Return to the Buying and Selling Homes Forum | Post a Follow-Up

 o
what happens to people who walk away from their homes?

Posted by newhomeseeker (My Page) on
Wed, Mar 19, 08 at 15:37

I'm not very familiar with the foreclosure process but I am curious what happens because my fiance's parents just walked away from their home last summer. They owned it for about twelve years but had refinanced and used the money to pay bills or buy crap I guess. They still owed more than they could probably sell the house for although the house was on 8 acres but mostly hillside and woods. Anyway, I was under the impression the bank had already foreclosed and that is why they moved. I just found out that they were behind on their payments but at the time they moved, the bank had not foreclosed. They moved in July of last year and just yesterday were served with what they say is the bank suing them for the balance they owe.

I'm amazed that people just walk out of their home and expect nothing to happen to them. They didn't damage the house or anything, just left a bunch of junk they didn't want and locked the doors and left. I'm sure the house has probably been vandalized by now by kids or people trying to break in. They never tried to sell the house at all. They just decided they couldn't make the payments and left. Their only concern was putting "no trespessing signs" on the property so they wouldn't be liable if anyone got hurt.

His parents are saying they are probably going to jail, etc. All I know about foreclosures is that the house will probably go to a sheriff sale and if the bank sells it for less than they owe and forgives the remaining amount they will have to pay taxes on that amount.I don't condone this behavior at all, I didn't know about it until yesterday (I thought the bank had already ordered them to move out) What normally happens to people who walk away before their home goes into foreclosure?


Follow-Up Postings:

 o
RE: what happens to people who walk away from their homes?

I think that if you just walk away, you could get hit with different laws etc, because my son is loosing his home but has been in contact with the mortgage co who is trying to work with him and advising him what to do when. His is due to a big job cut and no work in MI in his area.
Just being behind is not an excuse, especially if one or the other has a job. I would be concerned, because IRS probably will be involved. Please, if possible, don't lend them any money or let them move in with you or their son. They should seek some legal advice and assume some responsiblility.


 o
RE: what happens to people who walk away from their homes?

They have already moved in with their daughter so no worries there. They both work but make about $7 hr each. Also the father was out of work for about six months because he had a heart attack and open heart surgery. So they do have some legitimate reasons for not being able to make the payments. But I can't imagine just leaving your house like that. They didn't try to sell it FSBO or talk to a realtor to find out how much they could possibly sell it for or anything.


 o
RE: what happens to people who walk away from their homes?

Well, we don't have debtor's prison in this country. So, unless they've done something crimminal you haven't mentioned they won't be going to jail for walking away from their house/mortgage.

Recently, like within the past few weeks, a moratorium on federal taxes due for any waived mortgage debt was signed into law. But, there are certain criteria that have to be met such as date the mortgage loan was closed, whether the property was a primary residence, & when debt was foregiven. If they meet the criteria, they won't have to pay federal taxes on the difference between what the lender recovers & what they owe, if any.

The foreclosure process takes a very long time in some jurisdictions. It sounds like your in-laws live in one of those areas since they moved out last July & are just now receiving the Lis Pendens. There are lots of procedures that have to be followed exactly to assure clean title after a foreclosure. In some areas, this process can take a year, or even a bit longer.

Too bad they didn't even try to sell before abandoning the property. But, that won't get them thrown in jail. :)

/tricia


 o
RE: what happens to people who walk away from their homes?

Back in our youth,let's say more than 25yr. ago, we bought a condo at its peak price, and took out what was one of the first ARMs ever. We intended to rent it. The housing market in that town tanked to the point that you couldn't even get a realtor to list the darned thing because people could buy a real home with nothing down and less payment. People with local paper were given new, better mortgages, forgiven even principal in some cases, and carried on. Our paper had been sold out of state, and no one cared about the tanked market several states away. We tried to carry to the house for a while, but finally talked to a lawyer who said to ask the mortgage folks to negotiate; when they wouldn't respond, he said to walk away. We had to pay the lawyer and about 10k in extra taxes for the forgiven debt resulting. It was balanced out a little by the loss we could claim on it, but basically it was a financial blow. It didn't do much to our credit; existing loans or cards we had continued on with us. We did not try to buy other real estate for many years, so we don't know what would have happened on that. We rented.

