Homeowners who owe more on their house than it’s worth face a dilemma. Should I stay or should I go now? Suze Orman tells CBS Sacramento’s Call Kurtis that those folks need to take a hard look at the value of their homes and make a tough decision. “If you own a home that is 50% underwater, 70% underwater, it will never ever, ever come back to where you purchased it.” she said.
There’s an interesting detail at the end of this New York Times article on borrowers who strategically default–that is, they choose to walk away from the home when its value is significantly less than the mortgage balance. It turns out that the homeowner mentioned at the start of the article applied last fall for a loan modification with Bank of America after his income level had dropped, and this was BofA’s response: “The lender came back a few weeks ago with a plan that added more restrictive terms while keeping the payments about the same. ‘That may have been the last straw,’ Mr. Koellmann said.”
“Homeowners should be walking away in droves. But they aren’t. And it’s not because the financial costs of foreclosure outweigh the benefits. One can have a good credit rating again–meaning above 660–within two years after a foreclosure.” That’s the conclusion reached by a law professor who’s written a paper about strategic default, which is when you elect to walk away from an underwater mortgage because you stand to lose more money trying to keep it than if you cut your losses immediately. The problem is, lots of people think it’s the wrong thing to do, because individuals are supposed to play by different rules than the companies they do business with.
The Wall Street Journal says that the troubled California real estate market may be healing, but not without considerable pain. [WSJ]