Refinancing now is generally a wonderful idea as jumbo loans are back to all time lows in 2016 due to all the volatility in the stock market post Brexit. That said, what happens if you are so underwater on your mortgage that you feel it doesn’t make sense to continue paying anymore because you don’t think value will ever recover? Banks have become so annoyingly stubborn regarding allowing underwater homeowners to refinance, that you might have a better way.
Have you ever wondered why there have been so many foreclosures in states such as California, Arizon, and Nevada? I’ll tell you. If you live in one of the 12 “non-recourse” states of Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington you are potentially in luck! If you so happen to own property in one of these states, and have substantial assets elsewhere, you can legally hand over the keys to the bank and exonerate yourself from the mortgage with no penalty against your other assets!
AN EXAMPLE OF GETTING IN OVER YOUR HEAD AND BAILING
You have a million bucks in the bank and you bought a house for $800,000 several years ago by taking out a $750,000 mortgage. Real estate market crashes and the value of the home is now $400,000. You’ve already paid $50,000 of the mortgage principal over the years. $300,000 of your mortgage is now unsecured ($700K mortgage balance – $400K value of property), which means your house is now an under-secured debt. Because you live in a non-recourse state, if you turn over the collateral (your house), your lender cannot collect on the $500,000 unsecured debt. The lender assumed this risk when they approved your mortgage application, and you can walk away with your $1 million in cash and live happily ever after.
However, say you bought the house for $800,000 with a mortgage of $300,000, and then a few years later took out a second mortgage worth $500,000. Real estate market crashes and the house is now worth $100,000, leaving you upside-down on the house by $300,000. If you turn over the house, you can walk away from the first $300,000 mortgage, but you’re still liable for the second $300,000 mortgage. Since you no longer have the collateral, the second mortgage is now an unsecured debt. Unsecured debts can be discharged in bankruptcy.
BANKRUPTCY OPTION FOR REAL ESTATE
If you want to file for bankruptcy, the $1 million cash is a problem. Since you’ve got the cash on hand, the court is going to say you have to pay back your second mortgage. But who has $1 million cash in this economy? More realistically, you have $1,000 cash.
If your income is above the median, you are eligible for a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, the debt is not completely erased, but is instead consolidated and restructured into an affordable monthly payment. The debtor creates a three to five year affordable repayment plan to pay off a portion of the total debt.
If your monthly income is below the median for the state you live in, you are eligible for a Chapter 7 bankruptcy, which is a total liquidation and discharge of all of your debts, including the $300,000 second mortgage. The slate gets wiped clean and you get a “fresh start” to start rebuilding your credit. You are eligible for a new FHA home loan 2 years after your bankruptcy is discharged.
If your creditors are harassing you or if a creditor has served you with a court summons, if you’re facing a repossession or foreclosure, or you are only making the minimum balance on your credit cards, you should seriously consider filing for bankruptcy. If you feel like your finances are way outside of your control, bankruptcy is the “fresh start” you need to get your financial health back in your own hands.
Most bankruptcies are caused by one of three events: loss of job/failed business, medical emergency or family emergency. You may have been living within your means just fine, but then you lost your job and defaulted on a payment. One missed payment can change your interest rate from 8% to 39%, causing your debt to quickly mushroom out of control. Perhaps you or a loved one suffered a heart attack, resulting in thousands and thousands of dollars of medical bills that you simply cannot manage.
IS IT RIGHT OR WRONG TO WALK AWAY IF YOU CAN AFFORD IT?
There are actually plenty of people in California who have substantial assets who are simply walking away from their mortgages. Financially, it makes sense, especially if they’ve put very little down. Legally, they have every right to walk away as well. After all, the banks performed due diligence and made the decision to lend you money. Nobody forced the banks to do anything, as perceived profits are what drove them to lend.
Sure, for the first 5-10 years, your stellar 770 credit might get trounced to 570. But, if you have another fine property you are living in, and another vacation home down in Malibu, what do you care whether you can’t get more credit or not? You’re already living the dream and catching a break from an investment property that went sour.
Now that the economy has recovered and the stock market is at record highs (S&P 500 over 2,000), those who walked away from their properties in 2008-2010 have not seen a rebound in net worth. If you are going to buy property, buy property and hold on for the long term. Transaction costs are a killer, and selling during downturns not only wipes out your equity, but may permanently leave you behind for the rest of your life.
Recommendations
Shop around for a mortgage: Mortgage rates have collapsed after Brexit, and US assets are aggressively being bought by foreigners due to our stability. Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. This is exactly what I did to lock in a 2.375% 5/1 ARM for my latest refinance. For those looking to purchase property, the same thing is in order. If you’ve found a good deal, can afford the payments, and plan to own the property for 10+ years, I’d get neutral inflation and take advantage of the low rates.
Look into real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property or don’t want to tie up your liquidity in physical real estate, take a look at RealtyShares, one of the largest real estate crowdsourcing companies today. Real estate is a key component of a diversified portfolio. Real estate crowdsourcing also allows you to be more flexible and surgical in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates around around 4% – 5% in San Francisco, but over 10% in the Midwest if you’re looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Realtyshares has to offer. It’s free to look and discover.
Updated for 2017 and beyond.
I absolutely think it is wrong to walk away like that. Obviously it is within the law, but then the law should be changed. Personally, I am of higher moral quality than that and would not do it. At the same time, banks knew the risks as well. It is a bad situation all the way around.
