Home Foreclosure – Should I Walk Away From My House?

by on January 23, 2013Shannon O'Brien

Jane Schrodinger was aghast when she learned that she was $80,000 underwater on her “sad little condo” in Washington state. After all, she purchased the condo back in 2008, when prices were low and interest rates were attractive enough to make buying more sensible than renting. Smart move, right?

home foreclosureAs we all so painfully learned, prices continued dropping until she ended up where she was – deep underwater on her mortgage. We can’t call Jane a “distressed” homeowner, though. Despite the fact that thoughts of her situation kept her up at night, she was perfectly capable of paying her mortgage every month.

She decided, however, to walk away from her obligation. Not only did Jane fully plan this walk-away, she chronicled the process in a series of blog posts.

Strategic Default

Jane is one of 68 million Americans who see nothing wrong with walking away from their agreement with their lender. This is a process known as “strategic default” – a sanitized name for something that lenders call “jingle mail” (because they typically receive the house keys in the mail) and many others call downright wrong.

Strategic default is, simply, planning (that’s the strategic part) to walk away from the obligation one holds to pay as agreed on her mortgage loan. That’s the default part. It differs from economic default in that the homeowner has the money to pay her mortgage, she just decides that it’s more beneficial not to.

Studies show that there is a certain sub-set of the population that is more prone to strategic default than others. As one might expect, the list includes homeowners who have been denied a loan modification, those who perceive their lender as being evil or greedy, homeowners with previous defaults, homeowners under the age of 45, and males. Surprisingly, a rather substantial portion of strategic defaulters are high FICO scoring, high net worth individuals – the kind of buyers lenders love to lend to.

Should You Walk Away?

While this conversation was more pertinent two years ago, an estimated 7 million Americans remained underwater on their mortgages at the end of 2012. That number is down 4 million from 2011. Many homeowners who could afford to stay in their homes decided to ride out the market and are now beginning to see the light at the end of the tunnel.

If you’re one of those who can pay the mortgage and you’re considering a strategic default, you may want to think about the following:

Your credit score – Jane had a near-perfect credit score when she made the decision to walk away from her loan. During the process she worked diligently to protect her score by obtaining new credit cards, using them and paying on time. That said, the American Bankers Association claims that a foreclosure will impact your FICO score by 100 to 400 points. Furthermore, the public affairs director for FICO, Craig Watts, says that FICO looks at foreclosure as “one of the stronger predictors of future credit risk.”

Buying again – Jane is fortunate that her husband Cory wasn’t a co-borrower on the condo. She happily walked away from the home knowing that they could and would buy again shortly after the default. If you aren’t in a similar situation, you may want to consider that you will be ineligible for a Fannie Mae mortgage for the next seven years. The ABA suggests that you kiss off your chances of buying another home for the next three to seven years.

Tax liability – One of Jane’s biggest concerns was the possible rescission of the Mortgage Forgiveness Debt Relief Act at the beginning of 2013. While congress has decided to extend the act, you may still be liable for state taxes on the amount of debt forgiven in the foreclosure.

Deficiency judgment – When you walk away from your mortgage obligation and the lender forecloses on the home, it will determine the difference between the amount of money you still owe on the home and the amount it was able to realize at auction or sale.

This amount is known as the “deficiency,” and, depending on which state you’re in, the lender may go to court to obtain a deficiency judgment against you. Not only will the amount of deficiency be included in this judgment, but you could also be on the hook for attorney’s fees and the costs incurred by the lender during the sale of the home. In some states, according to Forbes, lenders may also add penalties and interests to the amount owed.

Phantom title – Strategically defaulting homeowners who have lived rent- free for the period of time leading up to the lender deciding to foreclose typically decide to abandon the house when they receive notification that the lender has the foreclosure judgment and is moving toward auctioning the property. Off they go into their new life, pockets full of unpaid mortgage money and blissfully unaware of what is known as the “phantom title.”

Should the bank decide, for any number of reasons, to cancel the auction, title remains with the homeowner. Although the lender is required to notify the borrower that the house was not sold, most strategic defaulters don’t leave a forwarding address and, thus, fail to receive the notification.

What this means is that while you may think you’re finished with the house, it remains your legal responsibility. Phantom title holders may find their wages garnished or their tax refunds seized to reimburse municipalities for moneys spent having to maintain the house or complete repairs due to vandalism. According to Reuters senior correspondent Michelle Conlin, some of these items include “graffiti-scrubbing services, demolition crews, trash removal, gutter repair, exterior cleaning and lawn clipping.”

