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Fear and Loathing in Mortgageville


I caught part of Talk of the Nation yesterday where the topic was Walking Away From Your Mortgage. One of the guests was Brent White, a law professor from the University of Arizona whose recent paper, Underwater and Not Walking Away, has the financial world in a tizzy.

The response to his article, which encourages homeowners to look at their situation as a business decision and walk away from underwater mortgages, has been fascinating. The intensity and content of the reaction indicates that a taboo has been breached. The main counter-argument is that a mortgage contract is indeed a moral contract. Where does this idea come from? Why doesn't it apply to lenders? Besides, I thought that the collateral for a mortgage loan was the house, not your quality of life or the respect of your friends and neighbors.

White's assertions are gratifying to us considering that we used the same logic back in September when we decided to short sell our house instead of delaying our dreams by six years (best case scenario)1. He also nailed the emotions that we went through in making that decision: guilt, shame and fear2.

Anyway, for those of you considering going through the short sale process, here's what we learned:

1. The process takes four to six months.
2. Talk to a real estate attorney and a tax accountant FIRST, before you meet with your realtor and list your house. Knowing your legal and tax rights will save you time and will assist when negotiating with the bank.
3. Get the details of the law in writing from both professionals (attorney and tax accountant) for use in negotiation with the bank.
4. The bank is not your friend. Ours asked for a $5000 promissory note from us to approve the short sale. They only backed down when we presented them with the above mentioned letters from our attorney and accountant showing that we knew the law3.
5. The bank did not consider our short sale offer until we were at least 30 days delinquent on our mortgage payment. Knowing that this was their policy would have saved us thousands of dollars. We would have stopped paying our mortgage as soon as we received an offer on our house and submitted it to the bank. It took them two months to even look at the offer.

I hope I didn't offend anyone with this. I've found that in talking to other people about our situation, that there are a lot of people out there in the same situation as us. I think it's important to talk about it and to let people know that they aren't alone.

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1 We calculated our best case scenario by graphing our amortization table against a 4% yearly appreciation of our current value and seeing where those intersected (taking into account the 10% that we would have to take off the top for realtor's fees and closing costs).
2 For example, we feared the "end of the world as we know it" credit hit, the bank ignoring the law and suing us for the deficiency, social stigma from friends, neighbors and family and "hurting" the value of the neighborhood we love. These fears are all irrational.
3 Arizona is a non-recourse/anti-deficiency state which means that the lender cannot pursue the borrower for the deficiency of a purchase money loan on a primary residence (as of this writing, January 15th, 2010).

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Photo by respres

Comments

  1. Any chance you could you post your analysis, without your financial details of course? I'd be interested to see what our "best case scenario" would be.

    I am loving reading your posts, by the way! It will certainly make the fact that we won't be able to hang out all the time with you guys a little easier. ;)

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  2. Thanks, Rich! I thought about you especially on this post as I was adding my footnotes a la David Foster Wallace. :)

    Good idea on posting the analysis. When I went back to the spreadsheet, I actually found that our best case scenario was six years rather than seven (post updated). Anyway, I will do that in another post right now!

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  4. Okay, just ignore the screen name that appeared on the above comment (long story).

    Yes... I would like to plug my numbers into your analysis as well. I'm very curious to see how long it would take for me.

    And I second Rich's comment... reading your blog posts will fill a little piece of the hole you leave behind:) I'm going to miss you guys so much.

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  5. We're going to miss you all so much, too! I'm so glad that there are these things called blogs so we can stay connected like this!!

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  6. Good for you. Where's the morality in all the shenanigans the banks have been doing to us lately??? And yet they continue to profit on our losses.

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