I absolutely thought I was too. Until I was unexpectedly laid off from my job of 12 years. I couldn’t find another job in the area that would allow me to make enough money to stay in my house. I took a job 800 miles away. I sunk money into painting, repairs, carpet. Tried to sell it, but 4 times the buyers fell through. Made the payments for 8 months. Finally I threw my hands up. I put 20% down. I paid my payment (and all other payments- perfect credit) on time, all the time. I paid an extra payment a year hoping to pay off the house early. I had the house 6 years. I left it in better condition than when I bought it. I now pay rent in a different town, 800 miles away, that is oddly $12 less a month than my mortgage. I am a responsible person of high moral quality as well. I guess the difference between you and I is that I had to eat a huge portion of humble pie. I hope you never have to. Good luck.
All you people who never had life situations turn against them best step down from you high horse before it does.
I was forced into early retirement at age 60 (bad back) and penalized on my pension for each year prior to the age 67 that I was supposed to work ($700/mo). I even went to Chicago from North Carolina to appeal this, but to no avail (who retires willingly with a 10 year old car and a 15 year old truck and a mortgage?). I had previously agreed to an interest-only mortgage because I had planned to fix up the house so my wife and I could downsize- kids grown and gone, etc. With disability, this plan no longer worked. The interest-only mortgage also had a balloon payment on the end and/or sale of $125K.
So, I live in NC and plan to walk, or rather ride off in a used Class A RV and to offer the deed in lieu of foreclosure. I have the RV and am doing what I need to update it with Wi-Fi, On-Demand Water Heater, Electric Management System and it came with 2 Flat Screen TVs. We will stay in this general area (because of Drs and kids) but will travel at least 2 weeks a month. With no expenses other than fuel, camp fees, insurance and registration and licences, all I will need is mail forwarding.
Do I feel bad about walking away on this mortgage? Nope, we have bailed out the banks twice (not to mention the S&Ls, Auto Industry and almost every foreign nation that now screams ‘Yankee, Go Home!).
So, I’m disabled, but because of my partial-pension, I make too much money for any aid. OK, after working for 40 years total- I’m taking care of my wife and myself. The kids are adults now and I hope they can wake up from this ‘American Dream’, as the late George Carlin put it.
How is doing what a contract entitles you to do either moral or immoral? The bank is not lending money because a homebuyer is a good all ’round guy & deserves it…it’s to make money. If the homebuyer defaults, the bank forecloses, even if the homebuyer is a good parent and donates to public radio. If the homebuyer walks away also to make money, so why is there a moral onus on one party & not the other? Last I checked, there is not a commandment that reads “Thou shalt not default on thy mortgage…” And no, it is not going back on your word, the contract expressly allows it because state law mandates it, & if lending institutions don’t like the law, they don’t have to do business in that state.
As much as I dislike constant flipping and re-selling of mortgage securities within the banking system, I’d have a hard time walking away from a contract.
Why do I like this post so much? I find it morally reprehensible to walk away from an obligation you can afford to pay. And no, the “everyone else, including the banks, is doing it” retort doesn’t sway my opinion. However, it’s good to know the truth. I hear it’ll set you free. If the topic ever comes up in conversation with anyone who’s distraught over the fact their home value has tanked, I’ll definitely cite your post.
If it comes between feeding your family and paying the underwater mortgage, I think we’d all choose the former and stop paying, especially in a non-recourse state.
The truth really will set you free.
what if you have a mortgage that you pay $1200 a month for and only gained $580 in equity in 6 months. and you now figured out that in 30 years you will pay for this property twice. Also the bank tells you to send all documents, to try for a modification, and then send them again and then resend them and now she wont return my calls.
We are in the process of walking away right now. Our daughter lives in the house and we CANNOT get ANYONE to refi it so she cAN AFFORD entire payment which is 939.00 a month. WE can no longer afford it as well since my hours were cut to part time. We live in Louisiana and the house in question is in North Carolina. Our mortgage was turned over to Nationstar from Bank of America and we have been trying since LAST DECEMBER to get a modification/refi for her (she has really good credit with an EXCELLENT debit to income ratio) & trying to get it in her name. Our biggest problem is the fact that (EVEN THO it has been EXTENSIVELY remodeled & is NO LONGER a double wide mobile home but is an immovable structure.) they keep telling us they don’t finance mobile homes. HELLO !! YOU OWN THE MORTGAGE !!!! All we wanna do is refinance it ! Anyway, since Nationstar took it over, we can’t get thru to ANYONE and if by chance we DO , they tell us they are going to transfer us to someone else who knows more…then the call gets dropped. I don’t even know WHO our mortgage is with anymore because Nationstar isn’t even a bank ! They are a go-between !!!! And NOBODY returns our calls as well ! I have found out online that Nationstar will pretend they are doing a loan modification with a customer when in reality they are foreclosing ! Okay, then let THEM try to sell a house they deem as a mobile home. Oh did I mention it sits on a 2/3 acre of private land in the middle of a rundown mobile home park ???? BWAHAHAHAHAHAHAHAHA !!!!!! We have been trying to “do the right thing for a year” but to no avail. Well, you know what ?!?!?! THEY CAN HAVE IT !!
I feel your frustration! You would think the banks would just allow us to refinance lower to prevent us from defaulting. Banks need to do a better job. I finally got some relief with my 5.85% 30-year fixed jumbo loan with a free loan mod from Bank of America for 4.25% five years later. I was seriously thinking about just giving up.
Totally understand. My mortgage company doesn’t take the time to read anything they requested in the first place. Job was lost. Hardship letter, listed with realtor, etc.. Now they deny my short sale saying my credit score is too good. After not making a payment in 5 months!! Give me a break, please.
Wrong.
If you borrow money you should repay it of face the consequences – usually bankruptcy (although a return to debtors prison sounds better every time I read one of these articles).
