patrick.net

I'm not for or against walking away, but the way these things usually turn out...the biggest losers end up being the people who thought they could get ahead by taking the easy way out.

I walked because, most importantly, I would have been flat broke and not able to pay. I sold the house for more than the purchase price, but I was underwater. Long, stupid story.

Anyway, it never occurred to me just to default on the second while still paying the first, but had I done that, any chance of a short sale would have evaporated quickly. I short-sold the home in '08 for about $850k, and now, based on sales in the area, the place would probably only be worth $450K. Would I still want to be paying for that? No comment. ;)

Do what's best for you, but know all the facts. I may end up declaring bankruptcy over this one day (if the second lender sues and wins), but at this point, I don't care. I would love nothing more than to move on, renting for the rest of my life if I have to.

Bankruptcy is OK, for, after all, what is a credit score other than a tool to just get into more debt? I'm tired of debt.

wow, quite a post. It has the feeling that there's an entire melancholy novel behind it somewhere...

As far as having to deal with a landlord that defaults - due diligence on the part of renters is certainly recommended in times like these. At least in San Mateo County, PropertyShark and the county clerk's office are some good places to start.

As far as being turned down as a renter by a big bank because you're on a black list, I don't think the chances of that are great. Feel free to cite some sort of example of this, but its not as if banks hold grudges. They'll do whatever makes them the most money. If that includes renting to somebody that has a foreclosure on their record - so be it. If they don't pay rent, it has got to be a lot easier/cheaper to evict a renter than to foreclose on somebody. Now, if you've got massive financial issues outside of that foreclosure, any potential landlord that does a credit check might take issue with you.

Walking away (not that I've done it, or even have a mortgage) is a personal decision. Spending time worrying about what everyone else is doing and how it will affect the macro climate doesn't seem wise. Worrying about your grandchildren paying some portion of the bank's losses for your financial mistakes pales in comparison to going to your children and grandchildren for handouts when you eventually default on a property you could never afford.

What "crashes like this" have you witnessed and when? It seems to me that we're in uncharted waters to a certain degree. Hopefully you're not referring to Buenos Aires prices recovering once hyperinflation hit there.

> 2) You will avoid Federal income tax liability through 2012. You will owe State of California income tax on any losses to the lender.

This is only if the lender writes off the loan as a loss, they are under no obligation to do so.

http://money.cnn.com/2010/02/03/real_estate/foreclosure_deficiency_judgement/index.htm

In some states the bank can wait years, till you recover financially, before taking you to court and filing a deficiency against you between the amount they were able to recover selling the house and the amount of the original loan. All you bastards that thought you could walk away scott free cause it was inconvient to continue to pay your mortgage are in for a rude awaking one day, if could be 10 years later, but your paying the bank back one way of another.

TechGromit says

All you bastards that thought you could walk away scott free cause it was inconvient to continue to pay your mortgage are in for a rude awaking one day, if could be 10 years later, but your paying the bank back one way of another.

There is a statute of limitations on suing over a loan default. In California, it's four years. Most other states are around that time, too. They can still pester you after that, but they'll have no legal clout.

The tax consequences from the state will come via a 1099-C which only has to be counted as income if you were solvent (assets > liabilities) at the time of foreclosure. In California, most people who have walked away were so far underwater that they were almost certainly insolvent at the time, and therefore not subject to pay taxes on the forgiven debt. As far as being "blacklisted", that will only apply to those who are seeking loans. And as stated earlier, banks are all about making money with the least amount of risk. If you can save for a 50% down payment, there is virtually no risk to a lender so the foreclosure is not likely to affect you very much. Just save as much cash as possible and avoid the need for loans. You will be fine. And your grandkids will be paying for ALL of the spending going on today. The amount you may save by walking away and looking out for you will be much greater than the negative impact walking away may have on your particular offspring.

stocksjustgoup says

There is a statute of limitations on suing over a loan default. In California, it’s four years. Most other states are around that time, too. They can still pester you after that, but they’ll have no legal clout.

True, but they will wait long as possible to file in the case you don't have money and sooner if you do. I remember one poster here, who had other assets, but felt it was his god given right to get a loan modification from the bank or he was going to walk away because the house was worth less than the mortgage was for. I hope he got his reward from the bank for his short sightness.

No Help in Sight, More Homeowners Walk Away by David Streitfeld
Monday, February 1, 2010 provided by The New York Times

In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.

“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

After three years of plunging real estate values, after the bailouts of the bankers and the revival of their million-dollar bonuses, after the Obama administration’s loan modificationplan raised the expectations of many but satisfied only a few, a large group of distressed homeowners is wondering the same thing.

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

In a situation without precedent in the modern era, millions of Americans are in this bleak position. Whether, or how, to help them is one of the biggest questions the Obama administration confronts as it seeks a housing policy that would contribute to the economic recovery.

“We haven’t yet found a way of dealing with this that would, we think, be practical on a large scale,” the assistant Treasury secretary for financial stability, Herbert M. Allison Jr., said in a recent briefing.

The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.

