shanNdjones March 30th, 2010
A fellow member of the Homeowners’ Association of my townhouse development recently asked my professional opinion about the current real estate market in general and the value of our townhouses specifically. The truth is, they have lost half of their “value” since being built in 2005, and of the twenty units in the development, more than half are in default or have already been foreclosed. He wants to know what I think about the trend of “walking away” from a property that is upside-down.
There’s been a lot of talk about just this type of thing recently. Consider this recent article in the Los Angeles Times about a homeowner in Palm Desert, CA (an area hit hard by the housing “crisis”). While the vast majority of homeowners in default on their mortgages are hardship cases (lost jobs, medical issues, etc.), we are seeing a rising trend in the real estate market where investors simply stop making the payments or sign a deed-in-lieu and return the keys to the bank on properties that have lost 30, 50, or as much as 70% of their value.
Personally, I have a moral issue with that. When I signed the mortgage on my investment property, I made a “promise to pay,” that was not dependent upon future market value of the property. Simply because the market dropped does not relieve me of my obligation to pay.
You could call it “business.” I call it “wrong.”
Make a comparison to buying stocks on margin. When the value of those stocks drops, the investor still has an obligation to pay the brokerage firm for the full amount borrowed to purchase the stocks. There’s no “foreclosure” process.
In this article in Investors Business Daily, the author editorializes, “…[J]ust because a home loan is “underwater” — meaning its value is lower than today’s current market price — why should a responsible person whine about it and walk away? Why not service this loan for the longer term and wait for prices to improve? That’s called personal responsibility.”
I couldn’t agree more. That’s why, even though my townhouse is still losing value, I continue to make my payments, and will do so until the thing is paid off or the market recovers enough that I can withstand the financial hit. It’s just the right thing to do.
