Walk Away - Save $200,000

Interesting interview on NPR regarding a couple who are considering walking away. They bought their house well before the peak at $400,000 it went upto $600,000 but now it is all the way down to $200,000. That is a third of its peak value - a loss of 66% - a huge hit anyway you look at it.

Obviously they also used an ARM which makes the situation even harder. The couple realizes they are so underwater that it will take them years before they have any equity in their house. With the rate of foreclosures in the neighborhood the value of their property can fall even more - over 75 percent of peak value. Of course the house was well beyond what they need - but it was available and affordable to them so why not.

There are numerous abandoned houses in their neighborhood which is escalating the neighborhoods falling house prices. Brown lawns and signs stating a property is "bank-owned" can really bring down a neighborhood.

Here are some of the interesting parts of the interview-

The [Sinclairs] bought their house three years ago. It's 3,600 square feet, including a four-car garage and a pool. Their purchase price: $440,000.

Sinclair: But the prices kept going up. At one time, our house was worth over $600,000. In fact, a model just like this they were asking $699,000 -- and now things have entirely collapsed.

A similar house down the street is already in foreclosure and the bank is entertaining offers for under $200,000.

The Sinclairs stopped paying their mortgage in October when the payment jumped from $3,000 a month to $4,000. Now they're basically squatting in their own home, living there for free.

It's happening all over the country because mortgage companies and bankruptcy courts are so backlogged, nobody's sending the sheriff to kick people out.

The backlog in foreclosures is allowing people to stay in their homes longer. This will allow for people to build up a little nest egg before vacating a property. Probably the best thing that could happen to many people.

Sinclair: We had to start making some hard choices, which included going into foreclosure on our house and kind of starting again. We're midway through the process, about a six to eight month process and we kind of have a plan of attack. If plan A doesn't work, we go to B, C and D.

Plan A is asking the mortgage company to lower the principle they owe on the house, something Fed chairman Ben Bernanke has suggested to the banking industry.

Plan B: Try for a short sale.

Plan C: Just walk away.

Plan D: Chapter 7 bankruptcy.

These are the same choices millions of people are facing all over the country. It is unfortunate but for most people option C will probably be the best choice. It will also allow them to have the most control over their lives.

Sinclair: We would do it if the equity was there, but in a case where we're already so behind... Imagine that for five years, say, we're gonna pay four grand a month and then we're just gonna be back up at what we bought the house for. We feel like we're throwing away money.

The Sinclairs say they want to take responsibility for their debts, but right now it makes more financial sense not to.

Sinclair: I mean, you ask a good question. Is it really the right thing to do to let the mortgage companies take up the difference? That's a really tough ethical question.

Dan says he experienced the various stages of grief, including denial and anger. Now he's just relieved.

Sinclair: We went through months of being skinflints, because we knew that we were going into the red, so we didn't buy anything. All the sudden, we had a bank full of money and we're living rent-free, but we know that's not really our money.

... It does feel great, because all the sudden, we feel like we have a little margin now where we can go out to dinner, get a babysitter...

And they say they are paying a price. They're losing their home, most likely and their credit is shot.

This family is making a tough economic decision about what is best for them. Many people in the walking away category look at their house first as an investment not as part of their identity. When you do this it makes it a bit easier. When you realize your family is better without the house even with the hit to ones credit score. Walking away is better than sticking it out and paying the mortgage.

Most of the mortgage analysts never envisioned huge numbers of people walking away. But when your house has lost 50% or more of its value and you are underwater it is a very rational decision to walk away. In many cases it is probably the best choice they could make for their families and themselves. As it becomes more and more common to walk away it will lose a lot of its stigma.