In 1981, English punk rock band The Clash wrote “Should I Stay or Should I Go?” about the rocky personal relationships between members of the band when facing the dilemma of sticking together or breaking up. The lyrics could not be more appropriate for homeowners buried in a mountain of negative equity and wondering what to do. After all “if I go there will be trouble and if I stay it would be double.”
The first step in answering this question is to find out if you qualify for a modification or if you can refinance using the HARP program to take advantage of today’s low interest rates. The process of getting a modification can be very frustrating. It’s “always tease, tease, tease, you’re happy when I am on my knees.” It not only takes a while to get approved, you must keep in mind that the lender does not have a legal obligation to offer or approve a loan modification. It is important to note that they may dual track your file, which means that while they are considering the modification they are moving forward with the foreclosure. Sometimes they “set you free” and foreclose in the middle of your modification application.
Let’s say you get a modification. I have a friend who was approved for what at first appeared to me to be an unbelievable loan modification. The modification did not lower the principle but did lower the interest rate to just 2 percent and locked that in for 30 years! This reduced their payment to the same amount that they would pay to rent a similar property. As such, it certainly seemed reasonable to stay – they get to keep their credit intact and remain owners, while paying no more than they would in rent anyway. Plus the payment remains fixed for 30 years, while rents would increase. But that analysis is incomplete. The question that remains is their status when they might want or need to sell, and when do they break even given the substantial negative equity that would remain?
Life events like divorce, death, job loss, job transfer, and others happen. Also sometimes folks just want to relocate. Based on our analysis, and assuming long-term home price appreciation rates, these folks would need to stay until 2026 to simply BREAK EVEN vs. paying rent. Worse, unless they use the rent savings to pay down principal, they’ll be stuck upside down in the property, and unable to sell without bank approval of a short sale until 2033. So whether or not it is a good deal for them depends a lot on how long they plan to stay.
For my friends, the best financial decision appears to be to try to short sell their current home, or if necessary let the bank foreclose. If they then rent for 3-5 years they should be able to qualify again to buy. Assuming interest rates don’t skyrocket, or some other major change doesn’t occur, this will save them over $100,000, and give them the flexibility to move if needed without being stuck in their current prison of debt until 2033.
Unfortunately, few homeowners facing this decision have the financial skills to really analyze the various scenarios, and few will consult a qualified accountant or other professional to do it for them.
This analysis is different for every homeowner facing this question. How far under water they are, and the terms of the loan modification are clearly important. It also requires some assumptions about price appreciation, rent inflation, and future interest rates. And importantly, it requires some serious thought as to how long they plan to stay, and perhaps some soul searching on the moral implications of walking away.
Bottom line, this question can be answered only by the homeowner based on their current situation and what is best for them. Would you stay or would you go now?
Thanks for a good article Michelle. I met a homeowner yesterday at the courthouse steps who was fighting to keep his home. The lender had placed an opening bid on his property and many who gathered (investors) expected it to be sold. The homeowner politely protested that he had an assurance by someone at the bank that his loan modification was “under consideration”, and his property “would not be auctioned today.” Thankfully (perhaps?) for the homeowner, the trustee sale was indeed postponed. I chatted with the homeowner after the good news (postponement) was announced and delicately asked him why he was fighting the process given his “deeply underwater” circumstance ($525K 1st with a current market value of appx $275K). His attachment to the property was more emotional than rational. A more forceful (less tactful), yet well-intended steps investor, then joined the conversation. He literally put his arm around the distressed homeowner and counseled … “you know, it’s going to take 25 or more years for property values to reach the point where you are back into positive equity! … Many in your situation find a great relief once they’ve made the choice to stop fighting a losing battle.”
There can be many reasons why people “hang on” when more rational analysis points to capitulation … and far be it for me to tell a distressed homeowner how he should think, feel or act upon his/her circumstance. But, sometimes people do need a well intended friend to walk through the numbers and likely scenarios over the next 5 to 10 years. Unfortunately, for those deeply underwater, there is (peering into my crystal ball) slim-to-none chance for any rapid acceleration in real estate values. This will more likely be a skidding along the bottom for a few years followed by a slow slog upwards.