If the lender can find you, you just might get a court summons or the threat of a jail sentence.

Current housing market – Finally, before you decide to walk away, take a look at current housing market trends. There is a lot of optimism out there, according to the results of Fannie Mae’s December National Housing Survey, especially when it comes to mortgage rates and home prices.

“The highest share of consumers in the survey’s two-and-a-half-year history expect home prices to increase in the next 12 months,” said Doug Duncan, senior vice president and chief economist of Fannie Mae.

Anecdotal evidence from real estate agents across the country shows that buyer enthusiasm is high while housing inventory is low: the perfect setup for a healthy rise in home prices.

In a nutshell, if you are considering a strategic default, think long and hard on the old motivational quote: “Don’t quit before the miracle.”

{ 14 comments… read them below or add one }

ryan walters March 20, 2014 at 10:34 am

I have tried working with my lender. Chase. Since 2012 one application after another .. they had stalled and delayed . Always requiring more modification. Paper work. So at this point yes they can foreclose

Reply

Garry February 5, 2014 at 10:51 am

Looking for walk always or people that want to get out of there mortgage

Reply

Bob March 23, 2014 at 9:02 am

Gary, what are you looking for?

Reply

Julie March 24, 2014 at 10:57 am

In what state r u looking for people that need to get out of their mortgage?

Reply

Peggy January 12, 2014 at 7:21 pm

Ed I have looked into all that you just said. They wanted me to pay over 300,000 for my home. Then on final payment pay a balloon payment of 25,000. Well if I don’t have that 25,000 then they get my house for a mere 25,000 after I paid all that money to them. Not gonna happen. So I quit paying and they are now foreclosing on me. I have found all kinds of fraud. Like for example, did you know when you go sign for your house. You are actually the seller. Yes, you actually sell the home to them, and then pay them for it. They don’t own the house nor have they ever owned the land. Now if someone builds you a home. You owe that builder for materials and work done. But a bank does not own your home now or ever.

Reply

Anna V November 18, 2013 at 11:15 pm

Ours is a combination. The Bank (the servicer) then the Loan Guaranteer (would that be who provided the funds?) refused to work with us when I called a year in advance with warning our income had decreased since 9/15/2008 and while we were still making payments, it would become troublesome soon, so, can we please get the interest rate modified while we still have time? Wow. What I game I uncovered…still playing strong in mid-2012!. Between the US Bank not even knowing what kind of mortgage we had (which didn’t turn out to be the one our paperwork seems to indicate we had, incidentally), and, putting us through the Bank plan of “lets ruin their credit so they don’t have any leg to stand on their already underwater, low equited mortgage”…then…trying to get any communication out of the Wisconsin Department of Veterans Affairs…who, it turns out are the Economic Hit Men enforcing their Goldman Sachs Bond Loan which they had marketed to us as a VA Loan only through Wisconsin…well…anyway…the price for being a Veteran and getting married and buying a house before even working on the kid? Yah. The house. So, at least the foreclosure judgment wasn’t issued on Veteran’s Day…they managed to wait until 11/14/2013. Anyway, don’t bother with the Wisconsin Department of Veterans Affairs if you are a veteran and ever really need anything…they look great on the internet…but…they would rather go through all of the time and money it takes to foreclose on a Veteran’s mortgage than find a way to give themselves twenty-five more years of interest from that very same Veteran. We are happy to help the WDVA further defund themselves, and, we anxiously await to see if we are going to have to bankrupt or not. So exciting…Living the Dream!

Oh, and, until it happens to you? Yah…don’t be thinking you are exempt…I was hoping we were…we almost rode it out until the very end….I was doing money magic & pulling funds out of my butt and doing all the tricks I learned while working for a bank…until the last overtime got cut… No one wants to help. I’ve made plenty of trouble…even contacting each and every politician… Even other Human Citizens have made it very clear: Well it is Your fault, you signed the bottom line.

Okay…well then…karma. Just another 836 sq ft 76 year old house that needs wall insulation and brand new windows on the market…cheap! for around $135,000…more than we actually owed on it now…LOLOL

Reply

l johnson October 23, 2013 at 8:56 am

My neighbor kept stealing ground through the process of pouring footers, extending roof beams and pushing out walls from the inside. The county documented the expansions, but the codes and zoning officer refused to require the expansions to be removed. I paid for a survey, title report and provided the bank with the all the docs, as the neighbor created a zoning hardship — the back door is not usable.