I hope that people will take advantage of the tax thing. There are circumstances where you feel you have few options. But in our case, and others' too I imagine, the best thing would have been a good dose of common sense before we signed the dotted line.


 o
RE: what happens to people who walk away from their homes?

We walked away in 1985. It was a horrible local economy -- the biggest employer closed its door and hundreds of houses hit the market the same week. My family needed to relocate, husband had a good job.
We tried talking to the local mortgage holder -- they would not discuss any options other than us continue paying the mortgage. We rented the house for a while and discovered that being long distance landlords was not working well.
Since the bank would not talk, we had to hire a lawyer to negotiated for us. We got them to take the deed in lieu of foreclosure -- but since, my husband had a good job, we had to pay them $5,000 to consider the debt paid in full.

Maybe, if the parents send letters offering the deed back to the bank (and save copies of all letters) the bank will accept the deed. Since you stated that these people have a low income, it's possible that the bank would perhaps accept the deed with no other recourse. Perhaps they could find someone in a free legal aid clinic who could help them. I really don't think that they have much to worry about, unless they have other property or assets that could be taken.
Good luck. I know how it is when there are no options other than just giving the house back.
Did this hurt our credit? I don't think so, we've since bought and sold properties & luckily have never been in that horrible situation house-wise.
Susan


 o
RE: what happens to people who walk away from their homes?

Its interesting, i read this Messege board and one at another site that is finance related as well as various deals.

Someone posed the question as to whether they should walk away. They said that the house down in price 100K, a neihbor had an exact same house sell. The person had a piggyback loan and and ARM that hadn't reset yet and was manageable. They also had a significant amount in savings like 50K. They felt that it seemed like a waste to keep paying even though they could afford to comfortably. Funny thing is, most people agreed, said they should walk away, that the bank made a poor investment decision giving a mortgage on this property.

I guess as much as it might occur to me, I could walk away from this, I couldn't see myself blaming the bank when there was no underhanded tactics and I just bought high.

The people on the board were suggesting to buy another place in the development low, and live in that, and let the other one go into forclosure.


 o
RE: what happens to people who walk away from their homes?

The laws concerning foreclosure are very different from state to state. Many states now have trust deeds which mean that the foreclosure doesn't go through the courts. Its called a Non judicial foreclosure. When that property is sold at the auction--there is no redemption period afterwards.

However, Triciae mentioned a Lis Pendens and that means that one went through the courts; when that happens the bank can foreclose and get a money judgement too. Some states still use mortgages and that foreclosure process is different, and has a redemption time after the sale.

When you have only the original loan and walk away, its different from when you have a refinanced loan or a 2nd trust deed and walk away. That's an area of law that I taught and practiced in Calif.
One thing I would add--is be careful buying homes in foreclosure. There are lots of laws in every state that protect the person being foreclosed on when they sell, not necessarily when they lose it to the bank though. The special foreclosure laws do not protect a buyer.


 o
RE: what happens to people who walk away from their homes?

"Some states still use mortgages and that foreclosure process is different, and has a redemption time after the sale."

There's not always a redemption period after a mortgage foreclosure. In fact, I've never worked in a state where there was. Redemption periods were limited to tax sales & other such circumstances.

Most states use mortgages. Here's the list:

Deed of Trust states: Alaska, Mississippi, North Carolina, Arizona, Missouri, Virginia, California, Nevada, & Washington DC.

Mortgage states: Alabama, Louisiana, North Dakota, Arkansas, Maine, Ohio, Connecticut, Massachusetts, Oregon, Delaware, Michigan, Pennsylvania, Florida, Minnesota, Rhode Island, Hawaii, New Hampshire, South Carolina, Indiana, New Jersey, Vermont, Kansas, New Mexico, Wisconsin, Kentucky, & New York.

States that use both Deeds of Trust and Mortgages are: Colorado, Montana, Texas, Idaho, Nebraska, Utah, Illinois, Oklahoma, Wyoming, Iowa, Oregon, Washington, Maryland, Tennessee, & West Virginia.

