As we're faced with a seemingly unending supply of foreclosure news and REO listings, I wonder if we're not reminded AGAIN that the "old school" thinking of, say, 20% down does have value.
While visiting some broker opens recently, one of my associates said she was talking to an aquaintance who was ready to "just walk away" from his house because he was upside down in it. (How many clients who purchased in 2004 to 2006 are now in the same situation?) She could not believe this person's willingness to abandon a contractual commitment. "When I grew up, your word was your bond. Especially on a contract. You honor it!"
Another friend told me about someone who's ready to let his house go to the bank. His home, purchased with no money down, has lost about one-third of its value. Even with 20% down he would have no equity. But with 20% down, would he have had some "perceived equity" in the property? Please note, in neither of these instances have the owners been hit with outrageous rate resets.
I play poker. I played long before it rose to its current level of popularity. Here comes the obligatory analogy: when first learning to play poker, you find that it is far tougher to lay down a hand when you have money in the pot than when you have no money in the pot. Even when my poker hand might not be a winner AND I know that fact, if I've already put some money in there, I still perceive that my hand has value. If you're a fan of Texas Hold'Em, then you may recognize that it's easier to fold a hand before the flop (before any money goes in) than after the flop (when you have had to put money in the pot).
This perception carries over to any investment. Why else would people hold on to stocks that drop and drop in value? They've put money in.
I'm not saying that a home in this market is like a losing poker hand or a sinking stock. And I'm not trying to justify the abandonment of a contractual obligation. But it is far easier to understand the "walk away" mentality when we consider the presence or lack of actual and perceived equity someone has in a commitment.
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