“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”

Suggestions that people would be wise to renege on their home loans are at least a couple of years old, but they are turning into a full-throated barrage. Bloggers were quick to note recently that landlords of an 11,000-unit residential complex in Manhattan showed no hesitation, or shame, in walking away from their deeply underwater investment.

“Since the beginning of December, I’ve advised 60 people to walk away,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope. They don’t qualify for modifications, and being on the hamster wheel of paying for a property that is not worth it gets so old.”

Mr. Walsh is taking his own advice, recently defaulting on a rental property he owns. “The sun will come up tomorrow,” he said.

The difference between letting your house go to foreclosure because you are out of money and purposefully defaulting on a mortgage to save money can be murky. But a growing body of research indicates that significant numbers of borrowers are declining to live under what some waggishly call “house arrest.”

Using credit bureau data, consultants at Oliver Wyman calculated how many borrowers went straight from being current on their mortgage to default, rather than making spotty payments. They also weeded out owners having trouble paying other bills. Their estimate was that about 17 percent of owners defaulting in 2008, or 588,000 people, chose that option as a strategic calculation.

Some experts argue that walking away from mortgages is more discussed than done. People hate moving; their children attend the neighborhood school; they do not want to think of themselves as skipping out on a debt. Doubters cite a Federal Reserve study using historical data from Massachusetts that concludes there were relatively few walk-aways during the 1991 bust.

The United States Treasury falls into the skeptical camp.

“The overwhelming bulk of people who have negative equity stay in their homes and keep paying,” said Michael S. Barr, assistant Treasury secretary for financial institutions.

It would cost about $745 billion, slightly more than the size of the original 2008 bank bailout, to restore all underwater borrowers to the point where they were breaking even, according to First American.

Using government money to do that would be seen as unfair by many taxpayers, Mr. Barr said. On the other hand, doing nothing about underwater mortgages could encourage more walk-aways, dealing another blow to a fragile economy.

“It’s not an easy area,” he said.

Walking away — also called “jingle mail,” because of the notion that homeowners just mail their keys to the bank, setting off foreclosure proceedings — began in the Southwest during the 1980s oil collapse, though it has never been clear how widespread it was.

In the current bust, lenders first noticed something strange after real estate prices had fallen about 10 percent.

An executive with Wachovia, one of the country’s biggest and most aggressive lenders, said during a conference call in January 2008 that the bank was bewildered by customers who had “the capacity to pay, but have basically just decided not to.” (Wachovia failed nine months later and was bought by Wells Fargo.)

With prices now down by about 30 percent, underwater borrowers fall into two groups. Some have owned their homes for many years and got in trouble because they used the house as a cash machine. Others, like Mr. Koellmann in Miami Beach, made only one mistake: they bought as the boom was cresting.

It was April 2006, a moment when the perpetual rise of real estate was considered practically a law of physics. Mr. Koellmann was 23, a management consultant new to Miami.

Financially cautious by nature, he bought a small, plain one-bedroom apartment for $215,000, much less than his agent told him he could afford. He put down 20 percent and received a fixed-rate loan from Countrywide Financial.

Not quite four years later, apartments in the building are selling in foreclosure for $90,000.

“There is no financial sense in staying,” Mr. Koellmann said. With the $1,500 he is paying each month for his mortgage, taxes and insurance, he could rent a nicer place on the beach, one with a gym, security and valet parking.

Walking away, he knows, is not without peril. At minimum, it would ruin his credit score. Mr. Koellmann would like to attend graduate school. If an admission dean sees a dismal credit record, would that count against him? How about a new employer?

Most of all, though, he struggles with the ethical question.

“I took a loan on an asset that I didn’t see was overvalued,” he said. “As much as I would like my bank to pay for that mistake, why should it?”

That is an attitude Wall Street would like to encourage. David Rosenberg, the chief economist of the investment firm Gluskin Sheff, wrote recently that borrowers were not victims. They “signed contracts, and as adults should also be held accountable,” he wrote.

Of course, this is not necessarily how Wall Street itself behaves, as demonstrated by the case of Stuyvesant Town and Peter Cooper Village. An investment group led by the real estate giant Tishman Speyer recently defaulted on $4.4 billion in debt that it had used to buy the two apartment developments in Manhattan, handing the properties back to the lenders.

Moreover, during the boom, it was the banks that helped drive prices to unrealistic levels by lowering credit standards and unleashing a wave of speculative housing demand.

Mr. Koellmann applied last fall to Bank of America for a modification, noting that his income had slipped. But the lender came back a few weeks ago with a plan that added more restrictive terms while keeping the payments about the same.

“That may have been the last straw,” Mr. Koellmann said.

Guy D. Cecala, publisher of Inside Mortgage Finance magazine, says he does not hear much sympathy from lenders for their underwater customers.

“The banks tell me that a lot of people who are complaining were the ones who refinanced and took all the equity out any time there was any appreciation,” he said. “The banks are damned if they will help.”

Joe Figliola has heard that message. He bought his house in Elgin, Ill., in 2004, then refinanced twice to get better terms. He pulled out a little money both times to cover the closing costs and other expenses. Now his place is underwater while his salary as circulation manager for the local newspaper has been cut.

