What is your opinion on the controversial viewpoint of Jim Cramer, advising people to walk away from their home and default on their mortgage if the home value declines?
Thursday, August 2, 2007
"Walk away from your home" per Jim Cramer
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13 comments:
I do not agree to walk away if you can manage to pay the mortgage and be there for the next three to five years.
I agree to walk if you bought the house only to "flip it", since the prices now are lower than what was paid for last year!
Any thoughts on commercial properties?
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This guy has eaten way too many coco puffs...if you default on your home you will still have to pay the difference of what the bank sells the house and what you owe, the consumer pays the difference...also you will be out of ALL credit markets (credit cards, auto loans, etc.) for mucho years to come. Bad history with credit cards is easy to fix, you CAN'T fix a foreclosure..
The practical reality is that if a homeowner is in preforeclosure status, he's going to walk eventually, regardless of what Jim Cramer says.
Also, most people know it's not possible to "save one's credit card rating," as if there's one rating for credit card debt and another for mortgage debt. The majority of people know there's only one FICO score generated by each of the three major bureaus, and it covers all debt--mortgage, installment and revolving. If you don't pay the mortgage, your credit card debt is negatively scored, and vice versa. All credit grantors use FICO scoring to make credit decisions. There's no distinction in how the score was derived.
My advice to troubled homeowners (1) if they're upside down in their homes, and (2) they can't sell or (3) refinance, is to live in the property until the lender throws them out. Lenders are inundated with defaults, and it could take the lender many, many months to foreclose. By homeowners refusing to leave until thrown out, at least (1) the house won't be consigned to vandals and (2) the homeowner will realize some beneficial equity in the form of housing during those months for which they're not making payments.
It's also a good idea for the homeowner to bank as much housing cost--that is, what they would normally pay their lender--as possible, to fund their transition from homeowner to renter.
If a homeowner decides to ride out foreclosure proceedings by staying in their home, they should write a letter to all creditors, including their mortgage lender, and tell them, pursuant to the Fair Debt Collection Practices Act, to not call and to direct all communications via U.S. Mail. Being foreclosed is stressful enough; at least the homeowner won't be further stressed by constant phone calls demanding payment.
Kent is misinformed. In most--but certainly not all--states, a mortgage is a "non-recourse" loan. That is, the lender's only recourse is the collateral (house) itself. The lender cannot come back to the homeowner for the difference between what the property is worth and for what it was sold on the courthouse steps. If, however, the homeowner has refinanced since purchasing the house, all bets are off and the loan becomes a recourse loan.
It's not a given that a lender will issue a 1099 for mortgage debt forgiveness, either. My guess is that, in the current environment, most lenders will NOT issue 1099s.
Kent is also mistaken about the effect of foreclosure on one's ability to buy a home in the future. "Seasoning" of a foreclosure for many lenders is just two years, after which, if one's FICO score can be otherwise rehabilitated, a consumer can get another home loan.
In any event, defaulting and moving out isn't the best advice I've ever heard from Jim Cramer. The option to rent is always there, so I would advise to dig your heels in and stay in your home as long as possible.
I disagree with Mr. Cramer. It all depends on the intent of the home owner. Most people that purchase a primary home; do it with the intent of home enjoyment, tax benefits & etc. and not just for the sole purpose of a short term return on investment. Certainly, we all anticipate equity appreciation due to increase of value over a period of time. However, there are certainly many other benefits to owning a home besides equity appreciation. Therefore, to walk away simply because the value has declined just doesn't make logical sense to me especially if you have a family. Just ask your family members where would they rather be...renting an apartment without equity or owning a home with future potential equity, and then hear what they have to say about it. Just because a property is upside down currently, doesn't mean it will always stay there. Weigh the pros and cons of ownership. Determine how long you plan on living in the home. Don't hit the panic button because of the negative media. Above all, don't forget by walking away,the debt is totally forgiven and the lender will send you a 1099 for their loss. The IRS will expect you to declare this loss as income on your tax return the following the year you default.
Cramer's comments are completely irresponsible and a prime example of the depths to which journalistic ethics have sunk.
Foreclosures ruin neighborhoods. Values sink further and further when high foreclosure rates occur. This causes more homeowners to flee. The pattern of chaos accelerates and lives are ruined as a result of it.
We all need to contact the sponsors of Cramer's programs and advise that if the lunatic persists in his immoral rant we will boycott their products.
I totally disagree with anyone "walking" away from their credit obligations unless they are destitute.- Jim Kramer implied that people should walk away from homes purchased in 2006 just because there is no equity and therefore not a good investment anymore.
