"Will USDA or FHA loan underwriting take the foreclosure into account only that it was underwater even if the potential homeowner is still making enough money to pay PITI + Prop + Ins + MIP plus have a good credit record?

What can be done for those in that situation?"

Why should they?

Did you plan in giving them a portion of the profit you might make if the value had appreciated?

Being "underwater" is not a reason to default (AKA 'strategic default') and anyone doing so (especially if they have the capability to make the payments) does not deserve much of anything.

AMEN!

Amen and Alleluia Brickeye !! My personal opinion is that if someone strategically defaults, that's fraud !! To me they should get MORE then a 7 year ding on their credit report !!

"My personal opinion is that if someone strategically defaults, that's fraud !! To me they should get MORE then a 7 year ding on their credit report !!"

Agreed!

"What can be done for those in that situation?"

Make the payments. Honor your commitment.

My house is $200k underwater, and much as I'd like to move, we're going to be in this house for a while. You gambled, and you lost, as did my husband and I. Honor your commitment, and continue to make the payments. Those of us that are in the same situation, and actually have integrity to stick by our commitment don't have a lot of sympathy for your type.

It's not fraud...it's part of the contract...you stop paying/default, then the bank takes your house and your credit is ruined for a while.

Walking away from a house when you can afford it is ridiculous. Walking away from a house when you can't afford it, the bank won't work with you, and you probably won't be able to afford it in the future, is not ridiculous.

We are entering a new phase...a lot of the exotic mortgages have worked themselves out (i.e. defaulted) and now it's moving on to regular mortgages.

That being said, there can be significant money at stake when deciding to walk away, especially in a place like CA where the raw dollar amount was so high. If your house was worth 600,000, and is now worth 400,000, it's probably a good idea financially (not morally or ethically) to walk away from the house and save yourself 200k + interest.

Companies do that kind of thing all the time, and you expect individuals to avoid it? Please.

First of all, its 10 years that a foreclosure affects your credit, 7 for a short sale.

I've heard recent chatter that banks are now holding home sellers responsible for the difference between the foreclosure sales price and what was owed. Homeowners will be required to pay the difference back before ever getting another loan, humm, what a novel idea. You actually have to make good on your debt before you get another one. Amazing!

Its sickening what this nation has come to. Everyone wants something for nothing, when the going gets tough, people quit. What happened to honor, integrity and work ethic in this country?

How come businesses do this all the time? I see people going out of business and then opening up with a different name. Same people! I work in a small town where there are many small businesses which closed and reopened. How is that possible? Don't they owe on their first business?

I can't tell you how many nail-salons open and close, reopen and close again. Where are they getting the money to do this?

Jane

If I buy a 50K SUV and drive it off the lot, I'm underwater. Does it make it right to hand back the keys after 6 months? Hey honey, YOU STILL OWE on the loan you signed for.

Why the crisis in lending? -- people who lied about incomes to get loans, people who bought as much as they could "afford" in good times - not thinking about being laid off even for a month. Most poeple in trouble thought of their homes as a bank account or a get rich quick investment. Most never even thought of an emergency fund.

Go ahead, default. Rent for 10 years. Have your rent go up yearly and see if you are in better shape. At least if you keep your house, you have a home at a stable rate (in most cases).

You are 200K underwater -- well you signed up for the trip. Did you need a house that big? Did you pay at least 20% down (in addition to closing costs. Why not a modest house like our parents had in the 60's? After they paid off a house, they didn't buy without at least 50% equity.

Will USDA or FHA loan underwriting take the foreclosure into account only that it was underwater even if the potential homeowner is still making enough money to pay PITI + Prop + Ins + MIP plus have a good credit record?
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I read that to mean that the poster will have the money to pay on the next house, not the current house. HOWEVER, the fault in logic here is that the poster WILL NOT have a good credit record after defaulting in whatever way on the current mortgage. And the answer the question, all underwriters will consider the default on the current home no matter if it is underwater or not.

