Home foreclosure - sound business move?

[Da Nag]

Here's an interesting article, with a twist on the current plummet of RE values in many areas. Seems folks finding themselves heavily upside down on loans, are simply walking away - even though they have the ability to pay. They'll simply purchase something elsewhere cheaper while credit is good, then walk away from the original home.

My first reaction was pretty much negative...but after reading an affected owner's response in the above article, I find it an interesting mental excercise, if nothing else.

Why attach some sort of moral obligation of repayment to a home loan? As the quoted guy mentions, he seems to have no illusion he entered into his financial obligation willingly. But given the recent turn of events, he views it as strictly a business decision gone bad. If the cost of foreclosure (bad credit for a period of time, in his case) is less than a current or future expected loss when selling, he made a sound move by walking away.

While such a situation doesn't apply to me, I could see how this decision might get further complicated when considering when to ER. Suppose all of your ducks are lined up...your investments/pensions are sufficient to sustain you, but you can't take the financial hit when selling your existing home.

Would you walk away younger taking any penalties associated with forclosure, or stick around in your day job until you figured out how to pay the piper?

Me - I'm somewhat ashamed to admit it, but I'd probably bail on the house. Quality of life vs. financial obligation seems like such an easy decision.

 

[cube_rat]

Something isn't right. There's a whole debt/income ratio thing that comes into play, unless the a person is making a butt load of money. Also, won't bank "B" question the mortgage with bank "A"?

 

[Darryl]

Yikes!

I ask for money and tell the nice banker I will pay them back and we agree to the terms of how that is going to occur. Yep that's a moral obligation.
Life happens and job losses, medical etc., could affect how that happens but I've got the money and just choose not to pay Can't get there.

 

[REWahoo]

Hey, "If big business can do it, so can I":

"I realize I agreed to the deal when I signed the mortgage papers, but I am within my rights to walk away from a bad deal and suffer the consequences, just as many corporations write down billions of dollars of debt, lose money for their shareholders, and lay off people as a result of their bad decisions."

This sure doesn't make me want to rush out and buy some of those beaten down financial stocks...

 

[Da Nag]

I ask for money and tell the nice banker I will pay them back and we agree to the terms of how that is going to occur. Yep that's a moral obligation.

And therein lies what I find interesting about this thought experiment...

Most people probably feel some sort of moral obligation to repay their loans, and for those unable to do so, it's probably safe to say a certain amount of shame and regret is involved.

But the banker certainly has no emotional consideration in the transaction; everything is strictly a business decision.

In short...it seems like any morality one assigns to this transaction is strictly one-sided.

I'm not suggesting that's a bad thing - simply an observation.

 

[Caroline]

Would I walk away from my mortgage if I could pay it? No.

I've been a member of the same credit union for the last 40 years (ever since my Papa took me down there by the hand and opened a $25 savings account for me). I owe them money on my mortgage, but I'm also a part-owner in other people's mortgages. When any of us walk away from our obligations, we are screwing one another.

I follow the same reasoning when it comes to the banks. Their shareholders (pension funds, mutual funds, etc.) are taking the hit for their mortgage holders' cheatin' ways.

I don't think it's right, and I don't think pointing to another wrong by saying that "big businesses do it" makes it so.

 

[Caroline]

But the banker certainly has no emotional consideration in the transaction; everything is strictly a business decision.

That may be so, but what about the banker's shareholders, and his employees, and his suppliers, and his landlord, and his other depositors, and his community?

The author of the article you cite couldn't have got his initial mortgage in the first place, or have gotten the new one he's bragging about now, if he hadn't been able to rely upon other mortgage holders to pay their debt to his banker.

IMHO, a marketplace where contractual obligations are optional is a marketplace that's circling the drain.

 

[Da Nag]

Something isn't right. There's a whole debt/income ratio thing that comes into play, unless the a person is making a butt load of money. Also, won't bank "B" question the mortgage with bank "A"?

I can think of two scenarios that would make the second home possible, with little/no involvement with banks. I'm sure both are fairly common.

First, one could have paid for the second home via a 2nd mortgage or HELOC on the primary residence - owning it free and clear. Given the number of cash-out deals done when there was easy money and values were high, I'm guessing this wasn't a rare occurrence.

