Time to Let Underwater Homeowners Drown

by | BiggerPockets.com

The house on Carla Vista Drive had never been remodeled.  Nor did the original owner elect to pay for any upgrades when the home was first purchased.  Built in 1992, it had no appeal to a retail buyer.  From the peach-colored mini aluminum blinds, to the blue countertops, to the white-washed kitchen cabinets, this house had it all – all awful that is.

My wife and I bought it anyway.  It was 2004 and my real estate investment business was firing on all cylinders.  About $50,000 and 6 months later we transformed this early-90’s eyesore into our dream home.

Soon my youngest daughter came along.  We brought her directly from the hospital to our newly renovated home.  She took her first step in this house.  Both of my daughters learned to swing on the backyard play set and swim in the pool.  On the weekends we’d walk over to the nearby park for picnics.

Then in 2007 property values plummeted.

By 2008, we were underwater on the mortgage by almost $100,000.  Our lender had no interest in a loan modification and a principal balance reduction was out of the question.  So we were left with a difficult decision – throw good money after bad to stay in a home our girls had grown up in, or walk away.

We chose the latter.  And now four years later I’m convinced it was an extremely wise business decision.

It didn’t feel that way at first.  The adjustment was difficult.  We had to rent a much smaller home further out of town.  Then we had to change schools.  There was no backyard pool or park nearby.  But, eventually we were able to buy another house again – a similar home to our last, for half the price and payment.  Ironically, it was a short sale and the seller was $150,000 underwater.  We found out that this family was doing exactly what we did four years ago.

Yesterday, the USA Today reported that the federal government is “very close” to a settlement with mortgage servicers that could help a million homeowners by reducing what they owe on their mortgages.  The settlement may also enable more borrowers to refinance into lower-interest-rate loans, even if they owe more on their homes than they’re worth, and to set more stringent mortgage servicing standards for the entire industry.

This is not the answer.  It’s time our federal government let underwater homeowners drown.  Nature must take its course.  In most states, lenders have little recourse if a homeowner strategically defaults.  The negative stigma attached to defaulting on a promise to pay a mortgage isn’t so negative anymore.  Plain and simple, it makes smart financial sense to walk away.  Once market values reset, on their own without government intervention, the real recovery can begin.

Yes, it’s painful.  But I’m living proof that drowning on an underwater mortgage will not kill you – it may actually make you stronger.

About Author

Marty (G+) is the Chief Financial Officer for Rising Sun Capital Group, LLC, a real estate investment firm based in Gilbert, AZ. His firm purchases homes at the courthouse steps and public REO auctions. They have two exit strategies, either fix and flip or seller financing.


  1. I might be missing something. But you are stating that it is better to have someone do what you did and lose their home, destroy their credit, leave the banks on the hook for the difference instead of allowing people to stay in their home and have them get the principle reduction instead of going through the costly and time consuming foreclosure or short sale process just to sell it to someone else at the lower price that the original homeowner would be happy to pay anyway.

    I just see if we could cut out the middle man and have more credit qualified folks out their it would be better for the economy as a whole. The banks take the hit either way, which will pass it on to the federal government either way. Why not attempt to have it done in a more orderly cost effect manner. If we really wanted to be fair and just rip off the band-aid to start the healing, then we wouldn’t be forcing the banks to eat the difference from the short sale or foreclosure, we would have it stay with the homeowner.

    At the end of the day I never understood the logic behind being underwater on a home. If a person purchases a home for $300,000 and gets a 30 year note, they are already willing to pay $600,000 over the life of the loan. So what if the underlying value drops to $200,000 a couple years in. It should be a long term deal. If we took this approach to other types of debt, everyone would be walking away. What is a school loan worth, even for the (lets be generous 50% of those with school loans that actually graduated with a degree), how about vehicle loans, many are underwater, or credit card debt on furniture or appliance purchases.

    Just my thoughts… Thanks for the post, its not a prevelant topic so its good to be discussed.

    • Kyle, it really boils down to how much principal these mortgage servicers intend to reduce. Do they plan to reduce the principal on the loan to within 5% of the home’s value, 10%, 30%? My guess is the reduction will be minimal. Refinancing a loan that is greater than the value of the property makes no sense either. That’s just prolonging the inevitable. These underwater homeowners would still be better off walking away.

      As for the logic of walking away, statistics show that most Americans stay in their homes 5-7 years. Very few people take out a 30-year mortgage with the intent to stay in the house to live out the life of the loan.

      And to your last point, there’s a big difference (principal and payment wise) between being upside down 5-10K on a vehicle loan and $50,000 on a mortgage.

      • I agree that there is a big difference but I don’t believe there should be. This is not from a moral or ethical standpoint. This is from a personal finance standpoint. In the US home ownership has been pushed so hard that in some ways people feel like 2nd class citizens if they choose to rent. Renting can be very beneficial especially if someone plans to move within 10 years.

        With a 30 year mortgage, much of the payment goes toward interest. People justify this with the mortgage interest deduction which is also silly as most do not understand this deduction. If you spend $10,000 on mortgage interest and you happen to get the max deduction you save $3,500 in taxes but it costs you $6,500 to get that priviledge. Not a good financial plan.

        As for a mortgage company writing down the principle amount. This could be achieved through government assistence by having an appraisal done, which I believe have been quitr conservative as of late. If a loan has never been refinanced with cash out the bank could write the balance down to 110% of value. This would help a lot and help limit the extra costs of bouncing around by folks. If this option was given to you, would you have taken it? I would have rather stayed in my home with a new mortgage lowered to 110% of appraisal. I still would have lost money but would also get to stay in my home, be able to pay my new mortgage and feel better about my position. This is opposed to a strategic foreclosure where my credit takes a huge hit, I have to move with the costs associated with that, my kids might have to move school districts among various other things. Then when and if I repair my credit and build up the cash I then buy a home at the lowered values. I believe this would speed the recovery for less the cost and pshycologial toil on a nation that this situation causes.

        Thanks again for your candor and responses on such a topic.

        • Kyle, yes, I would have taken a principal balance reduction IF it was within 10% of the value of the home. That would have been better than a short sale. However, I don’t believe that these mortgage servicers are going to do that drastic of a reduction.

          It will be interesting to see how these servicers award the reductions too. Will it be to only those that are current on their loans? Will those homeowners in foreclosure be eligible? I’ll be following this story closely.

  2. I fully agree with Kyle: you take on a mortage, agree to the terms, one should not walk away because the value went down. Using that lodgic, if the value goes up you should give it to the lender, right?

    • Jim, getting a mortgage on a house is not the same thing as borrowing money from your Grandmother. The bank made a business decision to loan you the money, their security is the property. If you decide not to repay the loan they get the house. A strategic default is not immoral, it’s smart business.

      Companies do this sort of thing all the time and are often commended by economists and Wall Street (read this New Yorker Magazine piece from last month): http://www.newyorker.com/talk/financial/2011/12/19/111219ta_talk_surowiecki

      The Mortgage Bankers Association recently did a short sale on their own building, yet demonize individual homeowners for doing the same.

      • Alan Mackenthun on

        Sorry, Marty – it is immoral. You made a commitment when taking out the loan that you would pay the money back with interest. When you thought the value of your home changed, you walked away. It is the very definition of immoral. I could understand if you were layed off or disabled. It’s still not good, but understandable. To choose to default in a strategic way shows that you take the easy way out and only care making a quick buck. I’m also strongly against any mortgage modifications subsidized or in any way supported by any government agency. If the bank wants to do it to avoid turning over a home, fine and if a bank offers 1st, there’s no reason not to accept, but that’s not going to happen. I didn’t leverage myself to the hilt to get more home than I could afford. I worked and saved and paid my bills. I don’t see any reason why I or any other taxpayer should be forced to pay yours also.

