New York Times: Walking Away From Your Mortgage, Not So Bad After All

Great news, distressed homeowners! If you aren’t eligible for the President’s homeowner assistance package and can’t negotiate a better deal on your mortgage, the New York Times says that turning in the keys and leaving your home may not be the end of your financial world. The Times mapped out a guide for dealing with the various players controlling your mortgage…

Your Lender: Lenders realize that this is a terrible time for everyone. You may be able to return your house and call things even, avoiding foreclosure with what’s known as a deed in lieu. Your bank might also be willing to allow a short sale, where you sell the house for less than the value of the mortgage.

If you’re already in foreclosure proceedings, you may be able to walk away without a chase. Several states, including Arizona and California, prohibit lenders from pursuing foreclosed borrowers. Don’t try this if you have lots of cash and are tiring of the payments on your beach house. A lawyer will be able to guide you out of your house toward the path to solvency.

The Taxman: Several states are following the federal government’s lead and won’t treat forgiven debts as income at least through 2012. Again, a lawyer can help you figure out if you qualify.

Your Credit Score: Yeeaahhhh, no way to escape this one. You’re going to take a big nasty hit and it’s going to stand out on your credit report for seven years. If it’s your only black mark, don’t sweat it too much. FICO may have to change their algorithm to downplay foreclosures. “To the extent that foreclosure doesn’t predict future behavior as much as it did in the past, you’d expect that the FICO algorithm would change to adjust for that,” said Todd J. Zywicki, a law professor at George Mason University.

Regardless of what you choose, if you’re unwilling to spend any more money on your mortgage payments, spend a few dollars on a lawyer to help figure out your options.
Thoughts on Walking Away From Your Home Loan [The New York Times]
(Photo: jetsetpress)

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  1. SarcasticDwarf says:

    The biggest impediment is still the banks. Short sales are near impossible because they take 3+ months for banks to handle. With buyers having a lot of choices for homes, why would someone wait months for a short-sale home when they could get another just as easily in a matter of weeks?

  2. Trai_Dep says:

    As much as I rely on the NYT, there’s some kind of irony with this article, considering that they’re doing a sell/lease-back on their corporate headquarters…

  3. Blueskylaw says:

    This is a tough situation to be in.
    My sister is getting divorced in Virginia and she left their home and moved into an apartment with her two kids. After about three months she lost her job (Engineer) and shortly thereafter her future ex lost his and moved back in with his parents. Nobody is making mortgage payments and the house is for sale with no interest from any buyers. The way things are going they expect to lose everything they put into the house (down payment, appreciation etc.)

    With so many government programs/solutions/recommendations flying back and forth and changing rapidly, does anyone have any ideas of what action(s) might be best for her?

    • ironchef says:

      @Blueskylaw: have you considered renting the house? It might generate income and buy you some time.

    • squishyalt says:

      @Blueskylaw: The bank DOES NOT want your sister’s house. So, a lot of them are starting to discuss refinancing the homes at a lower rate for the owners (something these clueless bastards should have done LONG ago). Tell your sister to explain the situation to them and ask for a lower payment, lower rate or increased time on her loan. Just don’t make it look as if she can’t afford ANY payment or the bank won’t talk. The lower the payment the greater the chance for getting at least a renter like ironchef suggested.

      • KyleOrton says:

        @squishyalt: Unfortunately she already moved out. As rotten as it sounds, the best thing to do is get as much free habitation as possible and save that money every month. It will take months for them to want the house and allows for the possibility of working something out with the bank.

        How long ago must she have bought the house for there to be appreciation and a down payment required?

  4. u1itn0w2day says:

    I can look at those walking away from their mortgage and sorta of see where they’re coming from but articles like this almost legitimize and justify doing it .

    And yes it will hurt your credit but too many are using the economy as an excuse or place to hide & justify their excessive spending .

    Although I’d much rather see home buyers walking away and dealing with the banks and their future spending without government aide . Still ; too many felt entilted to buy at hyper inflated prices with little thought to consequence .

