Have they stopped paying because they can’t afford the payments, ie loss of income? Or have they stopped paying simply because they feel the value of the house has gone down?
If it is the former then they need to get out from under as soon as possible. Renting in that case, is only feasible if they can cover the all house’s expenses. If not, if they can afford a one time loss, they should sell at a loss and move on. If that is not possible they should try for a short sale before foreclosure is forced on them. If they are bleeding money, they have to cauterize the wound quickly.
On the other hand, if their income is still stable and the payments are no more of a burden than they were 18 months ago,they would be foolish to jump ship now. I know it’s painful to be paying a $400,000 mortgage on what they perceive as a $250,000 house, but if the market hadn’t failed they would happily making those payments, right? Well the value of that house will come back. It may not increase 10 times and let your parents retire as multi-millionaires but it should pay for itself as a rental in a few years and be a retirement home or at least eventually return a small profit like a saving account for retirement.
Of course many people made mistakes, big and small, in the housing market
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Small-buying a house they couldn;t afford with tricky financing. Iy is easy to blame realtors or mortgage brokers but the buyers had access to mortgage calculators, too. Your mortgage should be in sight of a comparable rental. If you can only afford a $1000/mo rental payment, you can’t afford a $250,000 no down interest only mtg or ARM because on your best month you can scrape together the payment-it’s simple arithmetic not calculus.
Big-You invest only what you can afford to invest. You don;t buy a second home or borrow against your equity in the hope that you will get a ROI OF 20% annually for the next 30 years. The economy has never had a run like that and you are betting that you will have no personal economic crisis for the next 3 decades—that’s crazy!