I received yet another letter from a homeowner struggling over whether to do a strategic default and leave the house he loves or to stay in a neighborhood that is now in a serious downward spiral. I'm printing the letter, my response, and his follow-up because I think it's emblematic of the choice so many homeowners are facing. This correspondence has been edited for clarity and length.

He wrote:

I'm 58 and have been married to my wife for 11 years. We sold my home of 30 years about five and a half years ago, but due to a previous marriage and our divorce agreement, I gave my ex-wife half of the equity, which to be honest wasn't much.

My current wife and I purchased an older fixer-upper in what was a very nice neighborhood at that time. We paid $150,000 for the house (it was a foreclosure) and got a 2nd mortgage of $35,000 to renovate the kitchen and make some other necessary repairs.

Before the "downturn," the house appraised for $210,000. Now we would be lucky to get $100,000 for it. We still owe about $175,000 on it.

The question is, should we stand or run? Personally, I don't think the house will ever be worth what we owe. Our county has been hit hard and is now a very undesirable location, and home prices continue to drop more than in surrounding counties. Even if the economy were to improve over the next 10 years, I don't think homes in our county will ever recover, given the increasing crime rate.

Would you ever recommend that someone walk away from their mortgage? I know our credit would be ruined for a number of years, but I could easily find an owner/seller to buy another house from. I also have a relative who would sell me a house.

I wrote in reply:

I think the decision to do a "strategic default," where you could keep paying the mortgage but choose to walk away, is a personal one. You are very far underwater with your mortgage and in the exact category of homeowner who is much more likely to do a strategic default.

There are two sides to the strategic default decision: First, you made a moral commitment to repay the loans you took out when you bought the property in addition to a legal commitment. Many people believe that living up to the terms of the mortgage is paramount. If everyone simply walked away, neighborhoods and communities would be even further eroded, crime would move in, and it would be a devastating cycle -- a cycle you see happening in front of you.

On the other hand, there's a business decision to be made: Your house is worth $75,000 less than what you owe. If you don't believe the neighborhood will regenerate over 10 to 15 years, and you're afraid to stay in the property because the neighborhood has more crime, then you might consider walking away now.

You clearly understand that your credit history and score will take a big hit. What you may not understand is that you might be on the hook anyway for the difference between what you owe and what the home is worth. If you have assets, the bank may choose to come after you for the difference.

Finally, while a strategic default (also known as "jingle mail" because homeowners simply mail the lender the keys to the property) will be the fastest way to unload the property, it will cause the most problems for your credit history. Have you considered a deed-in-lieu of foreclosure or a short sale? These take more time but may do less damage to your financial health over time.

You should speak with a real estate attorney who can help you understand your options. If you don't know a good real estate attorney, please call your local bar association and ask for the head of the real estate committee. That person should be able to provide you with a few referrals.

Update from the Reader:

I agree with everything you said. But you left me with a political answer or non-answer that leaves me on the fence.

I know you can't come out and tell me to walk away from my home. Maybe if my wife and I could speak with you off the record you would tell us to walk away, but I understand why you can't tell me.

If your home was suddenly worth $100,000 and you still owed $175,000, and your payments (first and second) were $1,700 per month for the next 25 years, what would you do? Would morality keep you paying? Morality goes both ways.

Banks know people are struggling and should voluntarily offer a reduction on loan rates. Just because my wife and I work ourselves to death to pay our bills on time, does it mean we should carry the weight of all the loan companies and banks that got us into this mess?

Everyone wants to own a home. I don't blame people for reaching for the stars, but banks should suffer in this as much as we do. So, what should we do?

My wife and I really do like our home, and right now it's not in "danger." But I can see the storm coming and I know it won't be long before the $100,000 that my house is worth now, might be $60,000 or $50,000 in another year or two.

I don't want to walk away. I just really want some relief, perhaps a lower payment since our home isn't worth what it used to be.

My response:

Here's the truth: You're not going to qualify for a lower payment when you can easily afford your mortgage. And what would a lower payment do for you anyway? You might pay $100 less each month but your house will fall from $100,000 to $65,000 in value. That hardly sounds like a good deal.

You have to make this decision yourself. You're the one who has to live with it. If it's a business decision and you made a bad investment in the wrong property and don't feel the value will ever return, then you may decide to walk away and take your lumps.

The bank provided you with a loan so that you could buy a house. But the bank didn't choose this house -- you did. You are right that the real estate storm has created downdrafts throughout the country. And it has been worse in some areas. Some of the hardest hit areas will take many years to stabilize and grow again.

Ultimately, you'll need to make the decision that's best for you and your family.

 

 

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