No recourse has consequences. The banks know that they do not have recourse so will be less likely to lend and/or lend as much and/or will charge a higher rate to compensate for the higher risk of loss. Actually……that might not be such a bad thing after all.
What do you morally superior people think about corporations that file to reorganize their debts in bankruptcy court? Or bankruptcy in general? Many times they have the means to repay but choose the legal “work out plan” to pay part of the debt.
I also do not think it is correct to walk away from a mortgage if you can offord it. What a house is worth does not matter to me – a car is almost always worth less than the outstanding loan value – does this mean millions of people should stop paying on their cars?
BTW, is the following sentence correct, or is it missing a few words? How much do you value your credit and how would you value your credit?
Thanks for all the great posts!
That’s why there is no such thing as non-recourse car loans. They will repo your car and come after other things to get their money back and crush your credit.
I knew when I bought the car that I would lose value. When I bought my house I didn’t think that would happen. On top of that the lenders told me I’d be able to refinance in a few years for a lower rate. I’ve accelerated my loan payments, but I’m still quite a ways from breaking even.
At least Kansas is a nice place yeah? Best to own for the long term anyway.
Most people consider their car a depreciating asset while they consider their home an investment.
This topic gets argued all over the internet, and I don’t get it! The bank made a business decision to lend you money, the decision was a bad one who cares walk away.
And of course the Biblical answer:
Psalm 37:21 – The wicked borrows but does not pay back but the righteous is generous and gives. (translations vary)
Hmmm….. guess there are a lot of very wicked people out there!
I have had enough of watching those who CAN pay in California walk away free and easy. Completely irresponsible—let someone else clean my house up and get the short sale. It is thoroughly disgusting. I have known individuals who have substantial 401K money and are collecting disability checks (another rip in Ca) for hideous claims and elect to walk away. Strategic default or squatters have ruined a lot for responsible people who now cannot even get a loan because of you!
401k balance and disability checks are mutually exclusive no?
The bible also says to obey the laws of the land. If bankruptcy is legal and walking away in a non-recourse state is legal, then you are not breaking laws, and thereby obeying the laws of the land.
We are currently in this situation, which is how I happened upon this article. My husband makes VERY good money, a Florida salary in NC. We bought our house with zero down, first and second mortgage and anticipated refinancing the two together once the house accumulated equity. Well, then the market crashed and we have been stuck ever since. Of course we are upside down on value compared to what we owe. And now my husband’s job is on very shaky ground, we are fearing termination. We have already secured an apartment and are ready to walk away. We have to worry about our family first, not the bank, and you can’t pay a big mortgage without a job. We wouldn’t be able to live in the house even if he got a new job making half his salary. NC is a non-recourse state, but we are still nervous, hence me searching the web for information. And we are not rich. We do not have other properties or assets. We only have a 401 and a ROTH for retirement. What say you, financial man? I need expert advice! Thanks so much.
Sounds like you’ve answered your question. Family first. Navigating in the confines of the law is by definition, legal.
The wicked is probably not paying interest & leaving a tangible asset to the lender. Also, one would hardly call Goldman Sachs “righteous”…
TL:DR
This describes a friend who lends another friend money, not a contractural relationship with a default provision
Hopefully I’ll never be in a position to have to make that type of decision. It would feel somewhat wrong but I’d be foolish not to at least consider it if I got into a big mess since it’s a legal way to unbury yourself
Do I think it is wrong to just walk away from an underwater mortgage? You betcha. When you take out a loan you also take a risk… a risk that the property might lose value. It is your responsibility to pay your debts. Not doing so only hurts everyone else (indirectly).
How would you like it if a bank came to you 10 years into your loan and said, “When we gave you your loan interest rates were 5%, but now they are 10% so we are upping your mortgage payments.” It wouldn’t be fair, right? Nor is it fair for someone to stick the bank with a property that is no longer worth what they feel it should be worth.
It may be “legal” but is it “ethical”?
I think you’ve got a moral obligation to pay the money back – you borrowed it after all, and nowhere in the loan documents did it say the value of the property was going to be stable or go up. There is a possibility of the value going down, and it happened to a lot of people, Unfortunately.
This is also a business decision though – there’s no sense in throwing good money after bad for that long. The bank made a decision just like you did, and their risk of loss was always there as well.
Is there really anything to payback if the bank agreed to accept your house as collateral for our loan? We can just pay the bank back by giving them the house!
I am the sort of person that my word is everything! Would I break my word? No, but I would not buy real estate in the over heated market either. I am blaming the victim? Not exactly! The buyers have to take some responsibility in these transactions. The lenders should not get off the hook either! They have some responsibility because they accept the appraisal.
Normally I would say it is wrong to not keep your end of the bargain, but considering how reckless the bank and feds were, I’m having second thoughts.
BTW, very nice explanation of chapter 7 and chapter 13 bankruptcies!
No problem man. Hopefully I can provide some good insights for folks who read here. Seriously, the more we know, the better we are to combat the elements.
Hmmmm, well since you feel that way, can you lend me $499,999? ;)
I’m good for it… trust me, my credit score is over 800 and I’m debt free…
I’d lend you $499,999 if you promise to pay me a 10% a year and swear to have your nuts chopped off and fingers mashed by a sledge hammer if you don’t pay back! lol
What’s a half million between friends? :)
lol, that’s exactly what my mortgage contract said when I borrowed money from Wells Fargo! My reputation must have proceeded me :)
I think it comes down to common sense (like most things in life). If you are starving (or your kids are, etc), then walk way, credit score be damned…
But if you are like most of the newer strategic defaults these days (very well off financially), then shame on them! They are part of the problem of the slowdown in the economy creating an artificial surplus of foreclosures… They are the ones that keep unemployment high and hurt innocent hard working people…
They may strategically default, but they will crush their credit for at least 2 years if not longer and then not be able to do it again. Everything is rational, and when push comes to shove, everybody takes care of themselves before Godzilla comes and eats them.