        • Alan, I made a commitment to my wife when we were married. To love, honor and cherish. I made a commitment to my children when they were born to always be there for them and provide for them. But, when I signed the loan docs for my house I didn’t make a commitment – I made a business deal. The deal was simple – I pay the mortgage and get to live in the house. If I don’t pay the bank gets the house back.

          To say I took the “easy way out” to make a “quick buck” is ridiculous. I paid dearly. I lost my down payment, the cash to improve the house, the four years of payments I made and my credit score. Not to mention the stress of finding a new place to live and moving twice in three years.

          I, like you, didn’t “leverage myself to the hilt” or buy a home I couldn’t afford. I worked hard and saved and paid my bills. However, I chose not to foolishly flush any more of my hard earned money down the toilet on a bad loan (something that is perfectly acceptable in the business world).

        • Dear Alan, Are you familiar with the ancient term usury? Usury is immoral. Lenders charging unbearable interest rates and fees is immoral. Lenders signing up anyone and everyone for a loan so they can bundle the numbers into inflated returns is immoral. I slaved in too many offices not to know about immorality. Mortgage companies focused on ONE thing only–the number of files they could pump through the system–at any cost. They didn’t give a shit what people made or whether they could pay it back. And builders didn’t care about the quality of homes they built. And people were stupid enough to ride the ride. At some point it’s time to get real about all the contracts and quit trying to put lipstick on pigs, pretending transactions from every angle haven’t been anything but a giant dysfunctional circus.

        • Alan,

          There is nothing immoral about Marty’s decision. The bank agreed to the risk that this could happen and signed the same papers Marty did. Marty defaulted so they took the home – exactly what they agreed to in the first place.

  3. I agree with you, that the government shouldn’t be bailing out home owners who are in trouble. However, I completely disagree with strategic foreclosure and walking away from a home for convenience or financial gain. Anyone who signs a mortgage makes a commitment. It’s your moral and ethical obligation to follow through with that. The more people who walk away because it’s the easy thing to do, the longer recovery will take.

    • Keith, if you borrowed money from your parents or a friend then of course you have moral and ethical obligation to repay the debt. But as I explained to Jim borrowing money to buy a home is not the same thing. You sign a contract with the lender. The contract terms are very specific. You don’t pay, the bank gets the house.

      Most banks don’t even call these contracts loans – they’re known as mortgages or deeds of trust.

  4. Did the government not change the laws though. Before the bank would loan the value deemed appropriate for a home. If the mortgage wasn’t paid, the house could be taken back by the bank. The bank would then sell the home for what it would bring and the balance was still owed by the original borrower.

    • Kyle, the federal government changed the tax law during the Bush administration. If the home was your primary residence the IRS will not tax you on the forgiven debt in a short sale or foreclosure. However, that will expire at the end of 2012.

      Deficiency laws vary from state to state. Arizona, for example, is an anti-deficiency state. In most cases, the lender can not go after the homeowner for the forgiven debt. This law was written more than 20 years ago.

  5. “Yes, it’s painful. But I’m living proof that drowning on an underwater mortgage will not kill you – it may actually make you stronger.”

    I don’t understand how you feel you have earned the right to have a victims mentality on top of justifying how it is perfectly moral to make a decision like this.

    Americans should be inventive and hardworking and not take the easy way out.

    • Steve, if you believe from reading this post that I’m playing the victim card here then I really blew it. I take full responsibility for my actions and have paid a dear price.

      For what’s it’s worth – I was inventive. I used a perfectly legal and acceptable strategy to relieve my family of over $100,000 in bad debt. Both my attorney AND accountant recommended this course of action. And I promise you, it wasn’t easy.

      I encourage you to read the link I provided Jim in the comment above. Here’s the last paragraph from the article:

      “Of course, many borrowers made bad decisions and acted irresponsibly. But so did lenders—by handing out too much money and not requiring sensible down payments. So far, banks have been partially insulated from the consequences of those bad decisions, because Americans have been so obliging about paying off overinflated mortgages. Strategic defaults would help distribute the pain more evenly and, if they became more common, would force lenders to be more responsible in the future. It’s also possible that a wave of strategic defaults—a De-Occupy Your House movement—would get banks to take mortgage modification more seriously, which would be all for the better. The truth is that banks have been relying on homeowners to do the right thing. It might be time for homeowners to do the smart thing instead.”

      Read more http://www.newyorker.com/talk/financial/2011/12/19/111219ta_talk_surowiecki#ixzz1k31gsNsL

      • That last paragraph is EXCELLENT! Im from Vegas, and NOW they are being reasonable. Florida and Nevada have the most lenient policies (Which still arent that great) because of all the foreclosures. Change is happening due to the market because in Vegas, you roll the dice and cut your losses!

    • Annie Walker on

      Steve, because he IS A VICTIM!! The asswipes in the government are the ones to blame for the housing market falling so low that the home owners are underwater now!! It’s not Marty or any other underwater homeowner’s fault! (and no, 1 vote will not make a difference!) I have found myself in this same situation. My husband and I purchased our home just 5 months too early. Therefore, 6 years later we have found that we are underwater by about $23,000.00 and that if we continue to make upgrades to our home we will never regain them in the sale price of the home due to this current economic crisis! That is not my fault! My husband and I have fantastic credit scores and have applied for a home loan modification 3 times and have been turned down 3 times with the bank saying, “Why would we help you? You’ve never missed a payment and you’ve never even been late on one in 6 years! You’re not who we are helping!” As far as a principal reduction the Government has put in place certain stipulations that prevent OVER HALF of the homeowners who are underwater from getting a principal reduction. You have to have been at least 3 months behind on your mortgage as of January 31st, 2012. And since those guidelines weren’t released until then, if you weren’t behind you’re out of luck! I can’t refinance this house because it’s worth so much less than I owe on it now! That is what “throwing away good money after bad” is! Seems like some people need this explained to them. I am making this decision right now too. My husbands parents are elderly and live over 700 miles away and if we ever needed to sell the house in the next couple of years to go be closer to them, we won’t be able to! Who’s going to pay what we owe on it when it’s not worth that? And we can’t keep throwing money into it to make it worth what we owe on it because we can’t change the land value and the comparables and they are directly related to the housing crisis as well! Stop trying to demean the man for saying he is making the best choice he “Legally” has available to him!

    • Steve (and any others who feel it is immoral to do a strategic foreclosure or otherwise walkaway from a mortgage that one can pay but no longer desires to),

      As Marty and others have stated, it is a business contract-read your loan documents especially the section about failure to repay-there is no empathy in that language!!

      Furthermore, IT IS the smart thing to do financially!! and don’t think of it as taking the easy way out since most homeowners did not participate in this debacle and yet have taken huge declines in their property value (however overinflated the values became).

      Think of it as partial payback to the “system” (Wall Street banks/corporations and Fed. Govt.) for the financial damage they caused to everybody’s asset values including homes and stock investments. Millions of lives have been affected by this corporate greed ignored by the politicians and regulators. Homes lost, jobs lost, planned retirements now delayed, downsizing to a retirement condo delayed, etc. – the whole domino effect lowering your place in the food chain!