“It doesn’t seem right that I can rent a place somewhere for half of what I’m paying,” he said. “I told my bank, ‘Just take a little bite out of what I owe. That would ease me up. Isn’t that why the president gave you all this money?’ ”

Bank of America did not agree, so Mr. Figliola, who is 48, sees no recourse other than walking away. “I don’t believe this is the right thing to do,” he said, “but I’ve got to survive.”

TechGromit says

True, but they will wait long as possible to file in the case you don’t have money and sooner if you do. I remember one poster here, who had other assets, but felt it was his god given right to get a loan modification from the bank or he was going to walk away because the house was worth less than the mortgage was for. I hope he got his reward from the bank for his short sightness.

Well, in my case, I don't have any assets they'd be allowed to come after, so if they sue and win, I can't afford it and will have no choice but to file bankruptcy.

In my case, though, I'm not even sure if the bank still owns the debt in question. I've been subsequently contacted by two collection agencies over this, neither one of which has provided validation. I have no idea where this stands, actually.

stocksjustgoup says

TechGromit says

Well, in my case, I don’t have any assets they’d be allowed to come after, so if they sue and win, I can’t afford it and will have no choice but to file bankruptcy.
In my case, though, I’m not even sure if the bank still owns the debt in question. I’ve been subsequently contacted by two collection agencies over this, neither one of which has provided validation. I have no idea where this stands, actually.

Well any judgement they leagally levy against you, they can collect over 20 years, even to the point of Garnishing part of your wages. As for the colloection agencies, I would ignore them, until they offer some proof that they now own the debt, it's just there word against yours. If they really owned it, why not go to court to get you to pay?

pshawn says

With prices now down by about 30 percent, underwater borrowers fall into two groups. Some have owned their homes for many years and got in trouble because they used the house as a cash machine. Others, like Mr. Koellmann in Miami Beach, made only one mistake: they bought as the boom was cresting.
It was April 2006, a moment when the perpetual rise of real estate was considered practically a law of physics. Mr. Koellmann was 23, a management consultant new to Miami.
Financially cautious by nature, he bought a small, plain one-bedroom apartment for $215,000, much less than his agent told him he could afford. He put down 20 percent and received a fixed-rate loan from Countrywide Financial.
Not quite four years later, apartments in the building are selling in foreclosure for $90,000.
“There is no financial sense in staying,” Mr. Koellmann said. With the $1,500 he is paying each month for his mortgage, taxes and insurance, he could rent a nicer place on the beach, one with a gym, security and valet parking.
“I took a loan on an asset that I didn’t see was overvalued,” he said. “As much as I would like my bank to pay for that mistake, why should it?”

The same thing could be said of any gambler that makes a bet on BlackJack, a slot machine or sports betting, I didn't win, why should I have to pay up? How does it benefit me? This type of entitlement attitude just pisses me off! Yes, you made a mistake, you got all caught up in the real estate Propaganda, but isn't this exactly the same thing a casino does with the flashing lights, ringing bells and free drinks on the casino floor. To get you caught up in the moment and lose you sence of judgement? This is American, your perfectly free to make mistakes, BUT you have to pay for your mistakes. As for "Wall Street" getting bail out money, it's not free, congress has it's head so far up the asses of the bailed compaies, they are tripping all over themselves to pay it back to get rid of goverment oversight.

Mr. Koellmann applied last fall to Bank of America for a modification, noting that his income had slipped. But the lender came back a few weeks ago with a plan that added more restrictive terms while keeping the payments about the same.
“That may have been the last straw,” Mr. Koellmann said.
“It doesn’t seem right that I can rent a place somewhere for half of what I’m paying,” he said. “I told my bank, ‘Just take a little bite out of what I owe. That would ease me up. Isn’t that why the president gave you all this money?’ ”

Yes, the president help Bank of America out of a tight spot, but they are paying every penney back (interest free, but they are still paying it) Why should we kick in free money to you, what makes you so special?

Bank of America did not agree, so Mr. Figliola, who is 48, sees no recourse other than walking away. “I don’t believe this is the right thing to do,” he said, “but I’ve got to survive.”

I really don't agree with letting these deatbeats walk away without the tax obligations the president is currently forgiving. The government is only encourging this type of behavior. I hope bank of america Nails this guys ass to the wall with a deficiency judgement. This is how the capitialist system works, sell it cheaper or charge to the hilt to those that don't know better, yes sometimes it's a brutal system, but it works, Communism really didn't live up to all the hype, we have the Soviet Union as Proof.

I don't buy any of this about RENTERS being under a dark cloud after walking away.

There are tons of vacant rental properties, take your pick. Even assuming you were renting directly from Bank B, they are not going to really care that much about your default at Bank A. You paid your deposit and "last month" rent or whatever, they will be as happy to rent to you as any other Schmoe.

These days it's about as serious as getting evicted from a rental Apartment.
Especially when you factor what you had to put down to move in. 7K, that's First/Last and Security. We're living in Lala land folks, people don't have any skin in the game. These are the same people that has never had a problem renting in an upscale rental neighborhood, and when times got bad, breaking the lease, to move somewhere they can afford. It's still the same living beyond ones means, mentality.