    • richcreamerybutter says:

      @u1itn0w2day: Feeling “entitled” is buying a dress that hugs your curves in the right way, and the confidence it generates is worth the expense for something that might be slightly out of your budget (and for which you might adjust other expenses temporarily). Feeling “entitled” is splurging on an expensive take-out sushi meal after your first full week of work in months.

      I’m an unashamed renter, and and did so proudly even when strangers on the Interwebs were calling me an “idiot” for “throwing my money away” on rent. I stood my ground, knowing full well I was responsible enough to realize that I could not afford to buy (especially in NYC, and I’d rather travel anyway). My lifestyle is more important than owning a piece of property in a place I don’t want to live.

      That said, I realize many others have different priorities (kids, dog, picket fence) and home ownership is a huge part of this lifestyle. I may not understand their desires, but I can definitely see the role that home ownership plays if you embrace other very traditional American elements. I have empathy for the millions of people who were told that their hard work and compliance with rules would be rewarded with their own slice of the pie. These future homeowners were told by so-called professionals in the RE and finance industries that they could indeed afford their homes. How would they know any different if more than one person in these areas of expertise confirmed this information?

      I have a huge issue with those of you referring to the average foreclosure victim as “entitled.” In most cases this was just a logical life step. Obviously there ARE exceptions, but I truly don’t believe this is the rule.

    • Mary Marsala with Fries says:

      @u1itn0w2day: Your last sentence is complete unfounded bullshit, but ignoring that for the moment, if anything “legitimizes” walking away from a hopeless investment, it’s the banking system itself. Because the banks, the other party in this deal, would walk away .5 seconds after they figured out that the house was a money-losing prospect. It’s not fair to expect the other party, the homeowners, to hang in there until their last pennies are spent.

      If, in your situation, the bank would bail on the home, then it’s quite morally acceptable to walk.

  5. bagumpity says:

    There is little difference between a homeowner walking away from a mortgage and a corporation walking away from a debt security by a similar class of collateral. The phrase “it’s only business” which used to be used exclusively to apply to the actions of a business that hurt ordinary people. Guess what? Now it applies to the businesses too. It’s just business. When walking away from a mortgage is in your financial best interest, it’s time to shed the social stigma and hand over the keys.

    • richcreamerybutter says:

      @bagumpity: Well said.

      When I was a kid, my own family was once in a similar catastrophic situation. Who gives a shit about long term social stigma and credit scores when you’re trying to keep your family fed in the immediate future? I think many of those giving lectures to desperate people simply don’t realize that for some, this IS the only option.

    • Mary Marsala with Fries says:

      @bagumpity: SECONDED, and well said, thank you.

  6. richcreamerybutter says:

    The proposed FICO algorithm adjustment reminds me of when I’d receive 105% on a school test even when I didn’t answer all the questions correctly. The rest of the scores were so low that the teacher adjusted the grading curve.

  7. u1itn0w2day says:

    Another thing to note for many is that if you want a full fledged career and not just a job remember many potential employers look at your credit history . If you are doing a computerized application and they chekc if your number is too low you can be knocked out of the running without even be a given a chance to explain it : especially now with the large number of applicants for every job , especially the better ones .

    • richcreamerybutter says:

      @u1itn0w2day: I remember the last recession and subsequent recovery, and the current situation will bounce back at some point. Given the number of foreclosures and other disastrous situations influencing credit scores, I would imagine that when good labor is once again in short supply, job credit checks will also redefine their “worthiness” curve (or ditch credit checks altogether except for seriously money-related positions).

    • Anonymous says:

      @u1itn0w2day: Only the crappy employers do this. I am an IT professional and got badly burned in the .com bubble and had to make some tough decisions. One of those tough decisions was to walk away from an extra car and some credit cards. My credit took a nasty hit from that decision. If the creditors had been willing to work with me rather than being rabid animals demanding money I would have paid the debts. Walking away was a good choice for me and I would do it again if the circumstances presented themselves again.

      The employers that want to do credit checks are on the low end of the pay scale anyway and are usually in the financial or government part of the sector which is not worth dealing with anyway. Now in the really bad economy I am making the most money I have ever made in my career.

      I decided a long time ago to run my personal finances and career like a business. If nobody wants to buy your products do some market research and develop new products that people DO want to buy.

