Not seeing the downside to walking away

[Mike]

Hi everyone. My wife and I are in a house in SoCal we bought for $1.07 million in 2006. We put down $107,000 in money that we made by selling our previous house at an obscene profit. We'd only owned that previous house for 2 years -- and made 50% profit!

As our first experience with home ownership, this taught us a false lesson -- houses increase in value insanely fast. So anyway, we stupidly agreed to a negative-A mortgage on this, our second house, figuring that appreciation would outpace the negative-A.

The property we bought has two houses on the lot; we rent out the bigger house.

The rent from that front house pays half the mortgage -- but even with that rent, we can only pay half the interest every month. Like I said, we were stupid. So because of the "deferred interest" we now owe about $45k more than we did when we bought -- and it gets worse every month. Meanwhile, house prices are going down, so that even if we didn't owe more now then when we bought, we'd still be underwater.

The loan has a 115% cap, at which point we have to start paying back principal, which will double the payment. We'll hit that point on Jan. 1, 2010. The writing on the wall says there's no way in hell that we'll be able to sell the house before that date. We tried to sell for over 6 months, at our breakeven price, and got not one single offer. We've never missed a single payment yet, nor payed late -- but I don't think I'm going to send in this month's payment.

It sure looks to me like we have two options: -- default now -- default in Jan.2010 Given those two bad choices, it sure seems better for us to default now. I'm just not seeing any downside to walking -- or I should say, all the downsides that exist are even worse if we wait until 2010. We've tried to call Countrywide and get a loan modification.

They haven't even gotten back to us, even after we sent in all kinds of personal information. I don't really think they'll bother to help since we're current on payments, and lots of other people are behind. Countrywide would probably rather soak us for another year and a half of insane interest rates before we default. No thanks.

So I think we're going to stop paying, and wait to be foreclosed on. We can live free for a few months, and make back maybe 10-20% of that $100k down payment we're going to lose. We don't have any debt at all besides this mortgage.

It's my understanding that even if you have ruined credit, they don't come take your existing credit cards away, is this correct? So as long as we keep paying Amex and Visa on time, we won't even miss our current 710+ credit rating. Which of course is going to be in the crapper. We made a stupid bad choice in buying this place.

I feel like it'd be another stupid bad choice to keep throwing good money into it. I welcome criticism and people pointing out where I'm wrong -- it doesn't feel good to be doing this, it just feels like the least bad choice. :(