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We're going to quit making our mortgage payments . . ."

houseI’ve heard that from more than one acquaintance in the last few weeks.  It’s not because they’ve lost a job, or had a medical emergency, it’s just that it doesn’t make sound financial sense to keep making the payments anymore.

Defaulting on a mortgage or credit card has become a cool and calculated financial decision, not a great moral dilemma, or cause for endless shame, guilt and insomnia.

A young man and his wife both have good and ‘safe’ jobs. They have no kids and no debt. They live in a modest home and rent a spare room to a friend.  They can afford their $300,000 mortgage, but they’re going to quit paying anyway.

His house is only worth $200,000 in today’s market, so he has $100,000 of “negative equity.”

He won’t be able to sell his house and he won’t be able to refinance his loan at better interest rates. He’s trapped making payments on a large loan.

Defaulting is his other option. He stops making his mortgage payments and waits for the bank to foreclose, and when they do, he’ll be rid of his debt, and he’ll have enjoyed 6+ months of ‘free’ rent.  The foreclosure will ruin his credit, but it doesn’t matter. The blemish disappears from his record in less than 10 years. And in the meantime, his wife can buy a better house for $150,000 at a lower interest rate (the mortgage is only in his name).

To top it all off, the government is offering an $8,000 tax credit to first-time homebuyers who buy a home before December 1, 2009.  By defaulting on his loan, he’ll save himself over $100,000, and still own a home.

And even if he or his wife couldn’t get conventional financing, there are many seller financing deals to be made.  Credit is really less of an issue than most people think.

The last two properties I’ve purchased have closed with owner financing.  I don’t tend to have much use for banks . . . (I barely trust them to keep ahold of that flimsy fiat money the Feds keep printing).

New research this month from the University of Chicago’s Booth School of Business and Northwestern University’s Kellogg School of Management found strategic defaulting now accounts for 26% of all mortgage defaults.

And according to Zillow, a real estate database, 22% of homes in America have negative equity. In parts of California and Nevada, over 50% of homes have negative equity.

With all the negative equity in America, there’s plenty of cannon fodder for more strategic defaults.   Is it ‘right?’  Is it ‘wrong?’    Personally, I don’t tend to have a huge judgement either way.

Being overly attached to possessions and credit scores can kill you.  I’ve watched clients literally die from heart attacks trying to maintain ownership and FICOs, believing that their very worth as a human being depended on it.

Do I think we should do all we can to honor our obligations?  Of course.    Do I think we should enslave ourselves for decades to keep any system going (personal or global) that is ultimately unsustainable?  Absolutely not.  I contend that our collective creative energy could be put to much better use.

Always consult with your CPA, tax attorney and/or financial advisor before selling any real estate.
Dawn Rickabaugh is a real estate broker with expertise in seller financing and real estate notes.  www.NoteQueen.com; 626.641.3931;  dawn@notequeen.com

August 13, 2009

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Dawn Rickabaugh


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