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I recently married and my wife owns a house she bought 3 years ago. We live in new-jersey and have seen our neighborhood change from nice to almost a ghost town. 80% of the homes have foreclosed on and we have lost too much $. Although we can make the payments of the mortgage we have lost from a value of $360K to now $150K. It seems the negatives are smaller than the positives in walking away. My understanding is that her credit will suffer, but the bank can't tax us on the debt of the loss. What should we do? This investment can hurt us for years while other people are getting bailed out.
I think you need to check your loan documents, and then maybe talk to an accountant to figure out the tax implications. In California, the primary loan is usually non-recourse, so you give them back the house, and they can't come after your assets/wages. However, if you've refinanced or have 2nd/HELOCs, you may have other complications. Other options: 1. Negotiate with your lender to give you more favorable terms. It's a long shot, and sometimes they won't talk until you miss some payments. 2. Try a short sale with the lender, so you sell the house rather than default on it. If values have dropped a ton, then this is a long shot too. 3. Let it foreclose, but your wife will be hit with nasty credit issues. If you can afford the next place with just your salary/credit, then maybe you can buy again once the wreckage is over. Housing is not even bottomed out yet, so you may have many years being under water. I know in some areas in California, houses are 50% down from peak... you might have to wait an entire lifetime to see those peak prices again. While legally you can always let the home foreclose, there is the moral issue of you having the ability to pay it off. Unfortunately, we will all suffer from foreclosures since the government now runs Fannie and Freddie, as well as provide bailout funds to all the banks. That means our taxes and future taxes of our children will be paying for the mess, one way or another. Good luck with your decision, it is one that many are facing. One piece of advise, don't turn around and buy another house right away. You don't want to be in the same situation again, as the recession gets underway and banks are going under.
If you can afford the payments--and you say "we can make the payments"--then pay. Your wife agreed to pay when she got the mortgage. You say: "My understanding is that her credit will suffer." Your understanding is close. Her credit will be destroyed. Your credit will be destroyed. (Even though you're not on the loan, you and she will show up linked on credit reports.) As for the bank, no, the bank doesn't tax you on a loss. However, the IRS might. You say "This investment can hurt us for years." Is this an investment property? Or is this your home? There's a big difference. And, yes, it can hurt you for years. Especially if you "walk away." How about "running away to avoid your obligations"? And who's getting bailed out? Not other people in your situation. Maybe the big banks and lenders, but not the guy down the street. You can always try asking the lender for a loan restructuring. They might be willing to do that; it wouldn't hurt your credit and could reduce your payments. Just a thought.
YOU are asking; so I will volunteer; keep the house and suffer with the payments; this is a no brainer. why? Cause the drop in value is TEMPORARY; MAYBE 3-5 YRS. Then the house will creep back up and before long, you will have a house worth 400k. AND tell me where you live; I will consider buying the other homes there as they will be fully occupied within 5 yrs. [Aero Jet General, an employer in E. Sacramento area, has gone from many contracts to zero many times and for 12+ yrs, around 1960, it went from boom to bust. A wealthy investor knew the area and bought every empty home in the ghost town. He waited out the dry spell and when AGG again gained gov contracts, he started re-selling his houses for 3-400% profits permitting him to net an annual 9% return on his hold time. NOT bad. HE did well.] DO the same. Wait out the temp bust.
There are various proposals floating about for helping people in your circumstances. I'd hold on and see what's happens. However, it's doubtful anything will happen before late winter/spring. BTW, your wife will be subject to a lawsuit for the difference between the re-sale price of the house and the mortgage amount (plus fees and interest). A judgment against her will be valid for years (20 in some jurisdictions) and will allow the bank to garnish her wages, seize her financial accounts and lien her real property Judgments accrue interest at better than market rates until they are paid in full.
I don't see who's getting bailed out. If you can afford the payment, I would continue to do it. The market will rebound and the value will go back up. The bailout isn't going to protect anyone's credit.
If you can make the payments then I would say stick it out - your investment will eventually get back into appreciating once this crazy mess is over - that's for sure. plus it won't go against her credit and in a few years - you'll be able to do more things than the people who simply just "walked away"