Phoenix Real Estate Blog: Am I An Idiot?

I was planning to write today’s blog on the continuing woes of the nation’s mortgage giants, Fannie Mae and Freddie Mac.  But in snooping around for details, I found a shocking news story that I just have to comment on.  It’s from the San Francisco Chronicle, and it’s titled Are You An Idiot to Keep Paying Your Mortgage?

I hadn’t even read the article yet, and I was shocked.  It wasn’t too long ago that paying the mortgage was a family’s first priority (second – after food, I suppose); now it’s optional?  And maybe even stupid?

Yet I have clients who have asked similar questions.  One client needs to relocate for a job, is upside down on her mortgage and is wondering if trying to work out a short sale with the lender is just the way to go (as opposed to renting an itty-bitty apartment where she moves, trying to rent out the home she owns, and paying the large difference between what she could likely get in rental income and the monthly mortgage).

If she’s not likely to even break even on her loan-to-value ratio (the ratio of her mortgage amount to the home’s value) for several years and she’s not going to be living in the home, does it make sense to keep plugging away at the mortgage?

“Should you keep paying your mortgage? If you have significant equity in your home, absolutely. If you don’t, it’s getting harder to answer that question, especially when our government keeps giving people who owe more than their homes are worth so many reasons not to pay,” wrote the San Francisco Chronicle.

Indeed, most (if not all) of the government help programs require that a homeowner be delinquent on the mortgage – at least 90 days late in most cases.  Of course, that kind of delinquency will hurt your credit rating – it stays on your report for years – but is it a worthwhile tradeoff as government aid programs become juicier and juicier (there’s talk of rebalancing mortgage amounts so that people will only owe what their homes are worth).

More from the Chronicle:

“Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible [out of the new government aid programs]. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.

‘This is a once-in-a-lifetime opportunity,’ Schiff says. ‘People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn’t afford.’

To prevent fraud, the government says a borrower ‘must certify that he or she experienced a hardship or change in financial circumstances, and did not purposely default to obtain a modification.’”

But what about the good, old-fashioned moral obligation to pay our debts?  Does that count for anything?

What do you think?  Click on the “Comments” link and join the discussion!

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