Interesting - Why do so many Chapter 7 filers want to keep an UPSIDE DOWN home loan?

[gman]

Disclosure:

I am currently a renter who lost my home to foreclosure. My 2 home loans were $490k and the bank resold the property to someone else for about $380k.

My rent payment is 70% less than my 2 mortgages - and I am also not on the hook for "upkeep" except for mowing the grass and changing lightbulbs.

-----------------------------------

I see many debtors on this Chapter 7 forum asking about ways they can keep their home. With so many homes in America either having negative or next to no equity - I often wonder why anyone would want to go through a Chapter 7 and not wipe their balance sheets of what is probably their biggest debt - their upside down home.

With so many real estate experts calling for another wave down in home prices through at least the year 2014 - it seems that keeping a home with even little to no equity is a suicidal move as the odds are that the value is going to continue to plummet.

Chapter 7 debtors need to know that once they reaffirm a mortgage debt - they cannot get rid of it for 8 more years. This means many people will be literally stuck in their homes and their home payments for that period of time because should they decide to move - they will likely have to cut a check worth $1000s at closing to make up the upside down portion.

Finally - for those that do actually have equity - many states cap the amount that one can protect. In my state - the limit is $10k of equity. If one has more than that amount - the Trustee can force the sale of the home to get the excess for creditors.


So, I am posting this for 2 reasons:

1. To start a discussion as to the pros and cons of keeping a home with little to no - or even negative - equity...

2. To hopefully save a few souls from allowing their emotions of keeping a home override their personal and family well being.

[Freddy03]

I'll answer your question -

My house is upside down about 100K. When I file Ch 7 I do not intend to re-affirm just keep paying and stay. The reason I am keeping a house so underwater is I have been searching rentals in my area and everything is just about what my mortgage is. By me staying I won't have to worry about what happens if the house I'm renting goes into forclosure and I'm forced to move once again. I have 2 children that are in the school district that I want them to stay in. And I love my neighborhood. It's small enough that we know everyone and I feel safe there.

[justbroke]

Yes, the primary reason to stay is the cost of moving, combined with the rents in the marketplace. In many cases, it's "cheaper" to stay and pay. You'll be paying rent anyhow, and with some luck, should you chose to stay and pay, the economy could improve and the home may start to appreciate. (Noting that appreciation back to 2005 levels could take 10 years and that most of that appreciation may just be inflationary pressures!)

[johnb12]

Another reason is because sometimes people buy a house as a home not an investment. If you are upside down less than 10% to 15% and plan on staying in your home more than 5 years, you will most likley recover your losses and maybe even earn some equity back.

[gman]

Another reason is because sometimes people buy a house as a home not an investment. If you are upside down less than 10% to 15% and plan on staying in your home more than 5 years, you will most likley recover your losses and maybe even earn some equity back.

Personally, I think the hope that home prices are going to reflate by even 10-15% or more to their bubble years in the next 5 years is a pipe dream. Most real estate experts are expecting another dip in values through 2014 and then flat prices after that.

Bubble economies require masses of people to believe in the bubble...and unless people have very short memories, they do not jump back in with 2 feet for years. Case in point: Japan. Today, you can still buy real estate for roughly 70-80% off of the bubble values of the 1980s. Yes...their real estate bubble never "reflated." Add to this high unemployment and an aging US population, tons of excess home inventory, the good likelihood of higher interest rates, etc. and where does one expect the demand to drive prices higher to come from? I would not be the farm on it.

With that being said, doing a stay and pay is almost like renting, except you are responsible for (a) property taxes and (b) maintenance/upkeep.

Has anyone here actually contacted their lender (or lenders) about a stay and pay [and the risk of a quick foreclosure once the loans are NOT reaffirmed]? That would be my #1 step...to make sure I did not receive a quick notice and was forced to move quickly.

Also, though I realize that rentals differ in price by community, I'd encourage anyone in this quandry to really do your homework on the costs of your mortgage, property taxes, insurance and upkeep vs. renting and paying renter's insurance.

Personally, I found the difference to be a no brainer to go ahead and rent - even when I factored in the $2k to move.

Your results may vary.

