Walking on your mortgage

[PerryChase]

I know this person who made this terrible mistake of buying a townhouse in 2005. She’s getting close to being underwater.

I remember people saying on this forum that you could walk from your mortgage and give the house back to the bank. Here are my questions:

1. I understand that you can walk only if the loan is the original purchase loan and no refinancing or HELOC was taken out after the purchase.

2. I understand that the bank cannot go after you for any amount still due after they take the house (unless your had refinanced or gotten a HELOC).

2. What are the repercussions in terms of your credit history if you walk? Does the lender report that as a foreclosure on your credit report? Or do they take the house back and consider the loan paid off?

3. Say you have a $700 mortgage. There’s no good economic reason to keep on paying that mortgage if you could go out and buy a nicer house for $500k.

What do you guys think? Anyone here has first hand knowledge of what happens in such as case?

[Daniel]

My understanding is that: 1. yes, they can walk, 2. the bank takes the property, but can’t take anything else, and 3. a foreclosure will be on their credit report. When people are in this situation, they have the choice of either taking a hit to their credit score or taking a hit to their wallet (if they continue feeding the gator). If faced with these two bad options, I would choose to walk, but I have a feeling that most people would choose to stay, as long as they can make the payments.

[Carlsbadliving]

As far as I know, if you have that 700k mortgage and the bank unloads the house for 500k, you will be taxed on the 200k as if it were income. That’s no small piece of change.

[vcguy_10]

I have a friend in a similar situation. I wonder what happens when you have those piggyback loans: one for 80%, then another for 20%… I wonder if the bank can still go after you for the second loan.

My friend is a young woman who bought in San Bernardino county in Feb or Mar 2006, and she was motivated almost exclusively by expected future appreciation. (I didn’t know her then). She’s an immigrant, and I wonder what would happen if she tells the bank, “hey, I can’t afford the mortgage payments any more and I’m going back to my country for a while; here are the keys, and good bye.”

[Doofrat]

From a prior post by me:

From what I understand, you can’t just walk away from the primary loan either. Say you owe $600,000 on the loan and you walk away. The bank forecloses and auctions your previous home for $480,000. The bank cannot come after you for the $120,000, but I believe they are required to send the IRS a 1099-C for the $120,000 of cancelled debt which is considered a gain to you.

See requirements for 1099-A and 1099-C in regards to property abandonment and debt cancellation:

http://www.irs.gov/pub/irs-pdf/i1099ac.pdf

[waiting hawk]

My dad and both neighbors walked after buying a “2nd homes” and then saying “bye bye” to their first in 1994. What happened to us in 1990’s is why I’m so much involved on the idea that homes DO lose value and not go up forever. It was a great decision imo. The credit is clean and saved a ton. Also the appreciation gains from this bubble is better because everyone’s new home was bigger, cheaper, and in a better location (now with clean credit). win win win.

My website tracking Temecula and South Riverside County

[PerryChase]

What were the consequences for your dad in terms of tax and credit history implications?

[waiting hawk]

Nothing at that time. No tax and he didn’t need credit. He even used money orders for the time after on all bills and payments.

My website tracking Temecula and South Riverside County

[sdrealtor]

WH,
Sounds like he spent alot of time in 7-11’s getting money orders. Hope he likes Slurpees;)

[Chrispy]

7-11, there’s something about those spoon straws….

I had a friend who had a condo in Mission Valley in the early 80s. She quickly became upside down and walked. She claimed no consequences but I doubt it… she still lives on very shaky economical ground.

These days, potential employers check your credit history as well as your driving record and criminal history. There is much more transparency as far as credit-worthiness goes. Then, there’s the “looking over your shoulder” factor. Who wants to go through life being afraid to open the mail?

[Anonymous]

Chances are that if you think the worst, in terms of outcome, you’ll probably be pretty close to the mark.

The first blow will be to her credit score – the foreclosure or deed in lieu will trigger a significant drop in her credit score.

The most immediate next event will probably be that she has trouble renting (or purchasing) and will get socked with less than favorable terms. This will occur about the same time that most of her credit cards take advantage of their terms and conditions and move her credit rate up past 20%. This may cascade its way into some creditors cancelling or reducing the amount of credit they are willing to extend to her. She could see an increase in her insurance rates for her car(s) as well as her life, in general, turning into a living hell.

Finally, she’ll have to deal with the tax consequences of the debt liability foregiveness that the lender will turn into the IRS. The only thing that could make this worse is if the State of California jumps on the bandwagon and she will then have entered the 7th ring of hell.

If she is having trouble making her payments or is in a loan that is to adjust any time within the next 5 years she should take immediate action either in the form of refinancing into a better loan or selling the property or mentally preparing for the consequences of the situation.

[Peace]

And remember, bankruptcy laws have changed, no getting out from under consumer/credit card or medical debt so easy anymore.

How many think the Feds saw this coming and preemptively changed the bankruptcy law?

[Chrispy]

The timing did seem fortuitous.

[The-Shoveler]

Nor_LA-Temcu-SD-Guy

Odd the timing of that change. Seems old Greenspan was looking after the banks same as when you could get a 4% mortgage and Greenspan was saying you should get a ARM, never forget that one .

[PerryChase]

Thanks for all the response. I think it depends one how much under water she gets. If she goes say $300,000 underwater, it might be worth it to go out and buy a new lower-priced house then walk away from the old one. Even if one could afford to make the payments, why would anyone want to keep on paying on such an overpriced house. It only makes financial sense to me to let the lender deal with it.

It’ll tell her to talk to a lawyer if the markets really tanks.

[Author]

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