When to walk away from a mortgage
Some people believe that walking away from a
They believe you should do everything in your power to repay your loan, including draining yourretirement
Others insist that reneging on a mortgage obligation is no big deal. It's a business decision, they say, and nothing more.
As usual, both extremes are wrong.
Most of us know money is more than a matter of numbers. There are ethics involved. Most people feel, or should feel, an obligation to pay their debts. (So should business people, by the way. When ethics depart business, the result is Enron.)
But sometimes, despite valiant efforts, people fall short. In those cases walking away from a mortgage can become, like bankruptcy, the best of bad options. We cross the ethical line only when we choose not to pay, and many of the folks facing foreclosure these days really don't have much of a choice.
The 'walkaway' myth
Oh, sure, we hear anecdotes about folks who stopped paying their mortgages simply because their homes were worth less than they had paid, or less than they owed, even though they could still afford the payments. I even fielded an e-mail from a reader who wanted to commit what I saw as fraud: buying another home at its new, lower price and then mailing in the keys to his current home.
But there's little hard evidence that this is happening on a large scale, as Los Angeles Times writer Michael Hiltzik recently reported in "'Walkaway' borrowers might be an urban myth". Although lenders warn about the moral hazard posed by solvent walkaways, others say mortgage bankers are trying to shift the blame for the foreclosure crisis onto borrowers' shoulders. Instead of focusing on homeowners burdened with debt, lenders are spinning the story of homeowners unburdened by conscience.
As Hiltzik reported: "'So many of the loans made were irresponsible — for the borrowers and for the lenders,' said Kurt Eggert, an expert on predatory lending at Chapman University Law School in Orange County, Calif. 'Lenders have an interest in painting themselves as responsible, even caring entities. They want to cast blame for the subprime meltdown as much as possible on their borrowers.'"
Blaming the foreclosure crisis on those who can pay but choose not to is certainly one way to do that. Another is to point to evidence that some borrowers are staying current on their credit cards and car loans while defaulting on their house payments. This, lenders say, is an erosion of the long-standing assumption that borrowers would sacrifice other obligations before falling behind on their mortgages.
But again, there's no evidence these borrowers are merrily skipping away from their biggest debts. What's far more likely is that they're facing payments they simply can't manage. Rather than continue to throw good money after bad, they're giving up.
And that's not necessarily immoral. It may just be realistic.
When to walk away
Understand that most borrowers didn't commit fraud to get their loans. They didn't have to. Lenders were falling over themselves to make mortgages that made no sense, mortgages that would become unaffordable with the first or second payment adjustment.
The lenders assumed, as did many borrowers, that these loans would be refinanced or the homes sold before the mortgages became unaffordable. Lenders and borrowers alike discounted the possibility that home prices could fall, wiping out homeowners' equity and making refinancing or a break-even sale impossible. Now we're reaping the fallout.
But all the finger-wagging in the world won't change the fact that many people can no longer manage their mortgages. Help, if it comes, won't be quick enough or substantial enough to save millions from losing their homes.
If you're wondering whether to walk away from your mortgage, these are the questions you need to ask yourself:
Can you make your mortgage payments while meeting your other obligations?Those obligations include feeding your family, paying your other bills and saving for retirement. If you can trim your expenses and reduce your bills to make your mortgage more manageable, clearly you should.
But if your payment already gobbles up half or more of your gross income and more increases are on the horizon, your situation may be untenable.
Can you keep your home without raiding your retirement funds?It's almost never a good idea to dip into your 401k or individual retirement account to pay continuing bills. Withdrawals trigger serious tax penalties and deprive you of future tax-deferred returns — figure that every $1,000 withdrawal costs you $10,000 in future retirement income.
That sacrifice might be worth it if you'll actually keep your house, but many who are tempted to raid their retirements will only delay, rather than prevent, the loss of their homes. Then they're left with no home and no retirement. Federal law protects retirement funds from creditors' claims, so you would be able to keep your money if you wound up in bankruptcy court.
Is a rescue in sight?Any homeowner with an unaffordable mortgage should call his or her lender anda housing counselorto discuss possible solutions and to pursue any that might provide relief. You may have to be persistent; lenders say they're trying to work with borrowers, but many have been overwhelmed by the volume of distressed customers. (You can find a list of homeowner resources and counseling programshere.)
After exhausting your options, you may have to face the inevitable: that you can't afford to keep your home and that continuing to struggle is pointless. If that's the case, make one more call: to set up an appointment with a bankruptcy attorney experienced in dealing with the foreclosure process. What comes next isn't pretty, and you'll want a knowledgeable adviser to guide you through it.
Related Links:
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How to default on a mortgage without the guilt
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