A woman wonders if its time to walk away from a mortgage

Last night I got a call from a friend who needed some advice. In good spirits but distraught, she related to me the story of the condo she bought in suburban Maryland a few years ago.

It was supposed to be the modest beginning of a new life with her then-boyfriend and a reflection of her readiness for some stability after landing a new job, in her chosen field and not far from her parents, after spending stints in New York, Los Angeles after college.

All was going well and she did, she thought, everything right. It was the height of the housing boom and with not much saved, she opted for a zero-down mortgage. Not the best decision in hindsight, but with property values literally doubling in the DC area, she thought it a good risk. Besides, her income was stable enough to take care of the place in the event of a breakup (which happened) and since then, she's made every payment on time.

In short, she's been a model first-time homeowner. But that's part of the problem. The housing crash happened and the DMV

The real problem, though, came when she started watching home values drop and new buyers scoop up comparable places for pennies on the dollar. A similar condo in her complex just sold for $125,000, a sign her place could have lost $75,000 in equity that's not likely to come back any time soon. That's made her question whether keeping the place is worth it -- or whether she should just suck up the hit to her credit by letting the mortgage go into default, and walk away.

"I'm starting to think about whether I should hold onto this place forever," she said.

I understand her frustration. Many homeowners are in the same position, watching people who made bad choices get bailed out while their own good choices have left them stuck in homes that are now terrible investments. The losses they're taking are accruing with every mortgage payment they're making because not only have they lost equity, but each interest payment is money they can't get back.

Moving and renting the place out isn't a solid option because she likely wouldn't be able to rent the place for as much as would be needed to cover her hefty mortgage payment. Staying in the place would mean sticking around at least a decade until maybe

But walking away isn't a good option either. A hit to your credit score can affect much more than the ability to buy another home; it could mean limited job prospects, higher insurance rates and potentially that a landlord won't even rent to you.

My advice to her was to give it some serious thought, and then inquire with her bank about a possible short-sale, in which the bank agrees to accept less for the property than they're owed on the mortgage. Short sales are common these days, though there's no guarantee the bank will accept that from a paying customer, which is rare these days.

If you were in her position, what would you do??


was hard hit. She borrowed $200,000 for a one-bedroom condo and hasn't missed a payment, only to watch others who borrowed more than they could afford get out from under their loans either through foreclosure or loan modifications. With a stellar payment history and relatively high income she's not a candidate for either. she breaks even on equity. Not a good look for a single woman in her early 30s.

Why the homebuyer tax credit should be extended

I saw this question on Twitter yesterday and had to post it: Do you think the 1st time homebuyer tax credit should be extended past November?

The credit was approved by Congress last year to try and fix the foreclosure problem. It expires soon, so Congress is debating whether to extend or even expand it to a $15,000 credit.

My answer is it should be extended for another year. Here's why: though some are optimistic the recession is ending, we can't afford another "-less" recovery -- as in "job-less" or "homebuyer-less". The economy needs housing stability to be really strong and that's not possible until people have jobs again. Employment will likely be one of the last things to recover, so without help, people still won't be making major purchases like homes.

Note to haters: I'm NOT suggesting that the government subsidize home purchases for the unemployed. My point is that average people don't judge the economy's strength like economists do; we go by what we see in our checkbooks and what's happening around us. If a lot of my friends are still out of work or being laid off, I'm not likely to be comfortable borrowing a few hundred grand for a new crib.

On the other hand, the one good thing about the recession is that it caused working people to re-evaluate their financial habits. I believe a year from now, many people who weren't previously able to save enough for a down payment and to clean up their credit will have done so, and at that point there won't be a real need for an $8,000 or $15,000 tax credit anymore.

But that's a year from now. Until then, I fear for people like my friend who's home in suburban Cincy has lagged on the market for more than a year without a single offer, despite repeated price drops and an attempted short sale. Congress should renew the credit.

The Sad Story of a New Jersey Short Sale

In the week I've been writing about the economic stimulus, I haven't told a real-life story of who's being helped -- or hurt.

But yesterday I heard a story of joy and pain from a friend of mine in New York. For the past few years, she's been living and renting in Brooklyn, but with an eye toward buying a place of her own. When the housing market was bloated, she was priced out of the city, and the burbs in Jersey, so she sat tight.

But things are different now: after a few years' saving, she's got a decent downpayment and good credit. Interest rates are low, and as a bonus the just-passed stimulus bill would give her an $8,000 tax credit this year if she buys.

All that's left is to find a decent place, and now she has: a three-bedroom, one-bath in New Jersey about 15 minutes from the Holland Tunnel. The price: $190 grand, way below what you would have bought anything decent for in the New York area two years ago.

But that's where the pain comes in: the house is so cheap because she's buying it in a short-sale, meaning the person who owned it couldn't afford to keep up with the payments. Rather than going through the hassle of a foreclosure, the bank approved the sale of the property for less than they're owed on the mortgage.

In this particular case, the house was owned by a woman who paid $295,000 for it no more than five years ago. After an accident, she could no longer afford to keep up with the mortgage (although given she bought at the height of the housing boom, it's unlikely the house would be worth what she paid for it today anyway; even without the accident she may well have been one of those "underwater" homeowners that Obama's housing plan is supposed to help).

This is recovery at it's finest and worst: there's no avoiding the ugly necessity that many people will be hurt in order for the overall economy to rebound. Without this sad story of a short-sale and many others like it, many houses would simply go into foreclosure or continue to be owned by people who have no chance of selling them for more than they borrowed.