What Happens When The Sole Owner Of A House With An Upside Down Mortgage Dies?

[chinaco]

The estate has a debt. Generally, the executor of the estate is supposed to settle debts (assuming the estate has assets). I suppose there could be a number of outcomes. But if there was enough money in the estate to pay off the debt, then the executor would likely take care of the debt and then sell the property.

If the house is worth less than the debt on the mortgage, then there might be some negotiation to lower and pay the debt by the executor... or the bank may foreclose and hold up the closing of the estate to recover money as a legal debtor.

 

[Bestwifeever]

If someone who held their selves out as a practicing attorney told me I’d "likely" go to jail, I’d be making a "dating" plan! I’m afraid I’d "likely" be popular. You remember I was a model.

You were a model? This post is most definitely useless without photos.

 

[Brat]

Were I the PR I would look closely at the mortgage(s) on the house to determine if the estate had any liability. Then look to see how the other estate assets were held. Next I would consult an attorney in the local area to determine if any of the mortgage(s) had a claim on the estate.

If the house is also the home of an heir there may be more than a financial decision on the table. Remember, the lenders will play hard-ball to maximize their return on the loan. The heir needs to be prepared to walk away to make the threat of abandoning the house a risk to the lender. My reading from housing bubble boards is that some lenders are so overwhelmed that they can't respond to offers to negotiate. The PR might just sit tight and not pay the mortgage. Once the lender notices then make an offer to compromise.

If there is no heir who wants the house then I would do what Martha's client did, aka "Jingle mail."

There is no way I would offer to help the bank market the house unless they offered its occupant free housing during the process.

 

[Westernskies]

The mortgage is secured by the property, not the value of the estate... The bank would have to foreclose on the property pledged as collateral against the loan, sell it short and then initiate a separate civil action against the estate for the difference.... which might not be worth the effort in todays legal and political mortgage climate. IMO

Good hypothetical question, ha...

 

[Brat]

If the first mortgage was a purchase mortgage in most jurisdictions there can be no claim on the estate. If I were the PR I would want to know if the mortgagor(s) could tie up the estate until any shortfall is determined, or if the PR had any liability should the estate be disbursed before a claim was filed.

 

[honobob]

Martha
I’ll respond because I feel there is interest and I have something to say on the subject. You already seem defensive and entrenched in your opinion and I have no interest in changing your mind but to offer a different take on the OP’s question. If you are not comfortable with what I write feel free to request the moderators to delete my post. I won’t get mad, unless perhaps if you go out of your way to make a personal attack on me.

Remember Hono, the question was about what may happen if an owner dies and there is no equity in the property. I stand by my answer that most likely the lender will end up foreclosing.

Because?.........of nonpayment or due on sale clause? My contention was that as long as payments were being made it was very unlikely that the lender could or would initiate foreclosure. I provided some backup for that contention.


Both of you anecdotal examples resulted in foreclosure because the heirs “walked away”/”did not make payments”. I agree with that!

Now of course, there can be close questions about whether or not there is equity. But if no one makes the payments, the mortgage is going to be foreclosed at some point.

No brainer!

How is your claim that a PR should make payments on the debt because the property might double in value going to relieve anyone's apprehension? I think that is just speculation.

I took the view that the OP/heir was concerned about the disposition of the property and would be relieved that there would be liability issues if the PR did not act properly in their capacity. If they petitioned the court for permission to default on the mortgage then fine but the heirs also would then have an opportunity to protect their interest in the property. As an officer of the court I’m surprised you’d be so quick to encourage a self help course that could result in disaster for all, whether that be loss of 10% or 100% increase in equity or just the property itself.

As far as the side issue of due on sale clauses, you may very well be right that federal law has validly preempted state law on the issue. I don't know. But it is not really relevant if the mortgage is upside down.

Totally disagree! How did you come to this conclusion? I've got to believe that a lot of VA mortgages are underwater at one time or another in their first couple of years. And what about all those 125% financings. Underwater to start. Did that make the property worthless and subject to foreclosure?

Then we got to the questionable assumption of the value of the property to the heirs. Talk about speculation!.

“he has negative equity; the property might still have value to the lender, unless it's environmentally toxic.”

But we don’t have the facts on this specific property but we can present both sides. As an heir the value might very well be emotional. It was the old homestead, it’s where I always dreamed of retiring. It may very well be financial. Maybe the property is only underwater because of a comparable that was a distress sale and nobody else is selling because they would not be willing sellers for what a willing buyer is offering or can get financing for at this time. It takes both for a TRUE market value. Or it may be a $500,000 property say mortgaged for $525,000 with 20 years left of a 4.5% mortgage. As an heir with lousy credit but a good paycheck I can “buy” this property by “taking over payments” with NO MONEY DOWN! And it possibly rents more than the Piti!! I’m thinking a new chapter in my book, Know When to Walk, and When to Talk, Taking Advantage of Inherited Underwater Property. Here in CA it could also have a ridiculous low tax base where the State is subsidizing taxes to the tune of $10,000 per year. If you plan to hold long term then even if you’re $100,000 upside down this property is starting to look like a gold mine. OR the property could be in Minnesota where NBHDScout reports mean appreciation in Pillager of 25.04% a year since 1990 and Littleton 17.78%,Dexter 17.75%, Pineriver 17.64% and Sacred Heart 17.42% each and ever year, on average. Since 1990! 4% my *ss.