Thanks DannyB!! I always appreciate your stories and perspective. I certainly believe that people need to do what is in their best interest. At the end of the day the market doesn’t “recover” until people are living in homes that they can afford. There is much more to life than 4 walls and a formal living room with snow white carpet. There is not a house on this planet that is worth mental health, physical health or your family/friends. At the end of the day it is all perspective.
To “idannyb”, as a REALTOR, I could not have said it better myself…thank you for your wonderful response! as a homeowner, unfortunately having been in this exact scenerio after an unexpected death in my family, thank you again for your response. I applaud the fact that you don’t assume to know what is best for someone in this tragic situation…I sure never saw myself going through it. I experienced so many emotions while going through the modification process, may times looking at my fellow agents looking me in the face on the other side of my porch looking to list my property for sale.
It has been an experience I don’t wish on anybody. In closing, let me say one final time…thank you for your common sense approach in your response and I wish you many years of continued success while talking to others and being that listening ear when needed.
Michelle makes some good points but I would like to add a different spin. I am a REALTOR and I am underwater on a $480,000 combined 1st and 2nd and my recent tax assessment and my own comp check says value is more in line with $290,000. I can not get a loan mod due to my profession. I do not qualify. While I could rent for less I would also be at the mercy of a landlord. Rents go up usually annualy. Some landlords also stop making payments and you may have to move when their lender comes knocking (which has happened to my own adult children twice) That is not only expensive it is really distruptive to your life and your family. Have you checked the cost of moving lately? Do that every two or three years and it adds up really quickly. Also I do not agree that everyone that is emotionally attached to their HOME is an unintelligent sap. My HOME is where I build memories with my family, raised and burried my horse in the pasture in back of my barn, and chat with my neighbors who have become friends. HOME is where my kids bring my grandkids to play. HOME is more than a HOUSE for some of us. My husbands parents lived in their HOME for decades. We have to live somewhere til we die and I for one will live in my own HOME no matter what it is worth now or 10-20 years from now. If things change in my life I may be forced move but not because I don’t have a pocket load of equity. I am not selling my car, my computer, or my all be it out of date 3GS iphone either just because they are not ever going to be worth what I paid for them let alone worth more than I paid for them.
Hi CJ,
Sorry if I gave you the impression that staying in your home means you are an “unintelligent sap”. I can tell you from personal experience (my family STRUGGLED for 5 years to save our family property before losing it to foreclosure) that living in a HOME in foreclosure is one of the most stressful experiences. It is also the reason why I live in a home today that is not underwater. (You only have to go through that one time in a lifetime to know that you never want to do it again.) I completely agree with you that a home means a lot of different things to different people and I am a FIRM believer that people need to do what is best for them. Staying or going is a very personal decision. I chose to write about this topic because I also know that a house does not define your life or your memories. There are thousands of people that are desperately fighting to save their homes and losing the battle. I want them to know that there is more to life than just one house. Sometimes the strength is in letting go, claiming victory for fighting the good fight and then moving on. Now that time has passed I do not regret losing the family farm because I did not lose the memories but I do regret that we wasted 5 years of our lives fighting a losing battle. Those are 5 years that we cannot get back. I still believe that home ownership is the American Dream but we are also the land of second chances. I want everyone who is in a hopeless situation trying to save their homes to always remember that there is a lot of life to live after a foreclosure.
Hi Michelle
I agree with you about walking away to buy another day.
My question to you do I have to receive a Notice of Trustee Sale prior to a Trustee Sale? I received my Notice of Default on 10/6/10. My projected sale date is 2/7/12, I haven’t received anything in the mail or nor any notices on my front door! I live in California. Local realtors are telling me to start a short sale now before my projected date regardless that I haven’t received a Notice of Trustee Sale? My goal is to stay in my house as long as I can before a short sale? What should I do? Before the Auction Sale date? Nothing ? Show up at auction ?
thank you
Peter
Peter,
I’m not sure which county you are in. The average time to foreclose (time that lapses between NOD filing and Trustee sale is around 260 days in San Diego County. But that is just an average. Each circumstance is different. There should be phone number that you can call to find out whether the auction has been scheduled or not…Ask one of the local realtors you are talking to (pick one that is a short sale expert!), to either give you the phone number to call OR ask them to check for you on a regular basis and keep you posted. The odds are that the sale has not yet been scheduled…
I don’t know your exact situation but please make a huge effort to inform yourself as to whether foreclosure or short sale is the best option for you. Don’t delay…I’ve had very close friends wait too long…Short sale is usually MUCH better (especially now)…and it really takes time to successfully transact a short sale…Find a good agent! They are out there.