      The Japanese real estate and stock market bubble popped in 1989 and only began showing improvement in residential real estate values a few years ago. Hopefully, our real estate market rebound will not take that long!!

  6. I don’t think your scenario is very different then a professional tenant not paying rent so he can live rent free. It’s not illegal. Per the contract: if you don’t pay rent the landlord has the right to evict you… A landlord is not your grandmother who you feel a moral obligation too either.

    I understand millions of people have had to go through these same decisions and there is not an easy answer. It is pretty clear you had the means to continue making payments and I think that is the path I would pick (I know one friend that brought 60,000 to escrow to sell his primary).

    If the market were to dip again on your investments, I wonder what the hard money lender would do if you walked from a project because it wasn’t profitable. Your attorney and accountant would recommend this as the cheapest solution, so that is okay too?

    I will leave it at that. I like most of your other posts so keep them up.

    • Steve, its a business decision. The Government, Corporations, Banks, and Religious institutions all have a vested interested making you think its a “moral” decision. In the US we are free to start over with a fresh start and get our lives back together after bad business decisions. Thanks Marty.

      • Couldn’t have said it better myself Sherry. I’m reading Too Big To Fail right now. Wall Street and Washington used every financial strategy and loophole in the book to avoid a catastrophe of their own making, placing all of the burden on the American taxpayer. Now they use the whole “moral” argument to guilt homeowners into paying on underwater mortgages.

  7. I support this 100% and will tell you why. 99.99% of people in a situation like this failed to protect themselves properly prior to the purchase. Even in a few rare cases of a catastrophic life altering event, drowning would not be such a bad thing.

    Protecting yourself is obviously the first step in a home purchase and many people failed at that. OBVIOUSLY…
    The underlying issue with value is “Who cares” unless your not in it for the long haul. Unless you must sell or refinance out of a bad initial loan the value is speculative to todays date. not significant … numers on paper cannot hurt you if you did your homework prior to the purchase

    Without getting too much into ME, suffice it to say I have some experience with homes purchases/sales in TX, CO and MI

    Here are my “musts” when considering a purchase-
    1. What you need not what you want as long as it is within reason
    (You can get a very nice house, but if you have job instability and you went too big keeping up with the jonses you just screwed yourself)
    2. never smaller than 3 bed 2 bath, or more excessive than the average single family for the area. (These are the best “Most likely to rent or sell quick in any economy” not too big not too small)
    3. 30 year fixed rate with no pre-payment penalty loans ONLY!
    (get a 15 year or baloon / ARM and your job goes south you just screwed yourself, 30 Yr notes can be paid off faster than a 15 by making a high principal payment each month and you give yourself the security of a low monthly payment if your job disappears on you or your hours get cut)
    4. mortgage pmt should be 100 dollars less than the rental profit after 10% management fee
    (do your research.. if you had to rent your house what could you rent it for, subtract 10% and hire a good property manager and you will be able to pay your mortgage if you ever have to move for your job)
    5. the area/neighborhood, layout/sq footage, and property/yard must ALL be appealing or have potential because there is very little you can do if there are major problems in any of these areas (resale or rent will be very difficult)

    #6 is for all the HGTV / DIY fans out there
    6. Don’t buy a fixer upper if you are not a handyman (I am a handyman and know what purchases to avoid, I renovated two of the houses I purchased and did it professionally and more importantly to code) If you are not a handyman do not assume you can make professional looking renovations others will appreciate if it were to rent or sell later.

    Last but not least-
    If you are not a handyman and even if you are get a home inspection done prior to purchase the average inspection costs $400 up front and the average re-negotiations (after inspection) save the buyer $1,500

    Everyone overlooks things even me, my inspector pointed out a bunch of things I missed on our last home purchase and I saved $1,100 How could that be you ask If I am soooooo smart? Easy what does everyone do in a walk through of a potential new home? Try to figure out how their furniture will fit and what picture they will hang on that spot in the living room.
    We are too emotionally attached to the purchase to be objective.

    Good luck to all,

    • I got lucky in some ways. I bought my first house at Thanksgiving in 2006. I bought at a discount as it needed a lot of cosmetic work which helped me become skilled at handyman work. This house was also a duplex. I figured that I am 21, most people my age are gonna be renting anyway. Why not be the landlord and learn a business on the side in this unstable job market, yes even in 2006. I also never planned on selling as I would rent it all out when I eventually move. We are now looking to move next year as since then I married and have a 1 year old and momma is talking number 2.

      I did take a 30 year fixed. Looking back it would have been best to get a 3-5 year ARM. This does sound crazy but I recently purchased a duplex on land contract that has an ARM. We started paying it and the interest rate was 2.75%, two months ago it again dropped to 2.625%. With my macro understanding on this I am confident it will stay crazy low for up to another 2 years. I will refinance into a 15 yr fixed at longest duration while making extra payments now to take advantage of the favorable financing. While your plan on paying extra on a 30 yr note makes sense. 97% of people never do it because it is a choice.

      All my properties have loat value to some degree but when I purchased them I also had no intention of selling them. I personally have set values on each that I would part with them in a good market but the rental income is my main focus.

      As I approach pirchasing my first home for myself, a single family for sure with a much higher pricetag, I am saving for a sizable down payment and again a 15 year note. If I can’t do it comfortably on a 15 year note, I have no business doing it. Then 5 years out I have also paid down a decent chunk in order to account for a sale if I want to move up or have to sell for some reason.

      Good ideas Jeff, thanks for aharing your insight, I always find benefit from hearing another’s point of view. The 3/bedrooms, 2/baths has been reoccuring for me lately so I appreciate the rational.

  8. If I were in Marty’s I’m not sure what I would do. I am generally a “stick to the contract” sort of guy but I also understand that there are exits out of contracts, defaulting being one, and may decide to use those exits. Marty does bring up a good point that in the business world this sort of thing is done all the time, defaults, broken contracts, bankruptcy, etc. and the sometimes the business keeps on going.
    What happens though is that the banks get tighter and tighter for their lending requirements. If Fannie and Freddie ever do get phased out I would predict that the borrower qualifications will get even more restrictive.
    Strategic defaults may seem to help the owner occupants the most but in the long run it will hurt everyone, wether through stricter quals. or through higher taxes or through reduced govt. entitlements or all three.

    • With home mortgages being such a large part of the fabric of our culture, and a huge staple of our economy, I doubt that they will shoot themselves in the foot and leave mortgages to only the elites. Competition will come forward, and hueing to underwriting rules and regulation, to open up that market to others.

      • You are correct that competition will yield loan products for those less credit worthy. They will not, however, be the low interest loans we saw of yesteryear. They will demand higher interest rates and larger down payments to ensure that they have something if the borrower defaults.

  9. I would tend to aire on the side of caution, rather than just walk away. I am in a similar situation, whereby I live in Arizona which took a ” Big hit ” when the market took a downturn. But my Condo which I purchased for $105,000 in 2004 is now worth far less. I recently learned that the end unit, auctioned for $58,000 so therefore I am underwater for $47,000. I have two bedrooms, two bathrooms, two balconies, a pool, covered parking, and my mortgage is $603 a month. I would have to be out of my mind to walk away, even though it is in fact underwater. Would I like a reduction and a loan modification, ” Yes ” ! But lets be realistic about it, my point being for one thing, I
    would Not walk away. It is my own opinion and I would just like some feedback. Thank you.