Yeah, if I were in the particular scenario, I’m not 100% sure what I would do. Especially with such an unfair government. I heard another blogger state (not on this post) that the government doesn’t have to be fair… But isn’t that the way that revolutions begin? If an government isn’t fair, then trouble starts to brew…
Strategic defaults. Seem like D-bags, but I guess you can’t judge a man…
I’m just glad I never got myself into such a ridiculous situation to be walking away from a mortgage. I have a family, I can’t imagine telling my kids we’re moving to an apartment because I don’t want to pay the bills anymore – even though I could afford to.
Darwin – Did you go from wanting to buy a new place to installing a pool in your existing? What was the catalyst for making this change?
It’s a really long story; to boil it down, we didn’t “have to” move, the pricing wasn’t where we wanted it on both the new construction vs our sale price (spread wider than i liked) and we said, screw it, we don’t have to move. had a nice cash hoard saved up, good start on retirement/529 and said, let’s do that pool (the wife) always wanted! it’s working out nicely, we’re in, the family’s loving it… and it cost way less than a more expensive home w higher taxes!
it’s perfectly fine to walk away in my opinion. one caution however – i believe refinancing the mortgage turns it from a non recourse to a recourse (please double check on that). in addition, i was pretty much convinced that one could walk away from a mortgage in all states because mortgage loans are “fee simple” loans. am i wrong??????
Good point and warning! Found this on the net:
“California homeowners have been making the “refinance mistake” as long as the bubble has been going on. The big mistake homeowners make is turning a ”non-recourse” second loan into a “recourse” loan by refinancing it. A non-recourse loan is a loan that the bank can only look to their secured interest. In other words, they can only foreclose, they cannot get a deficiency judgment and chase you into bankruptcy collecting it. THIS IS HUGE! You can walk away from a non-recouse loan.
So how is a second mortgage a non-recourse loan? Simple, it was “purchase money” for your home. A purchase money loan is one where the money went from the lender, to escrow, and then to the seller or to pay purchase closing costs. In California purchase money loans made on your home (note: not second home or investment properties) are non-recourse. It’s simple as that.
The mistake comes when you refinance your second purchase money mortgage. Because it is no longer a “purchase money” loan a refinance transforms it into a “recourse” loan. That means the lender will chase you into bankruptcy collecting it. Or worse, they will sell it to a debt scrounger, the worst form of debt collector. Your life will be hell if it falls into their hands.”
Solution:
A couple of tips:
1. You can refinance your first mortgage or both mortgages into one mortgage and still be “non-recourse.” This is because the One Action Ruleprevents lenders from looking beyond the mortgage in a non-judicial foreclosure. Second mortgages do not benefit from this rule because they have not had their “one action.”
2. If a seller took a second loan on your property, they cannot look beyond a foreclosure even on investment properties or second loans. This is the “Vendor Rule.”
3. Always keep economics in mind. It’s better to let your home go and walk away without liability to the bank then to try to save your home with a refinance and become personally liable.
by Ken Andrews of Doanlaw.com
Thanks Sam – any comment on 11 states vs. all of them? Can’t you walk away in all cases anywhere?
On a moral level I agree with the majority of posters on this board and four years ago I would have looked down on these underhanded strategies of walking away, but then the bailouts happened. At this point my attitudes toward money is changing to some degree. When I see the ultra-rich take bailout money and then payout huge bonuses, only to get to continue doing business in an unregulated credit swap & derivatives market I really shake my head. I still don’t think I could just walk away from a mortgage contract that I had to agree to, but I would seriously think about it now just because of how everyone else seems to be taking advantage.
Our country has over 40% of Americans who don’t pay federal tax and who want to raise taxes on the other 60%. Isn’t that morally wrong too?
It is most definitely wrong, and in Canuck-land it is even worse. I’m just saying that it is becoming easier to justify not playing by the rules since the people running the show (big banks etc) clearly aren’t playing by the rules either. Pure capitalism does NOT justify multi-billion dollar bailouts… that is the definition of Socialist. To GM’s credit I understand they are paying back much of the stimulus money they took, but these other companies should have been allowed to fail. Right now there is no economic incentive for the big banks not to keep reeking havoc on the faulty derivatives markets as they know that they will get to keep making money until they don’t… then they will make more money anyway courtesy of tax payers. This is about 90% of the reason why Canada made it through the economic turmoil in slightly better shape in my opinion. It is tough to stand a soap box and shame people for making selfish decisions such as either walking away from a mortgage, or asking others to pay their taxes for them, when the leaders of our economy continue to do it on a much bigger scaled every day.
I think it is fine to walk away as well. A mortgage is just a business contract, so if you realize the recourses that the other party may have, and you are okay with that, then go for it. Just realize what you signed up for, and it is fine. Heck, companies do this type of thing all the time.
Think about all the times our banks try to milk us for fees and penalties. Might make people feel better about walking away.
I would have a hard time walking away from a contract, but good point, if food needs to be put on the table, survival mode kicks in. I’m sure tons of people thought they would never steal, but if a disaster struck and supplies were running low, looting would turn into a survival move. I guess you could say the same for walking away and filing for bankruptcy. Tough pill to swallow when I kept my finances in check and I hear about all the people in trouble getting bailed out. So Sam are you saying, if others are doing it, why can’t you? Or are you making readers aware of options in case we are backed against a wall? Great topic!