The bank sent the documentation to every imaginable department and is now contemplating if the property is worth defending or to be charged off. According to the bank I am to be held liable for the debt even though I did everything possible. I am not in default–did not stop paying while the bank tried to figure out recourse….If the bank chooses not to act to protect its asset how am I liable?

Reply

Pp October 6, 2013 at 12:49 pm

I need a question answered… I have a home with a mortgage held by a developer, she is a tyrant and made our paradise miserable! We hate coming home! We were thinking of buying another house and deeding this one back and be done with her. Since the mortgage is privately held, it’s not on our credit report and would not affect us. Am I correct in thinking this is an option?

Reply

Stefano B. February 14, 2014 at 6:50 pm

Hello Pp,

I can clearly see the frustration you had with this developer. However, I need more clarification on what you mean by “deeding this one back”? Deeding how and to who?
If you actually mean to give a quit-claim deed to the mortgage lender and walking-away, depending on the terms you have with your lender, He/She might say OK (assuming they are really private/not a large bank).
Otherwise, you may have to sell the house (if is not upside down) or rent it to cover the monthly payments to the lenders.

Reply

Gwen G October 5, 2013 at 7:37 pm

Finding this information, especially the well-thought out explanation by Ed Smith, is a watershed moment for me. My husband and I are both teachers. He is legally blind, but through accommodations he keeps going. We are so scared and so tired of trying to make ends meet. We are current on our mortgage – barely. We want to sell our house, but it needs a roof, the HVAC units need to be replaced, and there are many other deferred maintenance projects that my husband can’t repair due to his vision loss.

So our house is not sellable yet we don’t have enough money to prepare it to sell. On top of that, we are supporting our son and grandson, who is disabled. Our house is currently worth almost exactly what we owe on it – we have a first mortgage and a second interest-only line of credit mortgage. We feel desperate. Does anyone have advice for us?

Reply

Stefano B. February 14, 2014 at 7:03 pm

Gwen G,

As a real estate builder and investor, I can surely say every home has a value (even with bad AC, roof, etc…). Even though you and your neighbors may think otherwise.

There are a few ways out of this:

1) You can rent out the house for a reduced rent in exchange for the renter to fix up the issues. (You will have to give him a fair rent so he can cover his repair costs. But the good side is that you don’t take a dime out of your pocket).
You will have to rent a place somewhere else (likely smaller than where you are now) and with the proceeds from the rent payment of your home, you can pay the mortgage.

2) Even though is quite a challenge, you may try. NEGOTIATE WITH THE BANK.
How? Here is what you do, you tell them of your hardship (have proof at hand) and say if they don’t work things out, you have no other option than “bankruptcy”.

3) If the ideas above fail, you can file “ch. 7 bankruptcy” and have the mortgage discharged. (You don’t keep the home! just to clarify. All you get is the debt dismissed). This is a last case option.

Lastly, if your home is in Miami, FL or within the tri-county area…I may be able to help you further.

Reply

Candice September 28, 2013 at 2:35 pm

You have summed up exactly what I am feeling but couldn’t find the words to describe. I did not make a mortgage payment this month for the first time in six years and I, too, have perfect credit. I felt ashamed and disgusted with myself. Thank you so much for sharing your experience so that me and others out there don’t feel alone.

Reply

Mark Moore May 22, 2013 at 4:15 pm

Ms. O’Brien, your article was amazingly good. Most articles tend to be heavily lopsided towards “default is just evil” or “stick it to the banksters”. The truth is closer to the middle. Thank you for articulating a more balanced view.

In your discussion of “phantom title”, I believe your readers should take an even stringer position. The property is rightfully theirs until *after* foreclosure. The only thing that changes at foreclosure is who is on title.

Readers should ask themselves what they would have done a year or two ago before they stopped making payments. Would they allow strangers onto their property? Would they allow strangers to intimidate them and their family members in their very own home?

My guess is of course not! They would ask the strangers to leave and to leave them alone. If the strangers persisted, the homeowner would call the cops.

If you are pre-foreclosure, you are EXACTLY the same legal owner of the property with the *exact* same rights to peaceful enjoyment of your home.

If you would not let people harass you normally, why on earth would you let them do it now, while you are still the 100% legal owner???

Even after foreclosure, the new owner has no right to harass, and they must follow a well defined eviction process which will give you plenty of time to vacate in an orderly manner.

Homeowners should not vacate before the foreclosure is complete because of the risk of phantom title, but also because it’s THEIR house still.

