When most people think of “walking away” from their home, many people just assume that the home will go into foreclosure.
And plenty of times, it does.
But not always.
I have heard (and seen) many people make the independent decision where their home was worth significantly less than they owed — who could afford to keep making the payments — to hire a real estate agent and short sell their home.
And I have seen lenders approve a short sale in this situation.
Consider this piece on 60 Minutes recently ran about “Strategic Defaults” right here in Arizona:
One thing that they didn’t cover that I have seen right here in Arizona is this:
If you find yourself in the position where you owe significantly more than your home is worth, and you can afford to make your payments — there is no rush to make a decision. You will probably be in this situation for years to come.
Think about it.
Let’s say that you bought your house for $200k in 2006 and it is now worth $100k. You can afford to make your payment and you continue to do so.
For the next five years.
And then you get transferred because you were promoted.
So, when it comes to sell your house in five years your home is then worth $125k.
If that scenario plays out as I just illustrated (totally made up scenario), then you would have effectively made a $200k payment on a $100k house for five years and then ended up short selling it.
I wonder why they didn’t mention that.
About the Author:Justin McHood calls himself a “Mortgage Commentator” and works for Academy Mortgage Corporation. You can find his loan officers at Ten Day Close and read more of his thoughts on the mortgage business on Zillow’s Mortgages Unzipped Blog. You can also find him at most East Valley Friday Nights gatherings. He’s the one in the blue shirt.
Looking for more information on short sales? Below is a link to all articles written on this site about short sales:
Phoenix Short Sales
Thinking about short selling your Phoenix home?
Just complete the form below for a no cost, no obligation consultation with one of our experienced short sale experts:
The Phoenix Real Estate Guy was started by Jay Thompson, and I have a little blogging problem... he liked to say...
Hmmmm….sounds to me like you are encouraging people to do a short sale even if they can afford their home.
I agree with Carmen's comment. However, the real point that I would re-iterate is that the drop in values that many of us experienced, and the deficiencies that we have on our homes mean that the Short Sale as we know it will be around for many years to come.
Life continues on, and sometimes that means people need to move from where they are. If their home is upside-down, they'll have to pursue a short sale, or they'll need to stay put. Never has the underlying tone "being slave to your lender" felt so real for so many people.
When you purchase something, and you borrow the money to purchase it, it is your responsibility and obligation to pay back the debt. Period. Why should your "bad luck" become the responsibility of mortgage investors, and by extension, all of society, simply because you regret your purchase decision.
Those who have no ability to pay their debt due to circumstances beyond their control need some relief, but not without a price – difficulty to borrow again due to credit scores, deficiency judgements, tax liabilities, etc.
It is inexcusable for those who have the ability to pay yet choose to burden the rest of society with their debt regardless of future circumstances. How outrageous is that! Why should someone whose home is underwater in debt get different treatment than someone whose home has lost value but is mortgage free. Should the mortgage free homeowner get relief for the lost value of their home too? Perhaps we should pass around the hat.
Flame off. 🙂
Joe Sheehan
I’ll try and make this short and sweet, banks got a bailout from US taxpayers, and used the money to pay themselves million dollar bonuses. We already paid off our houses when we used borrowed money from China to bailout the banks. Or maybe we should have let the banks collapse. Really now don’t you think if we are paying for their debt. They should pay for ours.
The Banks inflated the market by giving loans to people who couldn’t afford them. Everybody wants a house of their own (The American Dream). Law of Supply and Demand, everyone wants one (Demand), Loans approved on whims. Supply grows short, demand remains, prices go up (because that is what the market will bear). Soon or later loans made by unscrupulous, unethical, greedy banks go into default. This causes the financial meltdown we’ve gone through and will experience for years to come, while causing the market to be flooded with all those houses (huge supply-lower prices).
Get Real,
those banks are banking on you to do the right thing and make those outrageous payments they set you up for while screwing you over. You’ve heard take it like a man, well if that’s the way you like it, then bend over. Personally, I think a short sale is a last resort. But, remember your dealing with a financial institution, and from what I’ve seen they never do the right thing if they can get away with it and nobody’s the wiser. Kevin Hardin in the post below has a grasp on reality, maybe you should take a little longer look at what has really gone on.
Thank for listening
One quick reply to Joe,
I bet you won’t find to many, or any mortgage free homeowners as you put it who bought their houses at the height of the market. And, if they are truly mortgage free, they probably bought their house 15+ years ago, if not more. That being said, I doubt their house is worth less than they paid for it. Probably your circumstance. Off your soapbox now. No hat passing for you, you could probably sell your house and still make a good profit over the original purchase price. You know why? Because you weren’t in need of a house at the height of the market, you already had yours.
Justin, great conversation. Here might be a few things for homeowners to think about when they reach a point where they can no longer make their payment or it no longer makes since and the home is no longer worth what they owe.
1) The collapse of the real estate market is not the result of a bad decision or bad morals. It is the result of financial situations outside their control. It would be an even greater shame to destroy a family's financial health by staying in that bad situation than to consider what some poster characterized as a morally bad decision.
2) The Mortgage Debt Forgiveness Act expires in 2012 making any canceled debt or forgiven debt after that time taxable so that if you decide to stay till a future date make sure that tax event occurs before that expires
3) The spread between short sales and REO sales has reached a spread of only $9 average per square foot here in Greater Phoenix. It is going to become more common for lenders to decline the short sale and opt to foreclose as this spread narrows and the NPV is better in foreclosure than short sale as time goes on. Better sooner than later.