Cheryl
To C J Johnson
You are emotionally attached to your home and because of that, you making bad decisions. Chances are your home will be your largest “nest egg” when it comes time to retire. To make over inflated payments because you have memories is, I’m sorry, acting like a sap. Let it go and move on with your life and take everyone of those memories with you!. To pay for the next decade or more and have nothing to show for it is horribly expensive! Do not hang on to yesterday’s dream. Turn the page and make new memories and stop living where you actually own “nothing” You are making a payment but own nothing and won’t for many, many years.
So let me get this straight. I should walk away from my home and pay some investor rent so he can make his payment with my money? Unless you want me to live under a bridge I need a roof over my head so how is this strickly an emotional decision? If I walk and let the house go to foreclosure I can not buy another one for at least 7 years which BTW will be long after I qualify for my first social secutity check. I will pay someones mortgage for the next decade I choose to pay my own and keep my home, memories, and happiness. You all seem to be painting such a dark future. I just do not agree. So what if the house is never worth more than I paid for it. Some things in life do not have a price and for me security, peace of mind, and a place of my own is still my American Dream.
Great article. We are strategically defaulting on our property and it was a tough decision. We felt trapped in a far too small home for our growing family, $40k underwater, and no longer motivated to do all the necessary repairs to keep up a home (roof, paint, etc.) I am currently dodging collection calls and waiting on a notice of foreclosure in the mail. I have never been late on a bill in my life and never missed a mortgage payment in 9+ years so this is stressful but my choice so I endure. In the meantime, instead of spending all our savings attempting to get a short sale and walking away with nothing, we are stockpiling cash and going to reinvest in a home at a lower purchase price and 1/2 the interest rate we currently have. For us, it was a no brainer. We are not emotionally attached to our home, although it is a fine home. For us, going was the far better choice and we are thankful the laws allow for American’s to walk away from bad investments just like corporations get to do everyday.
As a counselor, I see many homeowners that are not informed correctly about the modification and foreclosure process in our state. Some do not want to invest the time to attend our free 1 hour workshop. They want someone to just “fix it”
Those homeowners that invest in getting informed, educated and receive counseling understand the process. And wheather they get a loan modification, short sale or Foreclosure they are more prone to accept the outcome.
There are also the issues of foreclosed homes not being taken care of. There is an underdog candidate for Congress in Ohio who made a great video about this topic.
http://youtu.be/kS7QQTOn6Z8
Teresa – The issues in CA are radically different than Ohio. Here we have a lack of inventory for sale in most areas, and relatively few bank owned homes that are sitting (we know, we track each and every one). That said, forcing the banks to protect and maintain homes that they have foreclosed on seems like a reasonable idea – one that you would think wouldn’t require legislation.
I ask you all: What’s not right with 8 to 9 million foreclosures so far and another 9 or 10 million before 2016? Don’t think about too long. Say it. Bankster Fraud on the courts, country, and individual homeowners and real property rights. Look at the big cover up: from the Robo Signing 60 minutes piece to $2000 per homer settlement farce. There are some still fighting…Beau Biden, Neil Garfield, me, and tens of thousands other homeowners, Occupy folks, and many others who would rather see justice and rule of law instead of wall street ponzi rippoffs.
The soul of this nation of people has been enslaved by debt and the government that is owned by the 1%. Banks have no standing to foreclose because the banks did not lend money, they stold money from investors, told you it was a loan, got bailed out, and now banks are sweeping up the coins left behind as they evict homeowners and distroy communities and whatever freedom stood for. If you loose the family farm to a crook you loose your heart, soul, and freedom. Stand up and fight. Some say 2012 is the year of Truth. Let’s make it happen. I’m mad as hell!