It has come to a stage where many people across the length and breadth of the country can simply not afford their mortgage. Faced with the inevitable, these people just abandon their mortgage repayment plans. Most often than not, the mortgage on the home is more than the actual value of the home.
This situation arises because homeowners default with their mortgage payment until it comes to a time where the interest that has accrued from the default is more than the initial amount that was owed.
Defaulting in mortgage repayment and abandoning the loan all together has a negative effect on both the homeowner and the institution that made it possible for the loan to be granted. The homeowner earns a bad credit record that will affect future plans of securing a loan with any other financial institution.
For the bank, such a move can be considered as ‘bad debt’. But this is not the end of the negative effect of homeowners walking away from their mortgage plans. The ripple effect of mortgage defaults spreads further than these two groups of people.
Explaining the process by which the banks acquire the capital for which they lend out to homeowners, Richard Hagar who is with American Home Appraisals pointed to individual cash deposits, retirement funds and organisations as the means by which the banks secure capital. The banks borrow from these people, and intend lend it out to homeowners to purchase homes. According to Mr Hagar, when an individual walks out on his mortgage obligations, it means these people also loose out as well.
Aside this, abandoned homes also affect the community in which they are situated. As more homes are abandoned, the value placed on homes in such areas also decline. This is because homes that are abandoned by their owners are starved of the vital maintenance works that come with owning a home. These homes are left to rot and fall apart. Their presence in the community becomes a hazard and the general appeal of the community reduces. Income generated by the city from taxes placed on homeowners fall.
In his concluding remark, Mr Hagar advised homeowners not to walk out on their mortgage. He stressed that homeowners should do all they can to secure payment modification and keep foreclosure as the last inevitable resort. He was of the view that bad credit scores have a significant level of effect on the individual. He cited increase in credit card rates, failure to secure a home loan and even difficulty in renting a home; due to lack of trust the homeowner might have, as repercussions for walking out on a mortgage.