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Ditch the mortgage payment and rent for less

California homeowners find strategic default and becoming renters the new American dream.

By Teresa Mears Dec 11, 2009 6:02PM

Is defaulting on your underwater mortgage and then renting a better house for less money the new American dream?


The Wall Street Journal this week wrote about several families in California who did just that and are happier for it.


"It's just a better life. It really is," says Shana Richey, a schoolteacher who gave up on a house in Palmdale, Calif., that had declined more than 50% in value since she and her husband bought it in 2004.


She also traded a $3,700 monthly mortgage payment for $2,195 in rent on a larger house. "I don't have to worry about paying property tax, homeowners' insurance, the landscaping, cleaning the pool or any repairs."


The family bought the house in Palmdale for $430,000 with a no-down-payment loan. They added a powder room and pool and made other improvements. But by 2009, the value of their home had plunged to less than $200,000, leaving them more than $230,000 underwater.


They applied for a mortgage modification and were offered a payment of $3,300 a month, which they turned down. They ended up selling the house for $195,000 in a short sale.


The WSJ story also noted that the family had bought a $1,800 dining set, season tickets to Disneyland and were planning a cruise to Mexico with the money they were no longer spending on mortgage payments.

One analyst interviewed by the WSJ sees the roots of economic recovery in stories of families making the decision to walk away from high-priced mortgages to lower rents, increasing the money they have to spend on other things. "It's a stealth stimulus," Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy, told the newspaper. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."


About one in four U.S. homeowners owes more on a mortgage than the house is worth, according to real-estate information company First American CoreLogic, The Associated Press reported. In the markets hardest hit by the housing bust — Florida, Arizona, California, Michigan and Nevada — 40 percent of homeowners are underwater.


Andres Duque, a 33-year-old hotel worker, said he was struggling to keep up the payments on his $125,000 condo in a marginal neighborhood of Miami, which had seemed like a good deal when he bought it in 2005.


But with similar units now selling for $35,000 or less, he faced being upside down on his mortgage for 20 years. He decided to let the condo go into foreclosure and was still living there when The Miami Herald interviewed him, waiting for the bank to throw him out.


"I was able to pay off all my credit cards,'' Duque told The Herald. “In a way, it was the best thing that happened to me because all my income is not being consumed by this freaking monster of a debt.''


University of Arizona law professor Brent T. White has drawn a lot of reaction to his paper saying that fear and shame are keeping people from walking away from mortgages that it makes good business sense to abandon. He raises the question of why banks that made bad loans are getting a federal bailout but homeowners are pressured to do everything they can to keep paying those loans.


"The government was encouraging people to buy, telling people that it was a good investment to buy. Real estate agents pushing people to buy, banks pushing people to buy," White said in an interview with The Arizona Daily Star. "And then when the market collapses, the homeowner alone is left holding the bag and forced to bear the burden. And so I think we need to talk about the disproportionate burden that is falling on homeowners."


While some of Richey’s neighbors have taken the same step she did, others disapprove, according to The WSJ.


Tom Sobelman is still paying the mortgage on an investment property he owns in the neighborhood, even though he collects about $1,000 a month in rent less than he pays in expenses on the house.


He argues that people who default on their mortgages are doing so at the expense of taxpayers, who are paying for the bank bailout "All these people are gaming the system, and I'm paying for it," he told The WSJ. "My kids are going to be paying it off."


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