My thoughts are this. If you buy something for what ever the given price then you should pay it back. I believe karma has a large role in our lives and most people discount that. If you can make your present payments you should. When the bank figures out that you could have but chose not to then you will be looking at mortgage fraud.....I guess you wont have to worry about it then.

I am a home owner who bought a home in 2007 for 260k. Though the value has depreciated I thought it would still be worth at least 160k. I am renting my 1st home barely for the cost of the 1st mortgage and my second rental for about 400.00 more than the mortgage. I purchased a forclosure hoping to sell it and pay down on my upside down home but a new revelation. I can only sell the home for a couple of thousand dollars more than what I paid for it. Why? Because the comps show that most of the home in my neighbor hood are selling for 100-110k. I have 12k invested in repairs. So basically after realtor fees and closing costs I am going to be upside down again. My realtor knew this as she knew that of my home I purchased in 07 lost value. But she was money hungry and not looking out for me in 07 or now in 09. Now my home I purchased in 07 for 260k will only sell for about 115-125. I still owe 246k. My realtor convinced me to get a 30 year interest only loan. 10 year interest, 20 years interest and principal. Brokers and realtors do really think that in 8 more years my house will be worth enough to refi? NO of course not. I to am contimplating walking away. The bank can take all my equity in the other two homes. I would still be better off financially in the long run.
Why do we pay Mortgage insurance anyway.

When your home forecloses they WILL come after you for the difference, what the bank lost. People don't understand this when they walk away. You will be screwed and end up owing that 100k.

I too am in your shoes! I have some investment properties and a primary underwater. My advice to you is to buy and not bail.

If your able to buy in this over-corrected market (Phoenix), then purchase a property as a cash-flow investment. Stay in your primary and rent out a second property. When prices stabilize, you will see apprecaition in both properties. Although it will take many years for you to reach par on your 2006 purchase, you will reach it much quicker if have a second property appreciating too! On wall street, this technique is called dollar cost averaging and it is a strategy for long-term investors.

I am closing on property (REO) that I bought for $34K cash!! I will put in $10K and rent it out for $750 a month. That nearly a 20% annual return on my capital. Stock market could not even touch this return!!!!

So, before you go and do something you'll surely regret, think about investing in rentals!!

I just can't agree with your logic. Cars depreciate, homes bought in the wrong neighborhood depreciate, everything we buy depreciates. I can tell you are trying to do what is best. It just changes my view of the overall situation. I am in Wisconsin and while homes aren't selling as fast the values are staying up. The main reason I was even looking at Arizona property is my dream of living there in 8 years or so. Seems like a lot of good deals abound and getting in low might benefit me in the future. My plant closing has put that "fire" out so god speed to you in whatever you choose and thanks for opening my eyes to the real decisions people are forced to make everyday. I'm not sure what I would look to do in that situation.

As much as I am sympathetic for you and loseing your job..... I am glad we are not in that situation and I feel for anyone who is. Let me give you an example here. A coworker bought a house TOO big for there income (no doc) THEN REFI'D and took cash out. They are now UPSIDE DOWN 300K on a house that Cost 500K. They have not Paid a Payment in 17 MONTHS!!! The house has been auctioned 3 times by the lender and nobody has bought it. They still live there and have Saved up 45K By not paying a mortgage. This week there Lender contacted them and now wants to modify there mortgage and do a principal adjustment. Now to me there is something wrong with this!!! We did everything by the book. DID NOT buy our "DREAM HOME" it is a starter home. I am not some scrub who has refied or bought beyond our means here. I am realistic and looking out for my ownself. This country is in trouble because a bunch of idiots released restrictions on mortgages and allowed prices to balloon. Which in Turn caused good hard working credit worthy intelligent people like myself to PAY WAY WAY TOO MUCH (I admit I was Naive) I NEVER expected my house to go up in value. However I never expected to lose 50% of its value in 3 years. As Much I as I care about America, pay my taxes and have always paid my bills. When push comes to shove we are responsible for ourselves. If in 20 years of paying this mortgage and I take your advice and I am still upside down.... Will you cover me to break me even. I don't think so. Its all about me and my family and provideing the best I can for them. For Houseing prices to climb enough for us to break even is unrealistic. Its JUST Not feasable. They asked for the house as collateral and I am probably going to give it to them...... As the market continues to crash. Inflation on the rise. Gas Prices climbing.. Its time to think outside the bun... The building is burning and your the only one with a garden hose but risk being burnt further by trying to put it out.... Are you going to stand there and spray that building and risk being burnt further?... Hell no! your going to get out and watch it fall. Thanking god you got out when you did. So that your still alive to see what they build in its place. As I continue on... Looking through some foreclosures this week it has gotten real bad. We looked at 20 different homes yesterday (all previiously priced in the mid 300's to 400's) now priced 150-200's. Out of 20 homes 17 were not locked (you could walk right in) 1 we had to climb in the window and 2 were secure. (remember just 3 years ago these houses were going for 300 - 400K) Now useing your common sense with THESE kind of situations do you REALLY expect houseing prices to climb to the point where we can break even? Not unless our dollar is worth the same as a peso! Obama has got till July to prove to me that it makes more sense for me to Pay 2100 a month in leiu of renting.... or just living in my house for a year or longer till they foreclose. Or just doing a buy and bail.... As I wrote this my house went down probably 400$'s The stock market dropped another 2% and gas went up .5 cents a gallon.... Its time to stop it now... I am waiting for Change but not holding my breath!