[brokejoker]

We're staying and paying but not reaffirming our mortgages. #1 - We are not upside down in our first mortgage and are only upside down in our second by about $15,000. #2 - The payments are affordable on our home. Rentals in the area are actually either MORE (people trying to recoup their upside down mortgages) or about the same as our mortgage. #3 - We are gaining equity in our home as we stay. In a rental we would pay for years and have nothing to show for it. The housing market will recover eventually. It may be ten years from now but we've got time. #4 - It's the best of both worlds to be staying and paying our mortgage. We get to keep our house but if we have another financial crisis we can walk away and not be on the hook.

I don't know why people who are hundreds on thousands underwater REAFFIRM their mortgages but I can completely understand why they stay and pay.

[gman]

We're staying and paying but not reaffirming our mortgages. #1 - We are not upside down in our first mortgage and are only upside down in our second by about $15,000. #2 - The payments are affordable on our home. Rentals in the area are actually either MORE (people trying to recoup their upside down mortgages) or about the same as our mortgage. #3 - We are gaining equity in our home as we stay. In a rental we would pay for years and have nothing to show for it. The housing market will recover eventually. It may be ten years from now but we've got time. #4 - It's the best of both worlds to be staying and paying our mortgage. We get to keep our house but if we have another financial crisis we can walk away and not be on the hook.

I don't know why people who are hundreds on thousands underwater REAFFIRM their mortgages but I can completely understand why they stay and pay.

Q: Did you contact both lenders as to their policy on non-reaffirmed properties?

Q: Looking at the big economic picture in the US - what makes you have the current belief that the housing market will recover eventually? Note that it is now 25+ years since the Japan bubble popped, and they never had a rebound. (You can Google this...there are charts of this all over the place.) Where do you see the demand that will drive up prices coming from?

[Freddy03]

I have seen horror stories of families moving into rental homes then 6 months down the road the house is foreclosed on and they are stuck moving into a not so desirable neighborhood. I wouldn't be able to sleep at night knowing at any time I would have 30 days to move (again). I'm in FL and it's happening daily here. Twice in just my neighborhood.

[johnb12]

gman,
iwasnt talking about bubble prices i was just stating that if you want to keep you home and you are not totally upside down you have a good chance to recover your loses. Also when housing pricesstart to come back even in a modest yearly incerese of 2 to 3% in 5 years or so you should see some gain. Also you will be payinfg down the balence. If it is purely an investment you are right but if it is your home that is a different.

[brokejoker]

Q: Did you contact both lenders as to their policy on non-reaffirmed properties?

Q: Looking at the big economic picture in the US - what makes you have the current belief that the housing market will recover eventually? Note that it is now 25+ years since the Japan bubble popped, and they never had a rebound. (You can Google this...there are charts of this all over the place.) Where do you see the demand that will drive up prices coming from?

Yes

Overall the US may be in a steep recession but our little area of the country has not been hit that hard. Home prices were artificially inflated within the last 5 years and those who bought at the top of the bubble are hurting. We have one major employer expanding in our area and two additional employers moving in. Home prices are already on the increase from where they landed when the bubble popped, although those who bought at the peak are letting their homes foreclose. Our home is the same size and construction as home that sold for a ridiculously inflated $250-$400 thousand dollars 2 -3 years ago. We, thankfully, bought our house almost 10 years ago and did refinance it to renovate but we did that on the front end of the bubble so we were saved from being really underwater in our home now. Thus the foreclosure homes are selling for the "true" value, where we bought in. For instance, the foreclosed home next door sold for $89,000 last year. We originally paid $93,000 for our house and ours in bigger. The housing market here just corrected itself and once the foreclosures shake through the system the prices will either rise or stay flat but either way 10 years from now we'll have equity in our home and be able to sell if needed, KWIM.

[HHM]

Mostly fear...

Fear of the unknown. BK was hard enough, but giving up a house on top of that is too much for some people to handle.

Also, the "rent is the same or more" argument is pretty weak. Owning a home almost ALWAYS costs more than renting when you factor in ALL the costs of ownership.

As for home prices...if you are marginally upside down (must people are more upside down than they really think), then staying in the home if you plan on living there for 15+ years does make sense, but if you are really $100K upside down, you are just buying into fear and using whatever excuse you can find to not face reality.

[Freddy03]

Mostly fear...

Fear of the unknown. BK was hard enough, but giving up a house on top of that is too much for some people to handle.

Also, the "rent is the same or more" argument is pretty weak. Owning a home almost ALWAYS costs more than renting when you factor in ALL the costs of ownership.