I've heard recent chatter that banks are now holding home sellers responsible for the difference between the foreclosure sales price and what was owed. Homeowners will be required to pay the difference back before ever getting another loan, humm, what a novel idea. You actually have to make good on your debt before you get another one. Amazing!

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It doesn't make sense for a bank to do that, which is why it isn't done often. If the remaining balance is 100k, most average people have no hope of ever being able to pay that off. It's not worth the time and money of going to court and getting a judgment that will never be repaid.

Businesses default and reopen all the time because of the magic of LLC's and the owners not being held liable for losses, bankruptcy, etc.

We bought our house for $499K in 2006 and it is now worth $375K. We probably owe $475K and when we bought it appraised at $525K. We thought when we moved in, that this would be it. We had moved around and I was ready to settle down. Now there is a chance that my husband might get transferred from Chicago to Los Angeles sometime next year and we would have to move out there in the summer. At that point, I don't expect our market to pick back up enough to be anywhere near where we would need to pay it off.

What would you suggest we do? We would try to sell it or rent it, but if we can't what would we do? With realtor fees thrown in, we are looking at a shortage of $100-125K, and we don't have that money just lying around. I don't want to just walk away from it, I don't want a foreclosure, but if we move to a new house, we will either have rent or a new mortgage to pay. Do banks make some sort of new loan that would allow people to walk away and still be paying?

mkkristen - since there are few that would actually pay, I don't suspect they even bother. You bring up a good point and that is why this mess will take so long to work out. There will be people underwater for a decade that have to move. Houses will be short sales or foreclosures for a decade because of it.

In an ideal world, the transferring company would pay the tab. Since that isn't going to happen, your husband could look for a different job. I know - that isn't necessarily very good advice. The next best option would be rent your house if you can get a decent rent and tenant. When your husband transfers back, you can move back in.

I work in a different world but if a company had the power to make me move to LA, they had better pay me enough to have $100k in the bank or at least some equity in my house.

Don't mean to hijack and just thinking out loud here, but I don't really understand this or others who talk about being underwater as if it is the end of the world or something that's never happened before. We bought in '86 and were fairly quickly "underwater" when that boomlet ended around 1990. --and with a mortgage rate of 10%! (Down even, from 10.25) Lots of people were in the same boat, but I don't remember people talking about it as if it were something they could just walk away from...it was just one of those cycles we all had to sit through. By the time the current "bubble" came around, the boost in values only brought us up to what a nice (not great) investment might have made over the same period of time--at least, less the amount that would have been paid in rent. At this point, even that modest gain is gone of course--we missed it. When you're busy living your life, hitting those windows of opportunity where everything works out well is harder, I think, than most people realize. It happens for some people, just like hitting a string of green lights, but for most of us, sooner or later, there comes a time when we hit that red light and have to either stop or take loss, if possible, if other goals are more important.

I suppose default is "part of the contract" in a way, but not really--default is the result of breaking the contract, not taking advantage of its provisions. Besides, every default costs all of us in continued economic disruption and erosion of the value of our own investments.

A mortgage is a contract. As long as one party or the other honors the terms of the contract, there is no moral right or wrong involved.

The idea that you're corrupt if you honor the terms of the contract by handing the bank the keys in lieu of continuing to pay the mortgage (assuming your contract says that's something you can do) is ridiculous. The bank is a huge multi-million or billion dollar entity with teams of lawyers and expertise in writing mortgages. Your typical buyer is going through a stressful and bewildering transaction for usually the first (but maybe the second or third) time in their lives, involving pretty much all the money they have. It's the New York Yankees (bank) versus the Podunk Junior-League Slow-Pitch Second-String squad.

Do you think if the house was worth 50% more than you owed and you handed the bank the keys they'd refuse to take the house? Do you feel the bank would be an agent of satan if they did? If not, what exactly, other than spite, fear that someone may "get something for nothing" and/or petty-mindedness motivates you to think ill of a homeowner who rationally hands their keys in when they cannot sell without going bankrupt?

I think there is a bit of an odor when a home owner stops making payments but tries to stay in the house until they're kicked out; but that's pretty unusual.