By reading this post I can understand why the country is in the shape it is in. Your house was worth $269,000 when you bought it and now the market has tanked and you want to rip off the bank. The other side of the equation we all seemed to have missed is this, if your home was appreciating would the bank be able to come to you and ask for the new value?

It is a risk on both sides but John wants to look out for himself. Leave the house he is in, because it isn't appreciating anymore, and get in "low" in another house so that it will go up in value and when it does his credit will be good enough to buy an even bigger house at a good deal.

John, please help the rest of America and live up to your obligations and wait for the house to go up in value again. Defaulting your loan causes a huge ripple effect. If you don't believe me think about why we have 2 stimulus packages worth about $1.5 Trillion dollars.

If you feel bad that your dream house isn't worth what it once was, quit your job and join the other 5 million unemployed and let it get foreclosed on like the rest of the world. My job is ending sometime between now and September, if you have a surplus of money send it my way if I am unable to get a job this summer.

Hi John,
FINANCIALLY - the idea makes some sense. In the time it takes your property value to appreciate you could likely rebuild your credit some and pad your savings

ETHICALLY - it's very questionable. The bank lent you the money in good faith and you have an obligation to pay it. It's not the bank's fault your investment went down and walking away just adds fuel to the fire. For years people touted the "investment" aspect of owning a home, however by nature all investments have risk and real estate is not immune (obviously). Even if banks were wrong to lend to some people, I'm sure based on your credit you did not fit into that category. Two wrongs dont make a right. Just one man's opinion

REALISTICALLY - any loan that needs to meet Fannie/Freddie or FHA guidelines now needs to stand up to the "buy and bail" guidelines as well. This means that you need to document to the lender that you can qualify for both your current house payment and the new payment AND have 6 months worth of both payments in reseves. The reason for this is to make sure you are on solid financial ground and to discourage the practice of buying and walking away. Even if AZ is an anti-deficiency state, the laws may only apply to primary residences, and as soon as you move into the new home the current one becomes an investment property and may be subject to recourse. MAYBE nothing will happen to you. MAYBE you could be hit with a big tax bill on the deficiency amount. MAYBE you would be prosecuted for loan fraud and subject to a whole slew of legal ramifications.

I would definitely speak with a real estate attorney who can lay out all the possibilities and consequences for you. Look before you leap right? Whatever you decide to do, best of luck

"I know all you "real estate Pros" the same ones who told us first time home buyers back in 2005 that Houseing prices "never drop" "buy now before it gets too high and you can't afford it" "drive till you can afford to buy"."

I never remotely said any such thing John, and you can look back through my blog if you don't believe that. I've written many articles that said now was not the time to buy (or sell, or flip). You don't know ALL real estate pros.

If you didn't want "real estate pros" opinions, maybe you shouldn't have asked on a Q&A board populated with answers from real estate pros.

It's a free country, and you are free to do as you chose. I was just trying to point some things out, sorry if my tactics for doing so were disagreeable to you.

I understand where you're coming from, really I do. Personally, I put a lot of weight on contractual obligations, and like it or not, you are under an obligation to pay what you say you would pay. You can look at it form purely an economic point of view, that's fine. I wouldn't, but maybe that's just me.

Whatever you chose to do, I wish you the best.

Jay honestly if I wanted to be criticized I would have asked for it. I was looking for advice, not to be picked apart statement for statement, that doesn't help anybody's situation out. I know all you "real estate Pros" the same ones who told us first time home buyers back in 2005 that Houseing prices "never drop" "buy now before it gets too high and you can't afford it" "drive till you can afford to buy". I am sure all of us not so savy in the real estate market are thinking back to that advice as we digest your advice now. As for Jmonville I appreciate your advice but before you preech the good credit scare tactics, remeber that Arizona is an anti defciency state and get your facts correct. I have not decided which route I would take nor did I discuss that with my Lendor when I asked for a 2nd home loan. I stated it would be my primary residence and they were OK with that. They said we can approve you to carry both in case it doesn't sell. Either Way which ever direction we chose out of the 12 answers here only 3 were somewhat helpful. Being scrutinized for a situation that "REAL ESTATE PROS" helped create is hypocritical and if you were "such a pro" you would have sold in June of 2006 and be renting till about now.... Again I wish anyone luck who is in this situation its extremly unfortunate and completely exhausting....... Thanks again for the few that decided to help and not scrutinize...
p.s. with the 1100 a month we would save in mortgage payments.... we could almost buy a new car cash in 16 months..... Go on some trips to mexico.... a cruise... new furniture.... Stimulate the economy so to speak.

