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.