I personally support the idea that short sales represents the single best morally responsible decision when faced with this scenario. By putting the home up for sale for what it would bear today is a good faith way to secure the greatest outcome for all parties. Those that can afford today get good value for the home. The distressed homeowner, negative equity is a distressed situation, is working in good faith with their lender to mitigate losses that they are not responsible for creating thereby lessening any negative economic impact. Lastly, those homeowners who are remaining in their homes have less damage to their own home values. Keep in mind even with the short spread that exists today. Short Sales still sell at a higher price than a foreclosure. Thereby improving neighborhood values over the results of walking away and letting the home go to foreclosure.
@Carmen,
Thanks for the comment! I honestly don't know if I am trying to talk people into doing a short sale or not — I am not a Realtor so I don't personally have a possible financial stake in anything someone does regarding a short sale.
I try to take the angle on the topic of "what advice would I give my brother" and so it is entirely possible as you read anything I write here that there is an angle in it… nothing to do with personal gain.
But hopefully the message of "if you are 50% under water in your house, you are going to be there for a while" got through — and if you are in the situation where you are considering short selling your house, there really is no rush… chances are if you sell your home in the next 5 years (at least) you are going to be short selling it.
And it is a question that I get asked *at least* weekly — just because I comment on the mortgage business, so now everyone knows my standard answer to the question.
@Jon,
Agreed. Thanks for bringing that point up.
@Joe,
Thanks for turning up the heat! I try to leave out my opinion of what people *should* do in my writings it is a sure-fire way to light a crowd on fire.
And I have found that each situation is different, so I try to leave my personal opinion out of it… TRY!
One time I had a neighbor telling me how wrong it was for one of my other neighbors to strategic default and how it was immoral, shouldn't be allowed, etc. 6 months later, the guy who was telling me how wrong it was… did it!
Anyway, thanks for the comment — all opinions welcome.
@Kevin,
Thanks for sharing that data — I had no idea. Great insights to the overall market and what is going on.
The rewarding of bad behavior continues on in this country. My new motto is "Do everything get nothing, do nothing get everything". Can't get any help unless you miss a few payments on the house. Try calling and getting help on your credit card or house payment when you are current. Go bad and you get plenty of help. Sick of it. Think I might join them. Mortgage guy seems to be encouraging this.
Bill – You're right, but if you think of the long-term effect, these people will ultimately pay for this too. They're effectively doing something that will effect the economy SEVERAL years from now. It looks like they're free from consequences right now, but later on the economy will be more unhealthy as a result. I hear what you're saying though, because WE'LL be experiencing the consequences for their actions, too! Bummer!
Yes, Kevin, I agree that people need to be reminded that they don't "have to walk away" if they're able to make payments…
Thanks.
Woops… where I said "Kevin" in the last post, I meant to say "Justin." Sorry about that Justin!
Nice discussion – I agree with you Bill that it seems like you get more by doing less in this country, especially lately. However, as some have mentioned, there are consequences for walking away from your home.
Many of these homeowners will go without the ability to borrow for sometime, and when they do, they'll pay more for borrowed money. In addition, they'll typically have to put more money down to borrow money or rent a new home. Life will cost more for several years.
In some situations, I can see why walking away from a home is a good financial decision, but I agree that in most cases you should buckle down and "do what you agreed to do". I can't however see it as a reason to financially ruin your family and I doubt anyone in a similar situation would say "Sorry family, I agreed to this, and for 30-years things will be very tough, we may not make it, but we're going to try. By the way, who cares about your education, your prom, your graduation etc.., I made a decision years ago and you are all going to suffer because of it. Life sucks – get used to it"
If you're going to walk away from your home, I say get it over with. We could do without years of strategic short sales and foreclosures.
Short sales are a necessary evil for some unfortunate people but I don't think that it is something that anyone should rush in to just because the market has dropped. I think that Buyers should approach the whole idea much like a marriage..for better or worse…just because things get a little droopy is not a reason to just pick up and leave walking away from your commitment!
This isn't about things getting "a little droopy". If market values have fallen 50%, and you owe twice as much as the home is worth, you're probably seething with anger right now.
You mentioned approaching it like a marriage, and either short selling or just letting a foreclosure take it is akin to a divorce. What people are looking at now is this:
1) There are consequences to a SS/Foreclosure. (duh)
2) Are those consequences worse than being underwater for a protracted period of time?
3) If the owner DOES SS/Foreclosure, will their credit recover before the market does?
Just as a mortgage loan is a commitment to repay, it also has consequences for delinquency. If the owner feels the consequences are a better alternative to their current situation, what's keeping them in place? Morality? Compassion for the banks? People feel as if the banking industry has failed them. why should they feel bad if the bank writes off one more bad loan?
It really depends on the particular situation. If you are an investor and have a number of homes underwater, that’s a problem. Or if you experience financial hardship due to medical costs or loss of income, etc., you can’t just resell your home and move on like you thought you would be able to.
But just because you are underwater on paper doesn’t seem like reason to panic and bail in every situation. Yes, your options have dwindled, but I remember a time when people bought a home they could afford with the intention of living in it (yes, my age is showing). In such a case, it wouldn’t be such a crisis. If it was worth 200k to you to live in the house when you bought it, so what if today you coudn’t unload it for more than 100k – – you were in no hurry to sell it anyway.
But society has become so mobile and transient, and people have been convinced to buy the most expensive home they could barely afford with the promise of quickly accumulating equity and the help of creative financing, it’s a shame so many have to choose between the short sale and the looming threat of foreclosure.
Home values will rise again, just not right away and not as fast as people came to expect. Everything else keeps going up, it only makes sense that real property will follow. While their net worth will take a hit, for many people there is no reason they cannot continue to raise a family in their family home, at the cost that they expected. For those people, a short sale might be short sighted.