You Have the Right to Remain Broke – Reading Your Housing ‘Miranda’ Rights

“You have the right to remain broke.  If you stop making your mortgage payment anything you say can and will be used against you by your lender to make you feel guilty, irresponsible, immoral, shameful and stupid.  You have the right to an attorney that may charge you outrageous fees to negotiate a loan modification with your lender, but you’re better off just walking away from your house.  If you cannot afford an attorney we don’t care because you are a deadbeat.  We will foreclose on you anyway.  Do you understand these rights?”

I love sayings.  One of my favorites came from Lyndon B. Johnson, the 36th President of the United States.  He was once asked why he didn’t fire J. Edgar Hoover, at the time the very powerful director of the FBI.  Johnson’s reply, “I’d rather have him on the inside of the tent pissing out then on the outside of the tent pissing in.”  My Dad has some classic sayings too.  Many of them would be inappropriate for this post.  But, one is worth repeating and it goes like this, “never throw good money after bad.”

If you are ‘upside down’ on your mortgage, in other words you owe more than your home is worth; it’s time to walk away.  Experts call this a strategic default.  I call it a wise business decision.  If you are inclined to believe that your home is an investment (it’s really not, but that is a topic for another day) then this should be a simple choice.  But, as Brent T. White, an associate law professor at the University of Arizona, recently pointed out in a recent Wall Street Journal article titled, ‘It’s Okay to Walk Away’, “a failure to grasp the true economics of the situation is holding back many Americans whose home values have dropped far below the amount they owe and who would be better off renting.”

Let’s do the math…if you owe $50,000 more than your home is worth it will be 8 years before the balance on your mortgage and value are the same again (that’s using the historical 6% average annual appreciation rate.)  Unfortunately, you may be in a market where values are still going down so it could take even longer for you to catch up.

And then, of course, there is your FICO credit score to worry about, or as Dave Ramsey, the popular financial planner from Fox Business News calls it, your debt score.  Only in America do we reward those who stay in debt with a high score…it’s like some sort of twisted video game for adults.  How negatively does a short sale or foreclosure affect your credit score?  No one knows for sure.  Experts will tell you it’s usually around 80-120 points.  So what would you rather hold on to, the cash you have on hand and will continue to earn or a sparkling credit score (that most likely got you into this situation in the first place?)

By now you are probably saying, “Sure, you advocate this but you would never do it yourself!”  Actually, I did.  In April of this year I did a short sale on my own home.  I was more than $30,000 upside down.  But, that wasn’t the real reason behind my decision to walk away.  My monthly costs were almost $3,500.  I could rent a similar home for in the area for half the price and after my house sold that is exactly what I did.  After 11 years of homeownership I’m a tenant again and saving $1,200 per month on housing costs.

Bob Hunt wrote about this recently in his article for Realty Times called, ‘Is it Morally Wrong to Default on a Mortgage?’  In it he states, “Mortgages are secured notes. They are not like borrowing from your grandmother. If you willingly default to her, shame on you. She has no recourse. But, if you default to the bank, they can take your property. That is the deal they made. The property may not be worth what they lent you, but whose fault is that? They are big boys and girls. They made a business decision, and in today’s market, they lost.”

This brings me to final point.  It is financial suicide to spend every penny you earn and every penny you have ever saved to make your mortgage payment.  Even if you can afford your payment it still makes no economic sense to stay put if you owe $50,000 or more than your home is worth.  Your moral obligation is to secure a financial future for your family, not to “throw good money after bad,” as my Dad once said.

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4 Comments

Filed under Homeownership, Loan Modification

4 responses to “You Have the Right to Remain Broke – Reading Your Housing ‘Miranda’ Rights

  1. Thank you for writing what I have been thinking for a long time. The Big machine has been telling the populous that they are bad people because many at this point were responsible individuals with low LTV that are now at 150-300% ltv. Why would you keep paying on that? Save your money and buy in low. The market is still sinking in many areas nationally.

  2. freerealestateeducation

    Allyson,

    It’s worth noting here that I factored 6% annual appreciation for the example in my post. The reality is that in most places values are still declining. It is likely that we will not get back to historical averages for at least 3-5 years, which makes my argument to walk away even stronger. Thank you for reading!

    Marty

  3. freerealestateeducation

    Silverblade,

    You are welcome. I appreciate the feedback.

    Marty

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