Reply

Ed Smith January 27, 2013 at 8:30 pm

When homeowners are late on mortgage payments, the banks scream “default” as if missing payments is a crime. In truth, it is the banks that are often the parties that are, actually, committing crimes – and it is about time they were held accountable. In fact, the current situation is a national disgrace that should no longer be handled with the “deferred prosecution” of bankers (i.e. a voluntary alternative to adjudication where a prosecutor agrees to grant amnesty or immunity to the corrupt bankers in exchange for their agreement to fulfill certain requirements). It is an absolute outrage that any homeowner, that is willing to pay a reasonable and equitable mortgage payment based on current circumstances and economic conditions, should lose his or her home by a foreclosure shown to be the product of a fraudulent investment scheme on the part of, or known by, the foreclosing bank.

Consider the following and you be the judge:

1. Millions of homeowners have been foreclosed and lost their homes for being in default (i.e. missing mortgage payments).

2. A vast majority of these foreclosures took place in circumstances where the banking community, based on knowingly inflated property values and interest rates, pooled the homeowner’s mortgage with thousands of other mortgages – and then sold interests in those “securitized” pools of mortgages to investors. In doing so, the financial community made extraordinary amounts of extra money on the large income streams of mortgage payments generated by that pooling of mortgages.

3. In other words, it was the homeowners’ inflated payments that were supporting a wind-fall of extra banking profits and Wall Street bonuses.

4. However, the homeowner never even knew he or she was being used as an “investment pawn” to fuel what is now being exposed as, perhaps, the ultimate Ponzi-scheme that has all but destroyed the U.S. economy.

5. In most cases, the scheme was put into motion by and through the advent and use of a privately-owned company called “Mortgage Electronic Registration Systems, Inc.” (an invention inspired and organized by the country’s largest banks and mortgage finance firms to, allegedly, improve the servicing of mortgage loans by enabling their electronic transfer and tracking).

6. In fact, millions of borrowers showed up at the closing of their mortgage loans and were never told, nor realized, that they had (through, in most cases, one or two lines of small print in the beginning of only the mortgage document) given their mortgages to this “all-powerful” monster called Mortgage Electronic Registration Systems, Inc. that has been at the center of foreclosure controversy throughout the United States for the past several years.

7. Since it may not be legally possible for a mortgage to be modified after it has been transferred by Mortgage Electronic Registration Systems, Inc. to a third party (as the so-called “nominee” for the original lender), many homeowners are being further deceived by a host of government-endorsed (but knowingly disingenuous) mortgage modification programs which were, and are, merely “adding insult to injury” as schemes to extract more money out of homeowners under the guise of offering a permanent mortgage modification. These programs, on the whole, have been a failure.

8. Thousands and thousands of “applicants” have learned the hard way that the essence of a “mortgage modification application” is to (a) have the homeowner agree to being totally at fault, (b) extract financial information from the homeowner, (c) extract money from the homeowner while guaranteeing little or nothing, and then (d) ultimately declining the application; all orchestrated under unmercifully delayed and unresponsive processing procedures.

9. The ugly result of these circumstances is that, truth be told, the banks (especially in their capacity as “mortgage servicers”) know that a vast majority of the chains of title related to their mortgage loans are broken, and the preferred approach is simply to foreclose them to “start the chain of title all over again” with a “new” foreclosure deed which serves to erase the effect of the broken chain of title to the given property which, if properly contested and challenged, may very well have made the subject defaulted mortgage one that could not be legally foreclosed.

10. Tragically, both the state and federal regulators, as well as many Courts, are buying into the notion that America should be a “government of the banks, by the banks, for the banks” and not the government originally envisioned by Abraham Lincoln who, in the last section of the Gettysburg address, defined the nation’s task and objective that a “government of the people, by the people, for the people, shall not perish from the earth.”

The bottom line here is that tens of millions of homeowners (many of which are current on their mortgage loans and have no idea that they’ve also been duped) have been victims of intentionally deceptive and unfair trade practices which are illegal, if not criminal, in nature – and the deck is stacked in a manner which makes it all but impossible to do much about it absent very substantial resources to wage a court battle.

In the final analysis, the U.S. foreclosure crisis hardly exemplifies, under any stretch of the imagination, an application of the core principles that provide the foundation for a representative democracy.

Given these circumstances, the question is who is going to stand up and do something about it. Most don’t want to do anything for fear of political or occupational retaliation.

Reply

Leave a Comment