We've got an interesting problem on our hands. This conundrum represents a significant part of our current economic state. What is the answer? I'd really like to know your opinion.Facts:
- A homeowner buys his dream house for $600,000 and puts down $300,000 and mortgages the other half with an interest only loan.
- Real estate bubble bursts.
-House now worth $270,000.
-Due to negative amortization, now owes $350,000
-Guy wants to walk away.
Is he right? Should he walk away?
Is the bank right? Should they expect him to honor his contract?
Lets take both sides.
Guy:
-His interest only mortgage is ending and he will owe principal plus interest in a few months
-He's not late on his payments, so the mortage company will not re-finance
-He could buy his exact house down the street for $270,000
-It's not his fault the real estate market crashed
-If he leaves, he leaves $300,000 in cash at the house
-If he stays, he pays $350,000 more
Bank:
-Valuated the house at $600,000 before lending
-Loaned $300,000 to qualified buyer with an asset worth twice that
-Is making a good profit off the interest only mortgage right now
-It's not their fault the real estate market crashed
-If nothing changes, they stand to make hundreds of thousands of dollars
-If buyer walks away, they own a home worth $270,000 which means they're down $30,000
What's the right thing to do? I'd really like to hear your opinion.