Just walk away………..
A younger generation might hear Kelly Clarkson sing her song, Walk Away, while an older crowd may relate that phrase to lyrics from The Left Banke hit of 1966, Walk Away Renee. Unfortunately, “walk away” is also the lament of many current homeowners holding mortgage obligations that far outweigh the current value of their property. In fact, about 588,000, or about one in five borrowers who default, have done just that and walked away from their homes and mortgage obligation. They have decided that it’s better to cut losses than keep pumping cash into an asset that has decreased dramatically in value with little chance of that purchased value returning in the near future. After all, why would anyone want to stay in a home that was appraised for considerably more than it’s now worth? Those mortgages are considered upside down or underwater. A “walk away” or strategic default is much more likely in the housing bubble states of Florida and Nevada than in my area of western NY, but it happens in NY as well.
Job loss is a major reason for walk-away defaults, since banks do not count unemployment compensation as income if you are trying to refinance for a lower payment. I’ll have more on unemployment and walking-away later in the article.
Before I go any further, this isn’t a recommendation to walk away from a mortgage obligation. Consult an attorney before deciding if a walk away default is the right move for you.
There are both benefits and downsides to the “walking away” or strategic default approach.
The main benefit is that you can start over without the burden of paying for a home that is upside in equity, while the main drawback is that your credit score takes a hit for a few years.
I hope all is well. I thought you might want an update. About 90% people who sign up for our service now days, are “A” paper good credit borrowers who can afford their mortgages, but they just don’t think it makes sense to keep paying. The rest either already got a loan modification and didn’t get a principal reduction or just really can’t afford to own any longer. I wish you the best!
I had some questions about walking-away so I asked Jon Maddux, CEO of YouWalkAway.com, if he would like to discuss his company’s services with me and he readily agreed to do so.
Mr. Maddux is a thirteen-year real estate, financial and mortgage professional who saw in 2007 that the housing bubble was about to pop and realized that homeowners and many real estate professionals knew very little about the foreclosure process. As home refinancing became more difficult, underwater homeowners were left with few affordable options. Mr. Maddux realized that there was another option that could help stop the financial bleeding of underwater homeowners and that was to just walk away.
Over the last two years Mr. Maddux and You Walk Away have helped over 4000 clients make the decision to walk away from a financially crushing mortgage. Most of his clients are in California, but he has clients throughout the country, including New York. Many who walk away are upside down $100,000 or 30% (the amount borrowed is $100,000 or 30% more than the home is now worth).
You Walk Away appoints you an attorney that is familiar with your state’s mortgage laws and walks you through the process while covering the plusses and minuses of walking away. You make the final decision after weighing all the information.
Mr. Maddux indicated that walking away is an option for both recourse and non-recourse loans. I found that recourse loans allow a lender to attempt to go after what you owe, even after they have taken collateral. Non-recourse loans don’t allow the lender to pursue anything besides the original collateral (the house in a mortgage loan, for example). New York is considered a one-action state (a bit of both recourse and non-recourse) “In New York, for example, a lender must choose between the actions of foreclosing on the property or suing to collect the debt.”
Update 12:20:35: I asked Mr. Maddux what percentage of his clients contacted him after they became unemployed and he said that at one point about 45% of his clients said that unemployment was the main reason to consider a strategic default. Currently about 20% of those who walk away say it’s because of unemployment, while most walk away because they are upside down on their equity.
Below is a list of walk-away plusses and minuses that should be considered:
- You can live in the house for 6-12 months without paying a mortgage, which allows you to pay down any other outstanding debts, such as credit cards. If your credit cards are maxed-out, your credit score is likely not much higher than 600, but if you can pay off that debt, your credit score can improve to 780.
- Foreclosure – walking away – can be less damaging to your credit than bankruptcy. A foreclosure is one mark against your credit score. Mr. Maddox said that a foreclosure is like having an “F” on one trade line of your credit report, but if the other items are all current and your other debts are paid off that would be like having an “A” on the other sections of your credit report. Credit can be harder to establish after a bankruptcy than after a foreclosure.
- Some government loan programs such as FHA will allow you to purchase a new home again in as little as 3 years after a foreclosure (if there was a hardship)
- None of Mr. Maddux’s walk-away clients, to his knowledge, have ever said that they lost a job, couldn’t rent, or that their lives were ruined because they walked-away.
I want to thank Mr. Maddux for his time and expertise.
