Forclosure – The Financially Prudent Option?

Peter Viles, a blogger/journalist contributing to the LA TIMES blogs, posted a great piece today on an emerging kind of middle income homeowner.  This kind of homeowner is choosing foreclosure because it’s a smarter business decision than sticking it out.  Here’s a chilling quote:

Wachovia, in a conference call yesterday,
warned  investors that increasing numbers of homeowners are walking
away from their homes by choice: "… people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they’ve lost equity, value in their properties…"

Calculated Risk
notes this is "one of the greatest fears for lenders … that it will
become socially acceptable for upside down middle class Americans to
walk away from their homes."

I think that this attitude won’t make up a large percentage of foreclosures…but enough to add fuel to the housing downturn. 

Is this the ultimate lack of personal responsibility here?  There’s nothing in the rule book that says, you MUST pay if you can pay…right?  A foreclosure apparently will buy you XX months of time living "free" in the house before you’re removed.

If a couple purchased the home for $600k, it’s now worth $380k, and their mortgage is $600k (believe me it’s far more common than you think), and all economic news is gloom and disaster, it would be more tempting to consider this option.

Our Iowa market is still very stable.  Heck it really never boomed like the coasts.  It appears that I got out of SoCal (Corona, CA) at the peak of the market in the summer of 2005 when I executed my Geographic Arbitrage.  I got lucky and wasn’t greedy. 

I know plenty of people who are just like you and me that owe far more on their homes than they could get by selling.  It’s only a matter of time before the home equity lines and platinum cards run out.  There will likely be a glut of white suburbans, personal watercraft, and ATV’s for sale shortly.



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