As far as the side issue of due on sale clauses, you may very well be right that federal law has validly preempted state law on the issue. I don't know. But it is not really relevant if the mortgage is upside down. I suppose you could be an heir and really want to keep the property even though it is worth less than what is owned. In that case, maybe the better bet is to try to negotiate to buy the property from the lender for its true value and not make payment of the entire debt

Nothing wrong with trying to get a better deal but I do not believe in encouraging cavalier attitudes towards commitments to debt.

Or the lender could try to foreclose. It's happened to me three times. Of course, I had tons of equity and the last one cost Wells Fargo Bank $15,000 to me plus their expenses. Maybe that's why I'm a little nuts about BOTH sides keeping their commitments to a mortgage.

 

[Martha]

Hono, the heirs have no obligation for the debt so walking away could hardly be thought of as cavalier.

Otherwise, fair enough, your point is taken: if the due on sale is not enforceable (and at best, it is only not enforceable against relatives who inherit the property) maybe that relative will want to try to keep the property and keep up with the payments even though there are other options.

As far as your constant cherry picking of appreciated properties and trumpeting of "4% my ass," it is tiresome. As a result I tend to discount what you say even when you do have a point.

 

[honobob]

Hono, the heirs have no obligation for the debt so walking away could hardly be thought of as cavalier.

Otherwise, fair enough, your point is taken: if the due on sale is not enforceable (and at best, it is only not enforceable against relatives who inherit the property) maybe that relative will want to try to keep the property and keep up with the payments even though there are other options.

As far as your constant cherry picking of appreciated properties and trumpeting of "4% my ass," it is tiresome. As a result I tend to discount what you say even when you do have a point.

Are you mad at me or something?

 

[ChrisC]

My contention was that as long as payments were being made it was very unlikely that the lender could or would initiate foreclosure.

Actually, I think you're revising your contention here. There was no implication in your original point that payments were being made by the estate; in fact, I made the inference that the estate would not be making payments.

Indeed, this is all pointless drivel if payments are being made!

 

[honobob]

Indeed, this is all pointless drivel if payments are being made!

Ding! Ding! Ding!

But if you look at my first post to this thread you'll see that I disagreed with a death provoking a foreclosure. Death plus no payments equals foreclosure. No payments equals foreclosure. Death equals only a possibility of foreclosure or possible unenforceable attempt.

Second paragraph of my second post I stated "I can think of.....reasons for an heir to want to continue to make prompt payments"

 

[ChrisC]

Ding! Ding! Ding!

But if you look at my first post to this thread you'll see that I disagreed with a death provoking a foreclosure. Death plus no payments equals foreclosure. No payments equals foreclosure.

Second paragraph of my second post I stated "I can think of.....reasons for an heir to want to continue to make prompt payments"

Your point is well taken. However, look at Bubba's post that immediately came after your first post, which basically answered your post. And the initial post that started all this blathering could easily be read to inquire about legal responsibility for payment and legal conseqences of nonpayment.

I mean, really, the OP didn't seem to inquire about whether payments should be made, but rather what happens when someone dies and payments are not made. That's the way I read this exercise in blathering.

 

[honobob]

I mean, really, the OP didn't seem to inquire about whether payments should be made, but rather what happens when someone dies and payments are not made. That's the way I read this exercise in blathering.

ChrisC Please review HaHa's first post. I don't see anywhere that he mentioned payment or not. Bubba seemed to answer his own post in that if payments were made foreclosure was not likely so I did not respond to him but expand on it to Martha's statement that foreclosure was likely whether payment was made or not.

Had Ha said payments were not to be made I would be on the side of pending foreclosure!

 

[Bestwifeever]

Still waiting to see those model photos, Hono

 

[honobob]

Still waiting to see those model photos, Hono

Who said the medium was photography? Or even that I was the "after" or the "before". Quit flirting with me.......eventually.

 

[RunningBum]

I assumed the question was whether the estate has a legal obligation to pay off the mortgage before making distributions to the heirs. I would think it does, just like (I think) it must pay credit card and other debts.

But if not, who makes the decision whether to walk away from it? I wouldn't think the executor would. But if there are multiple heirs, who decides? If the house is only somewhat upside down, and the house has some sentimental value, I could see this being a contentious decision.

