“Should I Do a Strategic Default on my Mortgage?”

Dec 03

“Should I Do a Strategic Default on my Mortgage?”

I received this email this morning:

I bought my condo at precisely the wrong time. I didn’t, however, listen to everyone telling me I could afford to buy more. I did a straight 30 year fixed that I could afford in reality.

Of course I am incredibly underwater on my mortgage now. It is depressing, needless to say, and even more so when I feel as if my taxes are helping people who didn’t “do things the right way” and some companies who seemed to have contributed greatly to the problem and are not being held responsible.

Having said that I never really considered, uh, what do you call it, a strategic default. I mean it sucks I bought at the wrong time but because I didn’t buy more than I could afford it just means I live there longer.

Until they started talking about eliminating the mortgage interest deduction. If that happens, other than some one sided moral argument (immoral for me to walk away but not immoral for a company to make a purely financial decision in the same vein), what would the argument be for my staying?

Seven years of bad credit? I have a feeling it will take longer than seven years for the market to strengthen to the point where I could sell and break even.

Sorry, it just seems that I am getting hit from just about every direction… I believe I am about 50k underwater right now… just depressing as hell thinking about even MORE money out of my pocket.

Bleh.

I did a follow-up email and found out the following information:

I live in Illinois, western burbs of Chicago. Nice enough town with two sides, close to the lower end dividing line.

I bought for $139,000, now owe $122,000 and the most recent sale was $77,000. My association has so far avoided any foreclosures but not so for some of my neighboring buildings.

30 year, 6.75% (which was good then!) percent. Refinance would be nice but…

When I bought I planned on staying 5 years or so and moving up (didn’t everyone?). I don’t *need* to move. I sure wish I could buy some of the houses on the market now though! For what I paid? A real house…

I bring home (after taxes) about $40,000 a year. My mortgage + PMI + escrow is almost $1,100.

I know there are people in much worse shape. If I lost my job this whine about underwater wouldn’t even exist, you know?

Still – just the though of paying even MORE out when I feel like I am not getting any benefit is upsetting, depressing.

And you know they (yes, them, the big *them*!) keep wanting us to spend money. When I look at my mortgage how can I even possibly think about buying a car? I’m already so far in the hole I can’t add to it! Drive a 2003 btw.

Again, bleh.

First off, I don’t envy this guy’s position. That said, it could be much worse:

• He could have to move right now. Fortunately, he does not have to.

• His payment is around 33% percent of his take-home pay (even less if you factor in the mortgage interest deduction), which is reasonable (though on the high side of reasonable). He might have a hard time finding something else that will give him a payment in that range, especially when you consider the fact that he’s under water on his current mortgage.

• Eventually, housing prices will stabilize and begin to move back up. The longer he stays here, the more likely he’ll see a rebound.

• Even if the mortgage interest deduction is done away with, it will probably only be done to those who make more income.

• Strategic default can lead to lots of headaches, which are laid out nicely in this article.

Based on all the above (and not on any moral argument, which you guys already know where I stand), I think I would stay where I was and would not go the strategic default route.

What are your thoughts?

Your Financial Guide