If they can claim ownership for a brief while or while their economic means allow it, then heck for First/Last and Security what have they got to lose? Especially when all it takes is just three short years in most states for the foreclosure to cycle off your credit report.

The Credit Report is being used as a Class division tool, and not a realistic calibration of ones credit worthiness. It just keeps the Cretins, that are late paying their bills, from applying for competing Jobs, Rentals, Schools, Insurance and Services. While these same clowns can get unlimited credit, even if my secured card means. It has nothing to do with their ability to perform a job, safety wise for insurance purposes, or willingness to pay rent. Where as people that do actually skip on Mortgages are a clear indicator of character traits that these credit checks are supposed to catch. But as it is, these folks foreclosed have a far easier go, at bouncing back and getting back into the game, that those that keep a dinged credit score over the most silliest of things, like provided services bills that were late.

Techie I have no love loss for the Credit industry and it can rot under its own weight for all I care. I blame the Suckers that over bought less so than I blame those fraudulent lenders that sent out shady appraisers, Sellers committing fraud over valuing the property, and City planners that allowed while they looked away, and only budgeted a bigger fiscal budget on these insane fairytale revenues, and the RE agents that it took to start this whole charade.

These suckers that walk away are no less immune to contempt, than our municipal/Civil/and Financial process as whole in this country.

Tenouncetrout says

Techie I have no love loss for the Credit industry and it can rot under its own weight for all I care. I blame the Suckers that over bought less so than I blame those fraudulent lenders that sent out shady appraisers, Sellers committing fraud over valuing the property, and City planners that allowed while they looked away, and only budgeted a bigger fiscal budget on these insane fairytale revenues, and the RE agents that it took to start this whole charade.

I agree there is plenty of blame to go around, appraisers, mortgage brokers, banks, real estate agents, home inspectors, but at the end of the day it's your signature on the mortgage note, not theirs.

Financially, I don't think that anyone over the age of 45 will be able to recover from a "strategic default." Just not possible.

Along with a severe drop in FICO score which will affect everything from your car insurance rate to whether or not your dentist will accept payments from you for a root canal, there are many other repercussions to foreclosure that are deep and long lasting.

FHA will not lend to anyone with a foreclosure on their credit report for five years.
Most private lending institutions, banks, and credit unions will not extend a home loan AT ALL to a person with a foreclosure.

Following foreclosure, some may have to declare personal bankruptcy to stave off First Actions. Business bankruptcy may follow if personal loans off the home mortgage were used to fund low spots in the business.

Ever had to live under the government deciding how much you get to eat and spend each month?

Well google this: IRS National Standards for Allowable Living Expenses

This is what you will have to live under (the IRS) should you file for BK. And it doesn't end there....

Many landlords and especially property management associations are viewing a foreclosure as an Eviction,

....and they will not rent to anyone with an eviction. (Well, unless your name is Lynne Curtin and you have a friend who also makes jewelry and who owns a rental in Aliso Viejo and who doesn't care if Lynne has multiple evictions or not.)

If you have to "walk away" because you lost your job or suffered a dramatic reduction in income, you have my sympathy. Totally.
Try a short sale and if that won't wash, then honorably hand in the keys to the lender with a respectful letter of explanation and leave the property in pristine condition so that it can be resold.
Make copies of this letter - you will need one to add to a rental application as proof your unique circumstance along with your job loss paperwork.
What you want to do is separate yourself from the "strategic defaulters."
Remember to do a final walk-through with a lender's rep or the listing real estate agent so that you have a witness as to how you left the property. Take final pictures.

If you are doing a "strategic default" then for you, unless you are under 40, I really cannot see how the numbers will work for you to turn around and buy a property for half off within the time frame I'm seeing posted. Many strategic defaulters boast about what they will be able to do.

Court costs, fees, IRS penalties, wage garnishment, low credit scores, higher insurance rates, and difficulty in finding a new job with lousy credit - especially a government job, and then to think after all *that* you can save for a cash downpayment or pay cash outright for another home??? And have other cash assets as lenders are requiring? And pay higher interest rates and fees because rates will go up - they're going to have to. Many money managers are saying this interest rate increase will happen within the next 12 months.

Your home ownership plan ain't gonna happen unless you plan on buying a vacant lot on the backside of Mojave out in the desert in a single-wide.

btw, if you really want "to get even" with bankers because you're angry - just pay off your mortgage sooner so they get less interest income and live on a cash-only basis.
You can do that and still "stick them" without shooting yourself in the foot.

~Misstrial

TechGromit says

Tenouncetrout says

Techie I have no love loss for the Credit industry and it can rot under its own weight for all I care. I blame the Suckers that over bought less so than I blame those fraudulent lenders that sent out shady appraisers, Sellers committing fraud over valuing the property, and City planners that allowed while they looked away, and only budgeted a bigger fiscal budget on these insane fairytale revenues, and the RE agents that it took to start this whole charade.

I agree there is plenty of blame to go around, appraisers, mortgage brokers, banks, real estate agents, home inspectors, but at the end of the day it’s your signature on the mortgage note, not theirs.

