Walking away, letting the bank foreclose - ramification?????'s

[mamacatnv]

This morning on the Today show Matt was disgussing the latest trend in the housing mess. 1 in 4 home owners nationwide are upside in their mortgages (where I live it is three times that high) it's sickening actually.

Anyway, the latest is people who are saying, heck with it I'm not paying this mortgage and they are just walking away.
Note: This does not pertain to people experiencing economic hardships due to job loss or other factors, this is purely people saying, this house is not worth what I owe, no way am I going to keep making this mortgage payment.

Now, as Matt and his expert said, this causes a moral dilemna for some (not all) and does not have a favorable impact on neighborhoods already decimated by foreclosures due to economic hardships.

I actually have a few friends who are doing this, they have decided the hit on their credit is worth it and part of their reasoning is that due to this recession, a vast majority of people will have credit issues so if ever there was a time to do this now would be the time. They are fully capable of making the house payment but have decided that they don't want to throw away 100's of thousands of dollars in the process. The grim news in my area is that we may never see housing rebound to the prices it peaked at a few years ago.

The "expert" that Matt was interviewing stated that the banks can come after the former homeowner for the balances, take them to court, garnish wages etc. even after they foreclose and take posession back of the house. The "expert" did not elaborate, she said its rare but banks are getting tougher.

I thought (and I think my friends think) that once the bank takes the house it is a done deal. They no longer own the home, they take the hit on their credit and they walk away.

Does anyone out there know? I'm curious and I called my friend today who is in this process and she is under the impression that when the property is siezed that is it, game over. I really don't want this to turn into an ethics debate, I am purely curious of the legal and financial ramifications. The people who do this have their own ethics to deal with.

 

[CaliforniaDreamin]

This morning on the Today show Matt was disgussing the latest trend in the housing mess. 1 in 4 home owners nationwide are upside in their mortgages (where I live it is three times that high) it's sickening actually.

Anyway, the latest is people who are saying, heck with it I'm not paying this mortgage and they are just walking away.
Note: This does not pertain to people experiencing economic hardships due to job loss or other factors, this is purely people saying, this house is not worth what I owe, no way am I going to keep making this mortgage payment.

Now, as Matt and his expert said, this causes a moral dilemna for some (not all) and does not have a favorable impact on neighborhoods already decimated by foreclosures due to economic hardships.

I actually have a few friends who are doing this, they have decided the hit on their credit is worth it and part of their reasoning is that due to this recession, a vast majority of people will have credit issues so if ever there was a time to do this now would be the time. They are fully capable of making the house payment but have decided that they don't want to throw away 100's of thousands of dollars in the process. The grim news in my area is that we may never see housing rebound to the prices it peaked at a few years ago.

The "expert" that Matt was interviewing stated that the banks can come after the former homeowner for the balances, take them to court, garnish wages etc. even after they foreclose and take posession back of the house. The "expert" did not elaborate, she said its rare but banks are getting tougher.

I thought (and I think my friends think) that once the bank takes the house it is a done deal. They no longer own the home, they take the hit on their credit and they walk away.

Does anyone out there know? I'm curious and I called my friend today who is in this process and she is under the impression that when the property is siezed that is it, game over.

My guess would be (and it's just a guess) that when a bank forecloses on a house and resells it to the public, if the price does not meet the balance of the mortgage , they can probably come after you for the remaining balance. Banks are not going to just sit back and lose money when they have the legal right to attempt to collect the balance of the mortgage.

 

[Art 1]

The bank can come after you for the balance. I guess one would have to rent for a long time and drive old cars.

Don't know if it's true or not but was told that maybe: Lets say after the bank sell your house there is $20,000 left for the owner to pay back to the bank, if it's not paid the IRS will consider the person made an extra $20,000 and be responsible for taxes on the earnings. Don't know if it's true but I hope that it is.

 

[Ronda93]

Nope, the borrower owes the balance. The house was merely collateral. If the bank thinks it is worthwhile they can continue to pursue the debtors.

Ronda

 

[Ronda93]

I think loan forgiveness is considered income. There's a form for that.

Ronda

 

[KramBerries]

It depends. If the loan is a "recourse" loan, the bank can sue you for the difference between what you owe and what they can resell the house for. If the loan is a "non-recourse" loan, all they can do is take the house as collateral.

