Meager Income

Pay Off Debt, Retire Comfortably on Meager Income, Win the Lottery, Not Necessarily in that Order

Walking Away From Your Mortgage and Home

Posted on | June 26, 2011 | No Comments

Ali and Christine were picking on Jeff in the video below for making the decision to stop paying his mortgages and letting the banks take back his properties.  You can see the full interview below and a follow up story here:

I’ve included bits of the transcript for analysis:

VELSHI: OK, one in four homeowners are under water that means they owe more on their mortgage than their actual home is worth. Most of those people Christine are going to continue to live in their home and pay their mortgage.
ROMANS: Absolutely. For them they’re going to stay in that home and they know that over 10 or 15 or even 20 years, they’re actually going to recoup that investment.

I wish the media would stop referring to a primary home as an “investment.”  That is so 2005.  Now, we realize it is a liability.  How do you recoup all the money in interest you’ve paid to the banks?  For the majority of home owners that money is lost forever.  The same goes for any repairs and property taxes you pay while “owning” your home.

VELSHI: Jeff, help me understand this, I go to Best Buy, I buy a TV, I put it on credit, but I was the first guy to buy that new TV and six months later, it’s selling for a lot less money then I paid for it. I can’t stop paying the bill if I had monthly payments on it so why can you stop paying your mortgage, because the value of the house has gone down?

Comparing buying a house with a mortgage with buying a tv?  Really?  We know what will happen if you stop paying your credit card bill.  Eventually, it will be charged off and sent to collections.  They’ll keep calling incessantly and then they’ll either write it off and send you a 1099-c or attempt to collect using our court system.  If you are lucky you won’t be pursued: Lender Drops Pursuit of Debt.

VELSHI: Why is their problem? You made a decision to buy a house at a certain price, we all make decisions, sometimes we make, sometimes we loose. Why is it the banks problem because you doing that means that I have a harder time getting a mortgage?

During the crisis, banks were the only ones that knew how the prices were being justified.  They knew the data that was being used to justify the prices.  As a individual, Jeff had no idea how or what numbers were being used by fellow homeowners that allowed the prices to be bid up.  Banks however have that information.  They factored in the risk to the interest rate and issued the loan.  In fact, the really sophisticated banks then packaged the loans and then bet against them.  I believe that when a bank issues a letter rejecting a loan modification stating “it is not in the investors best interest,” I’d be willing to bet that that means that the same investor has a bet that pays out if the mortgage goes into foreclosure.  So the investor gets the interest while the loan is performing and then a payoff when it inevitably goes to foreclosure.

I still believe the real solution was to allow all homeowners refinance their mortgages.   I think it is also a good time to revisit the mortgage interest deduction that encourages homeowners to take on more debt! Let’s get rid of it and encourage homeowners to only commit to paying 25% of their income on housing.  Of course they can pay extra if they want and pay off their mortgage sooner.  Let’s encourage home ownership not home mortgages!

Follow this link to view a video regarding the strategic default of the Mortgage Brokers Association.



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