I'm not a financial adviser, but if you live in a no-recourse state I cannot even begin to see why you'd try a short sale instead of just going the "jingle mail" route. Either way your credit is probably hosed for a bit, so why go through the stress of a short sale?

Your mortgage isn't a contract that says "you owe money or you can return the house." It is a contract that says you owe money.

Hadley brings up a good point - I was too young and broke to buy a house back then but some of my friends did and a few of them ended up "underwater" for many years. But none of them complained or walked away.

My brother and SIL were transferred out of Detroit for new positions in the same company. The company had a plan to help them sell their home, but it didn't sell, and didn't sell, and didn't sell, and became "underwater". Yes they were highly stressed out and angry about the situation, but they came to accept the way it is, found a renter and still own that house. It gets them some nice tax deductions now :-)

Does anyone remember 1980-81? We renewed for five years at 16.25% because it was the best rate going (one-year rates were 20%) We managed OK, and sold that house a couple of years later. I'm still amazed at the current rates (here in Canada).. I pay 3.4% on a fixed 3-year mortgage.

ottawa...I do remember 80-81...we bought in that market...at 13%...by the end of the year interest was up to 18%. We sold in 1985 at a loss and had to take money to the table. Never even had a thought about not honoring the promissory note I signed. Sucked it up, took money to the table and had a clear concious as well as clear credit.

Mkkristen, I hear you! Let's hand each other tissues and start the "I bought a house in 2006" support group!

Paid $426,000 for mine then, and it's now worth $316,500 (according to Zillow.) My husband would like to pursue other career opportunities, but what to do? It's easy to feel very stuck and trapped and depressed.

We did a re-fi last January and brought our interest rate down from 5.26 to 4.25. We put down 50% when we first purchased. To put the house on the market for say $325,000 is quite a blow a mere 4.5 years after paying $100,000 more for it.

We've made some improvements & are going to be doing some more. That's the real headache I have right now...which improvements should I spend on?

The other thing is, (continuation of whining) we first took out a 15 yr. loan and when we did the re-fi, we took out a 10 year loan. We make bi-weekly payments, which will shave off another year.

When we did the re-fi, we thought (until quite recently, actually) that we'd be in this house for 10 -15 more years. We still may be, but it also looks like my husband may want to move on sooner. None of us can ever be sure of what's ahead I guess.

billl, respectfully, here in WA that's BS. When you take out a mortgage you're agreeing to pay the bank OR let them have the underlying asset securing the loan if you don't make the payments. The bank is supposed to be diligent enough to come out fine if the house is returned; if they're not, that's their problem.

How do you feel about paying off a mortgage early? Because you're "stealing" the bank's interest by cutting short the term of the loan.

What is your character worth? I think we just got greenbanks number.

When you sign the loan for the house, you agree to pay a set rate (on a fixed rate loan) while you hold any principle of the loan. The bank agrees to let you have that principle for a certain amount of interest while you hold it. That bank can't willy nilly say, "Hey give us all the money back now!" They can can only get that interest rate for the life of the loan (no matter how high or low the rate go later!) Part of the agreement is that you may pay it off early (in most loans). The other part of the agreement is that you WILL pay it off - and if you hand in the keys, they get to go after you for the extra amount AND report your bad credit action for 7-10 years.

If you default, you are costing everyone else a higher interest rate, so it isn't the fat cat bank losing out -- IT's US!!!

Sell your integrity and walk away, but don'tblame it on anyone else. Buy a house that is conservative, live BELOW your means, put down a large down payment, and have an emergency fund.

My first detached home (as opposed to condo) we bought in '74. It was at 11.75% interest rate and during the gas crunch, so had expensive electric utilities. We were divorced in '76 and that was at the height of the 'technology' depression where many professionals in the engineering fields were facing a situation similar to today's with jobs disappearing out from under us.

We did think of investment potential but we thought of the house as a home first and we certainly didn't expect our first house to be our ultimate 'dream home' even though we were young and upwardly moving professionals out of school for a few years. That's the difference between the mentality of then, versus now. We didn't want it all and want it NOW.

