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Tue March 1, 2011
Walking away from a mortgage
It's happening all over the country, including in the Pacific Northwest. People are walking away from their mortgages. In most cases, the homes that are being abandoned are valued for less than their mortgage.
Foreclosures have a big ripple effect
Home owners who are doing this are usually aware that such a move will damage their credit and mean a loss for the bank. But walking away from a mortgage also has a huge knock-on effect that reaches far beyond the borrower and the lending institution.
Richard Hagar, an appraiser with American Home Appraisals, tells KPLU's John Maynard that the bank has to borrow the money from someone else (retirement funds, individuals, etc), so that means those folks lose out, too:
The bank has to borrow that money from someone else so that you could borrow it and buy the house.
Abandoned homes also bring down the value of homes in their community. He points to places such as the Phoenix area and Detroit where there are miles of abandoned homes. Not only is it dangerous and ugly as homes fall apart, but the city loses vital taxes that come with home ownership.
Don't underestimate what bad credit means for your future
Finally, Richard Hagar warns that the damage to a person's credit rating caused by defaulting on a home loan is significant. He says it's quite possible that the person who has defaulted won't be able to buy another home for years. Their credit card interest rates will go up. And it may even be difficult to rent because of a landlord's reluctance do business with someone with bad credit.
Hagar's advice: Do everything you can to work out a payment plan with your bank to pay off your mortgage. Foreclosures, he says, should be a last resort.