    • I wouldn’t walk away from that, $600 for a great condo is okay, even if it is underwater. However, when you bought a home for 388,000, and its not worth 150,000….The difference is your mortgage by 3x’s. And thats just the difference.

      • I don’t see how that is different. It is all on percentages. Dollar figures shouldn’t matter. I don’t think it comes down to a moral or ethical decision either. I believe it is about business. If I am comfortable with purchasing a home with payments over “x” period of time, then the underlying value should not be overly relevant. The change would come if I lost my income among other similiar situation in which I could not afford it.

        • Kyle, as Lisa pointed out, Steve has a very affordable payment. If he walked away no doubt it would cost him more each month, not to mention all the costs associated with moving. He’s really nothing more than a renter right now anyway.

    • I wouldn’t assume that the current value of your property is actually the same as a property at a trustee’s sale. Those are all-cash purchases, sight unseen, with no disclosures etc. I’ve seen the same home purchased at an auction for $58k sell a couple of months later (with no improvements) for $90k for a financed, retail buyer. The point being, just because you see a short-sale or a trustee’s sale house go for a low price, doesn’t mean you can buy one for that price.

  10. In most cases, I believe, underwater homeowners who decided to walk away from their mortgage dues and just sell their homes in a lot cheaper price could actually drown and “kill” them. It will just give them the feeling of hopelessness, imagine putting your investment on that dream house and then just walk away from it. Buying a home is not like buying candy. When you decide to buy a home, then you should be responsible to pay for what is due. It will also give the homeowner bad credit reputation.

    Just my thoughts. I admire you for your stand.

    • Louise, I feel awful for those people who become so emotionally attached to their homes that they wipe themselves out financially to keep them. I learned a long time ago that a house is just a place to live. It’s what’s inside (your family, your stuff) that makes a house a home. The good news is that stuff is portable.

      I just read over the weekend that the FHA will insure loans to those that do a short sale in 2 years, for foreclosure it’s 3 years. To able to walk away from an underwater mortgage and buy again in 2-3 years doesn’t seem too hopeless.

  11. I commend you for writing this, and I support your BUSINESS decision, I am sure it was not an easy step to take, and it sounds like you did not have to do it, but none the less life will go on for all. (and that is really what matters… life, family & friends!)

  12. I understand the argument that paying down a mortgage and honoring the contract is a moral decision, but as Marty states, a mortgage is not a handshake deal between friends – it is a contract with consequences and benefits that are (or should be) mutually understood between the two sides. Walking away from a home due to an inability to pay is painful, and but immoral? I wouldn’t go that far.

  13. I had to strategically default (I was unemployed, the choice was to use my savings to save the house or cut my losses). 3 homes later now, I am ramping up on my real estate business. I am in a better position than all my underwater buddies (some who are bleating on this page about not walking away). I mean, they are complaining, and I am fixing up my 2nd rental property because I have more freedom. Lesson learned. Somebody’s choice to not pay on a credit card, car payment, or house, really isn’t your business to judge someone’s on. You’re just being opinionated, because you don’t know what people are going through. I am being opinionated when I say that you are probably making a bad business decisions to keep paying on a house you dont even want anymore. Who is right?

    A house can be a home, or a business. I am in the business. Business says walk away from a bad deal. Your heart tells you to be what you consider “moral” and keep paying. To be honest, if the bank did not take the house back, i would feel guilty. They do get it back. Thats the deal. They are a lot more protected than I am. Great article, people will always be judgy and preachy when it comes to that, then others are a lot more logical and finance oriented. Deal with it. Stay under water, or dont.

    • Lisa, I like your business focus. My situation has been very different as I live in Wisconsin with a low beta on housing prices. I like to learn from past but also don’t like to dwell on the coulda, woulda, shoulda. As a young man in my mid twenties, I don’t have a great deal of experience under my belt but information is everywhere to learn but as we all know this only goes so far. I will gladly be called a fool if it can help me in the future. I feel that to not admit and acknowledge mistakes locks them in and prohibits personal growth.

      Reading through your story I have a few questions. I don’t know if you had rentals prior to your strategic foreclosure but if so has your views on real estate investing changed? You say people are not to judge others on if they decide to not pay a credit card or mortgage and the like. Throughout your time in rentals, do you not screen your tenants? And if you do, do you rate them differently if they have a foreclosure or eviction or bills in collections? If that is not a factor for you I admire your consistency and wish you well in such a risky endeavor. I for one do screen my tenants and am also prolly more lenient than most but I also make sure we have a frank conversation about their finances. I also share some of my experiences and offer my assistance with any questions they might have. So far that has served me well.

      Lastly I hope everyone can take from this blog the lessons to be learned so we collectively don’t have to face such decisions ever again.

  14. Today on HousingWire.com it was reported that a principal reduction would cost Fannie Mae and Freddie Mac $100 billion. The head of FHFA said “Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action.”

    In my opinion it’s unlikely Congress will approve any more bailouts, they’ve already shelled out $160 billion to keep Fannie and Freddie afloat.

    This leaves underwater homeowners with just one option – strategic default.

    Read the entire article here:


    • This would be very beneficial and much more organized for out economy. The problem is with American’s understanding of our monetary system. Above you stated that the taxpayers bailed out the banks and got the houses. TARP (bank bailouts) actaully made money for the US government. This may sound good but in reality it is not. What that means is that money was taken from the private sector. People always state that the federal government has a debt of “x” and that means that every household in the US owes “y”. This is not how our monetary system operates. By organizing a mass write down of underwater mortgages facilitated by the federal government it would make the whole real estate stabilization much smoother than this hap hazard approach we have right now.

      Here is a great article on our monetary system from today. If you spend a couple months reading on this site with a questioning but open mind you will be a different person in 3 months.


  15. Well I’m certainly not vying for “King for a day” but if I were…

    I’d burn all the forclosures to the ground let supply balance closer to demand
    Let the insurance companies eat it ..
    (meaning they would get bailed out anyway cause that’s just what we do)
    once the excessive home volume has been mostly liquidated all other property values would start to go back up and housing could start building again along a more realistic path of growth instead of the crazy speculative growth everyone was building on that has created virtual communities of vacant homes around the country.

    Forclosures are not the only problem. There are brand new homes 3 to 5 years old out there that have never been lived in.
    You could burn them too if you want..

    Of course I am no housing terrorist or anything, that is just the fastest way to rebalance a market that in the shape it is in will take a lot longer that 12 more months to climb out of

    Keep them lighters in your pockets now..

  16. Because of the economy nowadays, people tend to rent a smaller house than to own one. You never know when you’re going to lose your job and what will happen in the future. Its really hard to earn money and pay all the bills monthly. As for Jeff you got a point but I don’t like the idea.

  17. I guess there is a bit of light at the end of the tunnel. In Colorado Springs where one of my houses is at they are still behind the forclosure curve. The house is rented out so I am not worried yet. I bought it as a HUD repo so I still have some equity in it. Even in 2006 I got a good deal rather than the typical overinflated cost they were back then. Good thing too or I would be in a much different position than I am right now.

  18. Marty Boardman, the name of a person to whom NO ONE should ever lend money. As a lender myself, I am very aware that regardless of who signs the loan documents whether personally or on behalf of a company, the borrower is always a person. We lend money to people because it is the people who pay the money back. Some people try much harder than others, and those are the people who deserve loans.

    Marty is very proud of the fact that he does not honor contracts. That is his business. He is quite comfortable burdening others with his obligations because it is in HIS best interest.

