Walk Away from An Underwater Mortgage?

The mortgage industry says it’s dishonest, irresponsible, dishonorable, and even anti-social. They term it as unscrupulous behavior. What could they be referring to? They’re referencing the latest phenomenon of homeowners walking away from their underwater mortgages.

What’s an Underwater Mortgage?

Well, that has become a pretty common occurrence these days with the debacle that has become the mortgage and housing industry. A mortgage is considered to be “underwater” when the value of the property drops below the total amount of outstanding loan. The homeowner has lost all of the equity in the home due to the decline in its value. For example, a homeowner purchased a house valued at $300,000 a few years ago at the peak of the housing boom. The mortgage on that home was $250,000, giving the homeowner $50,000 equity in his home. After the sub-prime mortgage led crisis and the subsequent burst of the housing bubble, home values plummeted and the home is only worth $180,000 now with an outstanding loan of $23,000. The homeowner owes more than the house is worth, has no equity, and should he try to sell, he will take $50K out of his own pocket in order to discharge that mortgage. His mortgage is underwater!

Walk away from underwater mortgage

According to the graphic from creditloan.com (above, click to enlarge), foreclosures have skyrocketed since 2005 and at least two and a half million homeowners have fallen victim to the dreaded words, your home is being repossessed. Alarm follows such a staggering figure, but the numbers are still rising. Last July 6% more foreclosures occurred than in July of the previous year. Twenty-five percent of ALL homeowners currently holding a mortgage are face down in the proverbial pool, owing more than their homes are worth. To add insult to injury, of that 25% one fifth are a quarter underwater. Meaning that over 25% of their investment cannot be recovered should the owner attempt to sell, simply because the home is no longer worth it.

Only ten of the fifty United States did not have homeowners who were experiencing this submersion in 2009. The problem spanned all age groups with the 30-49 year olds taking the plunge at a disheartening 25%. Of course the unemployed saw a deeper dive as they comprised the larger percent of those hanging on for dear life, with those that were employed but making less than $30,000 just a percentage or two ahead of them. When it came to these topsy-turvy mortgages the Hispanics lead the pack with African-Americans a close second.

Walking Away?

Now faced with what seems to be a lose-lose situation what’s a homeowner to do?

Well, there’s a growing trend to just walk away. To the chagrin of many lenders some homeowners are packing up and moving away from their own personal tsunamis. These homeowners view this solution as a strategic way to solve their problem. Often they can find homes to rent for less than the watery mortgage that they were struggling with. But is this right? Is this the principled thing to do? By in large most people think not; 75% of those who rent their current living spaces and a hefty 83% who have mortgages agree with the lenders and say this is a no-no. Yet in 2008 over half a million homeowners chose to do just that. In spite of the mortgage industry’s cautioning about their “moral obligation,” what their family and friends would think, the legal consequences, and the damaged their credit rating would undergo they just left. 59% of Americans oppose this action; while 25% of those that are struggling day to day to survive applaud it. 5% more men feel it to be a viable choice than do women, but they are basically deadlocked when it comes to feeling this shouldn’t occur. 11% more of generation Y than the baby boomers feel it just shouldn’t be done. But no matter where you fall on the question of leaving an underwater mortgage you must agree that homeowners are in deep trouble. Leave or stay they are the ones left holding the bag.

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One Response to “Walk Away from An Underwater Mortgage?”

  1. Matthew |  Apr 13, 2011 at 10:10 am

    This is exactly why we need debtor’s prisons in this country. Complementing this, we shouldn’t have government financing on mortgages or bailouts. Just wishful thinking on both accounts.