walking away.

I remember only a few years ago the pundits and otherwise morons talking about how the resets in home mortgages, although a problem for some, would not be a problem in general. They claimed that most people could handle the increased payment and would do whatever it would take to stay in the home. Well 60 minutes just dispelled that myth last night. See this blog here for a good discussion: http://globaleconomicanalysis.blogspot.com/2008/01/60-minutes-legitimizes-walking-away.html



The crux is very simple. Even if you could pay the mortgage why pay it? Why struggle to pay it and sacrifice to hold onto a house which is loosing value? The answer for any rational person is you stop paying. Although it is difficult to determine the exact declines, for most people in this situation a quick back of the envelope calculation would reveal they lose more each month than the pittance that actual goes into equity. This assumes you are actually building equity, which does not apply to those in the interest only stage of their loan.



But some would counter what about your FICO score? Well the people in this situation have already done the analysis and figured the hit they take is worth it. Also they realize that their credit cards or at least some of them won't be canceled so they can still get by. But this brings up a very good point. These people realize a foreclosure will bring a mark on the record that may prevent them from buying a home for the next 7 to 10 years. And the point is they don't care. So they don't care and will not be in the market to buy a home again for 7 to 10 years. So what does this say about the recovery and next real estate market boom? It's a long way off!



I do not believe the 60 minutes story is an isolated incident. In our neighborhood we have the same situation. A family that certainly can pay the mortgage let the NOD get filed. I was not aware of this until recently, but my guess is they stopped paying the day they bought a nice new Cadillac SUV. Mind as well buy the car while it's easy ...



The crux of the matter is that this part of the American Dream is a lie. Ala Kiyasaki (Rich Dad Poor Dad) a house is not an asset but a liability. This episode in our history should teach people that. It's not that we should not aspire to own a nice home or a nice car, but we most aspire to truly afford a nice home or nice car. Only if we can actually afford it do we buy it. What is a good indicator of being able to afford a home? Well how about you can put down 20% and your income meets the 28% front end ratio (Monthly Housing Payments/Gross Monthly Income) and the 36% back end ratio (Total monthly expenses/gross monthly income). Oh is this not fair?



Well how about this. What happens to all these people who did not meet these requirements and bought homes only later to be foreclosed. How many lost ALL their retirement savings trying to save the house? See the next shoe to drop is the devastation this is doing to peoples preparedness to retire. There is only one way to sum this up.



It is really really bad.

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