Walk Away (Renee) … an old song … now a new financial survival tactic ?

I’ve previously blogged in favor of toughing it out and not walking away from your  upside down/underwater mortgage  if you could afford to maintain your payment.   Been there, done that.  In my scenario, it was a hurricane that drove prices down for about five years, but they did come back to original levels and more.

An article in New York Times Magazine in the last few days somewhat said for some it was o.k. to abandon their mortgage commitment. I posted a good bit of that article yesterday because I agree  that everyone is unfairly putting this decision burden entirely on the shoulders of the Borrower. If Lenders have been given a big slice of the Stimulus Package Pie, why can’t they meet Borrowers half way or more, and modify their mortgages, specifically lower their interest rates ?

Why do Borrowers have to go to war with their Lenders, hire attorneys to modify mortgages, and other adversarial confrontations ?   Why can’t Lenders take a preemptive step and lower interest rates for anyone who can’t afford their original mortgage obligation ?  The lower interest amount collected from the Borrower would be offset by Stimulus funds, plus the Lender would get that upfront rather than waiting over the life of the mortgage.

The NYTM article suggests that in some situations it’s o.k. and a strategic default strategy to walk away from your mortgage obligations.   That indirectly puts the Lenders on notice that they stand to have a lot of properties on their asset sheets.   You’d think Lenders would  like to forgo that by helping the borrower/homeowner afford and stay in their home, which would also offset the consequences of property devaluations resulting in underwater-upside down mortgages.

In a simple example :

Existing scenario :

Mortgage amount :  $150,000

Mortgage terms :     6.5 % for 30 years

Monthly payment :  $948.10

Total payments over 30 years :                           $341,316.73

Of which this amount is interest :                        $191,316.73


Monthly payments over 30 yrs to equity :   $150,000.00

* * * * * * * * * *

Mortgage modification :    $150,000

New terms :             1% for  30 years

Monthly payment now :  $482.46

Total payments over 30 years :                           $173,685.60

Of which this amount is interest :                        $  23,685.60


Monthly payments over 30 yrs to equity :   $150,000.00


The Borrower pays $167,631 less in interest over the 30 years.  They have a mortgage payment that’s almost half of their original obligation.    They will  build up equity and achieve their home ownership sooner and paying less monthly in addition to over the full mortgage term.

Seems like a no-brainer to me.

What’s stopping the Lenders from working with the Borrowers to this end ?  Greed ?

Someone convince me why Lenders should make 6.5 per cent on their money on the backs of people trying to achieve the American Dream ?   Why not a nominal rate of 1 per cent, especially since the Lender isn’t losing this money — just making less — offset by taxpayer Stimulus Funds ?

I know, I know — it’s always been that way. 

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One Response to “Walk Away (Renee) … an old song … now a new financial survival tactic ?”

  1. This housing bubble resulted in quite a few homeowners refinancing their homes at lower interest rates, or financing consumer spending by taking out second mortgages secured by the price appreciation. USA household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990.

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