patrick.net

Texas is NOT a non recourse state. BUT, since our property values are not grossly out of line with rental rates or replacement costs, the "bubble" was tiny by comparison. AND, we have been growing jobs and population.

It is a big fear campaign because every article says "They may come after you" or "years later they were sued" They want people to think "If I walk away, I will have to worry about the bank suing me for years". They will do what the RIAA did and sue a few people for a lot then tell everyone about those few cases and then Send letters to the rest saying you can settle for only 5k-10k today.

If they come after you, just file chapter 7. All this mess is due to the banks lending money to people with stated income, and then the banks just passed the notes to Goldman Sachs, who packaged them and then sold them off as mortgage backed securities. The banks had no intention of holding the notes, so they didnt care that they would fail. They knew what they were doing. It's becoming so obvious now, and most people in the know realize this was just a big scam. They sold us what they said was a steak, but in reality it is a cheeseburger. False collateral. File Ch 7 if they ride you, and just get a fresh start. Don't worry about the tabu of bankruptcy. Nobody really cares about that considering how the banks screwed the economy.

Why do we always make the banks out to be evil? Those who chewed more than they could swallow are equally culpable. I have no issues with banks going after deadbeats. If they have savings, they ought to be able to make payments to cover the remaining debt. In Victorian times, they were pretty harsh about debt. There were debtors prisons for such deadbeats. Just yesterday, there was a story in the press about how these same deadbeats were being current on their credit card debts while forgoing mortgage payments since they are more interested in keeping their purchasing power than their home. Many of these deadbeats are also getting to stay put for months and years without paying their mortgage while using the money so saved on buying goods and vacations or merely increasing their savings. This is absolutely unfair and unjust to people who pay their mortgages on time and to renters.

I was surprised to see NY was not non-recourse, so looked into it, apparently there are 6 states considered 'One Action States': Lenders are only permitted a single lawsuit to collect mortgage debt. This plays out differently depending on the state’s laws, so apparently attorney blogs advise knowing state restrictions well when choosing a strategy. In New York, for example, a lender must choose between the actions of foreclosing on the property or suing to collect the debt.

The following states apparently have some type of one action statute, but I don't know why a couple overlap with the non-recourse list:

California
Idaho
Montana
Nevada
New York
Utah

sherlockhelms says

. This is absolutely unfair and unjust to people who pay their mortgages on time and to renters.

Actually it is completely fair to people who pay their mortgages on time. Those people who pay their mortgages on time get to stay in their house. That is what the mortgage contract says. What is unfair is for people to try and change contractual obligations after the fact. Where in the mortgage contract does it say "You must pay your mortgage payment before credit card payments"? It doesn't, so why do you think it is OK to impose that rule now?

If you lose your house in a recourse state, you should just file chapter 7. Then they can never touch you again. I did it when I got burned by the dotcom crash. I was making a lot in IT. I bought half the house that I could qualify for. I knew the dotcom bubble wouldn't last forever and I worked my finances so that I could take a 50% pay cut and still survive. How's that for conservative, responsible personal finance management? How many people can do that? Well it wasn't enough. I ended up with a 66% pay cut. At least I was working. Some of my friends were out of work for months. Within two years, almost no creditor cared much that I had a BK on my record. I think the fallout was that I ended up with an extra percentage point on a car loan. Within four years, I had a mortgage on another house at 5%.

The thing that sealed the decision for us was when a BK attorney asked us this question: Can you pay everything off in five years? If you can't, it's within your best interests to file, even if you're still able to make payments on everything.

The new BK laws (reforms :-/ ) mean that if you're a professional with a good job, but an insurmountable amount of debt, you'll have to engineer a job loss so that you can pass the means test for chapter 7. Don't go with chapter 13, it will just set your screwing in stone. And most people can't make the chapter 13 payments because the rules are insane and unrealistic, and end up getting their BK thrown out anyway.

The banks are screwing us! It's time to screw them back! They're not playing within the confines of any sort of ethics or morals, so we shouldn't be either. When they walk away from billion dollar real estate deals and let them go into foreclosure, it's just good business. We'll it's the same for us. It's time to act in your own best interests.

