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What We Can Learn From The Rich

A recent article in the New York Times deals with the fact that the rich are more likely to walk away from their underwater mortgages. One in seven owners of million-dollar plus property is in default, compared with one in 12 for properties worth less than a million.

This article got a lot of press last week, seemingly because of the idea that the rich are “more ruthless” than other people, an opinion expressed in the article. However, I believe that the real hook of the story should be this:

“They may be less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest,” Mr. White said.

This is the walk-away issue in a nutshell. Many people do not realize the extent of the PR push to keep underwater homeowners afraid and shameful about making the decision based on their financial best interest. The University of Arizona published a paper about this very issue recently, it is a disturbing read.

That this calculated message is not as effective on the wealthy is not surprising, they are used to making decisions on a financial basis, and also they have other resources to fall back on and walking away from the mortgage doesn’t necessarily mean they need to file for bankruptcy. Because of the potential for a deficiency judgment, for most people making the choice to get out from under an underwater mortgage is often accompanied by the decision to file for bankruptcy.

Filing for bankruptcy makes a great deal of sense for people with underwater mortgages. It protects you from any deficiency judgment from the lender and it can also wipe out the credit card debt that can result from struggling to pay that underwater mortgage and keep up with the costs of life. Additionally, in Colorado, where I practice, once you decide to let the bad investment go, you can live in the property rent free during the foreclosure process. We are currently seeing people take advantage of this rent-free living for six months to a year.

Whether or not walking away makes sense for you should be based on a financial benefit analysis. My husband, Mike, wrote a blog about this issue last year that is still appropriate to consider.

So, if you decide to let the mortgage go and move on to a new beginning without a mortgage payment that no longer reflects what the property is worth, remember that you are simply learning a lesson from the rich: you are simply looking out for your own bottom line.