      • the_wiggle says:

        @ConwayZinkbot: “I decided a long time ago to run my personal finances and career like a business. If nobody wants to buy your products do some market research and develop new products that people DO want to buy.”

        awesome. just plain paradigm shifting awesome.

  8. Blueskylaw says:

    @ironchef Darn this reply feature

    Because of the home prices down there, renting it out would not even come close to paying the mortgage, and since they both lost their jobs, neither of them can buy the other out of their share. Like so many other people in America, they are in a bad situation.

  9. dragonfire81 says:

    Wouldn’t this tactic result in a bad hit on your credit report? I mean, how is it much different from just not paying the mortgage and eventually being foreclosed on?

  10. Larmer says:

    A foreclosure would be a major hit on your credit score, and more importantly, your credit report. As a lender, the score is more or less an arbitrary number; you need to be above a certain threshold, but that’s about it. The credit report is what I grill you on, and I need an answer for anything that’s not a shining R1 or I1.

    If you look at other options to cover a shortfall, such as proposals, keep in mind that in terms of credit, a proposal looks very similar to a bankruptcy, and many lenders give them similar weight.

    I’m a Canadian, so keep in mind our system is a tad different.

  11. u1itn0w2day says:

    richcreamerybutter : I don’t mean to lump everybody into that category especially those who simply lost their job with a regular reasonable mortgage and purchase price on a house .

    But too many were doing things like chasing dreams when they used these mortgages or simply bought at an inflated price with the expectation things would go even higher . Those expectations are false and anyone one who just thought possible scenrios when signing a 50 page contract to get their dream would’ve realized that .

    I’m not letting the greedy scum bag financial industry off the hook either . They fed on those dreams like professional con artists looking for their next victim . They might have done it with advertising or pushing a premise but they knew who their prey would be .

    Many people look at themselves as some how better when they don’t worry about money or price . And they confuse chasing dreams with reasonable goals . But when you sign basically the equivilent of a small book and not think there might be consequences you are wrong .

    • Shadowman615 says:

      @u1itn0w2day: I’m really not sure how you can so easily determine what an “inflated price” is. Sure, it’s easy to tell that in hindsight. The properties in my area have always been expensive, got more expensive until about 2006, then began slowly dropping again.

      Even now, homes still don’t look like great bargains around here, although I guess they’re slightly more reasonable than they were 3 years ago. For all I know, they’re still overinflated. But it’s hard to imagine most home buyers have much of a sense of what prices are overinflated or not. I sure as hell don’t. All most of us really can do at a certain point in time is compare to other houses in the same neighborhood.

  12. Trencher93 says:

    If the economy is going to be in a depression for the next 5-10 years, who cares about your credit score? You won’t be able to do anything, anyway. The smart person would have bought a house he couldn’t afford and cashed out the bubble equity and spent it, run up huge credit card bills (unsecured debt) on stuff (you could keep), etc and then filed for bankruptcy. Likely he’d have gotten to keep the house with a government bailout, and would have ruined credit, but would (a) have all the stuff he ever wanted anyway, and (b) be looking at a decade of a bad economy anyway. The suckers in all this were the prudent ones.

  13. FrankenPC says:

    Gee…this article makes me wish I had purchased my home as a corporate entity. It seems like they can get away with murder.

  14. FrankenPC says:

    We are not in a depression. When unemployment gets to around 25%, then worry. And, BTW, credit is still flowing. The banks are taking your FICO score more seriously. But it’s still flowing.

  15. madanthony says:

    Gee, with articles like this I feel like a sucker for actually, you know, paying my mortgage.

    Having a house foreclosed on isn’t a good predictor of future credit worthiness? I’m having a hard time swallowing that one. I would at least think having a mortgage and NOT having a foreclosure is a pretty good sign.

  16. u1itn0w2day says:

    Trencher93 ” The suckers in this were the prudent ones. “

    And that about sums it up .

  17. KyleOrton says:

    @bagumpity: As a word of warning, if you business your way out of too many debts, you might end up as a running late-night hair joke and in a reality show with Dennis Rodman and Andrew Dice Clay.

