allow the house to go back to the bank.

The promise made was to pay the mortgage or give the house back. It's very different than the early termination of a car lease someone (maybe Crystal) mentioned earlier. So there is no break in the promise.

I only gave the poster this advice from the standpoint of ensuring he has enough financial margin in the future, and for him to maximize his savings in the medium and long term.

Do you think house prices need to stay high for the benefit of the community or would it be better for prices to come down and become more affordable to a larger pool of renters who are considering to buy a home? I've given a lot of thought to my argument so would welcome any contrary opinions or points, as I'm open minded about changing my perspective.

-Mike

Mike Hunt:
Home prices are just what a willing buyer is prepared to pay and what a willing seller is prepared to take. Here in Silicon Valley, it was the many benefits of synergy that kept attracting more and more hi-tech companies to set up shop, thereby attracting more and more workers. Finally all of the available land for building homes started to get used up so, as in any auction system, the prices just kept going up. Nice homes coming on the market would result in a bidding war between potential buyers.
My home sits on 1/3 acre in the heart of the valley on what used to be an orchard - the orchards have all disappeared. My home is 2400 sq.ft., 4br, 3ba, single story and appraised at $1.1M, the value is almost entirely in the land. It is not uncommon for someone to buy a home like mine, tear it down completely and build a much nicer and more modern one. Currently there are no homes for sale in our development and very few in our city.

We have lived in our home since 1977 and it really has taken all this time to get it exactly as we like it inside and out, particularly a Japanese style pond, waterfall, and garden and numerous interior improvements. We intend staying in it until we are carried out of it one day so its value means nothing at all - it is a just a nice, safe, comfortable, convenient, very quiet, place to live.

To answer your question - low home values wouldn't bother me financially but they bother the city and county a lot because property tax revenues are a function of home prices. City and County tax revenues support local Police, Fire, Libraries, Parks, Community Colleges, Streets, Transit Systems, and Utilities etc. so I do not want to see home values go down for that reason. Locals schools receive most of their funding from the state and the state receive income from sales and income taxes. Just this week there was a newspaper article bemoaning the loss of revenue brought about by the county assessor lowering the property taxes on homes purchased since prices peaked in 2006.

Old Limey - Do you honestly think that if all people did was only what the law said everything would be fine? Then how does your comment about the declining moral values have any relevance. All those people are following the law, so everything should be ok.

Mike Hunt - I completely agree that there are some people that shouldn't be in homes and programs that perpetuate keeping them in them are folly. It is throwing good money after bad, but it makes for good speeches and politics. I do not agree with much that are government is currently doing and wished anyone (people or companies) bear the responsibility for their own actions.

In this above example, let's deal with real numbers:

Primary Mortgage - The current payment on this is
$1,376. Future payment: Assuming the LIBOR is 2% (currently 1-Year is 0.84) would be $1403.
Secondary mortgage is fixed, so the payment will be unchanged. If it's a 30-yr amortization, the payment is $470 a month.
I do not see the hardship these people are facing. Their payments would change by $25 a month. If they can't find $25 a month then they have bigger issues. The option to walk away simply seems to be brought up because the house isn't worth $325K anymore because someone else says so.

My ethical dilema with this is someone loaned me $325K and I agreed to pay it back. This is an extremely simplistic view, I know. Why should I now walk away simply because the collateral I pledged to back this loan has declined in value. I said I would pay back $325K, I did not condition the payback on the value of the underlying asset.

MikeS
There are a whole host of morality issues these days particularly Abortion and Gay & Lesbian marriage just to pick a couple. I believe that everyone is entitled to their viewpoint and is free to use their freedom of speech to protest or support what they don't believe in. However they don't have the freedom to break a law just because they don't approve of another person's behavior, beliefs, or morality. Thus I have no problems whatsoever with anyone doing anything that is legal, whether I like it or whether it disgusts me. As a citizen of the USA I feel obligated to obey all laws but my inner thoughts, feelings, and writings change nothing unless I feel so strongly that I decide that I want to work towards getting it changed.

