To pay or not to pay is the question now facing some homeowners ”” not because they can’t afford their mortgage, but because they don’t want to keep paying on a home that’s lost value.
But even as they gain popularity, strategic defaults are highly controversial ”” some might say immoral. About a quarter of American homeowners took out loans that are bigger than their homes are now worth, and some of them say it’s simply irrational for them to keep paying the mortgage.
Grace Chen and her husband, Antonis Orphanou, have this debate about their own home. From the outside, there is nothing to flag them as troubled homeowners. They haven’t lost their jobs. Their interest rate has stayed the same. They are not counted among the legions headed to foreclosure. In fact, they haven’t missed a single mortgage payment.
But they’re tempted to.
I am in this position. Coincidentally I have the closing sale on my home tomorrow. I will be paying $27,000 to make up for what I owe on the place. I tried to negotiate with the bank, but they weren’t even biting. Their advice was that I give the place back to them and they will sell it and take the hit.
What should I have done? Sell myself and pay the owing $27000 or give back to the bank and let them deal?
You almost certainly did better than they would have done on a short sale.
This is one of the things about the down turn that people outside of the USA have found difficult to imagine. In NZ if you are foreclosed and the bank can’t get all of its money, then you still owe them the balance. The only way you can get out of it is to go bankrupt — and then you have to hand over all you have (cars, personal effects etc except for clothing).
Being able to “post the keys” must make it much easier to walk away. Here its is real last resort because you know the bank will not try to get absolute top dollar (but rather go for a quick sale) because they will get their money anyway.
Houses that are below their mortgage value today may well look much different in ten years time. Its a matter of how long you can hold out.
3, actually that’s true here too. The mortgage is security for the loan. In general (unless there are an unusual set of facts), foreclosure does not discharge the underlying loan. In general you would need to file personal bankruptcy to get out of that. Of course the facts of each case would control.
Br. Michael, that is only true in @ 1/2 the states. The others are anti-deficiency states; in them borrowers can accept foreclosure, which results in no further liability.
The emerging disclosures about the massive fraud by America’s financial industry in the origination, securitization, and foreclosure of mortgages will undoubtedly persuade many other owners to walk away in disgust.
Interesting. How would the banks account for those on their balance sheets? The value of the loan or the value of the house? Or the value of the higher amount?
I think there are very few states where a creditor cannot go after the borrower for a deficiency judgement. The procedure for obtaining a deficiency judgment is more complicated, i.e. judicial vrs. non-judicial forclosure; but generally, the bank does have options for going after the debtor for losses not covered by the sale of the property securing the loan.