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A Vent About Walking Away From Mortgages

February 28, 2012 · 60 comments

in Home & Garden, Personal Finance

Disclaimer:  Keep in mind while you read this post that I am referring to people that can afford their mortgage payments, they just don’t like that their homes are underwater, so they choose to walk away.

In a previous post, I discussed a home in our neighborhood that was basically abandoned by the previous owners.  (They up and moved out of state, leaving the home to languish.  They were not in any financial distress by any means.)

In a nutshell, the home was put on the market in August of 2011 for $299,000 and when I last looked about 6 weeks ago, it was being offered as a short sale for $235,000.  I then noticed a lot of activity going on at the house, and I found out the house did indeed sell in February of 2012- for $208,000.

Yikes.

I have to say, that sale price is not good for anyone that is putting their house up for sale in the neighborhood, or wants to refinance.

At this point, I do not know if the new owners plan on staying in the house or flipping it.  For the sake of home prices, I hope it is a flip so that a new sale price can go on the record.

Strategic Defaults Do NOT Just Affect The Bank And The Homeowner

Now, I know that a lot of people feel that ‘strategically defaulting’ is perfectly A-OK because a mortgage is an agreement between a homeowner and the lending financial institution.  When the bank loans money, they assume a certain level of risk.  If a homeowner decides to walk away (or in the case of my neighbor, run away) from their mortgage commitment, the bank has to suck it up because no contract is air tight and risk free.

However, as a homeowner, I don’t want to have to suck it up when I can’t refinance because my home’s value is now too low because of the ridiculous price this home sold at.  (In reality, I don’t need to refinance, I already did that.)

I wonder though.  These strategic defaulters justify their actions by pinning it on it just being a broken contract between themselves and the bank.  Well, there are a lot of other people involved too, the defaulters just don’t see it.  What would be great is if each person that defaulted was forced to go to the closing of every house in the neighborhood that was affected by their bargain-basement priced home.  There could be an original sale price based on factors that do not include the defaulter’s home.  Then another price could be assigned factoring in the low price of the defaulter’s home.  I would like the defaulters to sit and face those sellers and see how much money they are truly costing other people.

Anyway, I don’t plan on moving or refinancing, so my neighbor’s house will not impact me.  However, I feel bad for all the people in the neighborhood that it will affect, and it makes me angry.

(Keep in mind, I do recognize there are two parts to the equation.  For every unhappy seller, there is a very happy buyer, which very well could justify the defaulter’s actions.  However, I think it would be very difficult to watch your (former) neighbors lose money.)

What do you think?  Do you think it is easier for people to walk away from their mortgage because they don’t actually SEE the financial impact on the neighborhood?  

 

 

 

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{ 55 comments… read them below or add one }

Financial Samurai February 29, 2012 at 12:05 am

I would be livid if my neighbor did this to me and prevented me from refinancing to the 2.625% I’m currently doing now. That’s real money they’ve taken away from me!

I do have a property at a Resort which has some short sales, so what I’ve done is pulverize the value of my place to cut my property taxes. I plan to hold onto it forever as a lifestyle decision, so if I can lower the prop tax cost to 0, all the better!
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Kris March 1, 2012 at 9:16 pm

FS- since I recently refinanced and was not impacted personally. However, my heart goes out to all of those that will be financially impacted. Especially since these people could afford the payment.

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101 Centavos February 29, 2012 at 6:10 am

Understand your venting, Kris. If we could generalize, we coudl say that people who walk away from mortgages could fall into two camps, those that were never meant to have major debt obligations, and therefore feel little compunction in breaking a contract, and good people who are way in over their heads through circumstances not of their own doing — like a double job loss. In that case, they may be too overwhelmed to feel any sense of responsibility towards their former neighbors.
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Kris March 1, 2012 at 9:15 pm

My heart goes out to those that lost their jobs. I don’t think of them as ‘strategic defaulters’ though. The ones that drive me insane are the ones that aren’t in financial trouble, they just hate how much their home value has dropped, so they walk.

Good points.

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Thad P @ thadthoughts.com February 29, 2012 at 7:42 am

I think 101 Centavos is right. There are two people who would walk on their mortgage. The first group cares little about most things including their neighbors. They won’t care. The second group is totally different, and I think they would care greatly.