You can read more here.

 

[Lisa loves Pooh]

Depending on the state law....foreclosure can lead to bankruptcy. In many states, they can come after the person for the difference and unless they have the money in full, there is no payment plan.

Their credit will be screwed for years to come.

What I have heard of some folks doing--not that I suggest it--they go and buy a newer, bigger, better home as much as they are allowed without a selling contingency, then they dump the upside down home. Then it isn't a problem outside of a moral problem as they have a nice cozy place to live for the next 7-10 years while they let their damaged credit heal thyself.

They have changed the law for a short time period that the loss on a short sale is not considered income and thus not taxable, but a foreclosure is different. You aren't settling--you owe the money. You made no arrangements. You became delinquent on purpose without any effort to pay what you owe.

The only way to get out of the home without recourse would be a deed in lieu of foreclosure without recourse. But the bank will want its money. They won't wish you a happy day until a court declares that you are unable and do not have to pay it back.

It is not a decision to be made lightly and IMHO--should never be made unless one is forced to make it due to inability to pay it or a life change that requires one to move and necessitates paying living expenses in a new location.

There are repercussions that are more than a simple ding on a credit report.

 

[RadioNate]

The bank can come after you for the balance. I guess one would have to rent for a long time and drive old cars.

Don't know if it's true or not but was told that maybe: Lets say after the bank sell your house there is $20,000 left for the owner to pay back to the bank, if it's not paid the IRS will consider the person made an extra $20,000 and be responsible for taxes on the earnings. Don't know if it's true but I hope that it is.

This is true of a short sale so I would think it could apply to foreclosures.

We are currently trying to sell a home where we are upside-down on the mortgage. We are NOT doing a short sale because of the credit hit and are using savings, etc to pay the balance.

When we explored the short sale option we were told that the bank could do 2 things with the balance. 1) They can sue you for the difference. You would be responsible for securing a loan or coming up with the cash on your own. 2) they could 'write down' the difference and give you a 1099. Option 2 is far more beneficial to the home owner. You owe taxes on that difference but by deducting the loss on the house much of that is negated.

Our bank, who holds their own mortgages, in one that is known for suing the owner so we decided against the option.

You are also mortgage ineligible for 3 years with a short sale and take a 100pt hit on your credit score.

Obviously with a foreclosure it would be much longer and a bigger hit on the credit score. I don't know the rules but I would think that foreclosure would be a similar process to a short sale.

I'm very disappointed hearing this. Foreclosures have really hurt our area's home values. Banks are selling at rock bottom that the rest of us can't come close to competing with.

ETA - before anyone jumps on me for being upside-down. We put 20% down in the Orlando area nearly 3 years ago. We will lose all the money and then some. Hopefully the loss will just be the real estate commission but since we don't have an offer, I can't speculate. We plan on renting until we get our savings etc back. Trust me, I am losing TONS of money that I would rather not give up. The housing market here tanked through no fault of mine, I did everything 'right' yet, I'm still going to pay. It really makes me angry that other people aren't.

 

[golfgal]

Ok, I am confused, people you know are just walking away from their house because it has lost value? You have to live SOMEWHERE. Eventually the housing market will rebound and you will at least break even. If you throw away your home and your credit score, what does that prove to anyone? Now, like you said, there are people that have lost jobs and just can't afford their house anymore but people that can afford their house and just walk away

Our house value has tanked pretty good, we are BARELY above water but I would never consider tossing away the house just because of that. It's just foolish.

 

[Lisa loves Pooh]

This is true of a short sale so I would think it could apply to foreclosures.

We are currently trying to sell a home where we are upsidedown on the mortgage. We are NOT doing a short sale because of the credit hit and are using savings, etc to pay the balance.

When we explored the short sale option we were told that the back could do 2 things with the balance. 1) They can sue you for the difference. You would be responsible for securing a loan or coming up with the cash on your own. 2) they could 'write down' the difference and give you a 1099. Option 2 is far more beneficial to the home owner. You owe taxes on that difference but by deducting the loss on the house much of that is negated.

Our bank, who holds their own mortgages, in one that is known for suing the owner so we decided against the option.

