Mike Shedlock, presents an email from a reader who chose to walk away from his house.
After over a year of back and forth with the bank, the bank finally repossessed the home and foreclosed on the homeowner, but by all accounts, it seems the former homeowner made the right decision:
It’s been over a year since I asked for your opinion about how long it would take for the housing market to “recover,” which was about the same time that I stopped paying my mortgage and decided to walk away.
Well, the game is finally over. I moved out last week, and the trustee’s sale occurred last Thursday.
After thinking repeatedly about it recently, the end results look something like this:
After purchasing the house in 2005 for about $740K with only $40K down, if you count my mortgage payments as “rent,” in a sense, I recovered my down payment over the past year by living “rent” free over the past year.
The current value of the house is most likely around $400K. Thus, I was able to “get out from under” a $300K loss by walking away.
After a bit of looking over the past couple of months, found a two-bedroom house I can rent for $1200/month. The rental is in Scottsdale, just a few miles from my old house. It’s definitely smaller and not as nice, but it’s more than adequate.
Given my new rent payment, I am estimating that I will be saving at least $1500/month by renting the new house vs. staying in the old house, even with a modified payment (and yes, I am accounting for the tax break on my old property.
Therefore, as things currently stand, I believe I will “save” $150K over the next 100 months – assuming of course that my rent doesn’t change and/or I don’t move again.
Thus, I believe I can conservatively estimate that my decision to walk on the house will essentially increase my net worth by approximately $300K over the next 100 months had I struggled in the existing loan. Moreover, that assumes the old house increases in value in that timeframe. If not, the number may be more like $450K.
On top of everything, just this week, I was contacted by the real estate agency that will be selling the house for the new owner (i.e., the bank – it looks like they bought the house “from themselves” at the trustee’s sale), and I am being offered $2500 to leave the appliances, etc., in the old house.
The only real downside I see at this point is that my credit is shot. I guess I’ll have a foreclosure on my “record” for the rest of my life.
However, the irony is that if there has ever been a time in my life when I do not want to borrow any money for anything, it is now.
I’m not trying to make light of the situation. This is not something that I’m proud of. However, it does feel good to have it over with, and looking at the math, it really seems like the right thing to do. Sure, I “could” have been paying my mortgage over the past year, but given the hit my income took last year and the first part of this year, I would essentially be living paycheck to paycheck right now.
As always, I appreciate your work. Please keep it up.
Morally Conflicted in AZ
P.S. I did consult with an attorney before making the final decision to walk away.
Morally conflicted, in our view, made the right decision.
When bankrupt governments and banks across the world can seize taxpayer funds through the mandates of out of control legislatures, essentially changing the rules in the middle of the game, then it is our view that the people, who are left out to dry, have the right to do the same.
Incidentally, the former homeowner indicated that he remained in the house for quite some time while he negotiated with the bank. This, of course, means that this property remained on the bank’s book as a paying asset for a year, probably marked-to-model, indicating the value of the asset was still $740,000. The mark-to-market value, which considered the real estate market’s fair price, was actually $400,000. But, the fact that there were no other buyers but the bank, suggests that the property was likely worth closer to $0.00 (theoretically). Yet, the bank will still likely mark this asset based on a perverted pricing model so as to boost their numbers. All large banks engage in these same machinations, yet they don’t seem morally conflicted in any way, though they know full well that they are lying to shareholders and regulators.
This former homeowner did not make a morally “wrong” decision. If there’s anyone that should be morally conflicted by their actions leading up to and during this economic crisis, it’s our politicians, banking conglomerates, and heads of central banks.