You need to know the rules of engagement to make the most informed decision. 1) There are 12 non-recourse states that legally allow you to walk away without coming after your assets. 2) Understand the hit to your credit score 3) understand the difference between Chapter 7 and 13.
Hell yes I’d walk away if it meant saving my family. I would also walk away if I just had no hope and had a significant decline in income. Banks are here to make money off you and me. Don’t be fooled.
Wow – interesting post! In regards to morals, it may not necessarily be wrong to walk away, though I do understand why so many people feel this way. As noted in the post, banks exercise due diligence when deciding whether or not to loan you money for a property. The application process requires lenders to consider each applicant carefully. If you cannot pay your mortgage, they may repossess your home. So, what is so much different about making the decision for them? Especially when you have a family to feed and a retirement on the line. Personally, I doubt I would walk away either – but I love playing devil’s advocate.
The more you understand, the less you feel it’s morally wrong to walk away. At the end of the day, it’s a contract, signed by two people who want to make financial gain.
Actually! I didn’t know that you had written a post about this, but I have a blog post in queue regarding strategic default/bankruptcy!
When I first saw the article on CNN about an increase in strategic default, I celebrated it as a “power to the people”-kind of trend. But as I did more research, I learned that there’s more to bankruptcy than it seems at first.
Again, great article on why strategic default may seem logically sound. I’ll try to mention this article when my post comes out. :)
I do think it’s morally wrong to default even when you can afford the property. It’s not just about you; the entire neighborhood is impacted.
We had a neighbor do that in our condo which left the rest of us covering the HOA fees until a buyer was found. The bank resold at a below market value price which brings down all the property values. It’s a lose-lose for everyone.
I am flabergasted about the ethical and moral responses some claim.. Let me tell you a little secret. The money the banks loan you was creating out of thin air, is counterfeit money. They didnt have to sell their assets, dig into their savings, or raise a brick for that matter. They loan you counterfeit money (backed by the courts) and you pay interest. Obviously, they have been doing these for decades and gotten away it.. But I see this as immoral, unethical business practice. If you are contractually able to walk away, by all means do it..
From Ed:
I think its absolutely unethical to walk away from a home you can afford. I know someone who makes over 200k a year and he walked away from his condo because the price dropped 50k. I think that banks should have the right to come after the balance if the borrower has assetts. The money banks lend does not come out of thin air, becuase you are getting something for it, so just because you don’t see the money you are borrowing does not make it any less real. You are still benefitting from taking someone elses money and not paying it back.
shame on anyone who doesn’t honor their debts when they can afford it!
sorry to harp on but I have an issue with the integrity thing
I wonder if you are underwater in your mortgage? What if you bought a house as an investment, something to put your life savings into with the hope of liquidating it at sometime in the future. You are aged early thirties, you sign up for the mortgage, the same month the housing bubble bursts. You have never seen any value in your house, it plummets from the time you move in. First year 20k drop, second 40k drop, the 60k ,then 100k,then 200k.You honour every months repayments but once your house looses 2/3 of its value it starts to really bug you that you are throwing good money after bad. You try to rent it but have to invest more into the house to bring it up to standard. Rent covers approx 50% of the mortgage. Integrity is one thing and I’m a believer in such things but intelligence is another. The bank took a gamble ,I took a gamble, the bank gets bailed out and all the folks who signed off all the mortgages will be ok. I pay extra in taxes here in Ireland for the bail out and the stinking government pensions and salaries. I have a good job but will be tied to this massive debt for at least another 20 yrs just to break even. Just because I and others fell victim to the banks ponzi scheme. So, if I were to try and negotiate a settlement with the bank which they will refuse, and then give up the house for a short sale and go bankrupt so I can start again does that make me a lesser person? The property investment was a bad deal for me and the bank, but I must suffer all financial losses throughout my life because I must show integrity. That doesn’t make sense. The more I understand about how the banks and government work together and how penal the system is here in Ireland for mortgage deficiency the less I see integrity as been an issue. The way I see it is the banks and government milked the real estate market for all it could and inflating prices, now their scheme has failed and here in Ireland then banks refuse to lend and write off any of the debt so people who bought in the peak are suffering even more due to the fact that the recapitalisation of the banks is now been used to lend therefore bringing prices even further down..Where is the integrity there?
It appears as though some of the people posting here have a very strong ethical standard against walking away. I used to be one of you. I moved to TX to care for my parents, bought a house (that’s when they were considered good investments!) and spent 6 years working on and off taking care of my parents. When they passed away, I decided to sell my house and move. The house sold and was 3 weeks into the process, I moved and 2 days after arriving at my new rental home, my agent contacted me to tell me that the sale fell through. Now I have that TX house payments, utilities, upkeep etc as well as my rent and living expenses in my new location. In addition, my current state requires certification/license for my type of job (healthcare industry). I applied in April, before leaving Texas, and was told the processing time was 60 days, then 90 days, now I’m being told since my new state has state employee forced furloughs, my license might not be reviewed until November or December. So, I can’t look for a job in my field, I’ve looked for other jobs but we all know that situation, and I’ve tried to work with my mortgage co. who refuses to do anything because 1) I’m not behind on payments and 2) it is not my primary residence. In retrospect, I should ever have left Texas until the sale was finalized a the closing table, but I had just lost my parents and needed/wanted to move on with my own life. What’s done is done. It seems if you”ve done the right thing, you are offered no relief. I’ve exhausted every option available to me and have, what appears, no other choice but to walk away. The thought of it kills me as that is not how I was raised, but does anyone out there have any other ideas? I’m open to anything and desperate.
Thanks.