    Too afraid to tread water and struggle with a poor decision or a rocky economy, Marty Boardman cries foul and demands a rescue from an underwater mortgage, even one he could have continued to pay. You, sir, are a coward. And what is worse is you are trying to convince others to join your craven ranks. Pathetic. Thank you for contributing to the disaster that is this nation’s real estate market.

    Mental note: NEVER LEND MONEY TO MARTY BOARDMAN (and others here in the comment section who are strategic defaulters)

    • Jack, I was hopeful that someone with your point of view would join the conversation (and scold me so unmercifully). I’m grateful for your comments because it allows me to further illustrate why I made the right choice.

      In addition to being a fix and flip investor, I’m also a lender. Like you, I lend to people, not companies. Before I lend, the borrower must send me all of their financials, (W-2, proof of funds, etc). I also require at least 20% down from the borrower. Of course, I understand that even with all of this information in hand the borrower could elect to walk away from the home at any time, leaving me with little recourse. I’m quite comfortable with this business arrangement because I’m confident in my ability to identify qualified buyers AND if things don’t work out I get their 20% down payment AND the house back.

      If a borrower is a coward for defaulting on an underwater mortgage then the person who loaned the money is a fool. Both must share the consequences of their poor decision equally.

  19. Marty Boardman, you speak the truth when you state, “…then the person who loaned the money is a fool.” That is precisely the reason I have made a note to NEVER LEND MONEY TO MARTY BOARDMAN. I would be a complete fool to do so.

    The excuses you cite to justify your dishonesty may help you sleep at night, but your actions are fraudulent. A mortgage is a promissory note. See the root word in “promissory”? It is an unconditional PROMISE to repay a specific borrowed amount. You elected NOT to honor your written promise simply because you “didn’t think it was worth it anymore”.

    Why should I keep my promise now when my home has dropped in value? I’m just throwing money away, right? No. You are keeping your word and honoring your promise to repay.

    You can keep telling yourself that you made a savvy business decision by turning your back on your obligation, but your blatant disregard for all of the honest Americans who are fighting tooth and nail to keep theirs is shameful and unacceptable. Plus, they are the ones who will end up picking up the tab for your $100k+ theft.

    If you are such a wealthy big shot investor/lender, why don’t you do the right thing and pay back your lender the balance of your old loan? I know why. Because you don’t want to, and a written promise from you is completely worthless. Cheers to you, Marty Boardman. You represent America well.

    • Jack, as Sherry accurately pointed out earlier, lenders like yourself have a vested interest in convincing borrowers that it is somehow immoral to walk away from an underwater mortgage. You make people feel ashamed, guilty, afraid, dishonest and irresponsible for doing something that is done in the business world every day. You use words like “cowardly” and “fraudulent” in an attempt to evoke emotion. Emotion makes people do irrational things, like continuing to make huge payments on an over-inflated mortgage. Most of the time this works in your favor.

      To clarify for those of you reading here, a strategic default is not fraudulent. Lenders like Jack want you to believe it is because it’s in their best interest.

      Consider this – a bank packages up a bunch of bad loans, sells them off to an investment bank, who then bets against them going bad , and then both get bailed out by the federal government when the entire enterprise collapses. Top executives for these firms collected millions in fees. Now these companies have the audacity to cry foul when underwater American homeowners use a perfectly legal strategy to bail themselves out. Talk about the pot calling the kettle black.

      • Good Grief Marty, I get the sense of being part of the Salem Witch trials. Sorry all this has caused such harsh reaction by the “Preachers”. I like the part of the “Promissary Note” being an unconditional promise. Something you should “take to the grave”……… with your family in tow, no doubt.

  20. How many interest only loans did you peddle on people Jack?
    How many 3 yr ARM loans when the “People” who had to repay it could in no way afford the increase after 3 years?
    I bet you talked a good game like so many “lenders” do telling the client Don’t worry you can just refinance before the three years is up and it will be A-OK

    I never heard a single complaint out of a lender 5 years ago when the house pet could qualify for a mortgage, but now everyone in the lending community wants to complain when “People” take their own personnal bailout.

    I may not have taken advantage of walking away from a loan but for the ones that did.. Bravo


  21. I too, was in Marty’s position a few years back; “Should I stay, or should I go”?
    After all reasonable attempts to modify failed, I initially chose to stay & try to “honor my commitment”.
    After a year my situation got worse, I tried AGAIN to modify & was turned down flat. We could’ve either stayed where we were, struggled mightily with an unreasonable & unsympathetic bank that could care less what we were going through, or walk away. We gave the bank ample warning of what was to come…their response was “You’re deadbeats who have no honor”. So…we walked- & it was the best decision we’ve ever made.
    Banks REFUSE to see these situations from a “human” perspective..it’s all about the numbers. So we made a business decision, & removed ourselves from any “personal” aspects.
    Today we’re recovering nicely, & taking our time looking at REO’s in our old neighborhood which are selling at half the price our old house. If they’d agreed to the modification, we could have muddled through- but they got greedy, & ended up losing even MORE money!
    I’d recommend default as an option to any homeowner who’s left with no choice. We bailed THEM out, & they’ve refused to do the same, so…….adios!

  22. We purchased our dream home in 2005 with full intentions of never leaving.. we put 50k cash money down on it in Southern California we paid 392k for the home with 50k down. Now our house is worth 150k IF WE WERE lucky. We had good intentions we are not kids we were 50 we we chose to do this and we both have good jobs. But as I see my wonderful neighbors start to let foreclosure happen because PAYING A 3K A MONTH payment on a house in a neighborhood that is turning ghetto from the foreclosures when you can rent a home a block from a SO CAL beach for less… makes you wonder when to give up? Well We made our 3k payments on time now for close to 7 years..the house next door to me THE BIGGER HOUSE sold last year for 156k in a short sale and now have losers living there with dead lawns and a mattress in front makes you just sick to your stomach. Fannie and Freedie need to take responsibility for this too. We have now stopped paying our mortgage and chose not to look for relief UNLESS it was to lower the principal to the market value. And that will never happen WHY? Because..this is how it goes : LENDER forecloses..SELLS for market value..INSURANCE pays the differnece to the lender. so the lender looses nothing. Until this changes It will remain the same. We now rent a apartment 1 block from the beach ..And my stress level is lower..and I can now spend money into the economy again

  23. Love the comments.. Most are valid and very to the point.. What is really fascinating is the fact that Wall Street and DC have not paid any signifcant price other a reduction in bonuses and contributions perhaps. It seems that they walk away from their obligations all the time.. Dont get me going on this one…..

    Let me post the real estate fiasco a different way.. Most of the folks(aka consumers) who bought a house did so on the basis that they would not lose their shirt, work two jobs to do the “right thing”, did not plan on a divorce or that Servicemember getting recalled to go to the war…

    So they did not understand what the hell Wall Street did with Mortgage Backed Securities(aka MBS) and other fancy “insane financial instruments”, and that DC at least in my understanding let most of financial geniouses walk away.. Matter of fact, didn’t some of these financial institutions go out of their way to get the bail out from their CMO, CMBS, RMBS, etc instruments? Always, loved the fact the institutions said they were forced to take the bailout….

    So in a nutshell, “Joe the dam plumber” (aka “Joe the Plumber”, no pun intended) who bought a house with the intention of staying in the house for what, seven years, has to give up every dam nickel he earns because a bunch of greedy ass financial morons traded these things to every fool that would buy them here and overseas. Moodys, S &P, etc have had a free pass..

    Hmm, lets see here, I am just a moron perhaps but let me see.. As an example, JP Morgan wants to sell lets say ” Good homes MBS” and needs a rating so they can sell to hedge funds, Iceland, some States Pension fund, etc.. They(JP Morgan) have a contract with Moody’s to rate this “instrument”. Everyone at Moodys in the process is paid on some sort of commission/bonus and that is of course depending on Moodys retaining JP Morgan as a client… Perhaps I am wrong.. Keep the customer happy and keep the income coming.. Who cares if the MBS has some mortagage percentage of an illegal alien working at Costco obtaining a “no doc loan” in Ashburn VA (lets say from American Home Loans or Ocwen)getting a $700K loan ( you can get $600 a room lets times 4 rooms is what.., Magic income….and then throwing that in there with a 50% prime loan from Salem Five on a Newburyport, Mass $2.2 million dollar oceanfront property where the mortgagee puts 50% down and has $800K in the bank. Thats a MBS in my understanding,, correct me if I am wrong.. Looks like a AAA rating to me.

    Sorry, but I used to feel bad for owners and get upset when I see folks walk away.. We own a small Real Estate management company and see it from all sides. MOst of the owner I deal with only have the home now because they cant sell it without cashing in their 401K , or I should say those lucky enough to still have one.. I talked to one owner who has Top Secret Clearance and is under $150K, he would have away years ago.. But since he has a job where you have to just breath to get it he knows he wont make $180K with no high level clearance.

    Now, I realize it is actually corporate america(aka Wall Street) and DC politics that actually started the inferno..These credit unions would have never let these loans go past there desk. Let it burn since the folks that actually created the situation are sitting very wealthy watching the flames burn up on their seat on the “Hill” here or in NYC I should say the 14 million dollar coop overlooking Central Park…

    So Joe the plumber,, Walk away, who cares about you, your family, around your TS/SCI security clearance, etc…. Unless you contribute or deposit enough perhaps you may not be able to call in a favor.

  24. I remember working for a credit clean up/mortgage company several years ago. They funded anyone and everryone. It was all about numbers and profit–and making consumers believe it was all okay. Sure, consumers should have been more responsible and aware, but it was a freaking free-for-all that went on all through the 90s and into this past decade. So it’s time for everyone to just get real. The overinflated prices were all made up anyway. All these self-righteous kids who talk about Americans sucking it up and being responsible have no experience. This blog makes total sense.

  25. People wake up. Do you hear any investors crying because of this debacle? NO! Why because they were insured by AIG, and get this it was for 10 times the loan amount as allowed by the Federal Reserve. They made money. AIG being bailed out by tax payers, remember most Americans pay no income tax, is left with a lot of unsecured loans.

    The banks suing for foreclosure are going to keep all the proceeds of any of these sales because they are allowed to keep charging fees for a loan that is already paid off.

    Everyone is focused in the wrong direction as America is still being fleeced.

    Google Regis Sauger for more information on this.

  26. Marty,
    I am finding this to be very informative. We have a condo in Florida that we are probably $80,000 to $100,000 underwater on. We really don’t want to default but financially seems to be the smart thing to do. Seems like we are throwing money down the drain every month. And to make it worse, BOA keeps sending me things saying we can refinance, and when I call they say we aren’t eligible. We have LPMI, which was never disclosed, and they won’t do anyting with our loan. Also, same as you, no problems paying our dept, but why shoud we continue pooring money into the “black hole”. Thanks for your input.

  27. For those in Arizona, I am in a similar situation with my home. I am curious as to your approach when you made the business decision to get out of a bad investment. (I also firmly believe that we have an emotional attachment to homes, which is why we look at this as anything but a business decision.) Did you Foreclose, Short Sale or did you tender the deed in lieu of foreclosure? I am looking at those 3 options and there are a lot of opinions around all 3 from agents, attorneys, and financial advisors…

  28. We bought our home 9 years ago. A log home on 10 acres atop a hill that has incredible views. We love our home. We have spent everything we have on improvements to the house and the property. Three months after we moved in to it we had to replace the pump on the well. We got two 2500 gallon water tanks to protect our property, remodeled a bathroom, put in a spa and patio and decking all around the house. We are now 5 years from retirement . We bought our home knowing that we could spend about 15 years there, and then we would be able to sell it for a profit (investing in our retirement). We are both in Education and our salaries have been cut substancially for who knows how long.
    With that said …we have gone to the bank.. filled out their 35 page financial papers and denied. The bank told us, when you get your pay stubs with the lower salary we can revisit your request… We called the bank with our new pay stubs and the bank told us… “we can’t help you because of loss of salary” the only way we can get help is if we divorced, permanent disability, or death. They said with “loss of income” we can get a second job. She transferred me to refi to talk to them about a “short refi” .. then I was told, because you are upside down in your loan we can help you if you come up with $100,000. (If I had $100,000 I wouldn’t need help) So now we are faced with a decision…Should we short sale, foreclose … We really don’t want to go into retirement with bad credit. If we stay.. we won’t even have the money to make the house payment in 5 years. So as a business decision.. should we give the house back to the bank?rent something small for the next 5 years and save? or stay and lose everything in 5 years… Or are we going to be out of this mess in 5 years? We are very torn on what to do… so please tell me your thoughts on what we should do.

    • Laurie, how far upside down are you? Where do you live? The grim reality is few lenders will modify a loan unless you are behind on the mortgage. Is your lender local or some big nameless, faceless bank?

      It is unwise in my opinion to throw good money after bad. Bad credit lasts about 2-3 years. Bad debt lasts a lifetime. The FHA will typically lend to a borrower just 3 years removed from a short sale. According to Glen Reiley with Bell Mortgage in Phoenix, with 20% down you can get a conventional loan just 2 years removed from a short sale.

      Without knowing where you live I can say if you’ll be out of the mess in 5 years. In Phoenix where I live values here are up 17% in the last year. Many homeowners who thought they were underwater are discovering they’re not upside down anymore.

        • That’s a big hole Laurie. If you’re looking for specific answers on how each of those options will effect your credit I recommend you call a mortgage lender/broker in your area. I’d also seek legal counsel before going the strategic default route. I consulted my accountant and attorney before making the decision to walk away. You can always call me at 602-319-5391 or email [email protected] if you’d like to discuss further. Good luck.

        • You may not need to walk away. Your note might have been paid off by an insurance company like AIG. Many attorneys do not know how to prove this let alone how to present it to the right Judge (not the one presiding over a foreclosure). One reason why that insurance company doesn’t come after you is they do not have the note (which was destroyed) and the mortgage together(the note is the promise to pay and the mortgage is the security of the note) among the many reasons. The bank has no dog in the fight other than they had the right to collect as long as the payment was due, and that includes late fees and drive bys. That ended the 91st day of non payment, when the insurance company paid out. And get this that loan was insured for about ten times its original value. Banks are using a loophole in the mortgage to acquire the house then sell it for an extra profit.

        • Rodney, I don’t see how the insurance company would have paid off Laurie’s lender. There is no loss yet. She’s still current on her payments. I’m no mortgage expert but it seems to me the insurance payout wouldn’t come until the note becomes non-performing or foreclosure has occurred. And then the insurance would only cover the lender’s loss after selling the property at auction.

  29. If you are underwater and are trying to make a decision you may want to contact me. Some people will give you advice they think is right, but I know this business inside and out. I will try to help.