Georgia uses a security deed.

Foreclosure laws are State Statute so they vary considerably in everything from where the actual sale occurs (courthouse steps versus the actual property) to the time frames required for public notification.

As I re-read the OP post, I'm now wondering if the parents received notice of a deficiency suit as opposed to the original foreclosure. That would make more sense with the time frames given by the OP. I assumed they were located in a mortgage state & noted a Lis pendens sense the OP used the words, "served" & "sued".

In any event, nobody's going to jail...at least not for what the OP described.

/tricia


 o
RE: what happens to people who walk away from their homes?

Oregon is a trust deed state for any HUD regulated lender. Mortgages are rarely used with the exception of a select amount of private party loans.


 o
RE: what happens to people who walk away from their homes?

What happens to people who walk away from their homes? Not nearly enough, as far as i am concerned...


 o
RE: what happens to people who walk away from their homes?

Not to turn this into a "hot topics" discussion, but why *shouldn't* someone walk away from a house they can't afford due to various reasons? Get real.

Companies walk away from debt ALL THE TIME. Every day. All the time. But when it's time for INDIVIDUALS to walk away from debt, it's a different issue...the individual should live under the burden of everything while corporations can walk away from debt to make it easier for them to suck profit out of the world.

If you lose your job, or your ARM resets, why not walk away? Remember: There is a contract between the mortgagee and the mortgage company. The contract specifically spells out what will happen if the mortgagee defaults. If the debtor walks, then they are stuck with the consequences.

I have absolutely no sympathy for the banks that made way too many loans to the wrong people, and then sold them to someone else, and sucked our tax dollars away in the process.

I don't necessarily agree with walking away from an underwater mortgage, but let's be honest: If banks and corporations are going to treat contracts and debt as non-chalantly as they do, why shouldn't we?

In any event, back to the subject at hand, the OP's parents in law lost their house due to joblessness. Is MI a non-recourse state? I thought it was. Usually in non-recourse states, the mortgage holder does not/cannot sue for the deficiency balance, I thought. Anyone else care to clarify? I know Ohio is a non-recourse state.

There was no reason to turn this into something that it wasn't, qdognj. You just had to stoke the fire.


 o
RE: what happens to people who walk away from their homes?

"There was no reason to turn this into something that it wasn't, qdognj. You just had to stoke the fire."

There are people defaulting simply because the house is under water.
They can still pay, they just do not want to.

'Strategic default' is the term being bandied about.

Some of them used there homes as a cash cow, borrowing and then spending the money.
Now they want to default and walk away.

Not the same thing as losing your job.

I have some sympathy for folks who have hit hard times, but none for anyone that milked their house and now wants to walk away.


 o
RE: what happens to people who walk away from their homes?

Once again, companies milk their credit lines, their equity, and their customers until there is nothing left then declare bankruptcy. No one seems too outraged about that. I'm not saying walking away from your house is always right, but we can't make all these people out to be villains from our high horses.

Most importantly, walking away from your house is an ETHICAL dilemma, *not* a moral dilemma. The OP was not here to be judged, the OP was asking for advice/input, regardless of the reason that the house was walked away from.


 o
RE: what happens to people who walk away from their homes?

Apparently the wealthy are doing just that...without repercussion. It's considered a strategic investment decision...and yes, it is done by corporations all of the time.

If you aren't wealthy or a corporation, you are considered a deadbeat. Otherwise, it's a "smart investment move".

And people wonder why so many jump on the "Can't beat'em, join 'em bandwagon.

Read on:

Excerpt: "Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment..."

Here is a link that might be useful: Biggest Defaulters on Mortgages Are the Rich


 o
RE: what happens to people who walk away from their homes?

"Once again, companies milk their credit lines, their equity, and their customers until there is nothing left then declare bankruptcy."

Not in anything approaching the number of mortgage defaults.

And unless the state has a law against deficiency judgments, the lenders can go after the defaulters.

Even in the states with deficiency judgment restrictions, they only apply to a single principal residence, NOT investment properties.


 o
RE: what happens to people who walk away from their homes?

