Don't Walk Away from Upside Down or Underwater Mortgages

I came across this as a "feed article" and wasn't sure if it or the link to it would disappear, so have quoted and/or paraphrased it in almost its entirety.

The Case for Not Walking Away by Catherine Lee

People who are “underwater” on their mortgages are being advised to just walk away and leave the mess to the banks. This is bad advice. This article covers some of the consequences of giving up, and suggests hanging in there, if possible, as a better solution.

Today a lot of people who owe more on their homes than they are worth are taking what I think is bad advice, and packing up and walking away from the mess.

There was a time when interest rates were sky high and you had to pay “points” to get a loan. Furthermore, you had to follow some rigid qualifications. You had to have spotless credit, to the extreme of not being late even one time on an ordinary utility bill.

And if you defaulted, that was basically “it” for your home owning life.

If we had stuck to those principles, we wouldn’t be in the situation we are in now. But somewhere along the way, easy money won over everyone. Most people wanted a home of their own and when they discovered it was simple to do, they flocked to buy, encouraged by government endorsed programs and loosened lender underwriting.

Then reality set in, and suddenly they couldn’t make payments or if they could, they began to look too closely at their balance due.

In time, and in improved circumstances, balances can be adjusted, payments can be lowered. These aren’t impossible even though it seems that way now.

But it’s not the people who have already lost their homes or found themselves totally unable to pay that I am referring to. I’m thinking of the millions who can still pay but are choosing not to.

Walking away isn’t as simple as it seems. The debt remains even if you are gone, even if you never pay another dime. It will hang over your head forever until it’s resolved somehow.

You might think I can go rent an apartment. Easier said than done because apartment managers usually require you to pass a credit check. Many don’t allow children or pets. Many have inadequate parking or managers who don’t respond to complaints about appliances, utilities, furnishings.

Long ago I discovered apartment dwellers live in a different world. They party a lot. Some will play their TV or stereo at ear blasting volume any hour of the day or night. Complaints start fights; fights inspire revenge. Maybe you find yourself in a complex where someone “steals” your parking place on a continuing basis.

If you have a car and want to work on it, basically you can’t. You have to find someplace else for that.

And if you can’t rent an apartment, what are the alternatives? Staying with friends or relatives…never a happy arrangement. They have their way of living; you have yours. Maybe someone is a bad influence on your kids. You might have to give up your pets.

My advice is, if you can make the payments on your home, do so, even if you are “underwater” because a home is a valuable thing and something worth fighting for. Real estate can come back big time. You might be able to sell it for enough one day to make hanging in there a justifiable goal..or trade down to someone with a small, less expensive home. As long as you have the house, you have some fighting room…giving it up leaves you with next to nothing.

Of course, if it’s impossible for you, it’s impossible, but if there is any way to hang tough, rough economy and all, consider doing so. As long as you are making payments, your credit is not being destroyed.

A lot of people are out there giving bad advice but it was bad advice that created this mess to begin with.

If it is to do over someday, never buy a house you know you can’t afford. The old rule was the price of the house should not exceed 2.5 to 3 times your yearly salary. If you make $45,000 a year, that’s a house priced at no more than $125,000 and hopefully less --- not the $600,000, $800,000 and up monsters peddled to people who couldn't afford them.

And the payments should never be “adjustable” because Murphy's Law invariably have them “adjust” higher, and you will still need money for possible furnishings, and certainly for food, utilities, insurance and emergencies. What is the point of having a spectacular house if you can’t pay the light bill or buy a new couch? At one time I had two mortgages to pay and couldn’t even buy my kids a soft drink. Learn from those who have been there and done that.

Hang onto your home if there is any way possible. Make “giving up” not an alternative.

Looking Back

It's been three ! years since my original and only posting here.

I was a bit out of the mainstream then, talking about ethics in the mortgage industry. Looking back now, I think I was more ahead of my time.

Today, ethics and accountability are very much on the front burner. Or at least are being given more audible lip service.

But I'm not sure we've "gotten it" quite yet as I listen and watch Congressional partisan arm wrestling over the Stimulus Package(s).

I think we've lost control of our own government. They're so caught up in the "governmental process" and often "what's in it for me", our representatives can't see the forest for the trees.

I'm having a hard time staying optimistic about our Country's future, and have been relegated to hoping the collective "voices" here on the Internet are heard above the foray.

Meanwhile, in my corner of the world and my neck of the woods, I try to "pay it forward", assuming you have seen that movie. I think there are others following the same script; more would do us all that much more good.

Peace.

What Makes Me Different ?

I consider myself an ethical broker, committed to the principles of the UpFront Mortgage Broker Association, the National Association of Reliable Loan Officers, and similar consumer advocacy groups.

I might not get your business if you read this too late in your search for a broker or mortgage. That's primarily due to the fact that I will not low-ball a rate quote over the phone just to get your business. I will not compete with anyone who does that just to get their foot in the door, only to raise the cost of the loan to you once they have you on the hook.

This is unfortunately prevalent in the mortgage industry, and is done more as a slight of hand, often taking advantage of an uninformed consumer. The following paragraphs summarize what you should look for from any broker you retain to originate your loan for you.



What Exactly is a Mortgage Broker ?

The role of mortgage brokers and loan originators is not as a banker, underwriter or lender. They're basically a salesperson, and a middleman between lenders and the mortgage consumer. They are required to be licensed in Florida for originating/arranging mortgage loans on properties there, but with minimal education, and no experience requirements. If the mortgage loan does not close in their name, you are working with a middleman/Broker. Even companies like LendingTree fall in this category.

LO's/MB's who work for brokers or broker-banks get paid on a percentage basis, usually 50% or more of the origination/broker fee you are quoted. Behind the scenes, or "in the back", LO's/MB's also can get paid what's called YSP, or Yield Spread for selling you a slightly higher APR. The lender is willing to reward the MB for selling you a slightly higher interest rate on your loan. It's all in the numbers. You probably wouldn't even blink to know your loan could have been had at 6.5%, but your broker only offered it at 6.95. They are paid by the Lender for "the spread" because it is costing you more over the life of the loan in interest. The Lender is happy to pay the LO $2,000 for the $12,000 more in interest to be collected from you. It doesn't sound like a lot but it adds up, and it only comes out of your pocket.


The BottomLine

There are many experienced and good loan originators/mortgage brokers. Check out my background at "Meet Your Loan Advisor" on my website at http://www.loanwolf.us/ and let's talk about your funding needs.

Call me at 800-586-9424

Even better, email me at wolf (at) loanwolf.us