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<p>Surely the debt would be erased by bankruptcy.</p>
<p>I don’t see whether or not you continue to pay on this upside down mortgage as an ethical issue. It’s a contractual transaction. Bank agrees to lend to you; you agree to pay the money back; both parties agree that if you don’t pay it back, bank gets the house back. </p>
<p>For me, the big question is what are the long ranging effects of the black mark on your credit. It will make all credit more expensive for you for quite a while. Also, future landlords and employers often check your credit. How much of a problem will that cause?</p>
<p>The ethical question for me is whether he stays in the house without paying any mortgage at all to fatten his savings.</p>
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<p>Are you sure those are banks and not loan sharks? :)</p>
<p>And at what interest rate? A good friend is a mortgage broker and he tells stories about how exceeding difficult it is these days to get loans for people with stellar credit and high down payments. Getting a loan after walking away from a house is not all that easy.</p>
<p>An acquaintance who lost her job fell behind on her mortgage payments and her credit card company cut her credit limit significantly even though she had never been late on her credit card payment. They said she was now a credit risk since she was behind on her mortgage payments. Even though she has resumed making the mortgage payments, her credit is in the toilet. I would not minimize the potential effects of walking away from a mortgage on your entire life. True, you can rent an apartment if you can’t get another mortgage or maybe you can get a relative to lend you money for a new house but the consequences can be much more far reaching than that. For example, employers can and do look at prospective job applicant’s credit history before making hiring decisions.</p>
<p>If it were my son, I would advise him to sit tight unless there was a compelling reason to walk away and not just because the house is now worth less than when he bought it. Even then, there are always solutions… like getting renters or a roommate. Wrecking your credit history (and, yes, going into bankruptcy will also ruin your credit) isn’t worth it IMHO. I know people who have done this and even a decade later they still run into problems. It’s a very slippery slope and once you start down that hill, it can be hard to recover.</p>
<p>And I would add, if this young man could not afford the house without working OT, he made a bad financial decision from the start.</p>
<p>A small house in a good neighborhood sounds like a renter’s dream. Why can’t he rent the house for break-even and live in an apartment to save money?</p>
<p>STOP taking advice from the internet. Make an appt immediately with a HUD approved housing counselor - not a lawyer, not an accountant, not anyone who will make money on him. Depending on the state, he may be eligible for a greatly reduced mortgage, especially if his income has declined in the last 12 months.</p>
<p>Agree you should stop looking here for advice. Many people see defaulting on home mortgages as a character flaw. In this market, mortgages need to be viewed in a business sense without emotion. If it were an apartment complex, the owner would have stopped paying a long time ago and sent the bank the deed. We are living in a different world than our parents and those of us who have been homeowners for 20+ years. Banks do not hold grudges, they make business decisions.</p>
<p>Your nephew needs to get professional advice, and not from one of those credit counseling companies that advertise, preferably from a lawyer or accountant that are well versed in residential real estate. (there may be a tax impact from some mortgage forgiveness if he continues to live in the house, so that needs to be taken into consideration).</p>
<p>I agree with those that say he should talk to a real estate attorney. I’m definately no expert, but I thought that a short sale would be less of a mark on your credit report than default? I used to think that those who defaulted on their mortgages were unethical, but over the last couple of years, some of our good friends - hardworking, caring people - have walked away from their homes (about 200-300K underwater) because it was too much of a burden. Now, I can see the other side more. Also, I think that lots of middle-class folks like me attach a lot of emotion to our homes and neighborhoods, and feel much more guilt walking away. Of the handful of really wealthy people I know, I bet none of them would flinch at strategic default. For them, real estate is all about investment.</p>
<p>I agree with the notion about not getting advice on the Internet. </p>
<p>This having been said, I do think it helpful to carefully read through the site Mortgage Implosion. com</p>
<p>There’s a lot of policy stuff to wade through, but reading the site carefully could help find a capable attorney, and even if not, could help frame questions once an attorney is found. </p>
<p>I agree with the notion that this is not an ethical issue. Contract law has always provided for the notion of an efficient breach. The question always is whether the breaching party is willing to face the consequences of that breach. And again, I don’t see how anyone can obtain a good grasp on those consequences adequately without talking to a competent residential real estate attorney. </p>
<p>By the way, the entire mortgage industry (and the Government) ignored the possibility of homeowners efficiently breaching their contracts. The industry dispensed with the requirement to put 20% down, promulgated sub-prime borrowing, where given the credit profile of the borrowers it was virtually impossible to adequately price for the risk, because they looked at historical data and figured that very few would efficiently breach their mortgages. How wrong that turned out to be - homeowners will act little differently than corporations when stuck in monstrously bad deals.</p>
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<p>Well put, mam1959.</p>