  18. pecan 3.14159265 says:

    Blueskylaw: If you don’t mind me asking, how much is the mortgage payment? Even a $3,000 mortgage payment split between a bunch of students is a good deal. If the house will fit 4 people (and it looks like it did, because there were two adults and kids) that evens out to $750 a person which is an extremely good price.

    Where in Virginia are they? Unless they’re nowhere near a college, I would say renting is a very, very good option. If a family wouldn’t rent it, certainly students will if you’re near them.

  19. KitTrophonius says:

    Trencher93 “The suckers in this were the prudent ones.”

    u1itn0w2day “And that about sums it up .”

    Um, I don’t feel much remorse for having not spent the last decade gaming the system.

    It was a gambler’s paradise. Lots of us don’t participate in that sort of thing.

  20. hahamaximus says:

    In the 7 house segment my house is in, all but mine is in foreclosure. I currently have renters, but with that many vacant un-maintained homes surrounding, it’s highly unlikely I’ll find other renters if/when the current family moves. I know I wouldn’t move into that scenario.

    Additionally, the foreclosures are selling for 1/2 of what mine is worth.

    So I’m stuck with a house that people do not want to rent due to empty houses surrounding it, can’t sell without short-sell to match foreclosure pricing and I work out of state, eventually paying rent + full mortgage.

    I stress about walking away from it, if/when the renters leave, and what it will do to my credit score. I cannot afford (assuming I stay employed) 2+ years of maintaining house + apartment due to:
    a)People buying more than they can afford (most of the homes around me)
    b)The unfortunate situation of the others losing their income.

    I bought what I could afford. I moved because the job market was already tanking in Indiana. I worked from home for 6 months before moving while trying to sell, but couldn’t.

    I loathe the idea of walking away from my first home, but the idea of living (should I find a job in the area) surrounded by 6 houses that are not maintained sounds even worse.

    I have never defaulted on a debt, but the stress of paying mortgage on a for-rent house surrounded by empty foreclosed houses isn’t something I’m willing to do.

  21. u1itn0w2day says:

    hahamaximus : sounds like your stuck between 6 rocks and a hard place .

    1) Keep your house rented at all costs meaning some rent is better than no rent . How low can you rent at ?

    2) I don’t know how effective your local code enforcement is but anything a normal home owner is required to do as far as up keep make sure the banks who own the properties do the same . This is a sore point with me . If a bank is willing to forclose a property and not have it occupied they should be held accountable . If these banks started getting slammed more often for code violations perhaps they wouldn’t be so quick to foreclose or not negotiate .

    Curious , did you leave an existing job for this new one ? What was the housing market at the time you took the new job ?

    Good Luck

  22. lakecountrydave says:

    u1itn0w2day – Well Said! These customers hired lawyers and Realtors who were paid to look after their clients interest. In fact, they were bound by codes of ethics that each agreed to in order to become licensed. Granted there are plenty of exceptions (ex: house flippers), but for most people this was the only time they had made such a complex purchase. They knew that they needed professional assistance with such a purchase, and they paid for that service.

  23. ElizabethD says:

    While I am aware that there were “flippers” in the boom real estate market, to suggest that most home buyers were trying to game a system, make a profit, etc. is off the mark for the average homeowner IMO. People move and buy homes for many reasons: their place of employment changes, their household population changes (more kids, or fewer kids when they age out), they want a safer neighborhood, etc.

    I think there is way too much beating up by some Consumerist commenters on home buyers who got stuck in this lousy economy. When we decided to buy a smaller house in a location we loved (water view) as our household shrank, we were both employed with good salaries and the market was robust. A year later, my husband lost his job and has never been employed fulltime since then (almost 2 years ago). This has changed EVERYTHING. His was the larger salary. At the same time, two of our children went to college. Gas prices went up terribly for a while.

    We are over our heads with debts. We finally persuaded our mortgage holder (Chase) to rewrite our loan, adding 10 years in order to reduce our monthly payments. At first, they didn’t want to talk to us at all (this was beginning last October) because we hadn’t missed any payments. Huh? We were trying to avoid missing payments! We want our house. Finally they agree to help and a month ago the new mortgage went into effect. It only knocked about $350 off our monthly payments, but every little bit helps. We are still strapped and as educated professionals who have worked all our lives, we never expected this at our ages (late 50s, early 60s). We plan to sell the house (sob) when the market recovers so we won’t be stuck with the mortgage in our 70s.

