by The Smarter Wallet on March 7, 2009

Got An Upside Down Mortgage?

Its hard to believe that it was a mere couple of years ago when homes were selling like hotcakes with multiple bids. Back then, I was wondering when wed be facing the end of the real estate bubble. Well, many of us are now living the American Nightmare: thanks to the real estate bust and subprime mortgage mess, we face foreclosures and worry about our unemployment checks running out. while we try to manage job loss and avoid debt collectors.

These days, were now talking about how people are facing the prospects of walking away from their upside down mortgage, or a mortgage that keeps them financially underwater. Heres whats amazing: reports are stating that 20% of homeowners (or 1 in 5 families) now owe more than what their properties are worth.

Whats frustrating to me is that this was something many of us could have probably seen coming. Many of us probably anticipated that the market would eventually receive its comeuppance sometime in the future, given how crazy prices were back then, except that we didnt do anything about it. At least I didnt. I still remember a moment when I was tempted to call out the peak of the real estate (and stock) market (I was actually spot on, in hindsight), but still remained fully invested in the stock market. Oh well we can only wish we can turn back time and do things over.

Now believe it or not, when a basic cost-benefit analysis is done, it makes more sense for people to actually walk away from their devalued homes. But for those who are now wallowing in negative amortization and upside down mortgages the surprising fact is that theyre actually sticking it out. There are people have chosen to address their debt and loan problems by working to consolidate debt or by signing up for loan modification services instead of walking away from their obligations. As behavioral economics would have it, most people dont make the rational decision of moving on and cutting their losses. Now why is that?

Why You Probably Wont Foreclose and Walk Away From Your Mortgage

Why is it that most people will prefer to stay put and will refuse to walk away even if its in their best financial interest to do so?

1. Theres this thing called the endowment effect, where homeowners have the tendency to value their homes above their market price. Because people dont want to admit theyve actually lost money, theyd rather stick things out and avoid selling at a loss.

2. Homeowners place more importance on immediate outcomes than they do long-term effects. Now what does this mean? Theres a visible cost to walking away that people anticipate right away, while they dont see very much material benefit to actually abandoning their homes. The impact of walking away (theres effort, time and money involved) has an immediate negative effect whereas the positive impact isnt easily felt until possibly later. Hence, people will wrongfully assume that theres a heavier cost to walking away than it is to staying put.

Check out this interesting article on this difficult dilemma. What would you do if youre faced with an upside down mortgage?

For those whod like help with an upside down mortgage, you may want to consider modifying your loans or seeking help with debt management. Some possible services include those provided by:

• Debt Consolidation Care for your debt consolidation needs
• Home Foreclosure Fighter for loan modification services
• Lower My Bills for home refinancing, debt consolidation and debt management
• for mortgage refinancing and personal loan needs

But always do your due diligence before signing up with any service.

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