That Old School law, does trump all of the other BS doesn't it?
We Patnet fans for the most part, were smart enough to inherently know better. That it gnawed at me, keeping me from the agreeing to the bottom line. And it must be integrity of your logic. At the end of the day it would have been our signatures on a contract, stating we agreed our houses' were worth 150% or more, more than a fair true equitable value, yet agrees to pay a 30 year mortgage on it, or a mortgage at any terms.

TechGromit says

Well any judgement they leagally levy against you, they can collect over 20 years, even to the point of Garnishing part of your wages. As for the colloection agencies, I would ignore them, until they offer some proof that they now own the debt, it’s just there word against yours. If they really owned it, why not go to court to get you to pay?

Without debt validation, I'm not going to entertain any collection agency. If they can validate that they own the debt and that I owe it to them, I'd be very willing to negotiate with them. The first collection agency only produced the original promissory note without any accounting for the subsequent deficient amount; and the second collection agency hasn't produced anything, and it's been almost four months since they received my validation demand.

A bank is a business. They're trained to look at values and returns every day. They have specialists, people with insane amounts of experience to work all of these scenarios out. The fact is, a home owner doesn't. They're working off appraisers, they're working off the mortgage brokers, and government regulations. They're using all of these experts to tell them what they can afford, and whether they're going to back them or not. The people who managed to get in way over their heads were in the most part failed by a whole system. Had every appraiser that came along said "no, value is 80% less", or every bank said "no, not lending to you" then this wouldn't have worked. Even now, some people are turned down, while others accept them because they run the numbers and can make it work. This system we've built is about trying and trying again. If 5% of the lenders said yes, that means someone tries 19 times and gets through on the 20th. The system allowed them to get through. We train people that if they get through the grueling process, that they were then worth it, and the other 19 failed to see their qualifications correctly. Much like a job application, you don't go to one company apply, get turned down and then never look again. No you try and try again until something sticks.

Banks treat loans as business. People should too. This isn't any different than a lawyer practicing law. You can win this battle, it'll cost you 100K, and you'll get your full 110K you're asking for, netting you 10K, or you can settle for 30K now and make 20K extra, but get no vindication. It's a business decision to settle. People need to run the numbers and decide if it's worth breaking the agreement. Are the penalties worth paying, and does it work out in your favor?

Some of our laws allowed people to walk away almost scott free. Granted there are several ways in which they might not walk away as free as they had hoped, some pointed out by misstrial.

The ones who are going to get away "scott free" are the ones who are going to realize their mistakes and correct them.

As far as not being able to rent, I really doubt it. What it does mean is that you might not get into *every* place you request, but there will be tons of people who will take you on. If we get a massive shortage in rentals, perhaps landlords will become insanely picky, but I'm guessing that won't happen for quite some time.

As far as jobs, I'm guessing a simple explanation of what you did, and why will actually impress some employers. Especially if used when an employer asks for a time you got into trouble and how you dealt with it. Depending on how you present it, or course. If you present it as "omg, I had this big mortgage, and the lady on the phone said there was nothing she could do to help, and that I needed to keep paying......" Or if you say something along the lines of, "I tried having a loan modification done, and I tried these 12 other processes which I didn't qualify for. After exhausting all my options to keep the home, I looked at it as a business decision to break the contract with the bank and pay any penalties for that". One sounds like you're an idiot, the other sounds like when you were hit with an extremely complex situation, you tried every avenue possibility available to you, before calling it a business decision and walking off. You might be cut off from some employers still, but there are always others out there.

You lost your house - but you still have to pay
By Les Christie, staff writerFebruary 3, 2010: 3:21 PM ET

NEW YORK (CNNMoney.com) -- As terrible as it is to lose your house to foreclosure, at least it's a relief to put your biggest financial headache behind you, right?

Wrong.

Former homeowners may still be on the hook if there's a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these "deficiency judgments" are ticking time bombs that can explode years after borrowers lose their homes.

It can even happen to people who got their bank to approve them selling their home for less than it is worth.

Vanessa Corey, for example, short sold her Fredericksburg, Va., home in April 2008. She and her husband built the house in 2004, but setbacks, both personal (divorce) and professional (housing bust), made it impossible for the real estate agent to keep her home. So she negotiated the short sale and thought that was the end of it.

"My understanding was that the deficiency was negotiated away," she said. "Then, last November, I got a letter from a lawyer telling me I owed my lender $65,000. I had to declare bankruptcy. There was no way I could pay it."

Many homeowners are now in the same boat. And not just those who took out bigger loans than they could afford or who did so called "liar loans" where they didn't have to verify their income.

Because of falling home prices, borrowers who always paid their mortgage but who have run into unforeseen circumstances -- like unemployment or a job transfer -- can no longer sell their homes for what they owe. As a result, they are being forced to short sell or foreclose and are getting caught up in deficiency judgments.

"After the banks foreclose, it's very common now to have large deficiencies with houses not worth the balances owed," said Don Lampe, a North Carolina real estate attorney.

Lenders mostly declined comment. Although Corey's lender, BB&T did indicate it was pursuing more deficiency judgments.

"They follow the rise and fall of foreclosures," said the spokeswoman, who would not discuss Corey's account.

Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there's a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could haunt them.