    There is just so much ordinary citizens can’t know about the future. I really don’t feel that prudent home buyers with families etc. were idiots or fools… just blindsided by the speed of the bubble-burst and the rapid rise of unemployment.

    • orlo says:

      @ElizabethD: Sounds like you bought a McMansion on the shore that you couldn’t afford. Downsizing your household is supposed to free up cash, not saddle you with a mortgage that you can only afford on the income of two professionals. Good to hear that the bank and taxpayers are subsidizing your folly

  24. richcreamerybutter says:

    u1itn0w2day:

    I see where you’re coming from, and do realize that some were relying upon already inflated values in hopes of an impossible outcome (and flippers, which is a different subject altogether). I’m just referencing what I know firsthand: mainly, my own friends with kids simply wanting a reasonably priced dwelling with a small yard (luckily none of them are current victims). My family members have also been pretty fortunate, but I have been hearing heartbreaking stories of friends’ parents (near retirement age) suddenly losing a home of 30 years.

    These examples, along with what I’ve been seeing in the media, seem to represent the majority of the cases. I’ll be the first to tell you I don’t know for certain if every one of these victims bought beyond his or her means at the time, but when they simultaneously topple, I’m inclined to think most acted in what was perceived to be an appropriate manner at the time.

    Also, as mentioned before, about 95% of the advice POUNDED into the general public from the beginning of time until even a year ago was, “only idiots rent.” Every outlet was mocking those of us choosing to rent (though one or two experts finally began to concede a few years back that for some people, renting might actually be more beneficial). Although I don’t succumb easily to peer pressure, I can understand how this general sentiment might be overwhelmingly influential to others.

    But too many were doing things like chasing dreams when they used these mortgages or simply bought at an inflated price with the expectation things would go even higher . Those expectations are false and anyone one who just thought possible scenrios when signing a 50 page contract to get their dream would’ve realized that .

    Many people look at themselves as some how better when they don’t worry about money or price . And they confuse chasing dreams with reasonable goals . But when you sign basically the equivilent of a small book and not think there might be consequences you are wrong .

  25. u1itn0w2day says:

    Shadowman615: When I mention inflated price I’m including anything from market forces such as supply and demand or just knowing what previous prices were and was done to it . You can do this with any item : not just houses .

    I was in Florida during the boom . When I see condos bought in the late 90s for around or under 200K going for 700K by 2004 you can’t tell me someone isn’t over paying . The flippers drove up the price by taking excess supply off the market which kept prices artificially high . The flipping is only part of the problem .

    I also believe the excessive use and/or easy access to credit also keeps prices high because if everybody is buying (on credit) that keeps supply low and demand high . I kept wondering during the boom ,where the heck is all the money coming from when retirees who worked at places like Pennys are in the same condo with those $400k-$700k units .

    And if a price continously rises wouldn’t that be infinate inflation ? .

    I admit there is collateral damage here and for many the only option is walking away .But I think too many had unreasonable expectations on a lot of things housing related .

  26. richcreamerybutter says:

    Shadowman615:

    All most of us really can do at a certain point in time is compare to other houses in the same neighborhood.

    Fancy-pants moldings and appliances aside, his is EXACTLY how property value is determined. Selling agents actually have a printout of recent neighborhood sales in the vicinity of the home for sale, and this is a main factor in how homes are priced.

  27. Ann-Marie says:

    Why would FICO adjust their algorithm? It seems to me that if you take a major hit on your credit score because you foreclosed on your home, then the resultant credit score is demonstrating exactly what it’s supposed to — your credit worthiness, or credit unworthiness in this case.