FredMG, I was referring to the fact that many mortgage defaulters get to stay free for months or years till they get kicked out. That's money in the bank and free money to spend. Isn't that unfair to people who pay their mortgages or their rents? Try skipping rent for a couple of months and see what happens.

What is the bottom line? Can they go after you in FLorida for a deficiency? I am hearing yes and no! It doesn't effect me but I would like to pass on good advise to friends.

In Florida the non recourse only applies to your primary residence...it does not protect you from investment or second home purchases. And yes the banks are going after people and they are doing in two ways. Attaching the balance between the mortgage and what the property sells for as a 1099 income especially if there is second mortgage and also through a deficiency judgement. If you maintain a investment property and it goes into foreclosure and is not protected by ownership through a corporation, then they will attach the judgement to your primary home.

Expect this to become a new "business" itself for collections. Bank's just like credit card companies will pursue homeowners as long as the law lets them.

I know that I saw Florida listed as a non-recourse state on some website too, but I've also seen conflicting information and apparently deficiency judgements CAN be brought against the borrower.. 5 year limit and 20 to collect if I remember right. Mish wrote a very good article about it. I wish I could find the link.
I considered moving to Texas, so I was reading on it's laws and from what I remember, a deficiency judgement CAN be brought against the borrower, but it can't be collected upon.

I'm guessing that there will also be a critical number of people who need to default before others who are teetering say "it's safe! lets jump in!"

Of course they'll use the crowd mentality and essentially not realize banks can come after them. When they do, they'll just hope they're far enough down the line, that someone figures a way out for them, or shows them the next step they need to take. They need the RIAA lawyers, who know when to fold and how to prevent people from spreading the how-to's to others!

I'm guessing that they'll find out they can collect a maximum of 5 years judgement from these people, before they declare bankruptcy...

This is one more example of crocodile's tears. Banks want more of public dollars to cover their losses(as..es)

They figured they could recover more by keeping the guy in the house. In this case, it didn't work out for them.

Based on all the "0% interest" offers that credit cards offer, I'm pretty sure that people like us make a killing off them. They obviously know that for everyone intelligent person out there, they're going to bag a few that are going to screw up and pay them 30% by years end, which will make up for all the freebies the rest of us are getting.

Same with housing and mortgages. If they think you're locked in, and won't walk away, it's probably better % wise for them not to do anything. If they did, others might jump on board and try the same. And there is a good chance the people asking for a short loan might come around and keep the house, meaning they collect 100%. Or they might understand how many years it will be before a housing recovery takes place, if they can keep you paying until then, you will either stick with it, or the increase in value will prevent a massive loss for them. They could even be waiting for some laws to change in their favor. Whatever it is, I'm sure they're going to walk away with extra bundles of cash.

They've been in the business of lending money for a long time (at least some of these banks), they'll do what is best for them.

TechGromit says

Wow, 12 whole states.

But California and Florida alone are probably half of the walkaways.
I just can’t believe any garnishment can last 20 years. Got any proof of that? Heck, you can be bankrupt and have a clean slate in 7 years.

In order to get a garnishment you need a judgment. In California a judgment can be renewed every 10 years. Not a bad deal considering you receive post judgment interest at the rate of ten percent.

Patrick,
I really think you need to remove Florida from your list.
For instance, see:
http://southfloridalawblog.com/2010/01/26/why-oppenheim-law-prefers-short-sales-over-florida-foreclosure/
Florida is not one of those states and is in fact a RECOURSE state.