John there is HOPE for you after all!

You see, in America, there is a solution to ANY problem!

For you, the solution is to "Buy 'n Bail"! It's today's Fix 'n Flip!

http://online.wsj.com/public/article_print/SB121314811278463…

Remember, with under-the-bus capitalism, you can privatize profits and socialize losses!

So don't get thrown under the bus!

"Like I stated in my orginal statement we have ALWAYS been responsible."

Well, do this and you'll never be able to say that again. Ever.

"We've got 2 new cars so that not a worry."

Those cars depreciate daily. Why not just stop paying on them too? And "not a worry"? Let's hope neither one of them is involved in an accident. Insurance or not (and by the way, expect those rates to go up), something could happen one of them tomorrow that wouldn't be fully covered. Good luck getting another car loan.

"If we did a buy and bail we would obviously wait till the new mortgage was funded......"

And if that new mortgage is predicated on you selling you're existing home, or renting it, or continuing to make payments, add mortgage fraud to your credit problems.

"Sympathy for the banks is rough..."

As is sympathy for people perfectly capable of meeting their contractual obligations and choosing instead to walk away.

"Do the math and I hope none of you EVER get into this horrible situation."

I am in this situation, as are hundreds of thousands of other people. I can only hope most have the integrity to do the right thing.

Why is it that so many expect a home to do nothing but increase in value? Home prices have always been cyclical. Always.

I debated about writing back to you about this. You asked for advice and we all gave you similar advice. And that was do not do it. You are trying to rationalize your decision. How would it be if all of us did that? I lost value in my house. It is worth less than what I paid. So what.

It does not make sense to buy and bail. Is it worth getting into legal trouble? Loose your job because you could get in trouble for mortgage fraud?

Google up Buy and Bail.

Buy and Bail is not a good thing. People are getting into trouble with it. There are more restrictions about buying a second home. If you tell the bank that you are buying another home and you are going to rent your first house out. If you turn around and just stop paying it is considered mortgage fraud.

This has nothing to do with feeling bad about the banks. This has to do with you took out a mortgage. No one ever said that houses only go up in value.

So, if you buy and bail are you prepared for the legal ramifications? Are you prepared for when the bank forecloses on the house? They can send you a deficiency. You want to have a $100k or more deficiency? You want to have any tax ramifications????? In some states, lenders can sue for assets, including a new house.

Some banks are going to require borrowers purchasing new homes while retaining their existing home as a rental to prove that they could make full payments on both homes to qualify for a loan. Some banks may already be doing this.

Good luck. I am afraid that you have made up your mind on this by how you are rationalizing your thoughts. If all of us thought that way and did that how would that be?

Thanks for not hammering me too BAD.... Like I stated in my orginal statement we have ALWAYS been responsible. But being realistic is sometimes more important. You have to remember from the banks point of view its an Investement. The same way I am looking at it. If you owned a stock that you kept putting money in EVERY MONTH and it Kept going down would you continue to pay? The consideration of renting out the 1st property to pay the mortgage on the 2nd property has been contemplated, but again that 17yr in interest over the span of 10 years is about 150K. (till market/credit score rebound) 200 points on my credit score or 150K? Just depends how you want to look at it. We've got 2 new cars so that not a worry. Little Credit Card Debt. For you to make an honest opinion of the situation you have to be in the same situation I am in. Lets say the market drops another 25% this year. That would make us upside down 140K on a 260K mortgage. There comes a point when you have to realistically throw in the towel. If we did a buy and bail we would obviously wait till the new mortgage was funded...... It all depends on what happens in the next 6 months....If houseing prioces continue to drop (as they will)....I think there will be more people considering the option I so DON'T want to do. But it makes MORE sense. Sympathy for the banks is rough, as they got themselves in this mess. We Like this house, but paying 1100 a month for it instead of 2100 a month would make me enjoy it that much more.......Do the math and I hope none of you EVER get into this horrible situation.

Thanks for your help...
John

This answer is more directed at the agents, not "John".

It surprises me that other agents are suggesting a short sale in this situation.