I see many comments on here, that walking away is a bad thing. But you think it is ok for an industry that was deregulated (because they convinced the government that they could police themselves).to hand out loans that they new could not be paid back,just for bigger commissions and bonuses.. They have caused a world financial crisis, and they are now unwilling to negotiate with the people who played by the rules. I am currently underwater by 70,000 dollars (about double of what is owed) in a neighborhood that is rapidly declining.I have 10 years before retirement age and will never recoup that. You bet your a… I am walking away.
I’m about to bail on my house because I can’t afford it sis moved out her name is on house with mine she won’t pay her cut like she supposed to so my family and I are screwed
If I live in NYC, have an apt that I am paying a mortgage on, and have two investment properties that are underwater financially in Florida, if I walk away from them, can thy come after me? Is my apt in NYC safe? Florida properties were bought in 2006/2007 at the height of market, and obviously my NYC apt is not going to sell for why I bought it for….so do keep throwing money away in Florida? Much thanks.
I agree entirely. The banks are not in the mortgage business to help people. They are in it to make a profit. They issued many loans that should never have been granted. i myself, feel I should never have been given a mortgage although my credit was excellent, my debt to income ratio was too high. I am currently underwater as are many, and although I have always believed that I should honor my contracts as well, but let’s face it, these mortgage companies are basically criminals that have no compunction to refuse to offer you any assistance if you are under financial stress. Should I feel guilty walking away from a bunch of criminals? I think not.
AMEN !!!
I love the dont the comment
“”psalm 37:21 – The wicked borrows but does not pay back but the righteous is generous and gives. (translations vary)””
good luck making money using the bible as your MBA you tool
does anyone remember the BAILOUT !!! get out of your crappy home
Banks still win in the end. If you walk away they can collect on the PMI and on top of that come after you either directly via deficiency judgments or sell the bad debt to collection agencies for years to come. It all sounds very cavalier to make the decision to walk away when able to pay the mortgage, but that is short term thinking. Banks don’t care if they sell at a loss, they will come after you be it sooner or later.
I have a question concerning walking away from a mortage. We are current on our mortage, in fact we have never been late and have even paid ahead on our balance. Our employement was transfered out of state and we have been tring to sell our house.. lowered the price to just what we owe on it and it apprase’s for about $15K above that. We have had no takers.. we have to leave in 6 wks and can not afford rent and a mortage payment.. we looked at renting but the bank will not allow it with are ARM mortage. So what are the consiquense’s of handing the keys back to the bank when we leave the state? The house is a nice house in good shape, our problem that I see is that new homes are going in around us and our house is not new.. people want new..
I lived in a house for 2 years and then had to move away for career. I could not sell the home because I was to far underwater. The house is now rented out at has been for 2 years, but I still lose money to it every month. I am considering walking away because I don’t see myself every gaining equity in the house. I live in Oregon, which is a non-recourse state and my loan is non-recourse. Does anyone know if the loan will remain non-recourse if it goes through foreclosure and it is not my primary residence anymore?
Does the ability to “walk away” without the bank going after other assets in a non-recourse state (California) apply to rental/income property for which there is only the original mortgage?
I have a very basic question. If I have a original mortgage of $204K and I’ve paid down about 8k, which I know owe around 196k at. 4.75% interest VA loan. If I should get a another mortgage with a lower interest rate, hower than 4.75% if that’s possible, is that considered a second mortgage? My home is now worth 152k and I’m just weighing all my options for my situation. My mortgage is eating up 50% of my paycheck and I’m just wondering about my options.
Novice and feel screwed.
Then who do I give the keys to? I have called every department in B of A and they keep telling me there is no way to drop off keys. How do I do this? either physically or symbolically?
IDAHO is a recourse State. Lenders can and do go after mortgagors for deficiency after foreclosure. The information that it is a non-recourse State is in error. The mortgage is a personal liability only secured by the real property, and thus the debt remains as a personal liability of the mortgagor after foreclosure.
I would like to know a couple of questions, #1 I filed chapter 7 in CA on a 2nd and it was taken down to $00.000 on credit reports, do i have to pay. Also with GMAC bankruptcy on my husbands property they have sold it to a ‘debt collector’ who paid pennies on the dollar green tree…..according to FTC law a ‘debt collector’ cannot charge interest and the cannot threaten to foreclose your property…a ‘debt collector’ is totally different than a Bank…help anyone know these answers?
If they really want change unfair laws, start with divorce law. It happens 50% of the time yet it is still unfair. Then change the walkaway law . Although, when you buy real estate, there should be a guarantee that it will not lose 1/2 of it s value within 5 years too. Fair is fair
I live in a non-recourse State and have two condos that are under water and have been for some time. They both have 2nd mortgages that were there from the original sale of the properties (80/20 loans). Are both 1st & 2nd loans – since they were there from the origination – covered under the non-recourse laws? Or can the 2nd lien holders still come after me? Both of these condos were purchased by first time homebuyers and not as investment properties. They turned into rentals after the market crashed and we couldnt sell them. Thanks
It is to my understanding that once you take out a second loan (aka HELOC), the properties become recourse. Please ask a lawyer and mortgage officer for details.
For all the moral people. You are letting your morality get in the way of your business decisions. The banks never let that happen. Remember the banks are the ones that came up with liar mortgage loans so they could quickly resell them and they also knew properties weren’t worth what the appraisal were saying because they were packaging these loans and re-selling them to pensions.
And banks get the US taxpayer via the government to bail them out.
Is it really that simple? I have a condo that was purchased for $150,000 and the units in this complex are now selling for $90,000. I have been searching for any information on this subject and found your website. I am pre-qualified for a home loan, but would like to be educated on the process of walking away from my current mortgage. Any advise you can give would be greatly appreciated, I am willing to pay for a consultation, I just don’t know where to turn for the answers.