wish i was lucky says

I would think that the best thing to do at the very least is to consult with a Bankruptcy Atty.
You cannot go Bankrupt against taxes and the Gov’t forgiveness program is not going on forever - so it would help to clean things up now - even if you have to go out an find whoever it is that holds your old mortgage.
I lost my house - due to illness. I even drained my savings (401K) before I went BK and that was not necessary. I put 20% down but I borrowed it back to fix the place. I tried the Short Sale routine - but the buyers wanted me to pay for them to buy. The Bank would not deal - even when the offer was $3,000 less than what I owed (they could have knocked off the late fees). So I don’t feel sorry for the bank - and I don’t feel that I screwed other tax payers (since the Bank wouldn’t deal). They ended up selling the place for $100,000 less.
I saw an attorney - and what got me going is that he said the Bank carrying the 2nd could still come after me - and would I be able to pay the taxes on the forgiven amount. I could not afford to add $100,000 to my income and pay taxes on it. I only lived in the place for 6 months - was not able to save any money except what it took to leave and I left the place very very clean. I also put more into the place than the 20% down that I borrowed back.
It’s been a couple years and my credit score is above 700 again, I was able to get a car loan at 6.5% - but I may never be able to afford a house again at my age.
My advice - clean up your credit now, consult with an Atty and do what is best for you. Don’t wait for the other guys to come after you. At least you won’t have to look over your shoulder and suppose what could happen to you in the future.
I’m sticking with cash. I even have a secured credit card - so I know what my credit limit is and they can’t take it away from me. I also pay it off every month.

First let me offer my sympathies to you for your above-described situation.

2nd: for those of you who want to look into bankruptcy as a possible option, the U.S. Bankruptcy Courts have free seminars for the do-it-yourself filer.

I have included a link for the BK Court for NorCal, however each BK Court in other federal districts should offer the same thing:

http://www.canb.uscourts.gov/Pro_Se_Pro_Bono_Services

PLEASE TAKE NOTE THAT THIS IS FOR BANKRUPTCY ONLY AND NOT FORECLOSURE WHICH IS DIFFERENT!

Other legal resources can be sought through law schools in your State. Call them and ask if they have a "Pro Bono" Clinic for bankruptcy actions or foreclosure actions.

In California, there is Legal Aid and the CRLA (California Rural Legal Assistance) foundation.

Here in the SF Bay Area, there are several options for free or low-cost assistance or guidance, particularly in Berkeley.

~Misstrial

EBGuy says

I really think you need to remove Florida from your list.

OK, Florida removed. It's not legal advice, just a list I copied from some page that popped up after a search.

Misstrial says

I wonder why these articles were not published earlier such as in 2006.

Exactly. Why now?

Don't get me started.

Well, I will post this:

I've been reading your blog for a long time - since 2005 even though I registered back in 2007.

Together with Ben Jones' blog (the Housing Bubble Blog, Tanta (deceased), Irvine Renter, Mish et al) you have been warning about this for a loooong time. Including Yours Truly.

Back in Q4 2006 and in Q1 of 2007, I warned on Ben's blog (under my same username) that bankruptcies were going to go through the roof due to the upending of the housing market.

So, you Patrick, are in the clear. The MSM? Not at all. They could have done something about notifying the public-at-large, but did they? No.

People who had detonating subprime loans back in 2006 were calling Legal Aid here in Cali, particularly in the Central Valley and were hysterically trying to find legal guidance for a way out. Reports I heard were that people were crying on the phones and Legal Aid was swamped with troubled borrowers who they could not help. People had NO idea of what lay in store for them. There were no safety nets.

Now that mortgage blow-ups are happening in wealthier neighborhoods, only now is the MSM running articles like the one you linked to.

~Misstrial

We're in CA and considering short selling or foreclosure. We just talked to an attorney today about the lay of the land with respect to our facts. Refinanced our first and our HELOC, making them both recourse loans. We're about $150K underwater.

Even with a recourse first mortgage, California law prohibits a deficiency judgment on this loan if the lender goes through non-judicial foreclosure. (CCP 580d.) There is basically no chance the lender will do a judicial foreclosure, which would allow a deficiency judgment on a recourse first mortgage, so we're basically safe on the first.

As for the HELOC, we're on the hook for that. Options are: (1) try a short sale where the first kicks them over something from the sale and they both accept as a condition of sale that they will not sue you for deficiency; or (2) go into foreclosure and settle the debt with them for 10-20% of the original amount.