    • We have made the decision to short sale the home. We really don’t see any other option at this point. We would have to foreclose eventually anyway with the loss of income. Hopefully, making our house payments and keeping current till it sells will help (credit wise) rather than stop paying and going into foreclosure. I think I will sleep better at night too.

      • Ok not a problem. Just remember your note more than likely has already been paid off ten times over. If you change your mind let me know. I do some pre-screening for these attorneys so they are not overwhelmed.

        • Rodney, the only person that can pay off Laurie’s note is Laurie. Her note may have been bought and sold several times over at a discount but she’s still on the hook for the entire balance.

        • Marty,

          First of all notes are not bought and sold by the major banks for a discount. Any of those notes were sold straight to one of the secondaries such as FANNIE MAE, or FREDDIE MAC and THEY sent it to a Trustee.

          Servicing rights ARE bought and sold from Bank to Bank. This is the right to collect monthly payments for which they receive one percent of the payment and 100% of late fees. It also give the right to foreclose for non payment. These rights are authorized in the mortgage and the latter is being questioned due to the separation of the note and mortgage.

          The note ended up in a Mortgage Backed Security (MBS) through that Trustee. It was insured by each, the Trustee and the MBS for ten times the amount of the loan. On the 91st day of Laurie missing the payment BOTH entities applied and received shortly after application a pay out by said insurance company most likely AIG. So the NOTE has been paid.

          Now the Bank that had collection rights is trying to scarf up what they can. A forensic audit, not the $300 one but the more extensive one, will request opening of the SEC logs for that loan and will show that payment and will show any RESPA violations. It will take a qualified attorney to read that audit and present it. Also once the note and mortgage were separated the note became and unsecured instrument.

          The buying and selling of notes you are describing are usually unsecured notes, such as credit cards, which are bought and sold for discounts through collection agencies.

          Also once the NOTE was transferred to the MBS it was fractionalized and that WET note, the original, was destroyed. That is why there was the ROBO signing incident, the banks were trying to recreate the destroyed note because in many States the wet note is needed to collect a debt even for credit cards.

        • Rodney, forensic loan auditing, I believe, is pie in the sky. While it may buy a homeowner in foreclosure some additional time it doesn’t change the fact that they borrowed the money. The lender will ultimately prevail in court. If there was fraud involved then certainly the homeowner may win, but there are few examples of this.

          In Arizona, the foreclosure process is governed by state statute. We were completely unaffected by the the robo signing scandal.

          As for Laurie, she isn’t even behind on her payments yet so I don’t see how her loan could have been paid off.

  30. Thanks Marty and thanks to all of you who think marty’s did the right thing! Do you realize that those of us who have lose value in their home but continue paying their mortgage are getting screwed by you!! Each time someone in my neighborhood either forcloses or short sells, my property values go down even more! Thanks a lot! We’re all underwater! None of you people are victims. All of you who chose this path should have to pay some kind of restitution for abandoning your financial obligations. It makes me sick that I do the right thing and get nowhere and you flakes ‘get a fresh start’. Sorry, I guess I’m just old school, but if my parents in their day couldn’t have afforded to pay their mortgage, they would have gotten second jobs! I guess us baby boomers thought differently.

    • David, my cousin is an avid golfer. He has a saying – “the rules of golf are meant to help you, not hurt you.” Similarly, the laws of the land are meant to help people, not hurt them. Our federal and state governments created tax and anti-deficiency laws so that citizens can walk away from bad mortgage debt, much like corporations do through bankruptcy.

      All of those people that decided to walk away did pay restitution David – in the form of their down payments, property improvements, monthly interest payments and severely damaged credit scores. Not to mention the cost associated with moving out of their homes. It will take years for these people to recover financially and become homeowners again.

      For most strategic defaulters the issue isn’t affordability – it’s bad debt. I seriously doubt your parents, or any other wise baby boomer, would have taken a second job in order to pour more money into a bad investment.

      As for property values, well, they were overinflated anyway. If it wasn’t for all the bad loans handed out prices would have never gone up as high as they did during the bubble.

      • Love that analogy Marty and you are right those people did lose a lot.
        What people don’t understand is prices are regulated by demand, and the general populace is running scared because they saw what happened to people that should have never received a loan of any sort, which was actually the fault of the greedy wall street investors, and their political buddies. They are the ones that influenced the secondaries to relax lending requirements.

        Prices will come back in time, they always do. Real Estate is a roller coaster, it has ups, downs and wild twists but it always comes back.

  31. Marty, you sound like a 12 step program, “It’s not my fault!” What, your arm was twisted into signing a mortgage contract that you couldn’t afford?! It wasn’t your fault when you decided to use your home as an ATM? When you decided that you were the cool guy and bought the Harley, the Disney cruises, the Corvette, etc.?

    I’m paying restitution too. I’ve lost value in my down payment, my inprovements, and the foreclosers and short sellers are ruining my property values even more! Where and when does this end? I just don’t think you’re understanding that we are all losing. Please let me know as I’m really looking forward to being able to buy an estate in Beverly Hills for $100,00o and not concern myself about apppriciation.

    Sorry, but you’re asking people to ruin other people’s property values. Is this so that you can buy cheap property and flip it when and if property values go up?

    I certainly don’t want to make this personal, but again, where does this end?

    • David, no where in my post did I say I couldn’t afford the mortgage. Nor did I ever write that I used my house as an ATM. As a matter of fact, I put 20% down and spent over $50,000 remodeling my house. Furthermore, I made my payments on time for 5 years. Unfortunately, the market dropped in Phoenix by over 50%.

      I made a business decision to walk away because I was over $100,000 underwater on my mortgage. Businesses do this all the time. Even the Mortgage Bankers Association did it in 2010. Talk about hypocrisy. They walked away from a $75 million loan. Check out this article:


  32. Marty, sorry, I wasn’t meaning ‘you’ in the second person but ‘they’ or ‘them’ in the third person. Others have used their home as an ATM , vacation machine, etc. I too put 20% down and spend $60K remodeling and I’m in Las Vegas! I’m screwed worse than you! But, instead of walking away, I’m considering refinancing with a 15 year note. Interest rates are very low and hopefully I can make a profit 10 years from now on the back end.
    I understand your decision, but each time I see or hear of someone in my neighborhood forclosing or short selling, there goes my property values.

  33. So glad I found this article. I do am in a slight pickle and trying to determine my options. Right now the house that I bought 5 years ago is down about 50K of what I took a loan out for. While I am responsible and have never been late or missed a payment, my life situation has changed in the past five years. I married someone who had their own house. We decided to move into her place. Currently, I am renting my house. I am charging just enough to cover rent, but I am not covering expenses with it. I am losing more money than what I get back for taxes. I never thought I would end up in the landlord business, a business I am not terribly excited about. My whole game plan was to be in this house for 7-8 years and eventually get rid of. Instead ,I now have to maintain two mortgages. I hope that I have a consistent renter or else her and I will be screwed. I talked to my current lender about refi, but he was overly pessimistic about it. I don’t look at my house as an investment property. I look at it as a home. The only way I could ever walk away from my house is if one of us loses our job. I would then have no choose.

    Marty, I do applaud you though. Basically the system failed us due to greed. I think you made the right choice.

  34. I am so glad I ran across this site. We are going through the pains of leaving a house in San Jacinto, CA, and moving to Vancouver, WA, so that my wife can care for her very ill mother. We moved with the biggest U-Haul there is and now are mooching off our brother-in-law for storing our goods and a place to sleep where Mama is… now dying it seems. We want to remain in Vancouver as the place we left is going to the dogs… and I don’t like the laws in California even though I am a second generation Californian.