There will be people "mailing in the keys" as we used to say in the 80's - no doubt. For a public finance authority to encourage folks to do this is irresponsible.
Consumers want it all - no downpayment, a good interest rate, etc. but then they should just walk away when the equity is gone? This will create a very poor environment in the real estate and mortgage business. The higher the foreclosre rate the tougher the lenders will make their qualifying guidelines. This week many lenders have already pulled out of the "Alt A" market which allowed flexibilty for people to get into home. The lenders that didn't pull the product increased the price signifcantly.
Let's also address the "domino" effect of all the "Kramer advised" foreclosres hitting the market causing the market to soften even furthur.
He is really off base on this one.
It depends on the circumstances...I sold a home in Houston during the oil crisis and had to bring $19,000 to the table to close. and that was after the lender reduced my mortgage payoff by $20,000 (or I would have had to bring $40,000). In retrospect, I should have walked away and invested the $19,000. would have made more money and rode out the 3 years it would have taken to get my credit back. Karen Deis.
I have read everyones response. I didn't get to see the video, not available anymore. I am a homeowner who is sitting in the middle of 9 foreclosures, just on my block as well as several on each block around me. My street is called foreclosure lane.
I have a rate that is going to adjust 9/08. My model is seeling for 150,000.00 less then what i owe on my home and thats right now, as they try and accomadate a short sale. The homes on either side of me are selling for 300,000.00 less then what i owe on my home. My lender will not refi me because my home is not worth what i owe on it, they will not help with my adjustable until i default, they really wont even talk to me because i am in good standing with my loan. There are 6500 homes that are going to default in January of 08 in California alone and 300 of them are here. These are loans that have defaullted 9 months ago. The county is so overwhelmed they can't keep up. Should i continue to pay a 4200.00 mortgage? on a house that isnt worth what i owe? and in a year when my rate adjust shoujld i up the anty and coninue to sink money into this home? what will it be worth then? how many years will it take me to recoupe my 300,000.00? It is Nov. 5th and I am not paying my mortgage this month. I am going to put my money back in my pocket! It's a buisness decision. Credit? who cares, It will be forgiven, eventually. Credit cards? who needs them? I have a new car and when i am in need of another i will be able to buy one no prob. I have called my first and my second lender three times, they wont listen or refuse to help. So , what am i suppose to do?
AM
Writer: New thought New Life Style. Your story is identical to ours! Lenders wont help! Live on Shortsale & Foreclosure lane! House is not worth what we paid for! Loan is about to adjust to a higher mortgage payment! We are not going to make our payment this month they can come and get this money pit! If any one is interested in Paying a $4,000 mortgage for a home that is barely worth $245,000 let me know...
Cali said.....I hear you all. I don't think kindly of walking away from my responsibilities but what do you do. If the banks were smart, they would seriously re-adjust the loan balance to be somewhat equitable with home value. At least this way, they lose $150K versus $600K as more homeowners would remain. This might just be in my little fantasy world.
I have talked to two separate attorney's because I walked away from my home and it went into foreclosure. Note: I was in the subprime market. I had two mortgages, one was paid off at foreclosure, the other I defaulted on. One attorney said I can be sued for the defaulted loan even after they filed a 1099, the other said "no". Which is it?
"Have you seen the little piggies, playing in the mud..."
I think it's funny looking at all the bankers posting about this being horrible advice. It's like people who claim a "moral obligation" for all companies to live up to their contracts.
When it comes down to brass tacks, a mortgage is no different than any other contract - business or personal. Should you honor your obligation? Sure. But there are business decisions that need to be made. If your obligation is a losing proposition, the law will prescribe a penalty and remedies to the non-breacher.
Jim Cramer isn't telling everyone who has a subprime mortgage to walk away. He's telling them to look at their house as an investment, like all of their other investments.
Walking away is a business decision, even if it's your personal house. It doesn't matter if it's a "flip" or a "primary residence", the math is the same.
The bankers and money market folks who are taking a bath because the risks they took on are coming to fruition should have made better business decisions. Now, they're claiming "moral obligation" and "personal responsibility" as the impetus for staying in a bad business relationship. Shame on the foreclosed mortgagee? Nay, shame on the mortgage bankers.
John, thanks for your comment. I think given your viewpoint you might appreciate the post I made here: http://blog.imperiumcommercialcapital.com/2007/12/mark-hansons-mortgage-meltdown-analysis.html
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