One other looming issue is taxes resulting from foreclosure or short sale. You'll receive a 1099c for any cancelled debt from either foreclosure or short sale. Federal tax law currently waives taxes for foreclosure and short sale if you meet certain requirements (primary residence, etc.). California law was the same, but that law just sunsetted. There are two bills (AB111 and SB 96) that seek to reinstate the tax waiver for California. A tax attorney I spoke with believes that the bills will pass, bringing CA law into conformity with Fed law, but that hasn't happened yet.

With all of this in mind, we are going to strategically default. Our neighborhood is destroyed by foreclosures and values won't be coming back for a decade or more. We've been here five years and never envisioned it going this way. We've put lots of money into our house and don't want to leave it. But we also can't throw our famliy's future away by throwing good money after bad for another decade.

Jerome that sounds like an ugly situation.
This whole notion of strategically defaulting is like an oxymoron to me.
no equity, no house, ruined credit, and banks and tax collectors chasing after you.
That's doesn't sound like a good strategy!

just curious what part of CA are you in?
If it's in the Bay Area I would definitely suggest riding it out. If it's some place like central valley then maybe you're making the right decision. Even then I would seriously reconsider.

It is indeed ugly, but we'll save a ton of money in the long run. We're in Oakland in a "transitional" neighborhood. Unfortunately for us, it's transitioned right into the crapper.

We'll owe about $36K on the second and be able to walk away from this blackhole of debt. We have good income, so we'll be saving in no time. It's a no brainer.

Jerome, I think you're making the smart move. I hope the lenders behave as you predict. I know the area you're talking about, and you cannot get out of that debt yoke too soon.

You'll owe 36k on the second plus tax on the remaining balance?
What's your plan for how you'll be saving a ton of money off this?

Of course I dont know the details but seems like a better strategy would be renting out that house buy a cheaper house an wait for the market to recover.

No, we won't owe any tax on any of it. We'll owe $36K, which we'll settle for under $10K. We'll gladly pay $10K to walk away from this money pit.

We'll save $1500K+ a month renting, so the savings will add up quickly. Not the way I envrisioned it, but here we are.

well good luck. You might want to look at worst case scenario though. California is practically broke so I'm surprised that your attorney thinks they will waive the tax bill for people who walk away from their house.

I don't fear being sued anymore. In some ways I say to bring it on. If they're smart, they'll offer me a reasonable deal. If they're stupid, they can spend money in court and have me declare bankruptcy when it's all over.

If they'd be willing to sell the debt to a collections agency for pennies on the dollar, why not settle with me for the same?

infinite9 says

Within two years, almost no creditor cared much that I had a BK on my record. I think the fallout was that I ended up with an extra percentage point on a car loan. Within four years, I had a mortgage on another house at 5%.

You have to remember this was during the housing boom, anyone who could fog a mirror and some that couldn't were getting loans. I wager if you did the same thing today, no creditor would touch you for ten years.

infinite9 says

Within two years, almost no creditor cared much that I had a BK on my record. I think the fallout was that I ended up with an extra percentage point on a car loan. Within four years, I had a mortgage on another house at 5%.

You have to remember this was during the housing boom, anyone who could fog a mirror and some that couldn't were getting loans. I wager if you did the same thing today, no creditor would touch you for ten years.

Jerome says

No, we won’t owe any tax on any of it. We’ll owe $36K, which we’ll settle for under $10K. We’ll gladly pay $10K to walk away from this money pit.
We’ll save $1500K+ a month renting, so the savings will add up quickly. Not the way I envrisioned it, but here we are.

Sounds like you have this all planned out, rather it sounds like your counting your chickens too soon. We’ll owe $36K, which we’ll settle for under $10k? Sounds to me your dictating the terms of the settlement to the bank. I would advise you to be very humble with the bank, walking in with an attitude is going to get you into trouble.

Corporations don't feel guilty about walking away from a contract they don't like and they prey on the tendencies of lesser "persons" to wish to pay their debts. Don't do it if it doesn't make financial sense for you. Look at it this way: everyone will be better off when real estate prices are a third of what they are now, and you're helping bring it about.

