Professor advises underwater homeowners to walk away from mortgages
The article below is from the LA Times and Professor Brent T. White is echoing my thoughts on upside down loans/mortgages. If you are upside down on real estate you should consider walking away. Do not look at it emotionally… it needs to be a business decision. He touches on the ego and moral issues that the lender uses but it is even easier than that to describe… when the loan was taken out the agreement was if the borrower did not make the payments the lender would foreclose on the house and trash your credit (and possibly pursue shortages depending on the state you live in). But the reality is most lenders are not chasing foreclosure shortages because it does not make financial sense. So the deal was if you don’t pay they get the house and trash your credit and if you are down 50k, 100K, 250K the best deal you can take may be to let the house be foreclosed.
Big Legal Disclaimer: I’m not an attorney nor do I give financial advice
Brent T. White, a University of Arizona law school professor, says that it’s in the homeowners’ best financial interest to stiff their lenders and that it’s not immoral to do so.
Reporting from Washington –
Go ahead. Break the chains. Stop paying on your mortgage if you owe more than the house is worth. And most important: Don’t feel guilty about it. Don’t think you’re doing something morally wrong.
That’s the incendiary core message of a new academic paper by Brent T. White, a University of Arizona law school professor, titled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.”
White contends that far more of the estimated 15 million U.S. homeowners who are underwater on their mortgages should stiff their lenders and take a hike.
Doing so, he suggests, could save some of them hundreds of thousands of dollars that they “have no reasonable prospect of recouping” in the years ahead. Plus the penalties are nowhere near as painful or long-lasting as they might assume, he says.
“Homeowners should be walking away in droves,” White said. “But they aren’t. And it’s not because the financial costs of foreclosure outweigh the benefits.”
Sure, credit scores get whacked when you walk away, he acknowledges. But as long as you stay current with other creditors, “one can have a good credit rating again — meaning above 660 — within two years after a foreclosure.”
Better yet, homeowners can default “strategically”: Buy all the major items they’ll need for the next couple of years — a new car, even a new house — just before they pull the plug on their current mortgage lender.
“Most individuals should be able to plan in advance for a few years of limited credit,” White said, with minimal disruptions to their lifestyles.
What kind of law school professorial advice is this? Aren’t mortgages legal contracts? In so-called anti-deficiency states such as California and Arizona, mortgage lenders have limited or no legal rights to pursue defaulting homeowners’ assets beyond the house itself, White said. In other states, lenders may decide that it is not worth the legal expense to pursue walkaways, or consumers may be able to find flaws in the mortgage documents, disclosures or underwriting to challenge the original contract.
The main point, he said, is that too often people’s emotions get in the way of clear financial thinking about mortgages, turning them into what he calls “woodheads” — “individuals who choose not to act in their own self-interest.” Most owners are too worried about feelings of shame and embarrassment after a foreclosure, and ignore the powerful financial reasons for doing so.
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- Strategic Default for Homeowners Behind on Mortgage or Underwater (consumer-rights.suite101.com)
- Number Of Underwater Mortgages Falls, Thanks To Foreclosures (huffingtonpost.com)
- Foreclosure Relief: Good for Banks, Lousy for Borrowers (dailyfinance.com)
- Foreclosure trims number of underwater homes (msnbc.msn.com)