Walking from mortgage

[FinallyRetired]

With the recent concern about subprime mortgages and foreclosures, what happens if someone walks from a mortgage? Let's say someone has a mortgage, the value of their home falls below the mortgage balance, they can't sell, and they decide to just walk away.

Since the home is the loan collateral, does the bank have any option other than foreclosure and taking the home back? Can the bank garnish wages or have a claim against the person's assets?

Of course, they would take a major hit on their credit score, but in really bad times many may consider that the lesser of evils.

 

[Sam]

Can the bank garnish wages or have a claim against the person's assets?

I don't think they can do that. At least they didn't do that when it happened in Houston.

 

[CyclingInvestor]

I always thought purchase mortgages were non-recourse, but refi's and 2nds
were recourse (they could go after your other assets).

 

[FinanceGeek]

To answer your question briefly, whether a mortgage is "recourse" or "non-recourse" typically depends on the state it is written in.

In the area where I live an increasingly common practice is for someone who has failed to sell their house after a year or more of trying to simply strip out as much equity with seconds, etc. as possible and walk. The bank gets hosed, it takes ~1 year to take title via foreclosure in our state with all the redemption periods, etc. Then later the bank learns that these loans were written with very inflated appraisals (often using computer models based on ZIP and sq footage), which didn't account for the possibility that the house is essentially a scraper, former meth lab site, etc. Obviously the bank will attempt to grab the proceeds from the former owners, but they have largely been spent on sports cars, vacations, etc. and are not recoverable.

I guess the banks have become the buyer of last resort.

 

[FinallyRetired]

I guess the banks have become the buyer of last resort.

Thanks. I guess it's as they say -- if you owe the bank $1000 and can't pay, you have a problem. If you owe the bank $1M and can't pay, the bank has a problem.

 

[dumpster56]

Thanks. I guess it's as they say -- if you owe the bank $1000 and can't pay, you have a problem. If you owe the bank $1M and can't pay, the bank has a problem.

Oh yes remember what happened to donald trump!!

 

[ExtinctBird]

An alternative to foreclosure for the bank is to take "deed in lieu of foreclosure." When my father died a few years back, we found that his mortgage was basically equivalent or slightly above the home value. Rather than taking the expense and hassle of transferring ownership and seller fees, we simply gave the house to the bank.

Not sure if this would work for someone current in their payments but unable to sell their home.

 

[brewer12345]

In most places, the bank is within their rights to go after you for a deficiency claim which is the difference between what the bank gets for the property and what you owe them. Not sure how common they bother to do so.

 

[FinallyRetired]

In most places, the bank is within their rights to go after you for a deficiency claim which is the difference between what the bank gets for the property and what you owe them. Not sure how common they bother to do so.

It's hard to feel sympathetic for those who abused the easy credit to get in over their heads. But there are many cases in which a young family buys a first home with little down, the home's value drops below the mortgage, the wage earner loses their job, and they lose their home and have a claim against them as well. Argues for young people renting until they build enough of a nest egg to withstand these gyrations.

The worst real estate market I recall was in Colorado Springs in the mid 80s. The local economy went into the tank and real estate had been overbuilt. Seems like every 3rd or 4th home was for sale. One developer just south of town had built a community with the "build it and they will come" mentality. He laid in roads, sewers, and electric on his own nickel as a special improvement assessment area that would be levied on future homeowners.

He had only built and sold a small number of the homes when the real estate market crashed, and he went bankrupt. The costs of the improvements were legally binding on the few homeowners, with the result that, say, a 50k home owed 100k of improvements, resulting in a negative home assessment of -50k. That means that in order to get out from under the home, the owner had to offer someone 50k up front. When I returned to the Springs some years back, though, the economy had turned around and everything was again prosperous (overbuilt?), so someone made out. For every loser there is a winner.

 

[Joss]

I got stuck in that same time period, but in the Phoenix market. We did everything we could to find a solution to selling our townhouse. No luck.

Moved out of the townhouse into a tiny apartment and rented the townhouse. Still tried to sell it. No luck.

We had to move to St Louis for employment. Then the renters moved out. Finally gave the bank the "deed in lieu" of foreclosure. Got seven years of a bad credit hit, but it finally dropped off the report.

 

[Martha]

There is a lot of variability in states' laws as to how foreclosure works and when and if a deficiency judgment can be obtained.