We have plenty of laws at all levels that have been passed for the benefit of society as a whole and we are passing new ones all the time. If a legal contract gives a person the legal right to give the collateral back to the lender and terminate the contract then discussing your particular moral displeasure over one person's actions versus another, just because that person can afford to keep making payments, is your absolute right but it makes no sense in the business world. The law pertaining to the contract doesn't require a means test to terminate the contract. When enough people feel that a new law is needed or an old one needs changing they get together and try to get something done about it - that's our system.

I agree that the discussion we are having is apples and oranges.

I have never disputed that the bottom line number argues for them walking away. In the time that they are planning on staying in their home, they are unlikely to recoup the purchase price. The legal world is black and white, there is no gray area.

As you said, it is my right to voice my displeasure at them walking away from their contact. There would be nothing I could legally do to stop them, but perhaps if I voice my opinion on why I thinks its wrong, they might stay.

One thing I will disagree with you, is that morals have no place in the business world. The business world is not black and white, but gray. It is in the gray area that people use their moral values and ethics to guide them in their decisions.

Old Limey,
I think you are misunderstanding MikeS. He is saying that everyone should follow the law AND beyond - they should behave better. Yes, the country would be better off if everyone followed the law - it would be even BETTER if everybody strove for even more than that. I think that was the point.

I am once again trying to say that people should not strategically default just because they can. Can't pay the bills or your family is being hurt, then walk away. Just sad that you paid too much? Too darn bad. That was my point.

And yes, everyone has their own views on morality. I understand the legality of defaulting. I was bringing up ethics, which I now wish I hadn't, because the whole discussion has tainted my view of people I previously enjoyed hearing from.

The guy who originally posted did not bring up wanting to leave his home. Yay. The rest of this is moot.

@Mike Hunt
The car lease was brought up by Troy.

@Old Limey
I didn't see anyone else mention it, so I will.

You may "not have been happy" with your son't unethical behavior, but you supported it when you "helped a little with the down payment".

Just because "they wanted the house badly and there was no other way to get it", doesn't make it right. I wouldn't be so quick to judge the "disgusting" behavior of other people before you take a hard look at your own.

@MikeS
It was very nice to get to know you better. :-)

Crystal, thanks for helping to clarify. That was what I was intending. Just thought of a good example. The law says legally you are driving impaired with a blood alcohol level in most states at 0.08. So, someone who drives with 0.07 level is still obeying the law, but their reactions still might be impaired.

One of my friends in college had a breathalyzer and we spent one evening testing ourselves every 30 minutes while drinking. I wouldn't even think about driving at a 0.07...I'm clutzy enough to start with. :-)

I agree that simply following the law isn't enough for me, but obviously there are just some battles we will not win.

@Crystal, thanks. I definetly enjoy reading your comments. As I think someone said once before, you're wise beyond your years. I'm not that much older, 35, but it seems to have taken me a little longer to get there. Funny thing is, I work in the insurance industry.

MikeS & Crystal
I have no hard feelings towards either of you. I totally agree that if everyone not only obeyed the law but also lived by the Golden Rule that the USA would be an even better country. Even so there's nowhere else in the world that I would rather live than right where I am.
Though I don't like divorce and the problems it causes for children I realize it's necessary at times, particularly in the event of one spouse cheating on the other or if there's total incompatibility. I should also tell you that in my younger daughter's divorce 2 years ago I was by her side throughout the whole process supporting her and later negotiating the settlement with her very wealthy attorney husband and avoiding very expensive litigation. In the case of my older daughter I even gave her $2,000 so that her first husband (who initiated the divorce) would go away without the need for litigation. She was also 2 months pregnant at the time and asked my advice about an abortion, very reluctantly I told her that it was in her best interests. Her next marriage also ended in divorce but produced a wonderful granddaughter that just turned 21. The last piece of the story is that her third husband wanted children so at the age of 50 they adopted two cute little baby girls - one blue eyed blonde was the offspring of two high school kids - the other brown eyed brunette was the child of a stripper and a boyfriend that was in jail.