  28. trujunglist says:

    @hahamaximus

    Well.. that’s kind of the chance that you took by buying the house in the first place. No one can say for certain whether or not the job market in a particular area will tank tomorrow or in a week. You could get laid off tomorrow and get a job offer for another city the same day, putting you in the same situation. The thing is, you kind of put it on yourself by taking the initial risk of buying the home. Had you continued to rent – renting sucks because you essentially throw your money into the toilet so I understand completely – you would not be in this situation. That’s just the reality of taking monetary risks and making investments.
    This is the reason why I haven’t bought a home and have continued renting.. I’m just not sure that I won’t have to take a job somewhere else.
    Sorry mate, best of luck on your house.

  29. trujunglist says:

    Sorry guys, the reality is that when a bunch of people game the system that you’re trying to honestly be a part of, then it usually ruins it for everyone involved.
    If you did take a risk of getting a mortgage and are now screwed for any reason, well, that sucks, but that’s the risk you took. I didn’t take that risk and have been throwing my money away on rent for years. I could have a house now. I could also be in the same situation that you guys are in, hence the reason for NOT taking out a mortage – I just thought it was far too risky. Of course, when you’re gambling, you don’t really expect others to be cheating, you just assume everything is above board. Well, it’s not. The guy next to you at the blackjack table is counting cards. The couple to your right at the poker table have clickers in their shoes. The dealer works for the casino – the biggest cheaters around.
    Everyone is trying to cheat and it’s the honest people that usually end up paying out.
    Buy the ticket, take the ride.

  30. hahamaximus says:

    >sounds like your stuck between 6 rocks and a hard place .
    Ha! Good one!

    I’m already renting at a loss, sure I could go lower, but at what point do you cut your losses? Additionally, I never wanted to be a landlord (much less one that is 1200 miles away), did so out of necessity.

    A couple of the houses behind me had their grass mowed twice the entire summer last year. I started to fear of snakes appearing on my lawn. Unfortunately, the HOA is so ball-less they wont even enforce their own covenance, all they care about is the dues. Having them try to fight lenders for maintenance is a pipe dream…

    I did leave an existing job for a new one, the new employer let me work from home for 6 months before relocating since I was trying to sell a house. At the time (late 2007), the market was on the decline, but houses were selling, albeit slowly. Due to an incredibly incompetent real-estate agent (whom I’d really, really like to name), the house didn’t have a single showing under his reign. Once re-listed with a new agent, I had 2 showings in 30 days, but by then, the market was saturating with foreclosures and short-sells and my only option was to turn it into a rental. Being in the outskirts of a city is a wonderful thing, so long as you plan on staying there forever.

  31. ceejeemcbeegee is not here says:

    @Blueskylaw: Rent it out, Hire a good property manager. They are well worth the money.

  32. u1itn0w2day says:

    Mary Marsala with Fries – walking away from a mortgage or any other debt for that matter should be considered A tool or A possible solution but should not be done simply because everyone else is doing it . Is everybody walking away from a mortgage today a victim or simply someone who got in over their heads ?

    Just because a major media outlet proposes that idea does not mean it’s a one size fits all solution . And there will be consequences for who ever does it .

    And as far as buying at hyper inflated prices I still stand by that especially when you know and have known the guidelines for a getting mortgage . I was living in south Florida during the boom and where some properties more than QUADROOPLED in less than a decade so how can you be the last buyer and have any realistic expectation of a profit . They were still buying in many areas after the hurricaneS of 2004 and that’s reason enough to realize you might loose it all one day . Even here on the consumerist they had a post about the California house sold in the 1980s for like $80K and showed where it stalled at $510K – unless the last buyer was a victim of fraud I don’t care .

    And during the boom many a local news outlet kept rehashing the samething anytime a financial or housing number came out : Average house price $340K , average household income $51K , rule of thumb for a mortgage which should be no more than 3 times your yearly salary or income .

    I’m not saying treat people who walk like a leper but it should definately be reflected in their credit history and what ever consequences there after even if it costs them a job . I don’t want to ban walking as an option either . If you think it’s unfair that you have to pay til your last penny speak to your legislature and get some laws passed to that effect . Many states already have laws that your house is protected after bankruptcy nor can they pursue you for back debt .

    Repeat walking away is just A tool or possible solution , it is not a one size fits all answer and not everybody is a ‘victim’ .