I'll give a couple of examples. In Wisconsin, all mortgages have to be foreclosed by starting a lawsuit. In the lawsuit you can ask for a deficiency. However, if the lender choses a shortened redemption period (where the debtor can payoff the mortgage), and the mortgage allows the shortened period, then the lender must waive any claim for a deficiency.

In Minnesota, there are two ways to foreclose. One is by just having a sheriff's sale with no court involvement. If a lender choses that quick and easy route, it must forgo a deficiency. The other option is to foreclose by court action. In that case a deficiency is allowed. (However, there are very restrictive rules on getting a deficiency against farmers.)

Each state has its own rules which may or may not be similar to how Minnesota and Wisconsin work. A number of states use deeds of trust instead of mortgages. However, these deeds of trust still must be foreclosed through varying procedures. If there is no court involvement, and just a trustee sale, generally no deficiency is allowed.

Most often, but not always, if a lender takes a deed in lieu of foreclosure any deficiency claim is waived.

 

[FinanceGeek]

I got stuck in that same time period, but in the Phoenix market. We did everything we could to find a solution to selling our townhouse. No luck.

Moved out of the townhouse into a tiny apartment and rented the townhouse. Still tried to sell it. No luck.

We had to move to St Louis for employment. Then the renters moved out. Finally gave the bank the "deed in lieu" of foreclosure. Got seven years of a bad credit hit, but it finally dropped off the report.

Weren't those late 80s years just wonderful in the sunbelt states? DW and I bought at the tail end of those days and we put together a supremely pessimistic "rent vs buy" analysis. Our basic concept was to see how long we had to live in a purchased residence assuming we could "never" sell it and would eventually have to "walk". We wanted to see how many years it would take before the loss from having done this came out equal with having rented for the entire period. In those days it was cheaper to buy than to rent even given a low/no down payment

I used to refer this as my "burn down breakeven spreadsheet" since we were essentially assuming that the house would have zero resale value whenever we left it. At that time we worked out the breakeven period at 11 years.

We live there to this day nearly 20 yrs later, house priced has nearly quadrupled if I could have sold 3 yrs ago, even at present prices its a triple. Wow have things changed!

 

[FinallyRetired]

Weren't those late 80s years just wonderful in the sunbelt states?

The 1970s were great also. I remember contracting to start building our home in 1977 just when interest rates went crazy. I got a commitment for a one year construction loan at something like 8 1/2 percent and was glad to get it, because money was completely drying up. The rates kept going up and up, and they soon hit double digits. At the peak I think there were some quotes above 15 percent. I worried about finishing the home on time, knowing that if I was even a day late the lender would walk. A home in front of me didn't finish and they were left with a frame and a bunch of construction material scattered around. I finished my home with about two weeks to spare.

 

[FinanceGeek]

Stay tuned for more buying opportunities, history tends to repeat itself (never in the same exact way though).

Where I live we have seen literally square mile after square mile of open land turned into cookie cutter developments in the last decade. From the air it almost looks like giant ant colonies. Even the supposed "high end" McMansion developments have gone this way, you get a bigger cookie, but its still that same style. I gotta wonder how do people find their way around these neighborhoods since all the streets have similar names and all the houses are in one of 3 styles and 2 colors? Methinks its good that GPS no longer has selective availability enabled, I guess you just record the co-ordinates of your house once and let the in-vehicle nav system lead the way since visual reckoning would be of little value.

If I were in the market for a new home I'd rather spend my millions (yeah right!) on a log cabin in a nice locale rather than spend the remainder of my life in the middle of what looks like the borg collective.

Stay tuned, it may get quite cheap to pick up some of these tract homes over the next couple of years...if you could buy a few adjacent ones there might be some "consolidation" opportunities to actually put up something nice in their place.

 

[PBAT]

Unfortunately a lot of those neighborhoods have HOAs, which won't allow major changes, much less consolidation. Great idea though!

Since the Raleigh area didn't have a huge run up in home prices the last few years, the downturn hasn't hurt home prices as much as other areas. But there are still people with those horrible interest only loans. Even if they get their purchase price, they lose. (the poeple I know with interest only are not paying down principal)

Slightly off topic- There was an article recently about a town here being labelled "beige" because of all the bland cookie cutter developments. In one neighborhood, residents said they sometimes pull into the neighbors' driveways by mistake!

