March 28th, 2010 1:25 PM by Dave Gubler
In the midst of the most profound housing downturn most of us will ever experience this is the million dollar (often literally) question. Over the last three years I have witnessed many clients that have taken extraordinary measures in an attempt to stay in their home. Given the emotional attachment and considerable investment a home represents this is understandable.
Subjecting yourself to massive financial damage in order to remain in a particular home is not a sound decision, though. Humans have an amazing capacity to remain optimistic. There is a difference between healthy optimism and irrational optimism though. I have seen homeowners that owe 250% or more of their homes current market value struggle on admirably and destroy their credit and finances in the process. Is draining your 402k/pension/retirment account the right thing tod do? Is running up revolving credit debt the correct course of action to take in order to pay for living expenses and maintain payments on an investment that has plummeted in value? This, of course, is a very personal question that only you can answer if you are struggling to make your mortgage payments and are underwater. The social stigma against defaulting on a mortgage is so strong that I believe we are expecting too much from individual homeowners while government and financial institutions are exempted from this higher standard.
Underwater homeowners that are dealing with financial hardship need to apply the same principle that the bank CEOs have applied during the current housing crisis... KNOWING WHEN TO CUT YOUR LOSSES.
FIND OUT WHAT YOUR ORANGE COUNTY HOME IS WORTH
Some things to consider:
1. YOUR HOME IS WHERE YOUR FAMILY IS: Cliche as it may sound it still rings true. A "home" is unique and moves with your family. A "house" is, in the end, only a commodity and can be obtained again.
2. A HOUSE IS THE PLACE YOU LIVE AND NOT ALWAYS AN INVESTMENT: Would you, should you drain all of your savings and retirement and place your financial future in extreme jeopardy on a house that you rent? Of course not. Well, unless you own your home free and clear or have a tremendous amount of equity you are much more akin to a renter than an owner. "The Bank" really owns most homes.
3. IS LOAN MODIFICATION THE ANSWER?: It could be. Sadly though, the re-default rate for loan modification with most lenders is above 60%, The numbers do not lie. Loan modification is working for less than half of the people that have obtained one. Even if a loan modification that you can live with is obtained, you have to consider what you owe vs. what the home is worth. The negative equity leaves you in financial jeopardy. In increasing number of homeowners that obtained a loan modification will regret that they did not sell and cut their losses in order to start the clock on being able to buy again within two years. A vicious cycle may be repeated... buying high, selling low, only to buy HIGH again when finally eligible,
4. YOUR HOME IS UNLIKELY TO REACH IT'S PREVIOUS "HIGH" FOR ANOTHER 10 - 15 YEARS: Real estate typically appreciates 2% above inflation. That rate can be higher depending on your particular market but the basic rule. In a typical market your home will double in value about 15 years after it bottoms. Most analysts are predicting the "bottom" of this housing market in 2011. Fast forward 15 years and double the current market value of your home. For some they will still be in a negative equity position. Frightening!
5. THE RESPONSIBLE THING TO DO: Is dutifully paying your mortgage payment for 10 - 15 years on an asset that is worth much less than the debt amount going to improve your families financial future?
You did not create the housing crisis all by yourself (their is some collective blame to pass around) and you should not be the only one in the equation (you, your servicer, and the investor(s)) to suffer the consequences. If it was only your "poor" decision to buy an asset at the height of it's value (well if you had a crystal ball then you are to blame!) then you could simply sell and take your loss. Unfortunately the market has sunk so dramatically that you may only be able to do so with a short sale.
Short sale is a viable and eithical way in which to protect your family (first and foremost) and the lender (secondly) when circumstances dictate. Look at your family today... should you deny them a future of education, weddings, vacations, and financial security by fighting to the bitter end for an asset that has become an anchor?
I would never suggest that a homeowner sell short simply as an investment decision but I do believe this is a consideration in the decision. If you are underwater and you have experienced financial hardship (in it's many forms) I am simply advocating that you make a reasoned decision that protects you and your family's future. And I want you to know and feel that you are doing the right thing. There is no shame in a short sale!