When is it "right" to walk away from your mortgage?

[pemberly]

There was a very interesting article in the nytimes today about how some people are choosing to default on their mortgages, not because they are unable to pay, but because it has become an unwise financial decision. Here are some excerpts.

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.

Using credit bureau data, consultants at Oliver Wyman calculated how many borrowers went straight from being current on their mortgage to default, rather than making spotty payments. They also weeded out owners having trouble paying other bills. Their estimate was that about 17 percent of owners defaulting in 2008, or 588,000 people, chose that option as a strategic calculation.

It was April 2006, a moment when the perpetual rise of real estate was considered practically a law of physics. Mr. Koellmann was 23, a management consultant new to Miami.

Financially cautious by nature, he bought a small, plain one-bedroom apartment for $215,000, much less than his agent told him he could afford. He put down 20 percent and received a fixed-rate loan from Countrywide Financial.

Not quite four years later, apartments in the building are selling in foreclosure for $90,000.

“There is no financial sense in staying,” Mr. Koellmann said. With the $1,500 he is paying each month for his mortgage, taxes and insurance, he could rent a nicer place on the beach, one with a gym, security and valet parking.

“It doesn’t seem right that I can rent a place somewhere for half of what I’m paying,” he said. “I told my bank, ‘Just take a little bite out of what I owe. That would ease me up. Isn’t that why the president gave you all this money?’ ”

Bank of America did not agree, so Mr. Figliola, who is 48, sees no recourse other than walking away. “I don’t believe this is the right thing to do,” he said, “but I’ve got to survive.”

full article

at a time when people are getting laid off or getting their salaries cut, this seems like an ethically wrong, but easy recourse. yes, it can wreak havoc to your credit score which can hinder your purchasing a home in the future, but so would having tens of thousands of dollars more in debt.

[ROI]

Nothing wrong with it IMO. Property owner is already screwed. They lose what they already put in plus the hit to their credit. The only one that gets hurt is the bank. Bank took on risks by making the loan, that's why they get to charge interest. I'd rather people walk away than have the government bail them out.

[sowfoong]

It may not be morally correct but the homeowners probably make their decisions based on the financial advantages they gain presently. However according to the article with link below, the homeowners may still have problems later on with their banks, so they are screwed one way or the other.

http://finance.yahoo.com/news/Mortga...09798.html?x=0

[Trien Chieu]

Nothing wrong with it IMO. Property owner is already screwed. They lose what they already put in plus the hit to their credit. The only one that gets hurt is the bank. Bank took on risks by making the loan, that's why they get to charge interest. I'd rather people walk away than have the government bail them out.

Of course there is something wrong with it. Home owners knew what they were getting into when they signed the contract. When you make an investment, you have to live the consequences of either gain or lost. It's irresponsible to walk away when things turn bad.

[KeongJai]

I never understood the walk away thing US loans have. What's the penalty when you walk away? Are you blackedmarked so that you can't get another loan for XX years?

Because what's to stop someone from walking away from a negative NPV investment and going to another bank the next day and borrowing for a positive NPV investment?

[Ren Wo Xing]

If you default on a loan, your credit score goes to hell. Good luck on even being able to get a decent credit card, much less any future loans for houses or cars, so long as that remains on your credit score.

[tweety365]

I'm no expert on home mortgages, but I do have several family members who have foreclosed on their homes. As far as I know it, you don't simply "walk away" from a mortgage. The lenders (banks) have multiple ways of making your life hell.

First, it is best to sell your home and pray you break even or perhaps take a small loss. If that doesn't work, you can do the short sale. Note that banks don't always agree to the short sale, so you have to convince them to agree first. Show that you are financially unable to pay the mortgage due to unemployment or whatever the reason. Also, the loss that your bank agrees to take is considered profit/income by the government and they will tax you.

If you decide to do nothing and just stop paying the mortgage, the bank can take you to court if you have any type of asset or money left. If you truly have nothing to lose, then file for bankruptcy. I also heard that bankruptcy laws are tougher nowadays.