I went on from there as a single woman continuing to buy another home after starting, literally from scratch. It was a good lesson in how not to take circumstances for granted and never bite off the maximum amount you can chew, expecting automatic appreciation and job security. Putting all your assets into real estate is about like putting all your money into risky stock. It can pay off big, or belly you up.

I can't muster a lot of sympathy towards people who walk away from obligations blithely either. It's called not building on sand.

"Putting all your assets into real estate is about like putting all your money into risky stock. It can pay off big, or belly you up...never bite off the maximum amount you can chew, expecting automatic appreciation "

I wasn't expecting automatic appreciation, but I also wasn't expecting my value to dive $110,000 4 years after I purchased! I don't think that makes me silly.

I put 50% down so I wouldn't need to borrow so much. I took out a 15 and then a 10 year loan to save on interest & get the loan paid off asap. I was trying to be responsible.

If my value had just held steady or depreciated a few thousand I doubt I'd be upset. This huge drop in value no one could have seen coming. No one would have bought a house in 2005-2006 if they could have predicted this downturn.

No, I didn't mean to imply you were silly. I think a lot of people would never have thought the bottom would fall out of the market the way it did but it was a big, fat unsustainable bubble with scary amounts of governmental and corporate bedpartners involved, and it had to burst sometime. I wasn't even commenting on your posts, but the OP's situation.

Those who found themselves underwater from the course of events are there for different reasons and some of them dug their own holes with a lot of encouragement from the media and lenders and some were victims of circumstances. It's not fair to make sweeping judgments and put everyone in one basket.

But just like with stocks............your payments haven't changed and unless you can't make payments, your loses are paper losses with the potential to become assets sometime in the future. Sure, you'd like your payments to correspond to your house's value in bad times, but what if it worked that way when they were appreciating like crazy too?

Calliope, thanks for explaining further. I appreciate that.

I see what you mean in your last paragraph. I agree, in a way it's not all that bad (if one is making their payments) with one additional condition...as long as one plans to stay in the property until the market lifts out of the doldrums.

We were planning to do that, originally. Plans changed very recently. We've now gone from "We'll be here 10-15, maybe 20+ years, to "We'd like to sell in 2-5 years." Surely, in that near future time frame, we will lose a lot at the time of sale. The market will not bounce back that much, that fast.

That' why I posted on this thread. I relate to the stress of those who simply want to sell their houses and move on to make the most of career and other opportunities, but will lose big when selling their homes to make that move.

My husband is a professional who would like to go into a different direction with his career. He feels he needs to make a change to acquire further growth. He is very successful in his profession, extremely hardworking, and has high standards for himself. He is concerned that he more or less is stagnating in his current position and wants to move on to a place where he can learn more. Maybe he should just be satisfied to earn a decent income, which he does, but my husband pursues more than money through his work. He also cares about being the best he can be in his field.

Anyway, I just tell you this to explain why we want to move sooner than originally planned. It wasn't that long ago that people moved around all the time for their careers and it wasn't that big of a deal. It is a pretty big deal now, if you bought your house during the boom time!

Thanks again for your reply.

We've now gone from "We'll be here 10-15, maybe 20+ years, to "We'd like to sell in 2-5 years." Surely, in that near future time frame, we will lose a lot at the time of sale.

Yes, but there is a good chance that wherever you purchase your next house the prices will be down there also, so it sort of all evens out.

Hi Terriks! What a nice surprise to see you!

Thanks for the encouraging words. I think it does really help to try to think positive, so when the negative voices come in my head, I'll just say, "Don't go there...remember what Terriks said!" Thanks again!

My DH was laid off and out of work for a little over a year. We thought for sure that we would have to end up moving. Fortunately, even though the value of our house has gone down, like stinky, we still have a lot of equity. Every time my DH had an interview with an out of town company I checked the home prices in the area and found that in many cities prices had declined much more than they had in our area. The good news is that my DH was offered 2 jobs in our area - one with the company that laid him off.