Wouldn't it be great if all marriages were like mine. I was 15 when I met my wife in 1949, we married in 1956, and have been very happy ever since. No divorces, no abortions, no cheating, just a wonderful 61 years of togetherness and teamwork that we never want to end.

Old Limey, no hard feelings here either. I also agree there's no place I'd rather be living.

Still love living here too. :-)

@ MikeS & Crystal,

No hard feelings to either of you either. You seem like stand up guys.

MikeS,

From the way you calculated the payment increase I wouldn't think that would cause hardship so the person should be able to keep paying and plan to stay in the house for the long term.

@ Old Limey,

The bigger problem in California is Prop 13. Surely you are in favor for repealing this? Take you for example, worth millions but pay $2500 a year for a million dollar house that, if your neighbors were to buy into, would have to pay nearly 10 times that amount. Does that seem fair? If Prop 13 were to be eliminated and home prices were allowed to settle then everyone would be better off and the financial burden of living in a high cost would be shared by everybody equally.

-Mike

I hope the OP didn't get too lost in the varying course of this topics discussion.

Back on point, should he accelerate principal payments on an underwater asset?

No. Never. And being underwater is irrelevant.

Pre-paying your mortgage is one of the most common fallacies in personal finance.

Every dollar paid towards principal is a dollar that can't be retrieved and can't be used for another purpose.

So the opportunity cost is large. Larger than the difference in interest being paid vs being earned.

As an example, would you rather owe $200K with $1K in liqud cash on a $200K house or owe 300K with 101K in liquid cash on that same house.

Your net worth is the same, but your liquidity is dramatically different. And you have less risk. Because as I said earlier the bank assumes most of it so let them keep assuming it.

I am all for paying off a mortgage. In one shot. Because until it is paid for you are still obligated to the payment, regardless of how much equity you have or how much you have paid the balance down. You as the borrower are in no less risky position, no better off position (even though you may emotionally feel better)by owing 200K vs 300K on a mortgage because you still have a balance that requires periodic payments made from your uncertain future. Only until the balance is zero does the certainty arrive and the risk evaporate.

The bank actually has more incentive to foreclose due to unforseen circumstances as you owe less.

And regarding the walking as being "wrong" argument, it just doesn't hold water in my opinion.

Each action has a consequence that both parties willingly agreed to when they contracted. It is obvious it is legal but it is also "right"

If he walks, he pays the consequences. If he stays he pays the consequences. He knows that now, and he knew that up front. It is an informed decision, and both parties were told of their obligations and consequences up front.

Affordibility doesn't come into play. The consequences are the exact same for someone who can't aford the payments and walks as someone who strategically defaults and can afford the payments. They lose the house, their credit is trashed, and they both have the ability to legal consult and negotiate any deficience judgements.

@Troy
I completely agree the OP shouldn't accelerate their mortgage payments. Your points have made me rethink what I will do when I buy my next house in 2011. I had never really contemplated the risk aspect of the prepayment. I will have to decide how much I am willing to pay (interest charges) for that transfer.

On walking away, we are going to agree to disagree.

@Mike Hunt
No hard feelings here either. You don't seem too bad yourself. :-)

# 1 ~ establish 6-8 month emergency fund

# 1.5 implement fun money into monthly budget. This is personal spending money you and your wife can do whatever you want with. (Budgeting is more than going to work to pay bills)

# 2 Max out tax deferred investments

# 3 Mortgage pay down

# 4 (when child is born) 50/50 Mortgage pay down, college fund.

looking for help with a mortage remodofication with Chase. I'm about ready to screambecause of the severe lack of professionalism. Anyone out there able to assist me????

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