You are also mortgage ineligible for 3 years with a short sale and take a 100pt hit on your credit score.

Obviously with a foreclosure it would be much longer and a bigger hit on the credit score. I don't know the rules but I would think that foreclosure would be a similar process to a short sale.

I'm very disappointed hearing this. Foreclosures have really hurt our area's home values. Banks are selling at rock bottom that the rest of us can't come close to competing with.

Can I ask why you are selling?

We have to relo to Virginia and due to how our mortgages are set up, short selling is not an option--so if we have to get rid of our house--it would mean foreclosure and possibly bankruptcy (cannot remember if we are recourse or not).

I did speak to our bank today and we are eligible to make a second home purchase--thank goodness. It will allow us to go much cheaper than rent and make it possible to sustain two houses. Renting is not possible right now as our home needs work. But in the next year or two it could be rented if needed.

Rent where we are heading is nasty--but sadly, we can do much better buy buying another home and taking advantage of other people's agony with selling out of necessity.

We are willing to take the risk if we can make it work and get a reasonable home--but hubby wants to spend more than I want to when I don't think it is necessary.

In any case--we are severely upside down and are doing our best to avoid foreclosure since a short sale will be a waste of time as it will be an automatic no. (first and second is held by two different lenders, and second lienholder must approve the short sale and there is no way they would approve a loss of 70-100% of their loan. We do not have enough resources to cover that. We are a small neighborhood with 3 updated homes for sale, 1 desparate to sell just to get out of it, 1 not so much, and 1 short sale. They are about $60-$80K less than what we owe. Then you have to subtract the fact that there are much needed updates on our home--which puts us about $80-$100K negative equity.

I understand the temptation to just walk away. But I don't understand why folks in the story--would do so just b/c they feel that it sucks that they made a poor purchasing decision and nothing inhibits their ability to pay for it.

 

[Lisa loves Pooh]

Ok, I am confused, people you know are just walking away from their house because it has lost value? You have to live SOMEWHERE. Eventually the housing market will rebound and you will at least break even. If you throw away your home and your credit score, what does that prove to anyone? Now, like you said, there are people that have lost jobs and just can't afford their house anymore but people that can afford their house and just walk away

Our house value has tanked pretty good, we are BARELY above water but I would never consider tossing away the house just because of that. It's just foolish.

People that I have heard of doing this (I know noone personally)--they use their present positive financial situation to purchase a 2nd home. They then move to the second home and then "oops"--can't pay their mortage on the first original home.

I don't understand the logic and to me it is tantamount to stealing--but there are people who do this. I know a mortgage broker who lives in my neighborhood and he has a friend who did this. (Though I have no idea if he was the broker on that deal or not--but it is what the friend did. )

I agree--the whole things is just foolish.

 

[dakcp2001]

In my area there are "specialists" and "mortgage experts" now that teach you how to do this with the least amount of legal repercussions. And now, since many of my neighbors have chosen to do this, and the bank owned homes sell for about half of what they are worth, my property value is plummeting. And now that I am putting my house up for sale in March and doing things the right way, I am the one who will suffer.

I agree that walking away from a home you can afford to pay is stealing. And all of your neighbors will be sure to punch you in the face should the run into you at the corner store after doing such a thing. Ok, maybe not, but I would like to.

 

[mamacatnv]

The people I know are at least 250 - 300K upside down - bought their houses for $400 - $450K and for one friend, currently there is one of their model on their street that just sold for $115K (I'm not sure if it was a short sale, foreclosure etc)

I personally have owned my house for 15 years and we are almost 75K upside down due to how far the value has plunged. Our house is currently "worth" less that half of what we paid 15 years ago and there are no buyers.

Their plan is to rent for a couple of years and rebuy at a much lower cost.

The West Coast markets are in bad shape, whole cities and towns are ghost towns. Our paper today said we have an "underemployment" rate that is at 19% in this state.

 

[RadioNate]

Can I ask why you are selling?

We have to relo to Virginia and due to how our mortgages are set up, short selling is not an option--so if we have to get rid of our house--it would mean foreclosure and possibly bankruptcy (cannot remember if we are recourse or not).

I did speak to our bank today and we are eligible to make a second home purchase--thank goodness. It will allow us to go much cheaper than rent and make it possible to sustain two houses. Renting is not possible right now as our home needs work. But in the next year or two it could be rented if needed.

Rent where we are heading is nasty--but sadly, we can do much better buy buying another home and taking advantage of other people's agony with selling out of necessity.

We are willing to take the risk if we can make it work and get a reasonable home--but hubby wants to spend more than I want to when I don't think it is necessary.

In any case--we are severely upside down and are doing our best to avoid foreclosure since a short sale will be a waste of time as it will be an automatic no. (first and second is held by two different lenders, and second lienholder must approve the short sale and there is no way they would approve a loss of 70-100% of their loan. We do not have enough resources to cover that. We are a small neighborhood with 3 updated homes for sale, 1 desparate to sell just to get out of it, 1 not so much, and 1 short sale. They are about $60-$80K less than what we owe. Then you have to subtract the fact that there are much needed updates on our home--which puts us about $80-$100K negative equity.

I understand the temptation to just walk away. But I don't understand why folks in the story--would do so just b/c they feel that it sucks that they made a poor purchasing decision and nothing inhibits their ability to pay for it.

Same reason...job relocation. I really wish we hadn't bought here. Our mistake. We really thought the job here would be long term.

We could rent out this home. However, because there are so many other houses for rent we couldn't cover our mortgage, taxes, HOA, insurance with what similar places are getting. We'd have about a $500 per month deficit. Our agent says it'll take at least 5 years for us to even consider being able to get our downpayment out. That is 5 years of wear and tear on the house. Who knows what the tenets would do to it. That makes the house 12 years old and creeping towards the possibility of BIG expenses like air conditioning, a roof...then there are hurricanes. And the $6k we'd be losing each year isn't even in the 'getting the downpayment back' figure. That is another $30k.

So I'll take the hit now and be done with it. I'm looking at the downpayment money as "rent" for the last 3 years. It is actually less than had we rented all this time. The rest is 'mistake money' and buying me out of a 5+ year future as a landlord.

 

[DisneyBamaFan]

I can understand somewhat. Say you owe $1MM on your home and it is currently only worth $750k. You are upside down $250k. If the market never recovers, that means that you will do far worse than never recover the difference - it also means that you will pay interest on that negative amount. So that $250k is really more than $750k over the lifetime of the loan.

So, eat a $750k loss over 30 years or walk away knowing that you will only have to pay back the principle and that your credit score will recover. In these economic times, no one should just accept a $750k loss without considering the options...

 

[golfgal]

People that I have heard of doing this (I know noone personally)--they use their present positive financial situation to purchase a 2nd home. They then move to the second home and then "oops"--can't pay their mortage on the first original home.

I don't understand the logic and to me it is tantamount to stealing--but there are people who do this. I know a mortgage broker who lives in my neighborhood and he has a friend who did this. (Though I have no idea if he was the broker on that deal or not--but it is what the friend did. )

I agree--the whole things is just foolish.

I agree, that IS stealing and I would bet in that situation a bank would come after them, and maybe the law too .

Same reason...job relocation. I really wish we hadn't bought here. Our mistake. We really thought the job here would be long term.

We could rent out this home. However, because there are so many other houses for rent we couldn't cover our mortgage, taxes, HOA, insurance with what similar places are getting. We'd have about a $500 per month deficit. Our agent says it'll take at least 5 years for us to even consider being able to get our downpayment out. That is 5 years of wear and tear on the house. Who knows what the tenets would do to it. That makes the house 12 years old and creeping towards the possibility of BIG expenses like air conditioning, a roof...then there are hurricanes. And the $6k we'd be losing each year isn't even in the 'getting the downpayment back' figure. That is another $30k.

So I'll take the hit now and be done with it. I'm looking at the downpayment money as "rent" for the last 3 years. It is actually less than had we rented all this time. The rest is 'mistake money' and buying me out of a 5+ year future as a landlord.

I wouldn't want to rent out a house in Florida either--way too many worries. We bought our house about 3 months before the market started to tank. We were not able to sell our old house and we are renting that out. We are lucky we have good renters and good neighbors to keep an eye on things for us. We are only 3 hours away and visit friends frequently-heading there this weekend as a matter of fact. We get enough to cover most of our mortgage but from the write-offs we can take on our taxes we come out ahead of the game. It is better then doing a short sale or any other option--BUT the town is short on single family home rentals--especially one with 4 bedrooms so we are lucky there.

