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The Cost of Walking Away

There is a very interesting cultural change taking place throughout the country. And it is the direct result of the current challenges in the housing sector. It seems that there is a wave of support for the concept of walking away from your financial obligations in regard to your mortgage. The stigma attached to those who become delinquent on their house payments has now almost become a badge of honor.

And we are not just talking about some fringe element calling for the big banks to get what’s coming to them. Main stream media and college law professors are joining in on pronouncing this new behavior, if nothing else, quite reasonable.

The New York Times in an article in January stated:

Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property … The borrower isn’t escaping the consequences; he is suffering them.

Brent White, a professor at the University of Arizona’s James E. Rogers College of Law, is actually suggesting that it makes no sense not to walk away! In his extensive report he says:

Home owners should be walking away in droves…The real mystery is not why large numbers of home owners are walking away, but why, given the percentage of underwater mortgages, more home owners are not.

And just this week, The New York Times in their blog actually gave step-by-step instructions on how to determine if it makes financial sense to walk away and where to go to get the proper coaching.

However, there are costs to walking away that should at least be considered. The banks are starting to get tougher about going after people who default on their loan. Bloomberg this week ran an article reporting how banks are getting deficiency judgments at record numbers:

While there are no statistics on the number of deficiency judgments approved by courts, the Federal Deposit Insurance Corp. tracks the amount banks collect after defaulted loans were written off.

These mortgage recoveries rose 48 percent to a record $1.01 billion in the first nine months of last year compared with the year-earlier period, according to the Washington-based regulator.

And the person the bank is most likely to go after is the borrower who could afford to pay, but decided not to.

The likeliest candidates for deficiency judgments are so- called rational defaults, said Larry Tolchinsky, a real estate attorney in Hallandale Beach, Florida. In those cases, people who are current on their mortgages decide to walk away from a property because its value has sunk so far below their loan balance they have no hope of recouping the loss.

Will this slow down the number of people walking? We will continue to follow this situation closely because if it doesn’t slow down it will definitely impact housing prices this year.


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3 replies
  1. Michael Mekler
    Michael Mekler says:

    Steve,
    As usual very good and thought provoking post. Just this week I talked to a California attorney about this subject and it is entirely state specific. The other major component is the type of financing that is currently in place on the property. An original purchase money mortgage is less likely to be 1099’d than a cash out refinance or a second mortgage that was taken out after the fact and within the previous 3 years.
    Michael Mekler

    Reply

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  1. […] nothing or walk away: At times a homeowner may simply be upset that the value of the property has dropped or that the […]

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