By TESS VIGELAND
BERNIE AND JOYCE MURPHY are still convinced that they did everything right when they bought their home. And by all indications, they did.
Four years ago, the couple, who have been married 41 years, moved from a small town in Ohio to Stallings, N.C., just outside Charlotte. Mr. Murphy, 65, was retiring and they wanted to be near one of their sons and his family. They saved up, put 5 percent down on a $160,000 two-story townhome, got themselves a plain-vanilla 30-year mortgage and settled into a new life at the end of a quiet street. A small creek runs through the tree-lined development, where model homes have names like Riverbirch and Magnolia.“Little did we know,” said Mr. Murphy, “that within 24 months after we bought this place that this whole artificial bubble would explode.”
A recent appraisal put the home’s market value at 22 percent less than what they paid. So they owe $148,000 on a house that’s worth around $125,000. They are now among the 11 million homeowners in this country who are under water.
And based on what’s happening around their housing development, the worst might be yet to come. On a walking tour of their small neighborhood, they point to multiple homes that are pulling down the value of theirs.
“We had foreclosures, we had abandonments right here in these 99 units,” Mr. Murphy said. “This is the unit here that went for 50 cents on the dollar. I think this one up here is a foreclosure. And you think ‘O.K., that means if I want to sell tomorrow, next year, I can’t do it.’ ”
Not that they want to move anytime soon. In fact, their plan was to stay in these 1,700 square feet for another decade or so. Mrs. Murphy, 64, still works full time as an administrative assistant at a private school. They’re in good health and fully able to care for their property. They know that may change someday, and they figure at that point they will move to a retirement community.
Their planning was so thorough that they even weighed whether to get a home with stairs. “This is a two-story town home, O.K.?” Mr. Murphy said. “Normally people our age wouldn’t buy a two-story, because you never know when your knees are going to go or whatever and, you know, steps can kill you. But our plan was hold onto it for 7 to 10 years, then get rid of it. That is out the window now, because I don’t know whether I’ll be able to get my money back or not.”
But for all their frustration, the Murphys said they would not join the ranks of those who walked away from their mortgages.
“I mean, then what do you have?” Mrs. Murphy asked. “You would be in worse shape than if you just sit there and take it.”
In many cases, the math argues otherwise. Brent White teaches law at the University of Arizona, and two years ago he wrote a paper urging underwater homeowners to stop paying their mortgages and simply walk away from their properties.
It’s simple contract law, he said. You either pay the mortgage, or the bank takes the house. You both sign the same papers and you both know the consequences of breaking the contract. So homeowners should make what seems like a fairly simple financial decision.
“If they don’t default on their mortgage, they’re going to pour their disposable income into a toxic asset,” he said. “On the other hand, if they default, they find that they let go of hundreds of thousands of dollars of bad debt and are able to get back on their feet and recover.”
Yet it is rarely that simple, given all of the emotional and psychological factors that are at play in the decision to walk away, besides the financial ones. On the downside, a default means a serious whack to your credit score. But online services like YouWalkAway.com say they’ve found that on average, people lose just 100 points off their credit score. And they recover more quickly than initially predicted, sometimes within a year or two.
Fair Isaac, which provides the industry-standard FICO credit score, released a study earlier this year showing similar results. But if a person’s original score is on the high end, say a 780, they’ll find they take a bigger hit (150 points on average) in a foreclosure or short sale than someone who has a lower score of 680 or 720 to begin with.
Professor White said it was more a misplaced sense of morality that was keeping people from making the rational financial decision about a business contract. “When we make promises, we intend to keep them,” he said. “But we also understand that sometimes circumstances change and that it’s O.K. to break a promise. Your greater obligation is to yourself, to look after your financial well-being.”
So what is it that is keeping the Murphys from walking away? Partly it is the morality issue: they promised to pay and they are able to pay, though not without some adjustments to their future financial plans. They also noted that they were not in the same dire straits as others in their neighborhood who walked away, including a young family of four that left in the dead of night some months ago. Mr. Murphy receives monthly pension payments after 22 years in state government in Ohio. He also gets Social Security benefits from 17 years of work at a private college, though those are reduced by Internal Revenue Service rules because of his pension.
Mrs. Murphy will also receive Social Security when she retires, as well as retirement savings from her current and previous jobs. Her current salary is in the mid-five figures.
So although they can no longer count on making money if and when they do sell the house, and they have cut back on their spending because of that, the Murphys do not feel squeezed. They hang on to a hope that the market will recover someday.
For Mrs. Murphy, who manages the household finances, it’s also about loving where she lives. “When you’re writing that check, even though you know you’re under water, you know you’re writing it for your home. It’s still your home.”
A poll The New York Times and CBS News conducted in June asked how important owning a home is to achieving the American dream. Very important, 55 percent of the respondents said, with 34 percent saying it was somewhat important.
For the Murphys, owning a home still means something, even if that home has disrupted all the financial planning they did. They predict the local housing market will get worse before it gets better, particularly in light of the 30,000 layoffs announced recently by Bank of America, which is based in Charlotte. Mr. Murphy said he looked back every once in a while and asked, “Oh, what have I done?” But then he reminds himself that there was no way he could have known what was coming. Nobody did.
“We may have to live here for a long, long time,” he said. “But you know what? I got the patio out there, got my gas grill, and I’m just.... If you can’t get your hands around it, why sit and pull your hair out over it?”
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