Friday, June 05, 2009

The Cost Of Credit

Recently, someone I know got me on the phone and was picking my brain about their housing situation.

They want to move, far away, but they own mortgaged a house that has fallen to just below their debt load. I believe they owe around 200k and the house is worth that, if not a bit lower.

Of course, a real estate commission and other transaction costs quickly add up on an *exit*. So the dude will in all likelihood have to go in his pocket to leave the house with his credit intact.

So, say the total figure is $10,000. Would you tap your savings and ante it up?

What if it was $20,000?

In other words, at what point do you just keep your savings, walk away from the house, and imperil your precious *credit score*?

First of all, this is a multivariate imbroglio. How much savings does the potential walker have? Are they planning or hoping to tap the public mortgage market very soon, or not? What is their house really worth? Etc.

I thought about this question long and hard. I've concluded that about 10k is all that I'd put up, ever, to maintain my credit score.

Bad credit should be erased in 7 years time. Furthermore, I think that in the future banks won't be too harsh on borrowers with small black marks on their resumes from this recent period because....there'll simply be too many of them!

Plus, damaged credit has the positive side effect of returning people to reality, and renting.

As I wrote in Homeownership Sucks:

I know a guy who, unfortunately is amidst a divorce and has left his 3,700 square foot, 100 year-old Victorian house and moved into a 3 bedroom rental apartment. He insists that aside from all the other issues implicit in a divorce, he is loving renting now. He has nothing to worry about fixing or renovating. He no longer comes home to annoyances like leaky faucets; he no longer frets about peeling paint or creaky steps. Now he just comes home from work and can finally relax.

Getting back to the slightly underwater house....

I say, after negotiating a 4% real esate commission, put the house up for sale, keep dropping it till it sells. Then bring the sale to your lender - and when they decline, immediately stop making payments; and linger until law enforcement throws you out.

I do not think it immoral to walk away from a house even if you have the money to make the lender whole.

Check that. I don't think it's any more immoral than banks LENDING to people on terms that put them into abject, 30-year debt slavery.


Orion said...

I am not at all sure I can put it down as well as you-but I take issue with people leaving their debts behind when they are capable of paying them. It seems irresponsible and immoral (amoral?). But there is a dollar amount at which point I would do it. 10K-I say pay the bill. 20K-probably. More than that and I probably walk away. Even though I think it is wrong. Above 20K and it starts to potentially cripple my ability to deal with contingencies like family illnesses and such. These things come first and being prepared for them is a higher priority than a credit score and a bank obligation. The bank already made their money bank. if they can't, then they did a poor job of valuing the object-property-whatever.

Slow out.

CaptiousNut said...

I'm not totally happy with what I wrote in this post.

Two wrongs most certainly do not *make a right*. And, there's much to be said for honesty and personal responsibility.

But what are the two wrongs exactly?

I'm not sure.

The fact is, nobody NEEDS credit.