 

[Lisa loves Pooh]

Same reason...job relocation. I really wish we hadn't bought here. Our mistake. We really thought the job here would be long term.

We could rent out this home. However, because there are so many other houses for rent we couldn't cover our mortgage, taxes, HOA, insurance with what similar places are getting. We'd have about a $500 per month deficit. Our agent says it'll take at least 5 years for us to even consider being able to get our downpayment out. That is 5 years of wear and tear on the house. Who knows what the tenets would do to it. That makes the house 12 years old and creeping towards the possibility of BIG expenses like air conditioning, a roof...then there are hurricanes. And the $6k we'd be losing each year isn't even in the 'getting the downpayment back' figure. That is another $30k.

So I'll take the hit now and be done with it. I'm looking at the downpayment money as "rent" for the last 3 years. It is actually less than had we rented all this time. The rest is 'mistake money' and buying me out of a 5+ year future as a landlord.

I'm scared of tenants as well--plus I want an escape from the cold.

We've owned for 11 years now--and our home does need a hurricane upgrade on the outside. Thankfully--housing costs are down, so that reno won't be too bad. But I certainly would not rent to someone knowing full well that our home is getting closer and closer to breaching as it has done its best in the hurricanes over the years.

Then the interior would only be cosmetic issues.

Sad news is for our area--we likely will see another wave of housing issues when the shuttle ends and then there will be a big break. Things should pick back up when the next program takes off--but that is at least 5 years away.

I imagine that something similar likely happened between the apollo program and the shuttle program.

I'm here until May anyway to have the baby--and hubby has living accomodations until December if necessary. Throwing in the towel now is just far too premature.

At least you should be able to short sale.

 

[Lisa loves Pooh]

I can understand somewhat. Say you owe $1MM on your home and it is currently only worth $750k. You are upside down $250k. If the market never recovers, that means that you will do far worse than never recover the difference - it also means that you will pay interest on that negative amount. So that $250k is really more than $750k over the lifetime of the loan.

So, eat a $750k loss over 30 years or walk away knowing that you will only have to pay back the principle and that your credit score will recover. In these economic times, no one should just accept a $750k loss without considering the options...

The problem is--the market isn't in a position that it "wont' ever recover"--people will always need places to live and while you may not recoup the entire investment, over time you do pay it down. You'd have to pay rent anyway. So you don't lose all the money.

ETA: Funny thing is, people don't hesitate to plop thousands down on a new vehicle and the moment they drive it off the lot, it is worth less than what they owe. But people don't flood the dealer with voluntary repo's b/c of loss in value. To me--a house is no different. We just look at it as an investment for financial gain. And our feelings get hurt when it doesn't go as we wanted it to. But yet, they have no problem continuing to drive the depreciated hummer or beamer or even kia while owing tons on it. (for those who do loans of course, but those who bought cash have the same problem---they just don't owe the money anymore.)

 

[DisneyBamaFan]

During market booms, banks look for ways to foreclose so they can take advantage of market conditions. Well, the shoe is on the other foot, and the same people whose homes they would gladly take under other circumstances are now the bad guys.

Money lending has always been a dirty game...

 

[KramBerries]

Ok, I am confused, people you know are just walking away from their house because it has lost value? You have to live SOMEWHERE. Eventually the housing market will rebound and you will at least break even. If you throw away your home and your credit score, what does that prove to anyone? Now, like you said, there are people that have lost jobs and just can't afford their house anymore but people that can afford their house and just walk away

Our house value has tanked pretty good, we are BARELY above water but I would never consider tossing away the house just because of that. It's just foolish.

Imagine this situation. You have a non-recourse loan on your house. Your loan is $400,000 and your home value is $150,000. Your next door neighbor's house was foreclosed on. You buy it for $150,000 with no money down. You walk away from your current house. On the plus side, your mortgage has dropped from $400,000 to $150,000. On the negative side, your credit is hurt and you probably owe about $75,000 in extra taxes. For a lot of people, that looks like a good deal.