Second - nobody says you must buy another home. In days past, it might have been tough finding a good rental with a foreclosure on your record - but that's becoming more common all the time. With a healthy deposit and perhaps paying a few months in advance, I'm sure plenty of landlords would accept such tenants.

 

[W2R]

While such a situation doesn't apply to me, I could see how this decision might get further complicated when considering when to ER. Suppose all of your ducks are lined up...your investments/pensions are sufficient to sustain you, but you can't take the financial hit when selling your existing home.

Would you walk away younger taking any penalties associated with forclosure, or stick around in your day job until you figured out how to pay the piper?

How about waiting until your ducks are GENUINELY lined up, so that you can afford to at least keep your own house in ER! My goodness, you have to live somewhere.

Then I'd say quit and stay where you are, living in that house, even if you planned to move elsewhere. ER in place and wait out the housing slump. But foreclosure? No way. I know people who have gone through that, due to much more extreme circumstances, and it is no picnic financially or emotionally.

 

[jazz4cash]

1. I agree with the debt/income statement above. It's possible the homeowner and bank are complicit in making a bad loan on property #2 (Homeowner lied and/or bank did not verify income)

2. Honest people wil cheat if they think they've been wronged....i.e. following statement from the article:

"Despite all this, I would be willing to stay if the bank would refi the loans to a 30 year fixed, but since I'm not a 'hardship' case they'd apparently rather foreclose. I guess the only way I could qualify for loan mitigation is to get my boss to fire me, stop making payments, and wreck my credit. In fact, my bank won't even talk to me until I miss a couple of payments.
"I have purchased a cheaper place in a nearby area now, while my credit is good, and will stop making payments on house #1 after house #2 closes. I know the foreclosure will be on my credit for 7 years, but I will have saved a lot of money."

It's only good business to do some reasonable loan modification whenever possible and necesary...it's not a bailout if the homeowner ends up paying a market rate .........after making a series of on-time payments at the starting rate maybe they are better qualified.

 

[REWahoo]

Doesn't #1 (homeowner lied) make #2 (Honest people...) moot?

 

[haha]

I see no problem without walking away froma loan when the counterparty is corporate or institutional.

I would only consider what it did to my fiancial position, including any expected hit to my credit.

When is the last time any lender cared what happened to you , the borrower?

In life, there are people, and corporations. Morality has nothing to do with the corporate sector, therefore nothing to do with a person's legal behavior when a corporation is the counter party. Often, the corporation does not even follow the law, let alone ethics.

Ha

 

[Da Nag]

Would I walk away from my mortgage if I could pay it? No.

I've been a member of the same credit union for the last 40 years (ever since my Papa took me down there by the hand and opened a $25 savings account for me). I owe them money on my mortgage, but I'm also a part-owner in other people's mortgages. When any of us walk away from our obligations, we are screwing one another.

Agreed...I couldn't walk away from such a scenario. But then again, I don't consider a credit union relationship to be 100% business, for the very reasons you cited.

I'm also a long-time member of a credit union, and was also introduced to them by my Dad as a kid. I can't count the number of times, they've treated me as much more than a depositor or borrower...so many decisions they've made were on a much more personal level.

There is no such personal relationship with my mortgage holder - they are simply a PO box, and a means to an end. Which right or wrong (yeah, it's wrong), makes the concept of them getting the shaft much less offensive to me.

 

[jazz4cash]

Doesn't #1 (homeowner lied) make #2 (Honest people...) moot?

Probably, but not necessarily. #1 (homeowner lied) is most likely in the quoted article, I believe, but #2(Honest people) could apply in a more general sense such as a desperate individual that would lie, cheat, or steal to feed thier family.

 

[Achiever51]

Personally I couldn't walk away from a loan that I agreed to. It just isn't in my ethical DNA.

But I do know two couples who did exactly what is described in the article and they have no qualms about it. Both couples bought smaller houses - in one case using the proceeds from a HELOC, the other I don't know the details about -- and once they closed on them, moved out of the first bought houses and essentially mailed back the keys to the lenders. They've rationalized that they didn't have much equity in the houses, that what they did have in was more than what it would have cost to rent the homes and both were upside/down on the mortgages with no relief in sight, so why not? I can't say I agree, but then again, it's not my credit record.