"Once they have a judgment, they can pursue you anywhere," said Richard Zaretsky, a board-certified real estate attorney in West Palm Beach, Fla. "They can ask for financial records, have your wages garnished and, if you fail to respond, a judge can put you in jail."

In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms.

Some states, such as California, are "non-recourse" and don't allow deficiency judgments. But, even there, if the original loan was refinanced, some or all of it may be subject to claims.

Deficiency judgments on short sales and deeds-in-lieu can happen in many more places. In these cases, extinguishing the debt is often a matter of negotiating with the bank.

But even when lenders are willing, many borrowers may not be aware that they have to ask for release. So, if you are pursuing a short sale, be sure your attorney asks the bank to release you from any further obligation.

"People shouldn't have a false sense of security that a deficiency judgment may not be later sought," Zaretsky said.

He expects many will be filed over the next few years, based on the fact that banks have sold many of these accounts to collection agencies and other third parties, at discount.

"The parties who bought those notes wouldn't have paid money for them unless they had the intention of acting," Zaretsky said.

What can be scary is that the judgments don't have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.

It doesn't have to be a large amount of debt for a lender or collection agency to come after borrowers. Richard Varno and his wife short sold their Nashville home back in 2004 after he lost his job.

It wasn't until 2008, when the second lien holder asked him for $25,000, that he realized he still was liable.

"I told them, 'Hey, you guys released the title,'" he said. "As far as I know, I'm off the hook."

He wasn't. Releasing title does not necessarily end the debt. It's complicated because of variations in state law, but, generally, a mortgage has two parts: a pledge of collateral, represented by the home, and a promise to pay off the loan.

Lenders may release property liens in order to facilitate short sales without releasing borrowers from their obligations to pay under the promissory notes. The secured debt can convert to an unsecured one after the sale.

Zaretsky had one client who was so relieved to have arranged a short sale that he signed every paper his real estate agent shoved at him, even a confession that clearly stated he still owed the debt.

"He had no idea what he was doing," said Zaretsky. "All the lender had to do was go to court to convert the confession into a deficiency judgment."

Lenders are also very inconsistent. One of Zaretsky's short-sale clients was ready, willing and able to pay, but the bank did not even ask; another lender always reserves the right to pursue the deficiency.

Sometimes lenders go after borrowers walking away from their homes if they have other assets, according to Florida real estate attorney Larry Tolchinsky.

"Banks are pulling credit reports to see if it's a strategic default," he said. "If you're behind on all your other payments, you're okay. But if you're not, they'll come after you."

If borrowers have any doubts about their risks, they should seek legal advice. Or, at least, call non-profit organizations such as NeighborWorks for advice. According to Doug Robinson, a NeighborWorks spokesman, its counselors always try to negotiate away deficiencies when they facilitate short sales or deeds-in-lieu.

"We don't favor any short-sale contracts that leave any deficiency that can be pursued," he said.

Robinson himself knows what can happen. He paid off a deficiency after his own New Jersey house went through foreclosure 11 years ago.

stocksjustgoup says

TechGromit says

Well any judgement they leagally levy against you, they can collect over 20 years, even to the point of Garnishing part of your wages. As for the colloection agencies, I would ignore them, until they offer some proof that they now own the debt, it’s just there word against yours. If they really owned it, why not go to court to get you to pay?

Without debt validation, I’m not going to entertain any collection agency. If they can validate that they own the debt and that I owe it to them, I’d be very willing to negotiate with them. The first collection agency only produced the original promissory note without any accounting for the subsequent deficient amount; and the second collection agency hasn’t produced anything, and it’s been almost four months since they received my validation demand.

The original Promissory Note *is* the "debt validation."

The Promissory Note is "validation" (curious term) that the lender owns the debt.

Courts have long established the lender/collection agency relationship. Your actions will be viewed as "game playing" - in my view, this has already harmed your credit score.

I'm not sure where you are getting your legal advice, however, you are merely delaying the inevitable, are risking a worse judgment should the matter go to trial, and are risking a more costly outcome by using your tactics.

btw, civil defense attorneys love clients like you since the remedy is usually costly, however the atty always gets paid first, so....

Just sayin'....

I saw that Yahoo story, too. It's been two years now and I just want it over with, one way or another. If the legal debtholder sues, I'll respond, and if they win or look like they'll win, I know I can't afford the judgment, so BK may be the only option. If so, so be it.

seaside says

You lost your house - but you still have to pay

By Les Christie, staff writerFebruary 3, 2010: 3:21 PM ET
NEW YORK (CNNMoney.com) —

....He expects many will be filed over the next few years, based on the fact that banks have sold many of these accounts to collection agencies and other third parties, at discount.
“The parties who bought those notes wouldn’t have paid money for them unless they had the intention of acting,” Zaretsky said.
What can be scary is that the judgments don’t have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.
It doesn’t have to be a large amount of debt for a lender or collection agency to come after borrowers...

This is true.

Further, in California, a secondary lender has what's termed a One Action rule under a Purchase Money loan scenario whereby they can obtain a deficiency judgment against a borrower for an unpaid second mortgage.