It’s pretty straightforward. But you should initiate a dialogue with your bank first.
If you are interested in consulting, here is my consulting page: https://www.financialsamurai.com/fs-online-services/career-personal-finance/
Thank you for this post.
First, ANYONE making moral judgments about people walking away are, at best, nuts in my book. Anyone else realize the government probably owns 50% (not on paper) of the big five banks with all the insured mortgages AND the billions in bailout money? The banks were bailed out for gambling with OUR MONEY because THEY KNEW the government would save them; they were too big not too. So, the banks can go pound sand in my book.
Second, if a person is going to declare bankruptcy and walk away, can’t they just rent the property out on as long a lease as possible… at ANY amount of rent they can collect?
This completely encumbers the property for a new owner/title holder as, as far as I know, the rights of an existing tenant trump those of the new owners. Every lease I’ve seen is ‘inherited’ by the new owners, thus protecting and preserving a tenants stay for the duration of the lease.
This seems especially true in a non-recourse state. First, the bank would have to know you actually collected rent. Then they’d have to get a copy of the lease. Then they’d have to actually pursue civil action. Seems doubtful when they often don’t even go after the principal balance of those who walk.
Curious on your thoughts! Thanks, Thomas
Just thought I’d say that most banks are out to make as much money as They can from you, and they don’t care how they do it. And if they need to make up the losses they do it by coming to the taxpayer for Bailouts. So why is it that everybody’s telling you how bad believe it is morally?
If you have the time, please read this it will change your perspective on what’s really going on in this country. I know most people just don’t have the time to read, but I guarantee most people have no idea?
The coming collapse of the petrodollar system by Jerry Robinson
This will be very hard for most people to except, but it is the truth!
Does living in a non-recourse state like Arizona automatically save you from any tax consequences? Even in 2015?
no, everything I can read is no.
I am also seeing that you are not a no-recourse situation if you are a single family and have over 2.5 acres. Is this correct???
Where’s my bailout? I purchased my home in 05 gambled and lost. You all know what my real estate agent said. Sound investment that will appriciate in 5 yrs and you can walk away with 100K; yea right! We all want to do the right thing; but if you’re paying a financial adviser and he says walk away your a fool not to. Look at all the tax loopholes. Who came up with those? Tax lawyers that advise rich people. Dah! As Americans we have got to stop sitting around judging people. How constructive is that? We have to come together and realize that it’s such a good ambition to own a home. It should never have been manipulated by greed. A moral value the home and family is sacred. I can’t afford my home now. Where does it say I now have to bite the bullet and stay? Sacred things have a morality of their own beyond the pail of the common man. Just saying…..
Perhaps give the government a ring or write em a letter and ask for your bailout? The government has been forking over billions of dollars to bail homeowners out with NEW subsidized loans, loss forgiveness, etc. Kinda crazy!
Mister Financial Samurai, in AZ I am not in the no-recourse situation if single dwelling family and I have more than 2.5 acres?
Thank you
For those who are currently facing paying taxes on a large short sale deficiency because the government did not extend the short sale provision this year, this is the answer. If you live in a non-recourse state, the amount of the deficiency is not treated as income, but rather is added to the sales price to determine your gain on sale. In my case my deficiency was $70k, which was added to the sales price, leaving me with only a slight gain on sale in the end. That small amount tax was nothing in comparison to considering it as income.
Talk to your tax attorney about using the non-recourse option if you short sold your investment property. Worked for me!!!
I am one of those that is underwater by roughly $60K! We took an 80/20 loan. Will I ever recoup the $60K? I am seriously doubting it. Right now I am renting it out. We have to cover about $300/month along with the rent to cover the mortgage. That’s called NEGATIVE cash flow! We will be retiring in 2 more years.
It seem that all our lives we have been getting financially screwed. If that is our fault, so be it.
However, I will not go on living with this property noose around my neck. Sorry if you find that non-ethical. We will walk away.
Almost funny reading some of the comments here. Many Bible quotes and morality inferences. Really, People?
Its a mortgage using real property as the collateral!
No more, no less.
I can assure everyone that in the USA mortgage lenders do not utilize the Bible, the Koran or any other religious tome in their construction of financial instruments.
Real Estate mortgages are offered and granted (or not) as a result of utilizing experience combined with hard nosed financial due diligence, and the contracts are overwhelmingly advantageous to the Lenders, not the Purchasers.
Listen closely now – the mortgage is ONLY granted after the Purchaser qualifies for the deal with Down Payment or whatever is demanded by the Lender. The list of qualifiers and codicils takes 10 minutes to read, only if you don’t pause while scanning the document.
If the Purchaser “Defaults” in any manner – if they stop paying property insurance, property taxes, trash the property in a manner that causes significant loss of value, or become delinquent beyond 60 or 90 days, the Lender has solid legal standing to evict the Purchaser and take the property as their own.
And the Lender will care not one iota about where the person or family will live after they snatch the property.
That’s it, Boys and Girls.
The Lender receives the documented property if the Purchaser defaults.
That’s the remedy for the Lender, plain and simple.
There are no after life penalties. The sky does not fall.
Your first born will not be taken.
The Four Horses of the Apocalypse do not come thundering after the Purchasers in default.
So tell me, please: why is it “morally OK” for the Lender to evict a Borrower family for late mortgage payment – a situation typically caused when all other options are exhausted, and all savings are gone – but “not OK” if a Borrower chooses to remove the untenable burden of a hopeless mortgage property by Walking Away before their lives are ruined?
Read this post: Why Debt Welchers Are Admired
It’s the craziest thing in America I tell ya. Go USA!
