Wednesday, January 30, 2008

Homeowners Abandoning Their Homes

So now it seems that the next disaster in the housing kerfuffle is upon us. Homeowners with negative equity are walking away from their homes and their troubles. Does this surprise anyone?

Over the last 20 or 40 years, banks - along with everyone else - have decided that it is better if people never build up any equity in their homes. Second mortgages, home equity lines of credit, etc. are so common it is insane. People are essentially renting from the bank.

My father's generation stayed in their homes forever. (My dad has been in the same house for more than 40 years.) Leaving would be a hardship for him. I almost never managed to unpack all of the boxes before it was time to move again. One place was a lot like another.

Today, there are the issues of negative equity. People save money by walking away.
A commenter on L.A. Land this morning writes, "I am one of these people. My condo has dropped in value from $520K in 5/06 when I bought it to $350K now. My ARM payment will probably go up $900 per month in June.

"Despite all this, I would be willing to stay if the bank would refi the loans to a 30 year fixed, but since I'm not a 'hardship' case they'd apparently rather foreclose. I guess the only way I could qualify for loan mitigation is to get my boss to fire me, stop making payments, and wreck my credit. In fact, my bank won't even talk to me until I miss a couple of payments.

"I have purchased a cheaper place in a nearby area now, while my credit is good, and will stop making payments on house #1 after house #2 closes. I know the foreclosure will be on my credit for 7 years, but I will have saved a lot of money.
As he notes, the loan is "secured" by the property. The bank can take it back and ruin his credit, but there is damn little else they can do.

Now I don't hold this guy blameless. Most people with the loans and homes that are a problem got into the situation because you "never lose money in real estate" or some other urban legend about investing. And it being Kalifornia, the prices were (and maybe still are) insane. [hat tip Michelle Malkin]

The interesting thing to contemplate is, what does this say about "the full faith and credit of the United States?" Will we be willing to renege on other loans as this attitude spreads? Never say never.

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