~Misstrial

Misstrial says

Further, in California, a secondary lender has what’s termed a One Action rule under a Purchase Money loan scenario whereby they can obtain a deficiency judgment against a borrower for an unpaid second mortgage.

There is a lawyer in La Jolla who is saying that by accepting the short sale payoff to remove the lien, THAT is the one action, and thus the bank can't do anything after that. I'm not sure how that holds up as a defense, but it's interesting...

http://www.stilwellassociates.net/pages/content/1361

stocksjustgoup says

Misstrial says

Further, in California, a secondary lender has what’s termed a One Action rule under a Purchase Money loan scenario whereby they can obtain a deficiency judgment against a borrower for an unpaid second mortgage.

There is a lawyer in La Jolla who is saying that by accepting the short sale payoff to remove the lien, THAT is the one action, and thus the bank can’t do anything after that. I’m not sure how that holds up as a defense, but it’s interesting…
http://www.stilwellassociates.net/pages/content/1361

That would be for the senior lender, not the junior or secondary lender. The attorney is talking about the First Action rule, not the One Action rule.

Yeah, I know, complicated....

~Misstrial

Misstrial says

That would be for the senior lender, not the junior or secondary lender. The attorney is talking about the First Action rule, not the One Action rule.
Yeah, I know, complicated….
~Misstrial

I interpret that link differently, but have emailed them with some questions.

stocksjustgoup says

I saw that Yahoo story, too. It’s been two years now and I just want it over with, one way or another. If the legal debtholder sues, I’ll respond, and if they win or look like they’ll win, I know I can’t afford the judgment, so BK may be the only option. If so, so be it.

I would rec that prior to filing any lawsuit by a collection agency, I strongly encourage you to contact THE ORIGINAL NOTEHOLDER/LENDER and offer to settle your debt. This is termed Debt Negotiation.

Offer a CASH SETTLEMENT. This usually works.

Offer them .30 cents on the dollar amount owed. See if they will take that. If they do accept your offer, GET AN AGREEMENT IN WRITING THAT THEY ACCEPT THIS REVISED AMOUNT AS PAYMENT IN FULL OF THE TOTAL DEBT OWED. Get this signed and dated by THE NOTEHOLDER.

Then and only then, will they contact the collection agency to stop any further action against you.

Of course, if you fail to pay the new agreed upon amount, then they will again go after you....

btw, if you decide to wait until a court action is filed against you, you can still contact the original lender (noteholder) however, things can get complicated since, well, sometimes, they want this over with just like you do and having turned it over to collections, they may want to leave everything to them at this point. Hard to say.

~Misstrial

Is there a way that a lot of couples with similar two-income salaries could just transfer the loan to their partner... Then default.. And their partner would still have a clean record when they go to purchase a home again with a big downpayment from all the cash they saved while waiting on the bank to forclose?

Kinda like the old credit card balance transfer game i mentioned before.. I balance transferred thousands of dollars from credit card to credit card without every paying a PENNY of interest...

You can even avoid balance transfer fees by just applying for a 0% interest card... Charging up all your living expenses to it for a year and just paying off the old card in the cash you saved. So that way your always getting an interest free 0% interest loan on as much as $10000 without affecting your credit score by more than a 5-10 points do to multiple inquiries.

I've been doing balance transfers to leverage $10K in cash loans for 0% interest for 7 years now... I can afford to pay it off.. But it's a great way to get $10K in loans indefinitely at 0% interest.. effectively forever.. until credit card companies decide not to offer 0% cards anymore.

I'm not sure if the original noteholder even still owns the debt. The two collections agencies haven't validated the debt, and I fear that by contacting the original bank, if they DO still own it that I'll be putting myself on the top of the pile.

The only thing my credit report says, the last time I checked, was that the original bank charged off the debt and balance was $0.00. That could mean anything, though.

rmm221 says

Is there a way that a lot of couples with similar two-income salaries could just transfer the loan to their partner… Then default.. And their partner would still have a clean record when they go to purchase a home again with a big downpayment from all the cash they saved while waiting on the bank to forclose?

Your going to clarify exact how you intend to accomplish this. The only way I know of to get someone's name off loan to to pay off the loan with another loan. (ie refinance) if you both barely making the payments now, the odds the bank will approve a one income refinance are slim to none. The only other way is with a process called Novation.

Novation is a term used in contract law and business law to describe the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party....
...a novation is valid only with the consent of all parties to the original agreement: the obligee must consent to the replacement of the original obligor with the new obligor...

So basically the bank has to agree to the transfer, if your in trouble before, it's unlikely they are going to agree unless it benefits them somehow.

Good Idea, but pretty much impossible to accomplish, only people with a lot of money will be able to pull this off. And transferring all the assets from one partner to the other after a refinance or novation isn't going to too successful either. Banks may be foolish by lending money to people that can't afford the payments, but they are not complete moron's, they are going to go after you in court after the one partner defaults, can anyone say FRAUD? Fines? Jail time? It's not quite as easy as your suggesting to outsmart the banks.

If someone takes out a loan and then can't pay it back, they lose their collateral. Their credit score drops and they have trouble getting other loans - as it should be. And the banks are going after borrowers for the difference between short sale amount and amount owed. As it should be. If the borrower files bk, it affects their credit even worse.

as is should be.

