Strategic Mortgage Default

Over the past few years, a few couples that we know have strategically defaulted on their mortgages. These are people who could afford to make their mortgage payments, but who owed more on the house than they could sell it for, so they simply stopped paying. They saved the money that they had been paying, allowed the mortgage to fall behind, unsuccessfully tried to sell the house as a short sale, and ultimately had the house foreclosed. What happened after that varies- one couple took out a mortgage and bought a new house at the same time, before the delinquency/foreclosure hit their credit reports, another couple moved into a rental home, and another moved into an apartment.

I'm secretly hoping that all of them will get sued by the bank for the difference between what they owed and what the house sold for at auction. I'm incredibly annoyed by the fact that each of them seems to have gotten out of it basically unscathed. Buy a house when the market is high, and then simply walk away when values plummet. Sure, their credit scores surely were lowered, which probably translates into slightly higher insurance premiums, deposits, and interest rates - but they've each walked away from at least $50k in "underwater" loan balances.

One of the couples originally bought a foreclosed house a few years back, at an incredible price. At 2007 fair market value, they bought a $225k house for only $135k. They made a few renovations and improvements, then did a cash-out refi... getting over $60k in cash, and using it to pay off personal student/auto loans. Then, after the housing market tanked, they decided they wanted to move but discovered that their home was only worth about $150k. They stopped paying on the mortgage, allowing it to fall behind. When the bank foreclosed, they owed just shy of $200k on the loan- and had used the "equity" to completely pay off all their other debt. Ethically, morally, they see absolutely nothing wrong with this situation.

Compared to the "average" person who can afford their mortgage payments but simply don't want to pay any more, and decide to give back the house to the bank, this particular situation seems far worse to me. They got a huge financial gain out of it, by getting their other loans paid off completely! Had they not refinanced to pay off the other loans, they would still have had equity in the house, and been able to sell it. It is a horrible abuse of the system, and tremendously unfair to everyone else who continues to pay their debts.

For that reason, I truly hope that the banks chase after these people, and everyone else across the country who has walked away from their homes but who could still afford them. I would like to see the bank sue them for the difference, to have a judgment placed against them so that they have to repay the extra money that they've taken out.

I'm incredibly frustrated by stories like this, yet I know several people who have done it. I wish I could just hand our house back to the bank, and just get rid of the mortgage entirely, with no consequences! I'd be happy renting a house for a few years, if it meant being free of all the house debt and never-ending maintenance & repair bills. We fall into the large group of homeowners who owe far more on the mortgage than our home is currently worth, but wouldn't dream of just not paying on it just to give us more money to indulge in fun stuff.

It will be several years before we will be able to save up enough money to sell the house and pay off the mortgage (at even then, it'll be at a loss of $50-100k over what we paid!). In the meantime, we'll continue to pay more (due to higher interest rates, maintenance, etc) than those who walked away and are currently renting. Not to mention, we still have our other loans (student, auto, etc) that we'll be paying on for several years.

No Progress

In the past month, we haven't really made any more financial progress.

We spent a lot more on vacation than we had budgeted. We delayed in booking the trip, so prices went up a bit over what we had expected. We also splurged a bit while we were there. We had set aside $1000 for travel & accommodations, and had planned to spend an additional $500 while there. We ended up spending close to $2500 in total. We charged everything, and we'll pay off the trip this month.

We had a few extra bills this past month, including our annual homeowners association dues. The combination of vacation and the extra bills meant that we only paid the minimums on the remaining credit card debt.

We're still saving up for the down payment on the new car, setting money aside for car insurance on the new car, saving up for more home renovations, continuing to pay down credit card debt. Although I'd like to continue building up our emergency fund as well, and pay extra on other debts (car, student loan, mortgage), there isn't enough to do any of those until at least mid-summer.