Another piece in USA Today takes a less positive stance on walking away:
“It’s increasingly a more important factor driving the foreclosure crisis,” says Mark Zandi, of Moody’s Economy.com. “As we move forward, the job market will stabilize, and the big thing will be strategic defaults. People are going to determine it doesn’t make financial sense to hold on to their homes. That’s going to be a significant problem. Strategic defaults mean foreclosures could be high for a long time.”
It’s not just economists who are concerned about strategic defaults.
The mortgage unit of Citigroup says one in five borrowers who defaults does so willingly, even though they’re able to pay the mortgage. “It’s a very large number, and it’s a very, very significant risk to the housing recovery,” says Sanjiv Das, CEO of CitiMortgage, adding that new government programs to curb strategic defaults may be needed.
“The most disturbing aspect of this is that it’s becoming acceptable to do,” says Joel Naroff, an economist with Naroff Economic Advisors. “What does that mean down the road for housing and the economy if people are happy to walk away and destroy their credit? They’re saying, ‘Why pay a high amount if they can get something, even a rental, for less?’ “
Because of the time and expense involved in completing a foreclosure, borrowers who decide to walk away often wind up staying in their homes for months after they stop paying their mortgage.
In most states, lenders can go after homeowners for past-due payments, but many fail to take such action when borrowers abandon their properties, because the legal costs are so high.
University of Arizona law professor Brent T. White has a more practical view of walking-away:
“The government was encouraging people to buy, telling people that it was a good investment to buy. Real estate agents pushing people to buy, banks pushing people to buy,” White said in an interview. “And then when the market collapses, the homeowner alone is left holding the bag and forced to bear the burden. And so I think we need to talk about the disproportionate burden that is falling on homeowners.”
As of this summer about 15.2 million mortgages in the U.S. were “upside down” — meaning a borrower owes more than the property is worth — show numbers from First American CoreLogic, which tracks housing data……….
“Everyone is concerned about what happens if people actually do walk. The market is going to crash, and maybe that’s the case,” White said. “And maybe not. Maybe if people start to walk, lenders would start to modify their loans, and we might have decreased foreclosure rates.”………..
“We are propping up the market on the backs of the middle class,” he said. “If we are going to prop up the market on the backs of the middle class there needs to be some kind of bailout for homeowners.”
And if you are concerned about the morality of walking away, take a look at the following points:
Avalon writes: “Mish, I’m very disappointed that you don’t think people are morally obligated to try to honor their agreements. Just because it’s legal doesn’t make it right.”
Let’s explore the issue of moral obligation with a series of questions.
- Where was the moral obligation of those willing to lend money to someone who they knew could not possibly afford the house?
- Where was the moral obligation of those willing to lend money to someone when the lender did not care how overpriced the home was?
- Where was the moral obligation of those willing to lend money to someone when the lender explicitly knew how overpriced the home was?
- What are the moral obligations homeowners to provide for their family the best legal means they can?
- Suppose someone could “afford” to make payments but at the expense of say health insurance or better schools? What’s the moral obligation on that person?
- Does moral obligation only run in one direction?
- Should someone have a moral obligation if he signs a contract with a thief?
Generally, people feel a strong attachment to and take pride in their homes, so while people are walking away from their contractual responsibilities, most do so reluctantly – as a last resort. And why shouldn’t they walk away? Although many home buyers were participants in the housing bubble, they weren’t responsible for its creation. Banks, investment companies (Bear Stearns types), insurance companies (AIG ring a bell?), ratings agencies, mortgage brokers, home appraisers and developers, ignored their fiduciary and client responsibilities. Regulators walked away from their responsibility to regulate the entities that abused the system; the SEC and Madoff is just the highest profile example. The Federal Reserve walked away from sound monetary policy by keeping interest rates at historically low rates for too long, which led to a frenzy of “investment” home buying and building. And lastly, but most importantly, our elected representatives ran away from their responsibility to oversee and manage the people’s business in order to curry favor with deep pocket lobbyists for the abovementioned businesses. Also, they dismantled Glass-Steagall legislation, which since the Great Depression has helped curb highly speculative banking activities and placed a wall between commercial and investment banking. And Congress turned a blind eye to systemic problems at government mortgage programs Fannie and Freddie.
Walking away from financial responsibilities, and the American Dream, is a very difficult decision for most, but it may be the most appropriate decision.
Consult an attorney before deciding if a walk away default is the right move for you.
For some additional information:
YouWalkAway: Deed in Lieu of Foreclosure FAQ’s
You may enjoy the following James Keelaghan tune called House of Cards, which was sent to me by the fine people at Patrick.net, where you can find plenty of up-to-date information about the continuing housing crises: