Count me among them.
My family's modest, suburban New Jersey house is now worth about $30,000 less than our current balance. We never dreamed of walking away, but the idea of "strategically defaulting," is something we had to at least consider. Many others have, too, as my colleague Mark Whitehouse reported in Thursday's Journal.
We're not home flippers or boom-era borrowers who opted for an exotic loan with no documentation. In buying our house, we believed we were making a life decision.
We started thinking about buying in 2004, when my wife and I found out that we were having a baby. We were thrilled. Shortly after that, we learned we were having multiple babies, we were equally thrilled–and terrified. We're going to need a bigger place, we thought.
We probably could have held out a few years in our sizable apartment in Metuchen, N.J., a bedroom community about 35 miles outside of New York City. But we knew interest rates were hovering at historic lows. It was impossible, working at The Wall Street Journal, to not read those headlines every day. At the same time, people all around me were buying homes and refinancing their mortgages to capture these relatively inexpensive home loans. It was like a race, and everyone else was crossing the finish line while I was still putting on my sneakers.
When we started looking, one of the first things that struck me was how expensive even run-of-the-mill two-bedroom homes were–$450,000, $625,000 and more. A house going for less than $350,000 was rare, and what we found in that range would give pause to even the hardiest of fixer uppers. It was distressing. These weren't impossibly large homes either, at least not to this lifelong apartment dweller. Buying in tony Metuchen was out of the question.
We weren't oblivious to the fact that people were stretching to buy homes. We were adamant about getting a fixed-rate loan–rates really had nowhere to go but up, so why would we want an adjustable rate? (That line of thinking turned out to be an epic fail-30-year fixed rates have been at less than 5% for weeks lately.)
We were concerned about the down payment. My wife and I had just wiped clean our tens of thousands of dollars in college-loan debt. The nearly $20,000 we had saved seemed like a king's ransom. In reality, it would be less than 10% on any home we could afford. Getting to 20% now, with our three new arrivals, was way out of reach.
By 2006, we found our home in Middlesex, N.J. The friendly, blue-collar feel of the leafy town appealed to my Jersey City, N.J., roots. The expanded Cape Cod–three bedrooms with some creativity, and going for about $339,000–wasn't big by any measure. But it was well maintained, airy and had a nice layout. The living room was smallish, and the upstairs loft would hold the kids nicely for a couple of years. It fit our checklist of must-haves: a kitchen island, a roomy basement for laundry facilities, a backyard with grass. When the kids were older, we'd sell and upgrade. In time, I'd learn a lot of home buyers thought the same thing.
It came time to deal with the finances. Because we were plunking down only 7% or so on the down payment, we were faced with a steep insurance fee. I was naively insulted by this PMI–the idea that we were risky borrowers out of the box. So we opted for a "piggyback" loan, a second loan that would cover the rest of the down payment and allow us to avoid the PMI. We would pay about the same per month, and when our home's value rose, we would refinance and combine the two loans into one. A lot of the people I turned to for advice were recent homebuying colleagues facing similar questions, or longtime owners who were doe-eyed by low interest rates. I don't recall anyone saying "Dude, wait a few years."
We negotiated a bit on the price and closed the deal in May 2006 for about $328,000 at a 6.12% rate. At the time, I didn't know that the second loan was a de facto home-equity line of credit. I knew it would be a higher rate–a little more than 2.5 percentage points higher. But the loan amount paled in comparison to the main mortgage, so I wasn't overly concerned.
On signing day I thought I was prepared for the blizzard of paperwork. I wasn't. This is apparently a rite of passage not exclusive to any era. There was at least one big reveal: Our piggyback loan was actually a balloon loan. In 15 years, we'd have to pay a big chunk, in the thousands, in full. I was taken aback by this–how could I have missed this detail? I'm not a financial luddite.
The lawyer pulled me into a separate room to talk this over. We did some quick financial calculations, and projected what my life would be like in 14 years when Mr. Balloon came calling. We would have equity in the home, for sure. Even if home values stabilized, we'd be OK since we were in a suburb in the greater New York area. My wife would be working again, and we could throw the extra income at the piggyback loan.
What we didn't foresee was home values–ours included–dropping so steep, so fast. Zillow.com now estimates our home is worth $270,000.
There's been some debate in academic circles lately about why more financially distraught homeowners don't just pack up their belongings and walk away. The short list of reasons: moral shame, fear of credit repercussions, and social and governmental pressure, according to Brent T. White, an associate law professor at the University of Arizona and the author of "Underwater and Not Walking Away." These reasons don't sway Mr. White. Homeowners should be walking away in droves, he writes.
We never considered purposefully defaulting, but then again we're not falling down a catastrophic, high six-figure equity hole. After reading Mr. White's paper, though, we decided to run some numbers, pulling together basic info on our loan, tax bracket and rental prices for comparable homes in our area, and plugged them into this calculator at PayorGo.com. This was by no means a scientific appraisal. I had to enter how long we expected to be in our home, and I really couldn't answer "as long as it makes financial sense." So I said seven years. I don't know how realistic that is -- my kids will be about 12 years old then. Apparently, if my home doesn't rise 1.94% in value over the next seven years, we should call it quits.
We wouldn't. Although, if I were laid off and unemployed for more than a few months we might have to.
The price drop sometimes feels like an apparition. On paper, my home is considered less valuable than what I am paying for it. In reality, it is the same home (warts and all) that I liked when I signed the papers. I can afford the mortgage and insurance payment, even with my wife at home raising the kids. That is a luxury I can't put a price on. I wouldn't call us comfortable like a nice pair of jeans, I would call us comfortable like the same pair of jeans after Thanksgiving dinner. (Financial consultants would scream at me for how much of my net pay the loan sucks up. I could hold the least expensive mortgage in America, and I'd still be in trouble if I was laid off. But I did refinance this year down to a 5.25% rate on the first loan; the balloon sits still at 8.75%.)
I'm not blind to the pitfalls–if I was offered a job in another city, we wouldn't be able to sell; we can't get a home-equity line of credit because we already tapped it. Still, my biggest challenge week to week is operating the leafblower. And if I knew in 2006 that in 2009 I'd be able to get the same home for a 20% discount AND still get a low rate, I never would have pulled the trigger.
What I do know is that this is our first home. It is where our kids–going on 5 years old– are growing up. We love our neighbors and the school system. We put in central air. I still remember the feeling of getting those keys handed to me the first time. We have sentimental equity. Home buying wasn't a zero-sum financial game of win or lose.
The Fitzgeralds are technically underwater, but we don't feel like we are drowning.
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