As for home prices...if you are marginally upside down (must people are more upside down than they really think), then staying in the home if you plan on living there for 15+ years does make sense, but if you are really $100K upside down, you are just buying into fear and using whatever excuse you can find to not fact reality.

I maybe buying into fear but if I don't reaffirm the mortgage then I look at it like a win win for my situation. And I understand the cost of ownership but for a couple of hundred dollars a month I can rest easy that if something happens I can move out on my own terms not someone else.

[Panacea]

Mostly fear...

Fear of the unknown. BK was hard enough, but giving up a house on top of that is too much for some people to handle.

Thats me! I have to remind myself daily thats its the smartest thing to do (give up the house). Everyday, I wake up and think I can find a way to keep it. To make this work. Then, my reality sets in. My house is what started the downfall of my finances. Keeping an underwater home, with an interest only mortgage, will only be disaster down the road. The worst flaw in my personality, is my inability to look ahead a few years. Filing BK and getting rid of my house NOW, is me finally looking down that road. In 3 years, the child support ends...in 5 years, the IO loan goes nuclear!!!!!!!!

I honestly am scared to death of all the unknown, scared of losing the house, scared of BK. Sometimes I want to stop everything and go back to being in debt and worrying how I'm gonna pay my bills. Atleast that was a familiar fear............but I won't.....I know this will soon be over, and it will truly be a fresh start. I don't want to feel like this, or like I was when I was struggling for the last few years ever again.

Might as well hunker down and take all the hits now, instead of just putting a bandaid on something that needs MAJOR SURGERY!!!

[gman]

“Those who fail to learn from history are doomed to repeat it.” Sir Winston Churchill

I'd strongly encourage anyone that thinks that home prices are (a) no longer in a bubble and (b) are destined to come back even in the next 15 years to take a look at these 2 graphs:

The 1st one is the well-known Case-Schiller Index. It tracks relative home prices to a "normal" index value of 100. Note we had the largest "bubble" in US history when the index shot to over 200. We are on an historical basis way above the normal mark of 100 - currently resting around 145.

History repeats itself. In every real estate bubble in history, prices actually went BELOW the normal before climbing back to 100. In the Great Depression - the Index dropped into the 70s. We have a long way to go down to even reach the normal of 100.

For those who think your home prices will gain 2-3% per year, you are really saying you think the bubble will slowly grow back into the 140-160 range.

GRAPH #1: http://www.ritholtz.com/blog/wp-cont...er-UPDATED.png

Ask yourself a logical (not emotional) question: What makes you believe that housing demand is going to rebound with (a) Boomers entering retirement in the millions, (b) interest rates at all time lows - with nowhere to go but up - which always drives real estate prices lower, (c) high unemployment, (d) yesteryears liar loans disappearing - effectively driving millions out of the market because they never should have qualified in the 1st place, and so on.

By the way: "Because housing prices always go up is not a logical or factual answer. See The Great Depression (graph #1) and see Japan from the 80s until now (graph #2.)

GRAPH 2: http://www.generationaldynamics.com/ww2010/g070219b.gif

In Japan - millions of people believed that their real estate values would bounce back - and year after year the prices kept tumbling down. Note that they have some very similar problems that we do, with the top one being a huge Boomer generation retiring which will continue to lead to the need for less/smaller housing.

[gman]

For those who disagree with my perspective on future home prices, that's fine....we all have our views.

But one thing that strikes me is the number of people who think that if they do a "stay and pay" and their real estate value actually does go up in the future and therefore they get to keep the "profit" - I have a simple question to ask:

Do you really think that if prices come back up - the lender is going to sit still and let YOU keep the profits?

Did you know: Most mortgage or vehicle finance installment notes contain a default provision that includes bankruptcy as a default trigger. In theory, at least, once your bankruptcy is closed (and the automatic stay of bankruptcy terminated), your lender could declare your loan in default and take action under State law to recover the collateral. This can happen at any time.

Did you know: That there is such a thing as "constructive reaffirmation" meaning that by making payments you might be in effect re-obligating yourself. Are you creating a contractual obligation by your actions? What is the law in your state? Remember, this will all be post-BK so you will have nowhere to hide.

Look - I am not a lawyer...but before I would go down a path of "stay and pay" - I'd likely ask a few of them in my state what my risks were.