Lately it seems there has been a lot of talk about the rise in mortgage foreclosures. Specifically I have seen a lot of authors question the ethics of letting your home go into foreclosure, especially if you have the means to pay for it. So I thought I would chime in with my own opinion.
Enough people have decided to give their home back to the bank that a new term (jingle mail) has been used to describe the process. There are two main reasons someone would stop paying the mortgage on their house. The first is that they just can’t afford it anymore. This is likely to happen when someone has an adjustable rate mortgage reset, which hits them with a higher interest rate.
The other reason someone might decide to stop paying their mortgage is that their home is no longer valuable to them. This could occur because of a huge drop in equity, or because the cost of renting is significantly lower than the cost of the mortgage. This is usually when the decision to let a home go into foreclosure generates controversy. Many people believe that it is wrong to back out on your debts and that you should do everything that you can to pay. I disagree.
I think that if letting your home go into foreclosure is the financially smart move, than that is the move to make. Someone who decides to stop paying their mortgage is not taking the easy way out. Having a foreclosure on your credit report is a major ding. They will be paying higher interest rates on other debt for a long time. But if the savings of not paying for a home that has gone down significantly in value outweighs those risks, then why not do it?
When you decide to borrow money for a home, the bank lends you money with the agreement that if you stop paying your mortgage, they take your house. Look at it from the bank’s point of view. If you were truly unable to pay your mortgage they might feel bad for you, but they would still take your home from you. It’s the best financial decision for the bank. So why should any borrow feel remorse about sending the keys back to the bank if that’s the best financial decision for them?
This is by no means the last time you will see this topic come up, in my blog, in other blogs, or in the financial press. I have a feeling that for the next two years or more we are going to see a wave of foreclosures that this country has never seen. It will be interesting to see how the popular opinion of debt repayment changes as more and more folks back out of debt the promised to pay.
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