In this series, Underwater on Your Home?, I describe six possible options available to you if you are underwater on your home. This is part five of the series.
Option #5: Walk Away / Foreclosure
One in every 605 homes received a foreclosure filing notice in May 2011, says RealtyTrac. In some cases, homeowners struggle until the very end to catch up on their mortgage payments and save their homes. But others just walk away.
About six months into his newly modified loan, Javier Gonzales (whose story begins in the part one of this series) started falling behind on his payments again. He was trying to modify the other loan without success, and credit card debt had started to pile up as well. He realized he was in a losing battle. Surfing the Internet, he came across a website called YouWalkAway.com. He used their interactive calculator designed to help homeowners evaluate whether it makes financial sense to walk away from their home and rent instead. “At that point the home (value) had gone down to half of what I owe,” he discovered.” In 15 years I would be even at equity and in the process I would pay $1.1 million. So I just stopped paying.”
Though the term “strategic default” is often used to describe homeowners who stop paying in a mortgage when they can afford to continue making payments, it can be misleading. Jon Maddux, CEO of YouWalkAway.com, says that many homeowners have exhausted other options by the time they think about walking away. It’s not an easy decision for most of them. But the question he says needs to be asked is “whether having the title ‘homeowner’ is worth paying good money after bad for the next ten to fifteen years.”
Walking away from a home may not always be as simple as it sounds. There may be financial, legal and tax implications. In most states it takes time for lenders to foreclose, though, and that can be to the homeowner’s advantage. Lender Processing Services has found that over 33% of loans in foreclosure have not made a payment in over 2 years.
Maddux tells owners not to just pack up their bags and leave. “It’s important not to abandon the home,” he says. “Even if you abandon the home, it’s still your liability.” Homeowners who move out should make sure their insurance is updated to reflect the fact that it is vacant, for example. Homeowners should also consider keeping up with homeowner association dues or risk foreclosure by the HOA in some states.
“We advise them to stay in the house as long as they can until the property is transferred back to the lender or to the investor who bought the house. They need to hunker down and save money or perhaps pay off other debt.” Many of YouWalkAway.com’s clients leave their home with little or no debt outside the mortgage, and enough savings to rent a new place to live.
Legal Liability & Deficiency Judgments
Walking away from your home may not mean your problems are over, though. Depending on the type of loan and the laws of the state in which your home is located, you could be liable for the unpaid balance plus foreclosure costs. Very few lenders are suing on deficiencies, says Maddux. “We have over 6000 clients and we’ve only seen 15 – 20 deficiency judgments or lawsuits,” he notes.
But debt negotiation expert Charles Phelan warns that doesn’t mean the former homeowner is out of the woods. The statute of limitations can be several years in many states and he predicts that attempts to collect deficiency judgments will intensify as servicers and lenders start working through the backlog. He advises homeowners to put it behind them by settling their second mortgage for less than the full balance.
The lingering threat of a potential lawsuit is one reason why it’s a good idea for a homeowners to meet with a bankruptcy attorney if they’re thinking about letting a home go into foreclosure. Filing for bankruptcy may wipe out or reduce those balances. At a minimum, the attorney can explain what the lender can and cannot do to try to collect a deficiency.
Another good reason to consult a bankruptcy attorney? Taxes. You may owe taxes on part or all of the forgiven debt if you don’t quality for an exclusion such as the one offered under the Mortgage Forgiveness Debt Relief Act or because you are insolvent. Debt wiped out in bankruptcy is not taxed. Timing can be everything, however, so it’s a good idea to meet with a bankruptcy attorney before your home is foreclosed upon.
As far as your credit is concerned, foreclosures, short sales and bankruptcy are all very damaging. The impact they will have on your credit scores depends on how strong your scores were before you gave up your home. Over time, your credit will recover as long as you focus on building and maintaining positive credit references. Keep in mind, though, it may take longer to get certain types of mortgages after a foreclosure, short sale or strategic default.
In her book The Homeowner’s Guide to Surviving Foreclosure, attorney Teisha Powell urges homeowners to be proactive and seek out the help of an attorney who can help them negotiate away a deficiency or file for bankruptcy to eliminate that possibility. A judgment can be “a nightmare,” she writes. “I get a lot of calls from crying borrowers because their bank accounts are being seized to pay for the judgment.”
As for Gonzales, he says “I’m done.” The area where he is renting a home now is a little rough, but when someone asks him if he feels safe, he says absolutely. “I’m not scared of the neighborhood, but I am scared of these banks.”
Other options for homeowners with “underwater” mortgages:
- Underwater On Your Home Option 1: Stay and Pay
- Underwater On Your Home Option 2: Refinance
- Underwater On Your Home Option 3: Get a Loan Modification
- Underwater On Your Home Option 4: Short Sale
- Underwater On Your Home Option 5: Walk Away / Foreclosure
- Underwater On Your Home Option 6: Bankruptcy