 

[tryan]

I've never known anyone who had the bank take anything except the house. I believe there's two reasons for this: 1) bad publicity ... banking is still in the service sector; screwing your customer to the wall doesn't help business. 2) they made money ... the interest is sooo front loaded in the mortgage that even if they sell at a 30% "lost" after only a few years they're OK.

 

[ExtinctBird]

The worst real estate market I recall was in Colorado Springs in the mid 80s. The local economy went into the tank and real estate had been overbuilt. Seems like every 3rd or 4th home was for sale. One developer just south of town had built a community with the "build it and they will come" mentality. He laid in roads, sewers, and electric on his own nickel as a special improvement assessment area that would be levied on future homeowners.

He had only built and sold a small number of the homes when the real estate market crashed, and he went bankrupt. The costs of the improvements were legally binding on the few homeowners, with the result that, say, a 50k home owed 100k of improvements, resulting in a negative home assessment of -50k. That means that in order to get out from under the home, the owner had to offer someone 50k up front. When I returned to the Springs some years back, though, the economy had turned around and everything was again prosperous (overbuilt?), so someone made out. For every loser there is a winner.

Sounds like the type of neighborhood that Eric Estrada is pitching now.

 

[Texas Proud]

In most places, the bank is within their rights to go after you for a deficiency claim which is the difference between what the bank gets for the property and what you owe them. Not sure how common they bother to do so.

Usually they will not go after you.... if you have small equity they have PMI and get their insurance... I don't know how often the PMI company goes after them...

Also, most people who walk have nothing to get anyhow...

Then again... my knowledge is from the mid 90s and they might have changed since then...

 

[Texas Proud]

I've never known anyone who had the bank take anything except the house. I believe there's two reasons for this: 1) bad publicity ... banking is still in the service sector; screwing your customer to the wall doesn't help business. 2) they made money ... the interest is sooo front loaded in the mortgage that even if they sell at a 30% "lost" after only a few years they're OK.

You are right on the premise that not much happens, but not the reasons...

MOST mortgages are packaged in a trust and it is the TRUST that loses (which BTW is all those mortgage bonds that people buy which means you are losing).... the banks talk about how much they originate and service... so there is not concern about screwing the customer issue..

They made money Not if they lose 30%.... the rate on mortgages is LOW... the return does not have fluff in it... front loaded?? Well, yes, because that is when you OWE the most money... hence the most interest.... but it is still straight line interest...

 

[Texas Proud]

The worst real estate market I recall was in Colorado Springs in the mid 80s. The local economy went into the tank and real estate had been overbuilt. Seems like every 3rd or 4th home was for sale.

According to the rating agencies, the Houston market in the 80s was the worst ever... I was a trustee on some MBSs and they were issuing a new one... I had asked the rating agent about how they stress them and some of the ones that were under water that I had.... he said 'We did stress them with the worst market in history, but Houston was even worse than that"... he said they used Houston as their history for stress...

Since this was verbal... who knows if he was snowing me... but at least it was from a rating agency...

 

[FIRE'd@51]

Back in the oil bust of the 80's, I seem to recall reading articles about large numbers of folks in the Houston area, buying new homes across town (at lower prices) and getting a mortgage, then simply walking away from their old houses and letting the bank take them. They bought the new homes and took out the mortgages before their credit ratings deteriorated.

 

[FinallyRetired]

Back in the oil bust of the 80's, I seem to recall reading articles about large numbers of folks in the Houston area, buying new homes across town (at lower prices) and getting a mortgage, then simply walking away from their old houses and letting the bank take them. They bought the new homes and took out the mortgages before their credit ratings deteriorated.

Look at the Cramer rant posted on another thread. It's a manic rant, but Cramer says 14M Americans got iffy mortgages in the last three years. If the economy tanks, this could be a worse bloodbath than in the 80s.

That Houston bust in the 80s also coincided with the rumor that NASA was going to pull up and move to Colorado Springs. That, in turn, fueled the wild land speculation in the Springs that petered out and sent the local market into a nosedive.

 

[Texas Proud]

Back in the oil bust of the 80's, I seem to recall reading articles about large numbers of folks in the Houston area, buying new homes across town (at lower prices) and getting a mortgage, then simply walking away from their old houses and letting the bank take them. They bought the new homes and took out the mortgages before their credit ratings deteriorated.

I had heard that people did this.... but I would not say it was a 'large' number..