Of course, what this probably points to is how little all of us know our neighbors.
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Kris March 1, 2012 at 9:13 pm

I am guessing the ones that would struggle with the decision are the ones that probably truly can’t afford the payment anymore.

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Money Beagle February 29, 2012 at 9:55 am

I’ve argued for years that while strategic default can be beneficial to the individual homeowner, the negative elements it creates from the ripple effect are far worse. In fact, until strategic defaults stop, the housing market will truly never be able to recover. It’s my opinion that the low interest rates available for re-finance are a possible hope to and end in sight for strategic defaults, as it would allow underwater homeowners to reach positive equity at a much faster rate, making strategic default a less appealing option.
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Kris March 1, 2012 at 5:14 pm

I totally agree with you Beagle. I do think those that see their home value has dropped like 200k just want out because psychologically, they can’t handle it. So, they screw over their neighbors and just choose to leave.

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Krantcents February 29, 2012 at 3:22 pm

I don’t know if it is easier. The owner who walks away from their home is only thinking of themselves. They along with millions of people who made a mistake. They bought in an overheated market where there was too much free money being thrown around. Did they individually make a mistake? Yes. Are they the only ones to blame? NO. We are all paying for this crisis except the banks that caused it. The bank’s policies of “easy” money fueled this crisis. The banks are profiting off the lower interest rates, charging their normal spread and tightening their credit too.
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Kris March 1, 2012 at 5:13 pm

I think a part of the problem is the mentality that a house is an investment. A house is NOT an investment, it is a place to live! Many of those strategically defaulting can make their payments, they just don’t like living in a bad investment. Many of these loans were probably very reasonable in terms of what the owners could afford to pay. They just don’t like having a paper loss.

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Sherie March 1, 2012 at 7:33 pm

I agree with you Kris…. I see a lot more people who do it as a “good business decision” not because they lost their job (although that is the case half of the time). I read an article last month online in Yahoo business/finance section and the author was very adamant about it not being personal or emotional – “sometimes it makes good business sense” to cut your losses which means to walk away in foreclosure or bankruptcy. I was livid after I read the article! I was angry that he would even suggest that and encourage more people to think it’s an option, or support those that already do. What about encouraging people to use this as an opportunity to learn how to live within their means instead of taking the easy way out. More articles like his and I think we will see our current situation get a lot worse instead of better.

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Kris March 1, 2012 at 9:19 pm

Very good points Sherie. I wonder if the author of that article walked away from their mortgage themselves?

Can you imagine the people in our grandparent’s generation planning ways to get out of making their financial commitments? I know I can’t.

Thanks for the support! :)

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Charlotte@ Out on the Veranda February 29, 2012 at 10:19 pm

I feel sorry for the people that were given home loans when they really shouldn’t have been. Now they’re in over their heads and can’t get out. I’m very fortunate to have just paid off my house. One less thing to worry about.

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Kris March 1, 2012 at 5:11 pm

Charlotte, I am so glad you paid off your house, congrats!

I too feel bad for those who got in over their heads and truly cannot afford their payments. My rant is against those that walk away from their mortgage because they don’t like being underwater. They can afford their monthly payment, they just feel ripped off, so they walk away.

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Heather March 1, 2012 at 10:48 am

Those affected by the ripple effect aren’t going to help me pay my bills, so why would I sacrifice my finances to help theirs?
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Kris March 1, 2012 at 5:10 pm

Heather, I am talking about strategic defaulters- people than can afford to pay their bills but just want out of their underwater mortgage. Fact is, these people made a bad investment which is no different than buying a stock that tanks in my opinion. Except if my neighbor buys a bad stock, I don’t have to suffer for their choice.

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Financial God March 1, 2012 at 3:33 pm

A strategic default in Canada will only work if you go bankrupt, as they can just go after your other assets.

It seems selfish and unfair, but it is any less unfair when the banks foreclose on the homes so easily during the good times when someone loses a job or otherwise can’t keep up their payments? They entered into the contract as voluntary participants, and the sword cuts both ways.