People are coming up with all sorts of creative ways to alleviate their pain from the choices they made. No one forced them to buy - but they expect to be rescued so they can borrow again. I say tough shit. A woman I work with bought in early 2009, a 1100 sq ft home with big yard 'cause they just had to buy. Six months later they realized that homes that are twice the size (and better suited for them & their 3 kids) are selling for less... Now she's talking about walking away because her house is too small and they own $40k more than the place is worth.

Not my problem.

Wow...I am really bugged by some of these comments. So many are so angry, careless, resentful, and lack any sort of solution.

Some may be in a bad spot because of poor judgment or because of poor fortune, but either way they should not be crucified by you people. I think it is so much easier of you to judge when you are not in a tight spot and need help. If something unfortunate was to happen to you all...I am sure you would be singing a different tune.

Does it make you all feel better about yourself to slam others? I hardly think that solves anything. Like I said some people got into a bad spot without doing it intentionally. For example, what about a couple who saved $50k to put down on their dream home, get it and then they both loose their jobs and cannot find a job that will afford their bills in this economy. To me I see it differently...I see an unfortunate event and it is quite sad to see that couple loose their dream home that they worked so hard for. Just like I would think it was sad and unfortunate if say some of you criticizers had your spouse die for example. I wouldn't be making your situation right to harp on you and say...oh well you wouldn’t be sad if you never got married and took a chance at happiness and dreams...YOUR FAULT! Hardly seems appropriate.

Everyone has unique circumstances and it is WRONG to harshly assume you know it all when you don’t.

And for those who criticize strategic defaults...remember this country revolves around capitalism...so however you make or save money or how you SURVIVE...this society we live in encourages getting yours how ever you can!

Now please remember what your mother should have told you..."If you have nothing nice to say...then don’t say anything at all"

If you don't pay they take the house. After all, you were required to pay for an appraisal that PROVED the house was worth that much. I can see how the short-sale thing could get tricky, but if you just walk there's NOTHING they can do. They can hem and haw and try to convince you and others the end of the world would come if the sheep starting acting like the wolves but in the end they can't do a damn thing.

ever thought of a short sale? helps with a lot of the consequences you mentioned of just letting the lender foreclose...

I'm still trippin about the banks not even having the slightest thought of what will happen if home prices decrease!!

caliinreality says

Everyone has unique circumstances and it is WRONG to harshly assume you know it all when you don’t.

May I point out that you're posting on a real estate board dedicated to being prudent? That many of the people here didn't buy because it wasn't prudent, or didn't cash out phantom equity and remain in their homes?

We don't know it all. But we do have opinions about making poor choices regarding housing. My opinion is that if people suffered a crippling job loss or disease, they should have a chance to modify their loans. But if they gambled and lost I have no sympathy for them.

Either way, we're gonna state our opinion here and you shouldn't be too surprised. The title at the top of the page says that Now just ain't the time to buy.

TT says

Time for interest rates to go back up to more sane levels.

This is not going to happen. Because then they'd give you the opportunity in the future to refinance at a lower rate making you a winner and them a loser. They've learned their lesson already. They made you sign the dotted line to enslave yourself for 30 years. That's the way they want it to remain. Maybe in the future if interest rates rise, they'll amend the contract to levy huge penalties for early pay off.

TT says

Don’t blame appraisers. They just compare the latest sale of a similar house in square mile area from the house for sale. It’s not rocket science. Expecting them to stop the housing bubble is just silly. Banks that made the loans had internal appraisers and auditors who double checked every appraisal. The bank’s own appraisers all signed off on the prices. The Fed and Congress created this bubble.
Everyone was making lots of money. Everyone knew the deal and made hay while the sun shined. The Fed and Congress held the sun up over the farm for too long and we ended up with a Mount Everest of hay. Now it’s just sitting there composting (or maybe burning?).
Time for interest rates to go back up to more sane levels.

I disagree completely. Appraisers definitely share the blame--more than the Fed or Congress. They basically committed fraud--they would come up with whatever number was necessary to close the deal.

Vain says

This is not going to happen. Because then they’d give you the opportunity in the future to refinance at a lower rate making you a winner and them a loser. They’ve learned their lesson already. They made you sign the dotted line to enslave yourself for 30 years. That’s the way they want it to remain. Maybe in the future if interest rates rise, they’ll amend the contract to levy huge penalties for early pay off.

Banks don't set interest rates. True-they can determine the interest rate they will offer on a mortgage based on your credit history and prevailing rates, but "interest rates" are really determined by market forces. The FED can influence it by various means, but only so much...

But it just seemed too easy. Take a look at my parents. In 1996, they bought a $140k home with a $110k loan. They paid about $1200/month to the banks, but recently, they refinanced to a 4.75% loan making their payment $500/month. Anyone who bought a house back then seems so well off now because of them being able to escape slavery like that due to lower interest rates. There are probably works in the back end to ensure that this does not happen again. Levying a huge early payoff penalty will probably stop it. Keep in mind they were working near minimum wage at the time. I do not think their income situation improved that significantly, but they sure as hell are better off than a family with $150k income trying to buy a home now.