Thanks for the link, Logic. It was an interesting read.


 o
RE: what happens to people who walk away from their homes?

brickeyee: "Not in anything approaching the number of mortgage defaults."

Actually, CRE (Commercial Real Estate) defaults are at a 16 year high...while the residential mortgage default rate appears to be leveling off to some degree.

That said, the collateral for the loan is the property. In a default, where the borrower walks away, the property goes back to the lender.

That being the case, exactly what can the lenders go after the defaulters for?

And...the point of the article is that those with mega bucks don't care, because they can afford not to care...as they can afford to buy another property, even if they have defaulted on another.


 o
RE: what happens to people who walk away from their homes?

"That being the case, exactly what can the lenders go after the defaulters for? "

If the lender does cannot sell the property for the outstanding balance of the note there is a deficiency.

You owe $500k, default, and the holder of the note can only get $300k for the property.

This is a $200k deficiency.

I am leaving out all the costs of the foreclosure, so even if a property sells for the loan balance there is a deficiency.

Some states do not allow the note owner to sue the borrower for the deficiency on a principal residence.

Many banks do not pursue the borrower since they recognize that the money is not there.

If the borrower has any other property the bank can go after it, especially if it has a lot of equity.

"Actually, CRE (Commercial Real Estate) defaults are at a 16 year high...while the residential mortgage default rate appears to be leveling off to some degree."

While the rate may be leveling off, there are far more residential mortgages than commercial.

Changing rates say nothing about the actual underlying number of defaults.


 o
RE: what happens to people who walk away from their homes?

Not sure where you are getting your data, but from what I've seen, the default rates for commercial and residential are comparable.

"According to new data from Real Capital Analytics, the default rate for commercial real estate loans owned by the nation's FDIC-insured banks increased from 3.83 percent in the fourth quarter of 2009 to 4.17 percent in the first quarter of 2010."

Residential rates have been hovering in the mid 3's. and were estimated at 3.3% for June by Experian.

http://www.realestatechannel.com/us-markets/residential-real-estate-1/real-estate-news-consumer-default-rates-mortgage-default-rates-spexperian-consumer-credit-default-indices-standard-and-poors-home-foreclosures-2873.php


 o
RE: what happens to people who walk away from their homes?

"default rates for commercial and residential are comparable"

Rates do not tell you the actual number of each category.

If there are twice as many residential mortgages and the rates are equal, there are twice as many residential defaults compared to commercial.

I t reminds me of the TB 'epidemic' in Arlington, Virgina in the 1970s.

The number of TB cases increased by 1200%.

The Vietnamese who settled in the area brought TB cases with them.

The real numbers was 1 case per year, and then 13 cases the next year, followed by a huge decline back to a case a year.


 o
RE: what happens to people who walk away from their homes?

The pure number of defaults mean nothing. Sure, there are more home owners, so there will be more home owners in default. However, defaulting on a 150k mortgage doesn't have the same economic impact of defaulting on a 20 million dollar construction project.

Besides, the posters comment was about the actions of businesses in comparison to individuals. In general, a business is more likely to default on a loan. There is some understandable anger when companies get away with behavior that is unacceptable for individuals.


 o
RE: what happens to people who walk away from their homes?

"The pure number of defaults mean nothing. "

Yes it does..

It tells how long it will take for everything to recover.

The rate is just a trend line, nothing more.

It is possibly useful for trying to decide if the problem is worsening or easing.


 o
RE: what happens to people who walk away from their homes?

billl: "In general, a business is more likely to default on a loan. There is some understandable anger when companies get away with behavior that is unacceptable for individuals."

EXACTLY.


 o
RE: what happens to people who walk away from their homes?

There is some understandable anger when companies get away with behavior that is unacceptable for individuals.

Do you know this to be a true statement?


 o
RE: what happens to people who walk away from their homes?

Do you know this to be a true statement?

What a bizarre response. Why wouldn't it be a true statement? Why don't we charter a psychological study to find out? ::rolls eyes::

It's a true statement because I believe it so there you go. Psychological study done.


 o
RE: what happens to people who walk away from their homes?

