This is part 2 of my "Are you crazy" post. You can read part 1 here. I referenced the so-called "strategy" of those who voluntarily stop paying their mortgages. And, based on your responses, I wanted to do a second posting on this issue and why it is so important that we as industry professionals encourage not only our clients, but also our friends and families, to stay the course of continuing to make their monthly mortgage payments-even when they are hearing other ideas from the media and other sources you reported in your blog comments.
The 7-Year Credit Hit
Most of us know that negative credit listings stay on our report for 7 years. But what many don't realize is how far-reaching those effects are-or how they've become far more significant over the last few years.
It used to be that you could file bankruptcy or go through a foreclosure, then go out and buy a car within a few weeks. Sure, you'd pay a slightly higher interest rate, but other than that it didn't slow you down much. Well, not any more. One of my cousins recently went through a bankruptcy and then tried to buy a $3,000 car. No one-and I mean NO ONE-would lend them money. His mother had to lend him the money. But that's not where it ended. He had a hard time getting insurance because-you guessed it-they checked his credit report. Later, they had difficulties trying to switch electric companies for their home...because they checked his credit.
The scariest one to me? A friend mistakenly decided to "give" her house back to her bank. Quite the gift, no? Well, this one kept on giving: she was later turned down for a really great job because they pulled her credit and believed that her failure to make payments was a reflection of her level of (or lack of, as the case may be) responsibility. And she's not alone in this type of situation.
In short: making payments isn't just about keeping your house. It's about keeping your future.
Long-Term "Forced" Savings
For a lot of Americans, their home has always been a part of their retirement plan. My folks worked hard and, even if they couldn't put a lot into their savings account, they made their mortgage payment religiously. The result was that when they were ready for retirement, their home was paid for and their retirement income stretched a lot farther.
Those who believe that retirement planning should only include investments in the stock or bond markets are amazingly short-sighted. I've been in the financial services industry for over 30 years, and I can tell you that most folks aren't going to have enough money in the long run to live a comfortable lifestyle if they still have a mortgage payment.
As you make your payment every month essentially translates into a forced savings. Your mortgage balance decreases and your equity ultimately increases-even if it means that you have to wait for the market to correct. If you eventually owe nothing on that house, imagine the world of possibilities that are opened to you. And the worlds that will be closed if you pay rent for the rest of your life.
Life-and Real Estate-Are Always Full of Ups and Downs
Anyone who's ridden the real estate rollercoaster before understands that it's full of ups and downs. The market can't always be peaking. It has to slide in order to climb again. California goes through real estate "bumps" about every ten years: it climbs, it falls, it climbs, it falls. Admittedly, we've seen it take a hit over the past few years-but we'd also seen it climb higher than ever in the previous five.
Voluntarily deciding to stop making your mortgage payments because your entry into the real estate market was ill-timed is not only unwise, but also smacks of a spoiled child who cries because he can't have a cookie until after dinner. Sometimes you just have to exercise a little bit of patience to get the reward. Both when it comes to cookies and to profiting in real estate.
Adding to the Problem
I made mention of this one in my last posting, but feel that it cannot be emphasized enough: with every foreclosure that takes place on its streets, the property values in a neighborhood tumble. And that's not all that declines.
Mortgage banks, who have suddenly found themselves with a flood of properties on their books-properties that they never wanted to own despite some public opinion-hire companies specializing in REO properties to secure and market them. They're also supposed to try to maintain the properties as best they can.
A guy I've known for years is in the REO business, and he tells me that they are so overwhelmed that they simply don't have time to care for the properties. That means that the grass goes unmowed, windows that are broken may never be repaired, and pipes burst in the winter because they were not properly winterized. These properties not only pull down neighborhood values-they also become a blight on that neighborhood.
In truth, if people want to see their home, neighborhood-and investment-maintain their values, they should do everything to keep it looking good rather than becoming part of the problem. Hey-if mowing my former neighbor's yard on occasion meant that my property value wouldn't tumble irrevocably, you'd better bet I'd be on my John Deere getting the job done. I wouldn't just say "hasta la vista" to my house, walking away after tossing the key through the mail slot because I didn't think there was anything more I could do.
Agree or disagree? Tell me what you're thinking.
Tell your parents, your children, your friends, your clients, everyone you run across. Put your car keys beside your bed at night. If you hear a noise outside your home or someone trying to get in your house, just press the panic button for your car. The alarm will be set off, and the horn will continue to sound until either you turn it off or the car battery dies.