The real question should be why were these people given loans in the first place? There was a lot of fraud involved, and bad regulations made it worse. We haven’t had that to the same extent here in Canada, so I wonder if the lack of no-recourse and tighter lending is the reason why our prices remain so high and refuse to drop down. ;)
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Kris March 1, 2012 at 5:08 pm

FG- I think what is so hard for me is that it is the neighborhood that suffers when people who can afford their mortgage choose to walk away. There is nobody that protects them. In the case of my neighbor, they could have afforded a much larger mortgage, so it isn’t even the bank’s fault.

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Jenna, Adaptu Community Manager March 1, 2012 at 4:42 pm

I had never thought of the larger impacts of someone in my neighborhood walking away from the mortgage. Thanks for opening my eyes.

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Christa March 1, 2012 at 5:14 pm

This may not affect your property value much at all. If it’s the only home in the area being short-saled, it probably won’t be used in appraisals for refinances or purchases in your neighborhood — and therefore won’t affect your property values. If it’s a trend, though, values could decrease. I hope this short sale is the only case in your neighborhood and that your value stays high!
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Kris March 1, 2012 at 9:20 pm

Thanks Christa. I think there was another short sale around the block too, and a couple ‘regular sales’. I had an appraisal when I refinanced at the end of last year, it would be interesting to see what would happen to my appraisal if I had it again after this recent short sale.

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Sherie March 1, 2012 at 7:38 pm

On the bright side (for me)…. I’m buying a house for 40% of what somewhat owed on it a year ago

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Kris March 1, 2012 at 9:17 pm

Oh, it is great for the buyers of the world out there for sure! I need to hear about your house!

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First Gen American March 2, 2012 at 6:13 am

Look for a post from me on this. I’m with you and technically I was in a position I could have strategically defaulted and chose not to.
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Little House March 2, 2012 at 10:15 am

There’s a ripple effect that a lot of these strategic defaulters refuse to accept. Some close family members sort of did this – they decided to short sell in Dec. 2010. They packed up their house assuming it would sell right away. It sat for a year. This past Dec. they moved into a relatives home which is currently in foreclosure. We’re not sure if they actually short sold their house since it’s still showing up as for sale. They are thinking of buying a home in two years time for much less. They also just purchased a camping trailer (a pretty nice one) and have taken two vacations in three months. So, did they short sell their house because of dire financial problems? Obviously not. They did it because “everyone else was doing it.” Am I a little angry with their reckless actions? Yes. Because this is not helping the housing market.
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Maggie@SquarePennies March 2, 2012 at 9:42 pm

I have to agree. There is such a thing as just doing the right thing.
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Tie the Money Knot March 3, 2012 at 5:06 pm

You make great points. Such actions can really impact the finances of other people who have absolutely nothing to do with the situation. It does seem very unfair.

Of course, people in that situation (and many in general) truly believe in looking out for #1 first and foremost, and will put their own well being over the concept of doing the right thing. I’m beginning to think that it’s unfortunately one of the risks of homeownership, in that you could be impacted by others’ actions and that impact can hit your own finances. Unfortunate to be sure, and I wish it wasn’t the case, but it seems to be just that.
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Kris March 8, 2012 at 12:32 pm

I often think back to my grandparents generation. They NEVER would have just ignored a contract like people do now. Finding and exploiting loopholes is the norm now unfortunately.

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Julie @ Freedom 48 March 3, 2012 at 9:22 pm

I do understand the negative impact it has on the surrounding houses – but I also understand that sometimes people are in a very difficult situation – stuck between a rock and a hard place – and they just have no choice. Be happy that you can afford to keep your house and live a comfortable life. I’m sure the people that had to pick and leave are in very desperate and dire circumstances…
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Kris March 6, 2012 at 8:39 am

Julie, as my post stated, I am talking about Strategic Defaulters. These people CAN afford their payments, they just don’t want to keep a house that is underwater. Yes I am happy I can pay my bills, and those people could pay theirs too. They just chose to be contract breakers because the market wasn’t going their way.

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Roshawn @ Watson Inc March 4, 2012 at 2:27 pm

I was “crucified” the last time I wrote about this. Never did I receive so much hate mail, so I knew this would stir the pot. I know what you are talking about. It’s an integrity issue.
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Kris March 8, 2012 at 12:30 pm

I am sure you were crucified by those that decided not to keep to their commitments. Did any of the comments change your opinion though?