Once you are declared bankrupt by the court, all your assets are seized by the lenders. They will take or put a lien on everything you own. Even the last $1 in your checking account. Not only is your credit score in the dumpster, you most likely can't own or sign up for anything for however long the court decided. The good thing about bankruptcy is that all the lenders are prohibited from bothering you ever again.

Again, my info might not be 100% accurate. Just based on what happened to my relatives. Best to get financial consultation before "walking away" from your mortgage. You can dodge the bank, but be aware of the IRS.

[pemberly]

i've worked in the insurance industry before, and it is also nearly impossible to get home owners insurance with a foreclosure or bankruptcy in your past. you have to buy the kind that covers nothing, but costs an arm and a leg.

[sowfoong]

I'm no expert on home mortgages, but I do have several family members who have foreclosed on their homes. As far as I know it, you don't simply "walk away" from a mortgage. The lenders (banks) have multiple ways of making your life hell.

First, it is best to sell your home and pray you break even or perhaps take a small loss. If that doesn't work, you can do the short sale. Note that banks don't always agree to the short sale, so you have to convince them to agree first. Show that you are financially unable to pay the mortgage due to unemployment or whatever the reason. Also, the loss that your bank agrees to take is considered profit/income by the government and they will tax you.

If you decide to do nothing and just stop paying the mortgage, the bank can take you to court if you have any type of asset or money left. If you truly have nothing to lose, then file for bankruptcy. I also heard that bankruptcy laws are tougher nowadays.

Once you are declared bankrupt by the court, all your assets are seized by the lenders. They will take or put a lien on everything you own. Even the last $1 in your checking account. Not only is your credit score in the dumpster, you most likely can't own or sign up for anything for however long the court decided. The good thing about bankruptcy is that all the lenders are prohibited from bothering you ever again.

Again, my info might not be 100% accurate. Just based on what happened to my relatives. Best to get financial consultation before "walking away" from your mortgage. You can dodge the bank, but be aware of the IRS.

It is not as easy as one assumes to just walk away from one's mortgage or even tries to solve the problem with a short sale. According to the article,

"Mortgage lenders pursue homeowners even after foreclosure"

Quote:
"Former homeowners may still be on the hook if there's a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these "deficiency judgments" are ticking time bombs that can explode years after borrowers lose their homes.

It can even happen to people who got their bank to approve them selling their home for less than it is worth.

Because of falling home prices, borrowers who always paid their mortgage but who have run into unforeseen circumstances -- like unemployment or a job transfer -- can no longer sell their homes for what they owe. As a result, they are being forced to short sell or foreclose and are getting caught up in deficiency judgments.

"After the banks foreclose, it's very common now to have large deficiencies with houses not worth the balances owed," said Don Lampe, a North Carolina real estate attorney.

Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there's a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could haunt them.

"Once they have a judgment, they can pursue you anywhere," said Richard Zaretsky, a board-certified real estate attorney in West Palm Beach, Fla. "They can ask for financial records, have your wages garnished and, if you fail to respond, a judge can put you in jail."

Deficiency judgments on short sales and deeds-in-lieu can happen in many more places. In these cases, extinguishing the debt is often a matter of negotiating with the bank.

But even when lenders are willing, many borrowers may not be aware that they have to ask for release. So, if you are pursuing a short sale, be sure your attorney asks the bank to release you from any further obligation.

"People shouldn't have a false sense of security that a deficiency judgment may not be later sought," Zaretsky said.

What can be scary is that the judgments don't have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.

Releasing title does not necessarily end the debt. It's complicated because of variations in state law, but, generally, a mortgage has two parts: a pledge of collateral, represented by the home, and a promise to pay off the loan.

Lenders may release property liens in order to facilitate short sales without releasing borrowers from their obligations to pay under the promissory notes. The secured debt can convert to an unsecured one after the sale.

Zaretsky had one client who was so relieved to have arranged a short sale that he signed every paper his real estate agent shoved at him, even a confession that clearly stated he still owed the debt.

"He had no idea what he was doing," said Zaretsky. "All the lender had to do was go to court to convert the confession into a deficiency judgment."(end of quote)

Read full article @ http://finance.yahoo.com/news/Mortga...09798.html?x=0

Many homeowners will be hurting for a long, long time and many may never recover from this mess.