    The year 2000 I bought the little house in San Jacinto for $62,000 with about 26% down cash. In 2005 or 2006 it was appraised at $220,000. Around that time I had a quad bypass and serious upkeep to the car. I am retired and make $1460 in social security and $223.65 with a small pension. I should have sold the house in 2006 when the market was up and rented a trailer for a while but I went to Russia and brought my bride back… the best wife a man could ever have.

    So with the somewhat forced move to Vancouver we are now underwater because my debt from my “ATM machine” (the house) is $150,000 and is in a short sale process for $90,000. I have no idea where the chips will fall but reading the things here, and especially the good things that Marty says, makes me feel that we are doing the right thing.

    My dear wife, Irina, and I were talking the other day and I let her know that I wished I could have met her forty years ago. She smiles, she always is, and said, “No you wouldn’t.” So I asked why and she said that I would have been promptly taken away and locked up in a Russian prison. So I asked why would that be? And she said, ” Well, you know, that forty years ago you would have been forty and I would have been ten.”

    So the plan is this: Let the short sale take its course. Stay with the brother-in-law while I use the house payments to pay off the $12,000 card debt (I have never missed a mortgage payment in my life – but I will now to quickly pay off the cards), and in a year I will be debt free (unless I am forced to pay the $60,000 shortage as the house will sell for only $90,000 at best.

    So, one year to take care of Mama, she dies, Irina gets a job (she has a Ph D in zoology) and in one year on her job that totals the 2 years needed to heal from the short sale. I want to buy some land and build a house and at my age I hope I can live that long. I designed and built a house 42 years ago on Dietz air strip in Canby, OR, (instrument private pilot) and that was so much fun. I should never have sold the place… another stupid move of mine. Anyway… thanks all for your stories. Bob

  35. Great reads and comments by everyone.

    I am in a simiilar situation, I have a 330K loan broken up into 80/20 and now my condo is appraised at 145K. The unit condo association is horrible, the builing has roof issues, where it caused issues on my ceiling (im on top floor), so bad that the corner of my bedroom feels like i can kick through it. The hallwasy have horrible mold. The association isnt fixing anything. I have a 6 year old son and a 16 year old son. The neighborhood took a turn for the worst so i have concerns there. Since i fell behind on my association, im paying extra 290 a month for a total of 590 a month for association.

    I’m in debt with collectors calling on other items, I have been paying my mortgate but ignoring about 7K in other bills and 15K in student loans.

    My bank has given me 1 year extensions loans (im assuming 1 year arms) for the past 2 y ears. Does it make more sense to walk away and rent and get my self stable during the next 4-6 years, fixing my credit.

    I figure i am going to ask them for a modification to within 10-20% of value and if they go for it, stick with it, otherwise…..walk away?

    Thoughts? Much appreciated.

  36. I really do feel for you and your situation. Unfortunately the banks take is
    that you can bail yourself out first. I can just imagine someone with the same
    situation if they lost their job! Looks like home values have pretty much bottomed
    however – Its going to be 5 years + before they regain $50,000 .

  37. Wow. This is good stuff. I am really at a loss myself. in 2006 when when I went to purchase my first home I wanted to do things right. I got offered oodles of money, but I made sure I could make the payments based on my lowest wages at my current job. So I ended up in 1000sqft home, but loved the yard and the house had a nice layout. I didn’t mind because in 5 years I would sell and upgrade as my family grew.
    Guess what. My family grew and I am stuck. My home that I owe $160k on is worth around $100. I can still afford the payments, but I am watching people around me buy larger homes for less money. My wife and I had a surprise baby that put us at 4 kids in this 3bd, 1 bth home.
    Right now we are debating whether to add on so we can stay here or walk away. I admit I feel morally responsible for this loan. I also don’t like the idea of renting. Further My ability to save up the 20% that I would need to buy a house in 3 to 5 years is not so great.
    My sister in law just bought a larger house for less money. Guess how that makes me feel. I have only one debt (student loans) and have never missed a payment on anything.
    What do I do? This is my kids home. I realize putting any money into an addition is throwing money away. Part of me wants to walk away, part of me does not want that.

    I am glad it worked out great for you. Not all of us are quite willing to take that leap from emotion to business.

  38. I am not sure what to do. We did the right thing and pruchase a house within our means. The economy bottomed out. My son was diagnosed with a brain tumor. We tried to work with our lender. It took us two years to finally get a modification. The modification added $25,000.00 and 10 years to our existing mortgage. Our payments did not drop. The reduction in our payment was due to our property value dropping. We our trying to decide if we should stay and make our payments or move so we can make our children’s lives more comfortable in a smaller home.

    • To most of the people on this blog:

      I am a finance man. I look at every big purchase I make as an investment, including my home. Let me give you my situation. I currently owe about $100K more than what I can sell it for now. I have tried to work with the bank for a modification however I have been declined based off of my income and my ability to make my payments.

      Many people think that if you signed a contract you should go by the terms of that contract regardless of the current circumstances since you signed it. Although that is a commendable notion, from a financial standpoint that is insane! Why would you sacrifice your life to make payments to a bank? That blows my mind.

      With that said, here is my plan.

      1) Stop making payments.
      After the bank failed to take my modification I stopped paying my mortgage. Why?
      I need to be out of my house in the next 3 years (growing family). From right now until the end of 3 years I would need to have the value of my home appreciate $100K or I would have to invest in my home $100K (or a combo of the 2). There is no chance of that happening. Also I cannot rent the home because I would have to kick in another $500 p/month, which I am NOT doing. Therefore its simple, time to leave.

      2) I did my research.
      I found out that 8 other condominums in my community were in foreclosure process. Also, I found that the bigger units were selling for approx $60K less than what I currently owe on my mortgage. That tells you things are not turning around any time soon. I submitted this research to the bank along with a letter indiciating my intentions (be sure to have a legal consultant)

      3) Time to save
      It could take a year or up to 4 years depending whether you do a short sale or a foreclosure. But during the wait it is important to reduce any other debt you have, along with saving your cash. Make sure the mortgage payments you are not paying are going to good use

      4) After I sell/foreclose
      When you hear that your credit is going to get destroyed if you shortsale or foreclose, that isn’t exactly true. Your credit will certainly get hit, but it may be worth it. If I short sale, that will be a hit on my credit for 3 years, but totally worth it. Let me break it down:

      a) I stay in my house for three years investing into the home $100K. I would then break even, sell, and walk away with no value out of the home or money in my pocket

      b) I stop paying and start saving. In three years I make a fresh start on my credit with $100k in my pocket.

      What would you choose?

      Also, the three year hit applies to Fannie Mac and Sallie Mae. Basically it is saying that you cannot take out another loan with either of those institutions for that time period. HOWEVER, if you are like me and have good credit until this event, you can go to a local bank (town bank), and show them that this was an “isolated incident’ and that you are a responsible person. Many people get their loans that way.

      In three years I will have a ton of cash and a new start. Although it definetely stresses me out not to pay my mortgage I know it is in the best interest of me and my family. And what else matters?

      My intention of this was to hopefully help some of you think about this differently. It is not the end of the world, in fact in my case it is the start of a new one.

      Also, I did not talk about tax consequences or other potential liabilities, but that is something you HAVE to do your homework on as well. Before doing anything talk to a Lawyer, CPA, and real estate agent that specializes in shortsales/foreclosures.

      Good luck everyone!

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