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The Biz of Life March 5, 2012 at 9:46 am

I’m old school. I think if you make the commitment and can still afford to make the payments you have a moral obligation to do so…. to yourself and society as whole.
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Kris March 8, 2012 at 12:29 pm

I am old school too Biz…

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Ashley @ TheCCI March 5, 2012 at 3:36 pm

My parents weren’t strategic defaulters in the pure sense of the term, but I am so not comfortable with what they did anyway, and honestly, they should know better.

They lived out in Seattle where the housing market has been abysmal for a few years now. My father was transferred to Pittsburgh two years ago. They were upside down in their loan because property values dropped so drastically.

So instead of doing what I would consider smart, i.e. buying a small 2-3 bedroom house with a manageable mortgage, or renting, they bought another huge home, around $375,000.

Their house in Seattle sat on the market for over a year, but no one out there is willing to pay retail because they can get it wholesale. So, after paying the mortgage of over $3000 each month, my dad decided to short sell.

Can I understand why they did the short sale? Yes. Could they have worked around it, absolutely.

They were unwilling to rent, because then they would lose the relocation package that covered the closing costs that would have been around $25,000. But they lost more than $36,000 just paying the mortgage for a year, so that doesn’t make sense to me.

They were unwilling to adjust their lifestyle. They wanted the huge house with marble floors, their two Mercedes, they had a pool put in at the new house, etc. And right after signing off on the short sale they bought a $1500 coffee maker.

It just doesn’t make sense to me. It could have all been avoided. I guess this is my own little rant.
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Kris March 8, 2012 at 12:28 pm

Thanks for sharing your story Ashley. How in the world did your parents get approved for a second mortgage? Or, could they afford both payments, but just chose not to?

Who needs a $1500 coffee maker???

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John | Married (with Debt) March 6, 2012 at 11:45 am

I always wonder why I pay this PMI. It seems as if I am paying extra for quite a while in case this happens. I think it’s ok to walk away if the bank won’t wake up and offer a reduction in the amount owed. More defaults will spur banks to get aggressive and do what’s best for both parties.
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Kris March 8, 2012 at 12:27 pm

John, why should the bank offer a reduction in what is owed? Just like if I buy a stock that plummets, the company does not owe me a higher stock price, it is what it is.

Can you further explain?

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MoneyCone March 7, 2012 at 3:23 pm

A guy with a toothache cares more about his pain than an earthquake in China. I think that applies here as well.
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Kris March 8, 2012 at 12:24 pm

I agree MC. However, I see people up and leaving because of a ‘possible’ toothache. Meaning, it doesn’t hurt now, but they just can’t handle the fact that they feel ripped off by their investment.

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Chuck March 7, 2012 at 8:52 pm

That same thing is happening in my neighborhood. Four years ago buying my home felt like the best move both financially and for the sake of my family. Financially my homes value is down a lot from my time of purchase. Now people are building new homes next to me for a third less. It is an ugly situation for sure.
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Kris March 8, 2012 at 12:23 pm

Chuck, do you plan on staying or walking away? I can definitely see where it would be depressing. I try not to think about it, but it does get me frustrated!

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Heather March 8, 2012 at 12:04 am

Devils advocate…

The strategic defaults bring others’ property values down, but if a house is not an investment and what it’s worth on paper doesn’t matter … then why does it matter?

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Kris March 8, 2012 at 12:22 pm

Well, it does matter if you want to have the ability to refinance or sell your house.

Even if it isn’t an investment, wouldn’t anyone want to get the maximum price for whatever they are selling?

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Edwin @ Frugal Wiz March 11, 2012 at 9:30 pm

It’s sad when people lose their homes because they lost a job, but I have little sympathy to those who let it go because they got an adjustable rate mortgage that has now adjusted.

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Kris March 13, 2012 at 9:56 pm

I think if anything, people today actually do ok if their mortgage has been adjusted because rates are so much lower than they were years ago.

People I see walking away just don’t want to pay on an underwater mortgage, even though they can afford it. My heart goes out to those that lose their jobs and then lose their homes.