I am considering walking away from 2 of my rental properties, one in OR, one in WA. These are both refinanced loans.

The loan amounts are about equal to the market values but even if I can sell, I will loose even more money to fees, repairs...

I am loosing money every month because the rent doesn't cover my cost.

And there is no hope in sight. I am throwing money away.

Can the banks go after me for what little equity I still have in my other rentals or my saving ?

The credit hit is the least of my concern.

Any advice ?

Thank you.


 o
RE: what happens to people who walk away from their homes?

Investment properties are rarely 'non-recourse' even in states that limit recourse on owner occupied properties.

Yes they can come after you, and if you own anything else of value very well may.


 o
RE: what happens to people who walk away from their homes?

Also, even in the best case scenario where the debt is cancelled and they don't come after your other assets, the value of the cancelled loans is considered income and you'll pay taxes on it, since these are investment properties.

Honestly, if you can sell for about the value of the loan and all you're losing is the repair money, that's what I'd do. You'll lose some money, but probably not as much as you'd lose in legal fees and taxes to walk away---and losing money from time to time is the nature of investment properties.


 o
RE: what happens to people who walk away from their homes?

"losing money from time to time is the nature of investment properties. "

But...
But...

This seems to have fallen from the view of all sorts of quick RE investors interested more in flipping for a quick profit.

I have not lost money in a long time, but have had to hold properties longer than anticipated when renovation costs turned out higher than anticipated.

Part of the strategy is to make sure you can cover the mortgage payment (and other expenses) with the rent.

If you have a fixed mortgage the rents will slowly rise until you go from a neutral cash flow to a net positive.

During that time you have leveraged the increase in value on the property.

With 20% down a 0.5% per year increase is 2.5% overall (5x leverage).

It is nice watching values increase while someone else is paying the interest for you.


 o
RE: what happens to people who walk away from their homes?

Some of the answers you guys are giving are out of control! The nature of each loan/property can vary and then there are the specific state statutes, which vary. So, each case is determined by the note and the state.

Also, I can't imagine judging someone harshly for complying with a contract they signed. To the best of my knoweledge when a lender approves a mortgage, they specify the terms and conditions under which they will lend the money. If those terms say...in the event of default, we take your house, they must have thought it was a good idea. I have not heard of a contract that says, if you default the penalty is XXX and you are a really bad person.

OH wait, I forgot, after they made that loan, they placed bets that would pay out if the loan defaulted.

And another thing....during the bailout, most of those mortgages were purchased for about 10% of their value so they now hit the jackpot when someone defaults and they get to cash out the value of the home. (that's why the lenders aren't modifying loans - they make money on the foreclosures).

Sorry - Personally, I can't somach walking away from my underwater home becausem I like it and can make my payments. BUT - I don't think there is a moral issue for the homeowner. The lenders who bet against the mortgages on the otherhand......


 o
RE: what happens to people who walk away from their homes?

I know of a couple people who purchased a new home and walked away from the old one -- these were people who just wanted a bigger/nicer house and new they could never sell the old one.

This was a few years ago -- I can't believe they'd get away with it now.


 o
RE: what happens to people who walk away from their homes?

My horse trainer has a couple of clients who did this fairly recently, after buying all new cars first, of course. I find it totslly disgusting.


 o Post a Follow-Up

Please Note: Only registered members are able to post messages to this forum.

    If you are a member, please log in.

    If you aren't yet a member, join now!


Return to the Buying and Selling Homes Forum

Information about Posting

  • You must be logged in to post a message. Once you are logged in, a posting window will appear at the bottom of the messages. If you are not a member, please register for an account.
  • Posting is a two-step process. Once you have composed your message, you will be taken to the preview page. You will then have a chance to review your post, make changes and upload photos.
  • After posting your message, you may need to refresh the forum page in order to see it.
  • Before posting copyrighted material, please read about Copyright and Fair Use.
  • We have a strict no-advertising policy!
  • If you would like to practice posting or uploading photos, please visit our Test forum.
  • If you need assistance, please Contact Us and we will be happy to help.


Learn more about in-text links on this page here