Everyone is over thinking this. We walked away two years ago from two properties. The practical effect has been zero.
Making a stupid mistake is one thing. Continuing to make a stupid mistake when you know better due to cowardice is another.
People paying on underwater properties are fools. There is no such thing as morality when it comes to making a rational economic decision. Not repaying a friend or relative IS morally wrong but applying the same logic to an arms length commercial transaction is absurd.

Stocks and anyone else thinking of walking away,

Besides the obvious hiding HELOC cash somewhere, if you can HELOC out anymore money married couple can stash a total of 20K into IRAs for '09 and '10 tax years. I think the Supreme Court ruled a couple of years ago that IRA's are pensions and thus cannot be seized by creditors. Besides the IRAs, if you have a 401K loan you can also use the HELOC money to pay off that 401K loan to protect it from creditors, too.

Jerome says

With all of this in mind, we are going to strategically default. Our neighborhood is destroyed by foreclosures and values won’t be coming back for a decade or more. We’ve been here five years and never envisioned it going this way.

No your neighborhood was not destroyed by foreclosures, it was destroyed by buyers over bidding/overpaying on a home where the price wouldnt hold it value down the road. Paying $600-800K for a home which otherwise sold for 200-300K a few years prior is trouble in the making.

http://www.housingbubblebust.com/OFHEO/Major/NorCal.html

Florida is a recourse State 85% sure.

I was bombasted by Mortgage and Real estate Professionals on several occasions with "well grounded facts on why my house would only go up and then I could continually refinance if I bought the house".
I'm trained to think through that heavy sales pitch but I can easily see how so many Americans are in the foreclosure traps they are in... The pitch was extraordinarily well financed and pounded in to everyone by the money machine it was fed by. Of course though it's constantly stressed that Poor idiots bought houses they shouldn't have and it's their fault the whole housing collapse has happened.

Back in my old neighborhood in Texas, you can always spot a walk-away. Overgrown weeds and gang tagging on the house. This in a neighborhood that is only 5 or 6 years old. Wow. Glad I sold when I did.

What I find disturbing is when banks encourage people to cash out retirement savings, or college savings for their kids to pay for their underwater mortgage.

BTW, California is non-recourse, but only on initial "purchase money" loans. Refiancings, seconds, or HELOCs taken out after the purchase of the property are usually recourse loans.

It's the banks job to make certain the money they lend are for tangible solid investments.
Otherwise, then it is true, that the banks are no longer in the lending business, and are nothing more than Shylocks that wants the Vic on the money you pissed away on Gambling on the value of your house.

"Where's the MONEY! Lobowski?!?" (Punch punch punch flush)

"I think I saw down there somewhere, put me back in the toilet and let me see if I can find it."

LOL. Tenouncetrout says

“Where’s the MONEY! Lobowski?!?” (Punch punch punch flush)

Our choices have consequences. I chose not to buy a house but everyone is to blame. I just hope we have learned our lesson about greed and the thought that everyone can win. It all started when we begun handing out 16th place ribbons in school about 25 years ago. I remember because I recieved one. We need to teach our children that you can lose, and lose big.

What do you expect banks to do? They were pimps when they handed out the loans and now thugs when they want the money back. What do you expect?

kdkgf says

Everyone is over thinking this. We walked away two years ago from two properties. The practical effect has been zero.
Making a stupid mistake is one thing. Continuing to make a stupid mistake when you know better due to cowardice is another.
People paying on underwater properties are fools. There is no such thing as morality when it comes to making a rational economic decision. Not repaying a friend or relative IS morally wrong but applying the same logic to an arms length commercial transaction is absurd.

Very good point .. and a great example as to why social engineering being used in lending was a very bad step for the NRA / B.Frank machine to use to ram it to (pun) Fanny and Freddy (and ultimatly us tax payers, since we now hold all the bags (another pun) thanks to The Sodomite, B.Frank.

You see, if all loans were 100% colaterized, and 100% recourse, then the whole game of "walk away, it is not worth what it should be." goes away. But, as the game sits now, you make good points.