THANK YOU so much for a fair and factual comment. It’s probably one of the best I have ever read. It’s bad enough to have to default when you never have before, to lose your credit standing, to have to rent in your middle age years instead of being a home owner, but on top of all that to have to deal with the so called religious people heaping guilt on top is just too much. Why they are so overly sympathetic to the banks is beyond me. Really, I lost more than the bank did. And I didn’t lose it all in foreclosure, I lost it the day my home value plummeted from $210K to $50K in the first 6 months I owned it. It would never recover fully and I do not have the years left to have to pay down the difference if I had to sell. If anything, I think the banks should have seen a bubble coming and modified their lending and appraisals. If I had been warned I may have chosen to rent instead of buy at the market peak in 2006. They were playing the game of musical chairs with homeowners and I lost. After the bubble burst I did what I thought was best for me which was to walk away. Little did I know how very much the cards are stacked in favor of the bank. I lost my $30K equity. I lost my credit. The bank does not have to take back the house. The bank does not have to settle or negotiate with you. The bank can just wait and wait. The law does not require any speed on their part. The bank can cash in on the private mortgage insurance. The bank can get a foreclosure judgment and then just sit on it waiting for the property values to rise leaving you in limbo. If no one bids on the house at the foreclosure sale the bank can buy it back for $10 ($2000 in my case). The bank can send you a 1099-C cancellation of debt for the difference ($180K) which you have to claim as income on your taxes (then if it is your primary residence you can use the temporary deduction that will expire in 2014). The bank can then pursue you for the difference with a deficiency judgment (yup the same $180K plus interest and fees so its more like $250K less the $2K ), And last of all the bank can sell you home as a bank owned property (sold mine for $125K and keep the profit.) So the bank gets 25% from the PMI $50K, write off the loss with interest and fees of $250K giving them maybe a net income of $25K, and still chase you for the rest of your life for the $248K. And that is all legal. I will forever owe that $248K. Oh yes, AND they got a government bail out. Please STOP feeling sorry for the banks!!!! How about a little kindness and understanding for people who bought at the wrong time at the height of the bubble, especially in the most overheated markets. We lost everything. Walk away or not, the die was cast when the bubble burst.
I forgot to mention that the bank also gets the profit from selling it.
So roughly, 50K + 25K + 125K = 200K on a 187K original loan. AND still chase me for $248K. It’s insane how much they profited.
Debt welchers are very admired. Your comments and others makes me want to borrow a boatload and stick it to the banks of things don’t work out either. But I feel bad still making other people pay for my choices.
Check out this post: https://www.financialsamurai.com/why-debt-welchers-are-admired/
So much wrong with that article I hardly know where to start. I AM that person who always does the right thing. I never missed a payment on anything before or after. Bad things happen to good people. Lucky the writer was wealthy enough to afford a $2777 per month mortgage payment. Obviously he felt he could weather the storm. Don’t know how much his value dropped, but probably not 75% like mine. My mortgage payment was $1400. I could afford the payment but I could never afford to sell, EVER. I don’t have $100K to cover selling at a huge loss. I am close to retirement and that would nearly wipe me out. Having a home that would cost me my life savings if I ever had to move was a huge stressor. The bank did not want to negotiate AT ALL. I tried to do right by them by asking to work with me. Better for them to get something rather than nothing. (Naïve on my part, see my comments above. They knew they held all the cards.) After all, they approved the value of the house too. How would you feel if you bought a car for $70,000 and drove a car off the lot and the next day it was worth $20,000? The lender would be thinking they were very smart, but I bet you wouldn’t be too happy. Maybe you intended to drive that car until it dies anyway so you wouldn’t care. Most people do not buy homes intending to live in them until they die. Most people expect to be able to sell. Worse case you come out of pocket a little, but $100K, your life savings? No. My home devaluation was extreme. There should have been acknowledgement that something went very wrong and a willingness to negotiate down the principle. As for the bible thumpers (and I love the Lord) they should read and meditate on Deuteronomy 15. Please understand that I agonized over my decision. It was one of the worst times of my life. I do care about other people’s thoughts. What I see is that some people are resentful and judgmental even hateful. I think that is because they are not happy about their decision to do the right thing, the moral thing when they see people like me getting a “free pass” it seems like I am getting rewarded for doing wrong. I think the people you should be resentful to are the bankers who have so much and who should be more understanding and giving to people who by no fault of their own find themselves in difficult situations. The housing bubble was in so many ways worse than even the market bubbles because it put people out on the street. Where was anyone’s concern about that? I don’t believe that God would have sided with the bankers. If you can afford to absorb the losses to your equity, then you can decide to stay in your underwater home and keep paying. But if you can not feel compassion for others who are in worse situations that you, then, at least please let it go and stop harboring ill will toward people who felt they could never recover from the huge losses and decided to walk away and pay the consequences, which also are severe. We all were affected by the same economic event, sad that instead of polarizing on the issue, we couldn’t have all worked together and created solutions for the greater good.
I lost 7 properties and paid until my money was all gone, renters stopped paying rent, vandalism and criminals who trashed properties also decimated me financially….but I kept paying and kept paying, I had one house to fall back on and the bank from hell, Chase messed with my mortgage and refused to fix it or give an accounting, now they stole it. I say be careful, be very careful.
The banks are not acting honestly or with respect to us and now they stole my last house. I lost the equity I built and am soon to be in the street at age 60…..never had anything but perfect credit. Impossible to rebuild and very sick. I agreed always we should pay debts but the system is broken and the banks are crooked today. The bible also warns to not be in debt in the last days. We are here folks.
But yet, i bet you take advantage of all the Tax Return laws to maximize your check from the government every year. It’s immoral people like you and all your tax loopholes that are driving this country into the ground.