By: Rana Cash
March 30, 2010
You're officially drowning in debt and at the deepest end is a mortgage that amounts to more than your house is actually worth.
When forced to choose between a credit card for expenses or money for a mortgage on a house nearing foreclosure or with plummeting value, the choice for some is to keep food on the table and gas in the car.
"Some people are saying, 'I can rent the house around the corner for a lot less than my mortgage payments,' " said Mary Ellen Nicol of Consumer Credit Counseling of Atlanta. "It's a less-expensive alternative."
The consequences are obviously crippling. A foreclosure can drag down a credit score by 150 points or more and deliver long-term damage to a credit report. There could be judgments from lenders and severe tax implications.
In Georgia, there were 12,568 foreclosure notices in the 13-county metro Atlanta area for March, according to Alpharetta-based Equity Depot. A percentage of those likely have made a decision to walk away from their loan obligation.
"Borrowers do not make these decisions nonchalantly," said Ezra Becker, director of counseling and strategy at TransUnion. "It is a stressful decision. The vast majority of people feel an ethical obligation to repay their debts. These are the kinds of decisions people lose sleep over."
The more traditional order of default has been credit cards first, followed by auto loans and finally mortgages. As housing values decreased, the unemployed and under-employed have had little motivation to dump money into a weakening asset. Nicol weighs both sides when counseling.
"If their goal is to have the house in five years, they are putting that at risk," she said. "I want to hear the value of the house to them; not necessarily the paper value. I have to consider all the benefits, like family needs, the commute to work and how much money they put down."
As alarming as those numbers are, they don't apply to everyone.
The Minneapolis-based Homeownership Preservation Foundation receives 5,000 calls a day from homeowners seeking solutions.
"Your heart is where your home is," said Josh Fuhrman, vice president of programs. "The majority of people want to stay in their home."