If someone can afford to pay their mortgage (as John stated he could) a short sale is almost certainly not an option. Lenders require financial statements that show you can not afford the home before they will even consider approving a short sale. I assume those that said "do a short sale" have completed short sale transactions and understand this. If not, then how could you possibly recommend a short sale - a transaction you know nothing about -- to someone?

What lender is going to say, "sure, you can sell for less than you owe because you just don't feel like paying on the home any more"??? They have obligations to their investors. Depending on which starts you believe, up to half the homeowners in the US are underwater. What would happen if all of them just decided to walk away from their obligations and the lenders all just said, "sure, rip us off, we'll approve a short sale no problem."

You went to a dealership and bought a cool car. You drive it off the lot and it is worth less than what you just promised to pay. You drive it around for awhile and it is worth less and less. Would you walk away from paying the car because it is worth less? No.

In my opinion don't walk away. Your house is currently worth less than what you paid. Buying a house does not mean that it will only go up in value. Walking away because it is worth less than what you promised to pay is not looking into the future. Here is what I see in the future......... home values will come up someday. This down turn is temporary. We have been through down turns before.

Here is the deal with walking away. You are not wiping your slate clean. You can possible get in trouble with a buy and bail. The bank can come after the deficiency, foreclosure has a bunch of problems. There may even be some tax implications. Oh and to add to it the credit cards interest rates can go up (I have heard of cc being even canceled or credit limit dropped down), car insurance rates can go up, you may or may not be able to get certain kinds of jobs...... the list goes on.

I agree with the others. Don't bail. Look long term not short term. Rent it out if possible. Maybe a loan modification could work for you. There will be better days.

GREAT QUESTION:

Few Suggestion:
a) Lease or lease purchase 1st home you own
b) Contact lender determine if refi OR short sale property
c) Foreclosure will have lonnnnggggg term effect on your credit scores where you wont receive OR higher interest rates on car loans, any other type of loans.

Sorry to hear this however many families across country in same position start now working with 1st lender.

If you purchased 2nd home maintain 1st home as a rental you still receive annual tax benefits on both homes. Speak with CPA

John,

If you can purchase a new home great! However I think you should try to save your credit you could rent out your current home. Also, make sure you know your options with the lender before you make any decisions!

Please consult with an attorney and make sure you know you options! Most of us agents see this daily it would be better to save your credit if you can work it out.

Lucinda Windermere Central LLC
602-799-6846

As Dunes stated - I too have read you OP several times, however I speak my mind.

What you are proposing to do, or contemplating, is called a "buy and bail". Thousands of others have done exactly that. It would also appear you are seeking support of a public Forum, for your pre-determined action, thereby hoping to relieve you (or passing the buck) of any inner guilt associated with the moral obligation from when you were, as you put it, "naive".

John,

It looks like you are in a solid financial situation. If they approved you for $120,000 more, it means that in addition to the current loan you can pay another one.

Before making your decision make sure you consult with a lawyer. I have heard of similar cases where the homeowners have been accused of fraud - I don't have all the details, but it is better to be safe than sorry. In addition to that a foreclosure on your record will have a devastating impact on your credit. This can be very costly if you plan to take other loans, as car loans, etc... in the next several years. Nowadays it can also have a negative impact shall you loose your job and need to find a new one. Many employers these days are looking at your credit as part of the background check for a new job.

I am not saying that it is not a solution for you. But do your homework first before making such a big decision to avoid unexpected consequences. If you decide to do it foreclosure should be your last alternative, instead you should try for a deed in-lieu of foreclosure or a short sale. Buying one as an investment and renting the other one, as proposed below, is an even better alternative.

Good luck!

Carlos

John, I seriously read your question several times to try and think of a way to express myself without seeming flip or harsh.

The basic question you are asking is this.(IMHO)

We borrowed around a quarter of a million dollars and that deal didn't work out. We can afford to pay the money back, but can I justify not paying that money back (see we were naive) and borrow another $100,000 or more to save myself some money and get a bigger house?

The answer to your question is..NO
Dunes

John,

As Jay said, walking away from your current mortgage would cause more problems than solutions. If you can afford two morgage payments, I have had clients buy the second home because it is such a good deal and rent the other out until the market comes back up enough to enable them to sell and cover their basis. You might even decide that recieving the rental income each month is better than selling!

Jason Ewing, GRI/CNS
Coldwell Banker Triad, Realtors

If you walk away from this mortgage, the odds are overwhelming that your pre-approval for a new one will turn into a rejection very swiftly. A lender isn't going to be too keen on writing a new mortgage for you after you've just walked away from your obligation on an existing one. And of course you could say good bye to your mid 700's credit score. It'll get hammered and take several years to recover.