I just read a very good blog post titled “Walking Away from Your Mortgage: Emotion or Logic?” that highlights the moral responsibilities of a homeowner walking away from their home and the financial benefits of doing so.
The article sites a paper written by Brent T. White, a Professor at the University of Arizona about how homeowners tend to stay in their house and continue to make the payments even though they are upside-down on their loans. He states that they often do that instead of foreclosure because of “1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences.” What is interesting is that these homeowners may be making a financial mistake due to the perception of what others will think of them.
The story goes on to state that those that walk away have been able to save large amounts of money by renting instead of owning. According to Liz Pulliam Weston of MSN.com who disagrees with some of White’s points, there may be some merit in this. While the now previous homeowner will not be able to purchase another home for several years using conventional lending, they also need to understand that this maneuver will certainly damage their credit for several years affecting other aspects of their lives.
One point that I would like to make that is not mentioned in the article is that, at least in my area, there are several options including lease options (aka rent-to-own) where that the family can move into a home for several years as a rental and then purchase it when they are able to secure financing. It is interesting to think that a family could potentially walk away from their home and lease option the house across the street from an investor who bought it as a foreclosure. All while saving them money every month.
An additional point that the article broached is that if more homeowners just walk away from their home, this may cause the lenders to work a little harder at doing the loan modifications. I guess I can see where this may have an effect. The government is ready to start “shaming” the lenders into making more permanent modifications, so why not allow the homeowners to speak with their feet?
The question is, how many will be willing to risk the shame and guilt of foreclosure to attempt this?
PS. If you or someone you know is in this position, I may be able to help. Not only do I work with a company that will assist with loan modifications, but I have several investors who regularly lease option properties. Feel free to email me at firstname.lastname@example.org.
PPS. As your trusted mortgage loan adviser, I not only help clients get into a home, I try to keep them there.