 

[Milton]

A homeowner who can't sell his house tells The L.A.Times, "Foreclose me. ... I'll live in the house for free for 12 months, and I'll save my money and I'll move on."

I guess his mortgage must be nonrecourse debt. Is that common?

 

[youbet]

I understand the strategy of walking away even if you have the funds to pay off the loan. I don't understand the consequences of having the foreclosure on your credit record for 7 years. For someone FIRE'd, how painful would that be? If you didn't need to borrow money, would it even matter? Is it true the lender you're walking away from has no legal remedy to go after the big bux in your deferred and non-deferred retirement savings accounts? Could you keep and continue using your credit cards?

Also, for those who would walk away - opt for foreclosure, how much would it take for you to do so? Is $1,000 enough to make you bear the foreclosure on your credit record? How about $10,000? $50,000? $100,000?

 

[redduck]

Ah, it seems that turning in the keys is playing by the rules. Any law being broken? There are two current threads, one re: B of A credit cards, one re: American Express credit cards. Both the credit cards companies sound to be deceitful, if not dishonest. The little guy doesn't make the rules, but he'd be foolish not to play by them if it's in his best benefit. I'm not certain that taking the high road makes much sense if we're talking about dealing with banks and mortgage companies.

 

[cashflo2u2]

You can walk away from the house but not the loan

I hear a lot about just "walking away" from upside down mortgage loans. As far as I know one is still responsible on the loan and therefore any deficiency after the bank sell house at foreclosure. The bank can get a judgment against the borrower for the amount of the deficiency. Even though the borrower can't pay it, it is out there for the rest of your life and after acquired assets could be attached. The only way to get rid of a deficiency judgment is to wipe it out in a bankruptcy filing,

 

[Gumby]

I guess his mortgage must be nonrecourse debt. Is that common?

You have hit the nail on the head. I believe that most mortgages are, in fact, recourse obligations. In my state, if the bank forecloses and sells at auction, it may recover a deficiency judgment if the property brings less than the mortgage balance.

 

[youbet]

Can you please elaborate some more on this Gumby? In another thread, I was told that in some states the mortgage lender is not allowed to come after your assets to cover the deficiency after foreclosure and auction. You're free, even if you have assets.

Are there other consequences of having the foreclosure on your credit record that could be painful while attempting to lead a "normal" life these days?

 

[FIREd]

Whether what that guy did was legal or not, I find the idea astounding and reprehensible. Maybe I am being naive about that. But in this case, I personally would hope the lender sues the guy and tries to collect all the money he owes on that mortgage. I am not a big fan of banks, but in this case the lender has not changed the terms that guy agreed to when he signed the mortgage. What changed was the RE market and there is no excuse whatsoever to punish the lender for it. The homeowner took a risk (afterall a house is an investment with a fluctuating value), and now that he is losing money, he is cutting and running. Disgusting...

 

[Brat]

Somewhere I heard that home PURCHASE mortgages were non-recourse, refi's not. This could vary by state. This probably wouldn't prevent the lender from issuing a 1099 for the shortfall.

 

[Da Nag]

You have hit the nail on the head. I believe that most mortgages are, in fact, recourse obligations. In my state, if the bank forecloses and sells at auction, it may recover a deficiency judgment if the property brings less than the mortgage balance.

I'm no lawyer, and Wikipedia ain't exactly something I'd depend on for such matters - but its foreclosure page indicates original home loans in CA are non-recourse debt. Which is significant - that's where the respondent in the article resides, and this tactic is likely more common in CA due to larger value drops.

Re-fi's, seconds and HELOC's have no such protection, again per Wikipedia:

"In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans, however, refinanced loans and home equity lines of credit aren't."

 

[Gumby]

I'm no lawyer, and Wikipedia ain't exactly something I'd depend on for such matters - but its foreclosure page indicates original home loans in CA are non-recourse debt. Which is significant - that's where the respondent in the article resides, and this tactic is likely more common in CA due to larger value drops.

Re-fi's, seconds and HELOC's have no such protection, again per Wikipedia:

"In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans, however, refinanced loans and home equity lines of credit aren't."

If that is correct, then in CA this tactic would work and the only downside probably would be the black mark on the credit history, a possible 1099 with all the income tax consequences inherent in that, and any sense of moral failure.

As Brat wisely notes, this area of the law varies a lot between states.