Should I walk away from my mortgage?

If you are like many U.S. homeowners your mortgage is more than your house is worth.  If you are in Nevada you are in the 2/3 majority, in some California counties the number is even higher.  So you are asking yourself whether you should walk away from your mortgage since your bank has refused to reassess and reduce your mortgage.

There is a lot of writing on this subject mostly from financial columnists (MSN, Kiplinger, etc.) who were advising you just a short while ago to not worry about ARMs and to get into the real estate market to "build equity".  But they never really get to the point about what you should do now.   Even state and federal governments aren't doing their responsibility to fully help you know your options, take for instance Feddie Mac which I think puts undue pressure on staying in your "under water" house: http://www.freddiemac.com/avoidforeclosure/your_options.html.


My view is that if your mortgage exceeds the market price of your home by  more than 15% you should give the keys back to the bank.  Why?  Because making up 15% is a long way back for the real estate market and it won't happen for a long time, probably more than 5 years.

Simple example: you bought a $500,000 home with 10% down. You've been making payments for several years and your mortgage is now $425,000.  Your neighbor's house sold for $350,000 in Q4 2009 (Oct - Dec).   If you sold the house today you would have to find another $75,000 (plus fees associated with the sell) to pay the bank which is 20+% of the sales price.  If you have that much additional cash sitting around, save it and buy some I Series U.S. Savings Bonds. 

I came to my conclusion after reading a lot of opinions on the subject.  The writing that most influenced me was from Professor Richard Thaler at the Univesity of Chicago writing in "Sunday Money" at the Times.  (There's also a paper by Prof Brent White:http://online.wsj.com/public/resources/documents/WalkingAway1029.pdf)  Here are the main points:

• One can have a good credit rating again--meaning above 660--within two years after a foreclosure.
  
• If lenders and big property owners are doing what is in their interest, such as defaulting, then why shouldn't home owners? (Example: Tishman Speyer of New York)
  
• In states like California and Arizona, mortgages are non-recourse which means that the lender has no claim on a borrower's other possessions separate from the home.  In fact says Professor Thaler, homeowners in California and Arizon pay extra for the right to default without recourse.
• The economic and social costs of giving the house back to the bank is far less than the cost of paying off an underwater mortgage.

So if you are "under water"  on your mortgage seriously consider giving the keys back to the bank and look forward to another day when you might be in a position to re-enter. It will be a big burden of your back (and heart) and it's not as big of a deal as you might think.