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Call Kurtis: Should You Walk Away from Your Underwater Mortgage?

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SACRAMENTO (CBS13) — More than half of homeowners in Sacramento,San Joaquin and Stanislaus counties are upside down on their mortgages, owing more than their homes are worth.   You can bet the conversation whether people should keep making the payments or walk away from a bad investment is happening in every single neighborhood in our area.  

Here are the numbers from Zillow.com regarding homes that are underwater in your county.

“I don’t know what we’re going to do at all.  I don’t have a clue,” Amilia Blackwell said.

Married with a toddler and a baby on the way, she and her husband Jakob are feeling the pressure of living in an underwater home.  They owe $40-thousand more than theirCitrus Heightshome is worth.    The couple faces the moral versus business decision; should they keep making the payments or walk away?

“That’s our main conversation.  What are we going to do?” Jakob said.

Financial expert, TV host and author Suze Orman says everyone should be looking at the value of their homes.

“If you own a home that is 50% underwater, 70% underwater, it will never ever, ever come back to where you purchased it.” Orman said.    

 In her book The Money Class, Orman says if you like your house and are only 10% or 20% underwater, keep making your payments.  But what if it’s worse than that?

“Do the calculations everybody.  How much is it costing you to actually stay in that house?  How many years will it take for you to pay more than that house is worth?  If it’s 3 years, 4 years, 5 years; are you kidding me? That’s a house you really need to say bye bye.  It’s not worth the money.”

Using her theory, say your house is worth $150,000 and your monthly mortgage including property tax and insurance is $2,500.   You will pay $150,000 dollars; the current value of your house; in five years.   In that case, Orman says try to get your bank to modify your loan.

“If the banks will not work with you, then you need to either do a short sale.  If they will not allow a short sale, then do a deed in lieu of foreclosure.  If they won’t do that then walk away.  It’s just how it is.”

When Mary Beth and Bob Stucky say the bank wouldn’t work with them on their Somerset home which was underwater more than $200,000, they walked away becoming renters.

We were there on moving day last year.  Mary Beth was still struggling with the morals of walking away.

“It’s probably from my father that you don’t walk away when you make a commitment,” she said during while choking back tears in December 2009.

One year later? 

“I’m happy.  I feel secure,” she says.

Mary Beth realizes it was a bad investment.   She and Bob are now renting a bigger home with more land and a rental payment a fraction of their old mortgage.   It’s allowed them to build up a healthy savings account.

“We’re doing quite well and at the end of the storm, we’re going to be positioned to get back into the market and make our lives better,” Bob said.

But it could be years before they’ll qualify to buy a home again.   

Rob Sorenson of Folsom walked away from his home a couple years ago.  It’s the only blemish on his credit history and was enough to cause his credit score to plummet.

“Slowly but surely all the credit card issuers said you know we’d rather not have your business anymore because of your credit risk,” Sorenson said.

When his yellow lab Rosco got sick Rob had to ask family for help.    He had no credit card to pay for the $2,000 dollar vet bill.

“That’s what I depended upon for my safety nets before.   Now I don’t have that safety net,”

Sorenson and the Stucky family knew the risks of walking away.   They have to live on cash.  If they don’t have the cash they have to save up to buy whatever they want.

 Beth Mills with the California Bankers Association warns walking way or strategically defaulting as it’s called; has a larger impact bringing down your neighbors’ property values keeping the housing market from recovering.

“When you signed a loan document, you made a commitment you made a promise to pay,” she said.   “We hope people will continue to honor that commitment.”

But Orman says if you failed to get your bank to listen, you shouldn’t feel guilty.

“You have to make the attempt to work with them.  If they won’t work with you, then I think you can stand in your truth and leave that home.”

Orman says the new American dream may mean never owning a home again.

“And if you do rent for the rest of your life, it’s not a big deal.  Who cares?   Just invest that money you would’ve put in your home somewhere else.”

The Blackwell’s realize any decision they make involving their home will hurt somehow.         

With a baby due in September, they’re up against the clock to make the right decision.

“We want to be proactive now and figure out a solution, so that in September with baby #2, we’re not as bad off at that point,” Amilia said.      

Orman says if you’re thinking of walking away or doing a short sale, now is the time to do it.    Sometimes it takes a year or more for a short sale or foreclosure to go through.   A federal tax break for short sales and foreclosures is set to expire at the end of 2012.  That means come January 1, 2013 you may have to pay tax on any home loan you walk away from.   So if you’re $100,000 underwater you’ll have to pay the federal government taxes on the $100,000.

Before making any decision, you should talk with a real estate or tax attorney to see the potential impacts you could face.

Orman says it’s time to erase feelings of hopelessness, rethink your ways and moving toward the new American dream.

“The new American dream really is a dream that allows you to sleep at night where you feel secure, and you know what is yours cannot be taken away again, because of the actions of others.”

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