How can I minimize losses on an upside down mortgage for a condo I no longer live in?

Question

I have made a good faith effort to keep up my mortgage payments on a condo that I no longer live in since Oct 2005. In 2005 I had to move out of state for my job and I listed the property for about 60 days before realizing that there was not enough interest in the market to sell it at a reasonable price. The property is now appraised on the market at just under $300,000 while I am paying on a $330,000 interest-only 7/1 ARM loan. It is supposed to reset in April 2011.

Fortunately, I have a good property management company that has been able to keep the condo occupied by a tenant under lease for almost every month since moving in 2005. On the other hand, I have been losing anywhere between $700 - $1000 out of pocket each month because the rent doesn't cover my cash flow. This is really starting to add up and I am building a fear that I will not be able to hold onto the property long enough for the market value to recover.

It's one thing to keep paying the mortgage, knowing that one day, it will be worth more than I paid for it. It's another thing to keep paying my mortgage, with the chance that my condo might not reach the price I paid for it before the ARM resets. I have lost approximately $42,000 due to this negative cash flow over 50 months.

So, here is my question: Is there anything else I can do in this situation to minimize my out-of-pocket losses going forward?

Answer 1

I have this exact same issue. Event the dollar amounts are close. Here is how I am looking at the problem.

Option 1: Walk away. Goodbye credit for 7+ years. Luckily I can operate in cash with the extra $800 per month, but should I have a non medical emergency I might be SOL. With a family I am not sure I am willing to risk it. What if my car dies the month after I quit paying and the bank chooses to foreclose? What if my wife or I lose our job and we have no credit to live?

Option 2: Short sale. Good if I can let it happen. I might or might not be on the hook for the balance depending on the state. If I am on the hook, okay, suck but I could live. If I am not on the hook, it is going to hurt my credit the same as foreclosure. It isn't easy, you need an experienced real estate agent and a willing bank.

Option 3: Keep paying. I am going for this. At the moment I can still afford the house even though it is at the expense of some luxuries in my live. (Cable TV, driving to work, a new computer). I am wagering the market fixes itself in the next several years. Should the S hit the fan in most any manner, the mortgage is the first thing I stop paying.

I don't know what other options I have. I can't re-fi; too upside down. I can't sell; the house isn't worth the mortgage (and I don't have the cash for the balance). I can't walk away; the credit hit wouldn't be worth the monthly money gain.

I have no emotions about the house. I am in a real bad investment and getting out now seems like a good idea, but I am going to guess that having the house 10 years from now is better than not. I don't care about the bank at all, nor do I feel I owe them the money because I took the loan. They assumed risk loaning me the money in the first place. The minute it gets worse for me than for the bank; I will stop paying.

Summary Not much to do without a serious consequence. I would suggest holding out for the very long term if you feel you can. The best way to minimize the bad investment is to ride it out and pray it gets better. I am thinking I am a landlord for the next 10 years.

Answer 2

Sounds like a terrible situation. The only thing I can think of (if you have the cash for it) is to pay down enough of the Mortgage and refinance to the point where the rent covers the mortgage plus expenses.

On the one hand, this feels like literally burning money in the fireplace, as you will likely never see back the difference between the likely value when you sell and what you are putting in now.

On the other hand, every time you make an interest payment, you are burning the (smaller amount of) money with no hope of seeing it back ever.

If you don't have the cash, or you find that just throwing away money, then I would get out as fast as I can. Every month you hold you are paying a huge amount of interest. If you sold at $300,000, you would have only a $30,000 debt to manage. The total amount it would take to pay that off (at anything resembling normal interest rates) would probably be less than you have already sunk into this thing.

Of course, if you are willing to bet that the market will come back and make you profitable on what you will have to put in from now on, then you might want to hold on. Personally, I would not make that bet.

All around a terrible situation. I wish you lots of luck in resolving it.

Answer 3

I wouldn't like to say either way what you should do, not being an financial advisor or lawyer, but I did find an interesting article on nytimes.com: Walk Away From Your Mortgage! that you might also find helpful to frame your decision. It has some interesting information on defaults, it says this:

Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.

In some states, lenders also have recourse to the borrowers’ unmortgaged assets, like their car and savings accounts. A study by the Federal Reserve Bank of Richmond found that defaults are lower in such states, apparently because lenders threaten the borrowers with judgments against their assets. But actual lawsuits are rare.

And given that nearly a quarter of mortgages are underwater, and that 10 percent of mortgages are delinquent, White, of the University of Arizona, is surprised that more people haven’t walked. He thinks the desire to avoid shame is a factor, as are overblown fears of harm to credit ratings. Probably, homeowners also labor under a delusion that their homes will quickly return to value. White has argued that the government should stop perpetuating default “scare stories” and, indeed, should encourage borrowers to default when it’s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis.