Few financial advisers would recommend it, but more and more Americans are walking away from “underwater” mortgages. Hey, if the money’s not there and the late mortgage payments are stacking up, leaving the keys in the mailbox and backing up the moving truck might seem like a way out. But if you do so, know the ramifications — because they stack up, too.
It’s become increasingly apparent that walking away from a mortgage — known in the credit industry as “strategically” defaulting — is becoming more common. A recent report from credit scoring giant Experian, in partnership with Oliver Wyman (a consulting company), concludes that about 18% of all “troubled” mortgages resulted in mortgage owners taking a hike. Experian bases its estimates on homeowners who were at least 60 days late on their mortgage payments.
The Experian study also points out that many “walkaways” are mortgage-holders with high credit scores. Invariably, they live in states like California where mortgage lenders have no recourse to go after a homeowner who walks away from a mortgage.
Then there’s a white paper written by a University of Arizona Law School professor, which states that leaving a troubled mortgage situation should not only be tolerated, but encouraged. In “Underwater and Not Walking Away: Shame, Fear and Social Management of the Housing Crisis” professor Brent T. White says that the social and economic repercussions of walking away from an underwater mortgage aren’t nearly as bad as you might think.
What are those repercussions? For starters, your credit score would take a major hit — in the short term. Dropping your credit score more than 100 points would most likely eliminate you from consideration for any kind of credit — even a gas station credit card — for a few years.
But after a while, some mortgage lenders are willing to give you another chance. The Federal Housing Administration (FHA) says it will revisit a mortgage loan for a walkaway after only two years. Even private lenders, like banks and credit unions, will lend to you after five years.
But if you do go, and are willing to live with the hit to your credit score, there are some other factors to consider:
You may not get a rental. Your credit score matters to property owners who might rent you a home or an apartment. If you walk away from a mortgage, the thinking goes, then you’ll have no problem walking away from a rental agreement.
You may be in the wrong state. While California doesn’t allow lenders to legally chase down walkways, other states aren’t so accommodating. Many states do have laws against walking away from a mortgage, where a lender can sue you for deficiency. Check with your state’s consumer affairs for walkaway laws in your state.
If the market snaps back, you’ll be on the outside looking in. Real estate prices won’t stay down forever. So if you abandon ship on your mortgage, that’s that — no going back to a dream home which once again is appreciating in value.
The “social pariah” factor. If you walk away from your mortgage, the property could become neighborhood blight, thus fueling a decline in values not just in your old home, but in your neighbors’ homes, too. Don’t expect a going away party — or any kind of party, for that matter.
In the end, walking away from your mortgage is a personal choice, with ramifications that touch not only your financial life, but the emotional side of your life, too.
The takeaway on a walkaway? Tread carefully.
—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.