With 1 in 5 homeowners underwater, many pundits predict a flood of people walking away from their homes. Five readers talked to us about why they are - and are not - sticking around.
Fewer walking away than you think
Almost 20% of homeowners - or 8.3 million people - are "underwater" on their mortgages, owing more than their properties are worth. Another 2.2 million are near that drowning point, known as "negative amortization."
A basic cost-benefit analysis predicts that these people will abandon their homes and accept foreclosure. But there is little data measuring whether that logic holds true. In fact, Eric Johnson, a business professor at Columbia University, believes it doesn't. After years of studying behavioral economics - essentially the economics of choice - he argues that people will simply not make such rational decisions.
"There are two effects that suggest [walk aways] won't happen so easily," he says. "The first is the endowment effect. People tend to value their own house above its market price. Owners don't want to sell at a loss. They have what we call a loss aversion."
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The second is that people weigh the importance of immediate outcomes more heavily than long-term effects. Walking away involves upfront expenditures of time, money and effort, while the benefits of walking away are back-loaded.
"People are impatient and weight present costs and benefits more, so they will walk away less often than we might think," Johnson says.
Following are some homeowners who have thought hard about the costs and benefits of walking away from their mortgages.
Won't walk: Rich Foretich
My wife, Tara, and I live in Pass Christian, Miss. We began building our `dream home' in mid-2007 in one of the nicer, new subdivisions on the Coast. Halfway through construction, the house appraised for about $835,000.
In June 2008, we moved in and sought a permanent mortgage on the house. We owed $640,000 on the construction and had a loan-to-value ratio (the amount owed versus the value of the house) of 76.6% until the bank's re-appraisal came in at $575,000. This put us underwater. We owe $65,000 more than the house is worth. We seriously considered walking away from the house and letting the bank take it.
But doing this is not in my nature. I borrowed the money. I built the house. I owe the money. As long as I have the means to pay it back, I plan to do so. I believe it is sad that people see an easy way out and simply do not lie in the bed they made. I believe I am a classic case for a walk-away, but what's `right' about doing that? I could have easily walked away and contributed to the economic mess we are currently in. This would have helped my family out financially but it's not the right thing to do.
Considering: Pat Conroy
As a first-time homebuyer, I bought a condo in West Los Angeles. I worked hard and put 20% down on the $465,000 price and took a 30-year fixed mortgage. My credit score is 700 plus. I'm a lender's dream - you would think.
But the value of the condo has dropped 20%, which isn't terrible. I'm still slightly on the plus-side, supposedly, but there's no market; no one is buying. Meanwhile, my income - I'm an executive recruiter - has dropped 75%.
The kicker is that banks won't refinance my loan. My savings are almost exhausted, and I'm considering walking away. It's interesting that I can't get a refi from my original lender.
I've always been a hard worker, paid my way through college and scrimped to save for a downpayment. If I could get a refinance to lower my interest rate - I'm paying 6.25% right now - and extend the term out to 30 years (I have 27 years left on my mortgage), I could save $400 a month.
If I walk away, I would look at it as a business decision. But I also look at it from a responsibility viewpoint, and as long as I can afford my mortgage, I'll pay it.
Considering: Ben Franklin
My wife and I have a condominium in Denver. I purchased in December 2005. I was a young bachelor with meager income, poor credit and no down payment. I had not intended to purchase at that time, but because the loan qualifications were so minimal and the prospect of rebuilding my credit so attractive, it seemed like a smart decision at the time to pay a high interest rate for two years and then refinance.
I drastically improved my credit - and married my beautiful wife. When the time came to refinance, I did not have enough equity to qualify. The appraisal at the time of purchase was $106,000, and my loan was only for $100,000. Now I would be lucky to get $85,000, so refinancing without bringing $13,000 plus closing costs to the table is unrealistic.
Our family, we have a daughter, has simply outgrown the condo. We can't lease it without losing hundreds of dollars monthly, and we can't sell without bringing thousands of dollars to the table. My wife is not on the loan, so if we were to just say "forget it" and walk away, only my credit would be damaged. I've spent four years being financially responsible and have excellent credit now, but that's not what has prevented us from walking away. While it seems like the government is only helping the irresponsible folks who are able to stay in their homes while not paying their mortgage, families like mine are equally affected but our moral standards don't allow us to not send out that monthly check.
If the current trend continues, we may have to put morals aside in order to do what's best for our family. So the question is: Do we continue to be responsible and stay in a situation that will take us years to get out of, or just walk away like so many other Americans?
Won't walk away: Mike Files
I have been in my house for five years, and I paid $82,000. The house next door just sold at auction. It was listed for $55,000 and sold for $51,000. The houses selling here in South Dallas are all foreclosures.
I'm sure I'm underwater, but I would never walk away due to the damage that would do to my credit score. I will be looking at whether I can refinance under the president's plan. I would like to free up more money each month.
I have a first mortgage, a 30-year fixed at 6.5% and a second; the total payment is $745 a month. I also have credit card debt and a car loan. If I could refi down to a 5% or so, it would give me more money to spend.
