Your Mortgage – When to Walk Away

A very reputable publication, the San Francisco Chronicle, recently posted a story on their website that is a true sign of the times; “Your Mortgage: When It's Time to Walk Away.” Wow. Only in America.

This comes on the heels of a new government initiative to incentive's and streamline short sales. The new HAFA (Home Affordable Foreclosure Alternatives) program is scheduled to go into affect on April 5, 2010 and encourages borrowers to work with their loan services for reaching an alternative to foreclosure. Many critics foresee this legislation to be counter-productive to our country's real estate recovery because it will encourage borrowers to walk away from their mortgages.

Proponents of this newest form of government intervention into our free market economy would say that borrowers are already walking away from their mortgages. And they're right. The fastest growing segment of defaulted borrower population is surprisingly those who are current on their payments. Strategic Defaults, as they have been dubbed, is the latest trend puzzling mortgage underwriters across the country because they are trying to assess a new loan applications and the standard rules of risk are being turned upside down.

Only time will tell. You're encouraged to post your point of view on the new HAFA program and whether you think it will help or hinder a real estate recovery in the comments section below.

There have been some very high profile organizations in this “strategic default” category recently. Among them is Tishman Speyer Properties, who performed the largest residential strategic default in history in January 2010. They walking away from $4.4 Billion that was borrowed to acquire the sprawling Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan encompassing 56 buildings and a total of 11,000 units. And the company remains in business. Only in America. Another organization that saw the benefit of walking away was the Mortgage Banker's Association who strategically defaulted on their headquarters.

If you are Beverly Hills 90210 star Brian Austin Green however, deciding to stop paying the mortgage may relieve some short term burdens but unfortunately, may not release the responsibilities quite as easily as with Tishman and the MBA. A sad injustice indeed. It would seem that the bigger the default, the fewer the long term repercussions.

So when is it a good time to walk away from a mortgage? The article penned by Lisa Smith mentioned at the beginning of this post posits that one should run their life like a business. But it is extremely important to point out that choosing to stop making mortgage payments is a serious decision and shouldn't be taken lightly. Despite the injustices of big banks and their ability to incur big losses and pit that on taxpayers. Despite the unfair ability for businesses such as Tishman Speyer Properties or the MBA to walk away basically scoot free. The average borrower in Anywhere, USA is not a business and defaulting on a mortgage is not a light matter.

Just ask folks in California. This tax season many were shocked to find out that even though they may not have had a federal tax liability on the losses incurred from a short sale or foreclosure, they did have a state income tax liability. I guess California was so broke that they were willing to kick their people while they were down. The governor of CA has vetoed an appeal on this subject but the debate ever wages and many believe the Californian government will lift this tax burden soon.

For those of you who have always paid your mortgage on time, have never defaulted on a loan and have always paid debts back, sorry to say, but you're not the big winners here. In fact, it seems the rewards have gone to the Tishman's of the world who gambled big and lost big. (And the loan brokers who pushed those loans through and earned percentage commissions on the close.) But hopefully you learned a mighty fine lesson about our banking system from all this. If you owe a bank $50,000, you have a problem. If you owe a bank $5,000,000,000, they have a problem.