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When is it time to walk away from your mortgage? Let the bank take the house.

April 4th, 2010

It is hard to give up on your house. The memories, the celebrations, the newborns, they all have a special corner in your heart. But when you are seriously underwater what then? Do you choose a strategic default?

My friend JD’s uncle is in this position. JD is like my sounding board. I bounce ideas off JD. His uncle, Joe is 40 years old, ex-army, and currently a federal employee. Wife and 3 kids, a dog and 2 cats completes the family.

Uncle Joe bought the house 5 years ago for $590,000 and put down 10% or $59,000. The plan at the time was to have the house paid off by the time he retired at 65. At this time he would do a reverse mortgage, plus he would get his work pension, plus Social Security. The kids would be grown-up. He and the wife would go on cruises, travel a lot and spend time just laying back and enjoying life.

Then the housing meltdown happened. Uncle Joe owes the bank $493,193 after paying $3,132.59 every month for the last 5 years. But the house is only worth $300,000. In addition, there are monthly payments for taxes of $250, and HOA fees of $150, and house insurance of $125. And we have to include the private mortgage insurance (PMI) of $221.25 a month (for 87 months).

So JD came to me and asked my opinion. “Dude, what would you do?”.

I told him that I would probably walk away, but first I would crunch the numbers.

If Uncle Joe stays and continues to pay, he would have made a total of $1,127,732 to the bank. The house would appreciate in value to about $430,000 to $450,000. This is still less than the original price.

I asked JD to go with his uncle to the bank and to find of if the loan is a “non-recourse” loan. Fortunately Uncle Joe’s loan was non-recourse. This meant that the bank can only go after the asset that secured the loan. No garnishment of wages, no grabbing the 2 cars, no freezing of bank accounts…the decision although painful, will be easier for Uncle Joe.

After presenting Uncle Joe with all the facts and figures, he still stayed, vowing to tough it out…like a soldier.

JD took a day off from work and personally delivered Uncle Joe to the bank to seek help. The banker is working his butt off to try and get a modification loan for Uncle Joe. We hope it works. He’s a great guy and deserves some help.

P.S. Why do military people find it so hard to ask for help? And to accept help?

Entry Filed under: Underwater mortgages