Sorry if this is a dumb question, I've never had a mortgage and I'm having trouble finding the answer to this question on the web.
If you have a house and a new mortgage, and the market price of the house suddenly drops precipitously, it is quite possible for you to have negative equity in your home, i.e., if you sell the home that won't provide enough money to pay off the mortgage. In such a situation, in the absence of constraints, your most rational course of action from a standpoint of maximizing wealth, would be to stop paying off the mortgage (default) and let the mortgage holder take possession of the house. But, I imagine there are constraints (I'm not talking about moving problems, etc.). The mortgage holder obviously doesn't want this to happen. That is one reason for the requirement of mortgage insurance for people with less than 20% downpayments. But even then, I imagine the mortgage insurance terms might attempt to discourage the mortgage-holder from just skipping out leaving them holding the bag. And it is always possible for the house to drop more than 20% in price, so someone might not have mortgage insurance and still end up with negative equity. So, I have two related questions. 1) If you have mortgage insurance and negative equity, and you default on your mortgage, what are the typical consequences? Can you get off scot-free? If you have money, are you likely to get sued by someone? Will your credit record be ruined? 2) Same question, but if you don't have mortgage insurance, but you have negative equity because of a large drop in market value of the home. In case you are wondering, the reason I am asking is because a mortgage insurance company, MGIC Investment Corp. (NYSE:MTG) recently came to my attention. I'm trying to understand how this business works. Interestingly, their stock is trading at very low prices relative to historical earnings, which indicates that Mr. Market thinks that there will be either a significant increase in mortgage defaults or a very great decrease in the demand for mortgage insurance in the near future. -- "Erik Reuter" <[EMAIL PROTECTED]> http://www.erikreuter.net/ _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