There seems to be agreement here that if the mortgage isn't repaid and payments aren't made, either because the estate doesn't have the assets to cover the loan, or they are allowed to walk, the bank will foreclose. Certainly a bank won't give up an asset that has some value, even if it's not enough to cover the whole debt.

 

[RunningBum]

Maybe a better post would be, "haha, give more details about what you are asking."

 

[haha]

Ok, not that it matters, but the situation I envisioned was an underwater house and mortgage, and little or no estate, whether due to pay on death clauses, trusts, or simple insolvency.

I see that it is a very complex subject, but my takeaway so far is that if there is little or no estate other than the house, the bank is stuck.

If I were the dead guy, looking down from the land of naked harpists I would click my heels and say "yippee".

Ha

 

[honobob]

the bank is stuck.

If I were the dead guy, looking down from the land of naked harpists I would click my heels and say "yippee".

Ha

Could be a strong arguement for not paying off the mortgage.

"yippee" Is that better than 15 years of sleeping better with a paid off mortgage or not? Maybe I'll start a thread with a poll.

 

[Martha]

Are you mad at me or something?

Or something.

I get tired of you flogging real estate as being so super fab all the time, that is all.

 

[honobob]

Or something.

I get tired of you flogging real estate as being so super fab all the time, that is all.

Why?

 

[ChrisC]

If I were the dead guy, looking down from the land of naked harpists I would click my heels and say "yippee".

Ha

And if I were his heir or a friend of his, I'd be looking up and saying "you idiot, why did you keep pouring good money down the drain when you were probably judgment proof, unless you really liked living in that house."

Why is the bank stuck? If it's done good underwriting, it already priced this event. Charge-offs and bad debts are built into the business model of lending.

 

[REWahoo]

Why?

I suspect it's because it comes across as trollish.

 

[kumquat]

WADR to Martha, I'd talk to a lawyer in my state. Then, I'd do what (s)he told me. That way, my fiduciary duty has been fulfilled.

 

[Martha]

WADR to Martha, I'd talk to a lawyer in my state. Then, I'd do what (s)he told me. That way, my fiduciary duty has been fulfilled.

I don't disagree on consulting with a lawyer and of course people will do that when someone dies and there is an estate to think about. I don't think that I advised one way or another about what a person should do in these circumstances and if I created the impression of giving advice, I didn't mean to. I specifically said that I could give no advice at all as to whether someone should make loan payments after the death of the owner. I did say that it is likely that the lender would foreclose based on what I have seen in the past. I should have qualified the statement to say that the lender will eventually foreclose if no one is making payments (because the house is under water) instead of simply saying that it was likely that the lender will foreclose. But I think that the qualification came out in the subsequent discussion.

Why?

Honobob, you asked why I tired of you promoting real estate all the time. Let me be more specific. You suggested that the underwater property may double in value while the estate is pending. Though theoretically possible, the likelihood is low. Then you cherry pick some properties in neighborhoods in Minnesota that have appreciated. While I can pick even more neighborhoods where houses have not appreciated or have lost value. Same old, same old, Bob. It proves nothing and hearing it over and over is tiresome to me. And not pertinent to the topic.

 

[Nords]

I assumed the question was whether the estate has a legal obligation to pay off the mortgage before making distributions to the heirs. I would think it does, just like (I think) it must pay credit card and other debts.
But if not, who makes the decision whether to walk away from it? I wouldn't think the executor would. But if there are multiple heirs, who decides? If the house is only somewhat upside down, and the house has some sentimental value, I could see this being a contentious decision.
There seems to be agreement here that if the mortgage isn't repaid and payments aren't made, either because the estate doesn't have the assets to cover the loan, or they are allowed to walk, the bank will foreclose. Certainly a bank won't give up an asset that has some value, even if it's not enough to cover the whole debt.

This thread went on a lot longer than I thought it would, so I finally read it.

It would seem that an executor has a fiduciary duty to the estate's heirs, and that duty would include only paying debts where necessary to protect the heirs' interests.

If I understand credit cards correctly, they're all unsecured personal debt. When the card's owner dies, then the estate's not required to pay anything. I don't care what people deem ethical or "proper" or "collectible"-- if the card issuer accepted the risk of not getting paid then they have no ethical or proper, let alone legal, obligation to be paid. In fact I'd say it's highly unethical of a credit card company to try to collect on unsecured debt. They're exploiting the executor's ignorance and perhaps a misplaced sense of what's proper.

I'd treat a property the same way. If it has equity then I'd continue to pay the mortgage (out of the estate) in order to protect the equity. If there's no equity then I'd have to make some sort of fiduciary judgment about whether it's better to pay the mortgage (hoping for appreciation) pending a sale, or cut losses and let the lender foreclose. If the heirs didn't agree with me then I'd encourage them to pay the mortgage.

Is there any state or federal law requiring executors to behave otherwise?

This type of discussion is reason #276 why I hope I'm never an executor...