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

[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]

Quote:

Originally Posted by haha 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]

Quote:

Originally Posted by honobob 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]

Quote:

Originally Posted by Martha Or something. I get tired of you flogging real estate as being so super fab all the time, that is all.

Why?

[ChrisC]

Quote:

Originally Posted by haha 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]

Quote:

Originally Posted by honobob 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]

Quote:

Originally Posted by 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.

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.

Quote:

Originally Posted by honobob 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]

Quote:

Originally Posted by 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.

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...

[Martha]

Quote:

Originally Posted by Nords 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...

Speaking very generally, the PR does have duties to creditors and may have to pay the debts of the decedent to the extent there are assets to pay debts. In states that I know about creditors can file claims for sums due them. Plus there likely is a state probate law obligation to pay debts. However, this doesn't necessary mean the PR pays monthly bills that come due in the future. (Though as you indicated in your post, you might). You pay the necessary costs of administration of the estate and you may pay the debts the decedent owed when he or she died. I have been a PR several times. In each case I paid things like utilities until I sold the underlying property, paid rent until the property was vacated, and terminated things like phone service. I paid other bills like hospital bills from probate assets, filed an account, and closed the estate.

There are exceptions to this obligation. A personal representative can't pay debts from money or assets that don't go through probate, like joint accounts or IRAs with beneficiary designations or life insurance. The issue then is whether the joint holder or beneficiary of those accounts has a personal obligation to pay the debts. Of course, if the asset has a lien on it the lien would have to be paid to keep the asset. But other than for estate taxes where joint tenants and beneficiaries do have an obligation to chip in to pay the taxes, they may have no obligation or it may depend on the nature of the asset. I don't know as I have never heard of a creditor (other than the IRS) trying to chase this stuff down. Life insurance payouts would be free of creditor claims except the IRS for estate taxes.

(Sometimes there is no probate because of minimal assets. If the assets aren't jointly held state law may require the heirs to the assets to certify that bills have been paid before they can transfer assets to their name.)

You can have trusts involved too, which don't go through probate. In this case the trustee may have similar obligations to pay debts of the decedent.

Back to the issue of the underwater house. Some states' laws make mortgages on homes non-recourse so there is no obligation to pay the mortgage debt. Other states do not allow a mortgage lender a deficiency after foreclosure so there may be nothing to pay there--let them foreclose or give them a deed in lieu. Most if not all states require a court determination of a deficiency even if one is allowed on a foreclosure. What are the odds of a mortgage lender trying to hold up an estate just to bring a court case to foreclose and establish a deficiency? That said, the mortgage lender may choose to file a claim against the estate for the entire amount of the debt but if I was the PR I likely would object to the claim. But I have no personal experience with that issue and don't know how probate courts deal with secured claims, which is a state law issue in any event. My anecdotal experience is that lenders who are not paid take their collateral back (cars, homes) and they don't think about deficiency claims. Probably because often there often are minimal if any other assets to chase down.

See my signature. And note that I am speaking very generally as these issues in large part are a matter of state law and I am NOT a probate lawyer.