Society seems to think that walking away from you home is immoral if you can afford to pay your mortgage because neighboring property values decrease as foreclosures increase. Unoccupied homes quickly become eye-sores, go into disrepair, and attract transients. When the economy is bad, a foreclosure listing can go months without seeing a single offer because no one wants to buy a rapidly depreciating asset and they are cautious about getting into long-term debt when the unemployment rate is high. There is no refuting that foreclosures are bad for society, but what about the individual? Does it make sense for an individual to stay committed to a bad investment? Companies default on bad investments all the time. A “Strategic Default” is a business tactic they utilize if it makes financial sense to walk away. Ultimately, companies always do what is in the best interest of their shareholders. For example, Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Shouldn’t individuals do what is in their best interests as well? If we look at this in dollars and cents like business do, the decision on whether to stay or go comes down to which option will save the most money. If you stay, you anticipate that the market will turn around soon and it would be cheaper to ride out the storm then getting stuck with outrageous interest payments on future loans for the next 3-5 years. If you go, you anticipate the market will be down for a long time, and you will pay more in mortgage payments than you would renting and making large interest payments on new loans. Many homeowners who are upside-down on their loan try to get a loan modification or short sale approval from their lender because either of the two is better than having a foreclosure in their credit history. However, it is unlikely that borrowers who have the financial wherewithal will qualify for a loan modification or short sale because those who do not have money already have a hard enough time trying to convince their lender to give them one. The borrower’s financial hardship is a key factor that lenders take into consideration before granting a loan modification or approving a short sale. So if you have money in the bank and positive cashflow your options are limited. Either you stay and pay, or walk away and live with the consequences of bad credit for a couple of years.
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