With 1 in 5 homeowners underwater, many pundits predict a flood of people walking away from their homes. Five readers talked to us about why they are - and are not - sticking around.
Fewer walking away than you think
Almost 20% of homeowners - or 8.3 million people - are "underwater" on their mortgages, owing more than their properties are worth. Another 2.2 million are near that drowning point, known as "negative amortization."
A basic cost-benefit analysis predicts that these people will abandon their homes and accept foreclosure. But there is little data measuring whether that logic holds true. In fact, Eric Johnson, a business professor at Columbia University, believes it doesn't. After years of studying behavioral economics - essentially the economics of choice - he argues that people will simply not make such rational decisions.
"There are two effects that suggest [walk aways] won't happen so easily," he says. "The first is the endowment effect. People tend to value their own house above its market price. Owners don't want to sell at a loss. They have what we call a loss aversion."
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The second is that people weigh the importance of immediate outcomes more heavily than long-term effects. Walking away involves upfront expenditures of time, money and effort, while the benefits of walking away are back-loaded.
"People are impatient and weight present costs and benefits more, so they will walk away less often than we might think," Johnson says.
Following are some homeowners who have thought hard about the costs and benefits of walking away from their mortgages.
Won't walk: Rich Foretich
My wife, Tara, and I live in Pass Christian, Miss. We began building our `dream home' in mid-2007 in one of the nicer, new subdivisions on the Coast. Halfway through construction, the house appraised for about $835,000.
In June 2008, we moved in and sought a permanent mortgage on the house. We owed $640,000 on the construction and had a loan-to-value ratio (the amount owed versus the value of the house) of 76.6% until the bank's re-appraisal came in at $575,000. This put us underwater. We owe $65,000 more than the house is worth. We seriously considered walking away from the house and letting the bank take it.
But doing this is not in my nature. I borrowed the money. I built the house. I owe the money. As long as I have the means to pay it back, I plan to do so. I believe it is sad that people see an easy way out and simply do not lie in the bed they made. I believe I am a classic case for a walk-away, but what's `right' about doing that? I could have easily walked away and contributed to the economic mess we are currently in. This would have helped my family out financially but it's not the right thing to do.
Considering: Pat Conroy
As a first-time homebuyer, I bought a condo in West Los Angeles. I worked hard and put 20% down on the $465,000 price and took a 30-year fixed mortgage. My credit score is 700 plus. I'm a lender's dream - you would think.
But the value of the condo has dropped 20%, which isn't terrible. I'm still slightly on the plus-side, supposedly, but there's no market; no one is buying. Meanwhile, my income - I'm an executive recruiter - has dropped 75%.
The kicker is that banks won't refinance my loan. My savings are almost exhausted, and I'm considering walking away. It's interesting that I can't get a refi from my original lender.
I've always been a hard worker, paid my way through college and scrimped to save for a downpayment. If I could get a refinance to lower my interest rate - I'm paying 6.25% right now - and extend the term out to 30 years (I have 27 years left on my mortgage), I could save $400 a month.
If I walk away, I would look at it as a business decision. But I also look at it from a responsibility viewpoint, and as long as I can afford my mortgage, I'll pay it.
Considering: Ben Franklin
My wife and I have a condominium in Denver. I purchased in December 2005. I was a young bachelor with meager income, poor credit and no down payment. I had not intended to purchase at that time, but because the loan qualifications were so minimal and the prospect of rebuilding my credit so attractive, it seemed like a smart decision at the time to pay a high interest rate for two years and then refinance.
I drastically improved my credit - and married my beautiful wife. When the time came to refinance, I did not have enough equity to qualify. The appraisal at the time of purchase was $106,000, and my loan was only for $100,000. Now I would be lucky to get $85,000, so refinancing without bringing $13,000 plus closing costs to the table is unrealistic.
Our family, we have a daughter, has simply outgrown the condo. We can't lease it without losing hundreds of dollars monthly, and we can't sell without bringing thousands of dollars to the table. My wife is not on the loan, so if we were to just say "forget it" and walk away, only my credit would be damaged. I've spent four years being financially responsible and have excellent credit now, but that's not what has prevented us from walking away. While it seems like the government is only helping the irresponsible folks who are able to stay in their homes while not paying their mortgage, families like mine are equally affected but our moral standards don't allow us to not send out that monthly check.
If the current trend continues, we may have to put morals aside in order to do what's best for our family. So the question is: Do we continue to be responsible and stay in a situation that will take us years to get out of, or just walk away like so many other Americans?
Won't walk away: Mike Files
I have been in my house for five years, and I paid $82,000. The house next door just sold at auction. It was listed for $55,000 and sold for $51,000. The houses selling here in South Dallas are all foreclosures.
I'm sure I'm underwater, but I would never walk away due to the damage that would do to my credit score. I will be looking at whether I can refinance under the president's plan. I would like to free up more money each month.
I have a first mortgage, a 30-year fixed at 6.5% and a second; the total payment is $745 a month. I also have credit card debt and a car loan. If I could refi down to a 5% or so, it would give me more money to spend.
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