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Long Term Returns March 21, 2012 at 10:29 am

It’s definitely an ugly situation, but fact is people who strategically default have to do what’s best for them. The whole situation is the result of terrible underwriting practices of late 1990s – early 2000s which resulted in all sorts of “liar loans” and little-or-no-money-down loans. If everyone had to put down at least 20-30% of home’s value as down payment then, (a) we could have likely avoided the housing bubble and the recession that followed entirely and (b) there would be no strategic defaults because people would still have equity in their homes even after a 20-30% slide in price. Good news is banks have woken up to these really basic facts and current underwriting standards are much higher. Which bodes well for the future. But in the meanwhile we can still expect to work through the last housing bubble’s mess for the next few years.
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Anabelle @ CashAdvances US March 27, 2012 at 3:50 am

I recall a situation in my previous life as a financial planner when one of my clients’ adult child had run into trouble with a mortgage. My client didn’t want his son to walk away from the mortgage, but after analyzing the numbers, I looked at them both and said, “In this case, I think it’s fair to say that you should run, not walk away from this loan.”

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William May 23, 2012 at 4:26 pm

Wife and I bought before the bubble burst. Later, I retired. The wife had to quit for a disability. She is on SSD and makes about a third of what she used to. Now the house note takes nearly 45% of our income. We went to the bank for help and they said we were still able to make the payment so no help was available. They also cited our savings account as being able to help over the rough times until better ones arrive. It’s been two years now and our house keeps losing value and our savings are being depleted. We haven’t been on any vacations for nearly this entire time. I am weary of all you moral policemen talking about how I am inconsiderate and immoral if I were to strategically default. I have a limited amount of time left and I am going to use it. accusations be darned. I will be defaulting in January. This albatross has to go!

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Penny Stock Blog June 13, 2012 at 12:23 am

Boy oh boy. I can just see the look on the faces of all the real estate hacks in the great state of california during the long long decline in the price of real estate in the golden state.. Contrary to popular belief that a large decline in the price of real estate is a bad thing. Those who profited most from the meteoric rise in the price of real estate in california over the last twenty years are now the ones suffering the most. First time buyers with good credit can now qualify for a thirty year mortgage at a interest rate of just four percent. Or think about this the young couple with fairly good credit but not quite perfect credit making a reasonable down payment of ten percent’ they have been waiting for the so called chance of a lifetime to appear and wanting to seize the opportunity to buy that dream house at a rock bottom price. Having picked out their dream house made the deposit. Than nervously waiting for two whole weeks to see if they qualify for their thirty year fixed rate mortgage at 3.99 percent. Than only to hear back from their banker. Im sorry but you just don’t qualify for the thirty year fixed rate mortgage.

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Fed Up June 17, 2012 at 7:12 pm

The one person making any sensible comments here is Kris. Oh Boo Hoo! A ripped off investment?
PLEASE. People walking away from mortgages are what is KILLING this economy. I have know many strategic defaulter -squatters who choose to sit in their homes, not pay their mortgage until they are physically thrown out by the bank, refuse to pay taxes, let someone else clean their homes to sell on foreclosure or short sale and continue to work and not pay bills. Others in the neighborhood work just as hard and PAY taxes and mortgages and struggle. I have seen selfish squatters stay in homes for more than four years. Some of them with huge 401K’s and in California’s ridiculous “no recourse” state they get to not have to use that money to bail themselves out. Did anyone in life promise you your home would always be a fabulous investment? Just like the stock market? Have of those nitwits who claim to not have been able to figure out the loan verbage should never have gotten a loan in the first place. I feel for those who lose jobs or are disabled. True crisis. But there are selfish slobs out there ruining the economy for responsible others. Many of them HAVE been given loan remodifications but still cannot manage their money. Boo Hoo for them. Enough is enough. Go ahead, you people walk away and this country will take more than your lifetime to ever recover this economy. You hurt everyone. It is NOT all the bank’s fault. Got news for you———maybe this seems harsh but their are tons of others thinking just as I have written. Fed up.

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Greg October 18, 2012 at 6:41 pm

What Kris forgets to mention….many of these people took EQUITY loans against their home and therefore not only walking away from their mortgage but also getting away with FREE EXTRA cash. Cash they probably used to payoff charge card debts and/or toys. Many of these homes were purchased for hardly anything down…so anything they spent could be compared to rent. This is what REALLY pisses me off for those people doing a strategic default. If it were up to me, people who can afford their homes but choose to walk away, should STILL be responsible for any EQUITY LOANS that were taken out on the house. And, they should never be allowed to purchase a home again….only rent one.

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