We've been in business here at Grabham and Associates for a number of years now, and none of us have ever seen such a drastic downturn in home values that is comparable to what we have seen over the past several months. Those of us who dwell daily in the realm of residential housing have been exposed to a number of different scenarios that until recently have been extremely rare. One of those scenarios being the reality of home owners voluntarily "walking away" from their homes, and letting the bank take possession of it. We understand the full gamut of issues that a homeowner will deal with, some factual, and some emotional. But we thought we'd shed some light on this phenomenon in an effort to help some of our clients make the best decision for their family.
Let's first make a distinction between "walking away" and "losing" a house. This article is strictly addressing homeowners who are current with their mortgage and voluntarily give their house back to the bank. We are not addressing the homeowner who loses their home because they can no longer pay the mortgage for whatever reason. With that being said, the number one concern that gets owners thinking about walking away is the fact that the value of their home has gone down drastically over the past 24 months. And the chronology of questions usually goes something like this; How much is our home worth today? How much do we owe on it? When will we get back to even? The answer to any of these questions could sway a homeowner one way or another, but the critical answer is the one to the last question posed.
If you experienced a significant financial loss on paper, but had confidence that you would be made whole again in a couple of years; would you consider making drastic changes? What if the recovery would take 10 or more years? Would you do anything then? That's the dilemma.
Despite the behavior of the masses, no one expected the appreciation trends of in 2005 and 2006 to continue forever, but now moving forward, what is a realistic expectation for housing appreciation? Truth is, no one knows! The percentage of appreciation in Arizona between 2005 and 2006 was about 20%*. The total appreciation from 1990 to 2004 was 10%*, averaging between 1% and 4%* each year, with a few dips in between. But let's assume that moving forward, at least in the foreseeable future, we are generous and average 5% appreciation each year, and apply that to a typical home situation that many owners find themselves in.
Let's say you bought a house in '06 or '07 for $400k; that house today is probably worth around $250k today, give or take. At 5% annual appreciation, how long will it take to get back to $400k? I'll save you some time; it will take 10 years. At a more modest and probably more realistic 3% rate, it will take 16 years. That's 16 years just to get back to your purchase price! Those numbers can seem rather ominous when writing out your mortgage check every month, which is why many credit worthy, responsible people are considering letting their house go back to the bank. Because the next 2 questions asked are, Does it make sense to keep paying on a house that is worth almost half of what we bought it for? And, What's the impact to my credit if we walk away? Many people are answering the first question with a resounding, NO! If it will take 16 years to get the value back in your house, you could walk away from your house today, re-purchase it for the current value, (theoretically) put it on a 15-year fixed-rate mortgage keeping roughly the same payment you have now, and have the house PAID OFF before it gets back to it's original value in 16 years! It's tough to keep writing that monthly check when you look at the numbers that way. But what would happen to your credit if you did this?
Having a foreclosure or a short sale on your record is not a productive way to improve your credit rating. But is it the end of the world? We have a client who had a failed business and had to file for personal bankruptcy, leading to the short sale of their house. When they filed for bankruptcy, they were told by seemingly everyone that their life was over, and they would be relegated to being renters for at least the next 10 years. Long story short, one year after their bankruptcy filing, they owned a new home with a 30-year fixed-rate mortgage. Now their rate is 7%, but hardly the 15% you might expect with a bankruptcy and a short sale. All that to say, the overall impact to your credit life, may not be as bad as one would think. Of course each situation has variables, and just because it works for one person, doesn't mean it will work for everyone.
Now let's assume that the owner gets past the initial shock of the numbers, and decides that giving the home back to the bank is what they want to do. Especially since Deficiency Judgments are illegal in Arizona, and there is no way that the bank can sue the owner for them coming up short at the Trustee Auction of your house. But what about the moral considerations of that decision? Is it morally wrong to do this? After all, you did sign a contract stating that you will pay the money back to the bank. These are the same exact questions that were asked of a prominent, local, and very well respected theologian recently at a conference that one of our agents attended.
Dr. Wayne Grudem is a Professor of Theology at Phoenix Seminary who travels the globe teaching the Bible in its original Ancient Greek and Hebrew languages. Dr. Grudem is also the General Editor of the English Standard Version (ESV) Study Bible. All of that to say that he is well qualified to offer a moral opinion on this subject. So when these questions of ethics were posed to him his, rather succinct answer was this- paraphrased:
"I am familiar with people doing this (walking away from their house) but I haven't studied the issue too much. However, just like the owner signed a contract to repay the bank, the bank made a deal as well. And the deal was that the owner gets to live in the house as long as they pay the monthly mortgage. If they don't pay the mortgage, the owner can't live in the house and the bank gets the house back; seems like a pretty fair deal to me. So, in a nutshell, I think the homeowner is fine morally, to walk away from the house and give it back to the bank."
Grabham and Associates is not offering this article as an encouragement or even a justification to walk away from your house and give it back to the bank. And conversely, we are not suggesting that it is wrong to that either. What we are trying to do is offer some additional information for our clients who may or may not be privy to all of the information out there regarding their situation. And again, every situation is different and the decisions need to be made based on the uniqueness of the deal along with your trusted advisors. In our efforts to stay relevant and effective, it is our hope that the information and perspective offered here will assist our clients in making informed decisions.
*Historical Data regarding home appreciation provided by the Federal Housing Finance Agency. www.FHFA.gov