Currently, in the United States, there are about 7 million homeowners behind on their mortgages.
Banks are working with homeowners who are behind due to lost jobs. What if you haven’t lost a job but your home value has dropped, in some places by as much as 50%? Don’t make a judgment, really think about it. What if you had paid, say $200,000 just 2 years ago and your home is now valued at under $100,000. Would you want to continue making those payments? Suppose you could rent a much larger, nicer home for less than the cost of your monthly mortgage payment. For many in the country, that is a reality.
In this 60 Minutes clip from Sunday night’s feature, Chris and Dana’s house was purchased for $262,000 and is now worth $142,000, if they could even sell it. More than one third of the houses on their block are vacant due to foreclosure. Their bank refused to negotiate with them because they can afford their current payments. Their dilemma; should they continue to “throw money away” on what is, at this time, a bad investment. What would you do? Would you walk away?
Estimates show that, in the past year, at least 1 million people who could afford their payments simply walked away.
The stigma of foreclosure is melting rapidly. It’s just too common. Credit ratings suffer, but for how long? That remains to be seen. Many borrowers believe their credit will be fine in as little as 3 years. Will that be the case?
What we’re seeing in our business is lenders turning down potential home buyers who have a previous foreclosure. Lenders believe that, if they did it once, they are far more likely to do it again. Foreclosure victims are seen as a very high lending risk by the banks.
Lenders have received billions from the government specifically to work with troubled homeowners. Commissioner of the FHA (Federal Housing Authority), David Stevens, agrees with banks that those who can pay should not be assisted. But, maybe the people who can afford to pay are exactly the ones to work with, people who can afford to both keep the house and maintain it. Why work with homeowners who have lost jobs and will probably end up losing it or neglecting it because they don’t have the finances to maintain it?
Citibank estimates that 1 in 5 who walk away are able to pay and, don’t forget, walking away is not illegal. Banks have made provisions in the loan documents that, if you cannot afford to pay, assigning your property to the lender is a payment option.
We need to stop the slide. Banks should work with anyone willing to work with the banks! Keep people in their homes. Keep homes out of foreclosure. Our economic stability remains at huge risk because of the housing market.
In Arizona, 50% of houses are underwater. In Nevada, 65% are. More than 11 million nationwide are upside down and estimates say that number could easily double in the next year. In 2011, at least half of all homeowners may owe more than their homes are worth.
The banks are being paid to help people stay in their homes. Walking away is becoming easier. How do we resolve the dilemma?
We are sooo tempted to walk away. Only thing stopping us is the values our parents instilled in us. I am self-employed and the banks will not refinance my home for a better interest rate b/c I am a sole prop. without 2 years tax returns. (1.5 years). Our home value has dropped more than 50%. All we wanted is to lower interest rate, not to lower our total we borrowed. Banks are cutting themselves in the throat and may force us to just walk away, even when we don’t want to. What good is my great credit score if I can’t get financed anyways?
May 13th, 2010 / 9:18 am
Oh, Mary, I am so sorry that you’re in this situation.
Will you be able to refinance in 6 months, once you have a 2 year employment history? Are you in an area that is prime for property values to now increase? You are probably looking at 3-5 years for this market to turn. Will your payments be worth it then? Do you have an adjustable?
Your tax preparer and attorney may be best at guiding you at this time. I am writing an article on short sale vs. foreclosure, which is the better choice for the homeowner. Of course, neither choice is a good one to have to make.
I hope things turn in your favor. Please keep us posted.
May 13th, 2010 / 9:47 am
What most people seem to forget is that, while banks have not been doing it, if they do not recoup the amount of the money due, the borrowers are still legally responsible for the remaining balance.
I have little sympathy for those who simply choose to walk away. Borrowing money is about keeping your word. The more people walk away today, the harder (and more expensive) it will be for everyone to borrow tomorrow.
May 13th, 2010 / 11:29 pm
I am reminded of the famous saying, ” there is no intelligent life form at the bank”. Great article Karen.
May 14th, 2010 / 5:36 am
Ray,
Actually, most borrowers are not responsible for the remaining balance. My next post, Monday, is about that very thing.
Until December 31, 2010, they may be exempt from any amounts due up to $2 million.
Be sure to watch for that Monday.
And I wrote about why the banks may be happier to have someone walk away than to do a work out. The banks may actually make more money that way. http://www.karensperspective.com/foreclosures-more-profitable-than-loan-modifications/
Thanks for your comment and please keep following.
May 14th, 2010 / 10:27 am
Bill,
Hilarious! I had forgotten that saying.
Thanks for your comment.
May 14th, 2010 / 10:48 am
Good for you Mary. I realize this discussion is mainly about what makes sense financially and what the consequences might be of a foreclosure on your credit rating, but I do think that there is a moral question that probably only exists in this day and in this culture. “My word is my bond” just isn’t something you hear said much any more. I’m glad I just read it (in maybe a slightly different form) from Mary. At least one person is building up some good karma. I hope you can bank it soon!
May 16th, 2010 / 6:24 am
Great point, Laura.
Thanks for highlighting that for the rest of us.
May 16th, 2010 / 11:54 am
I find it amazing that anyone who makes a legally binding contract can feel that they can just wake up and decide it was not worth their while! What idiot in our federal government came up with the idea that you can walk away from your mortgage? You agreed to pay it, and you should have to pay it. Real estate is an investment and one which should be seriously considered prior to “signing on the dotted line”. There is no guarantee that it will increase in value. Who agreed to that? We are such a spoiled society now that we feel if we make a “boo boo” we should be able to ignore it and it will go away. All of the flux we are now in has come from this attitude, and we have to put our foot down…..say HELL NO……you wanted it and now you will pay for it. My mother used to tell me….”You made your bed. Now lay in it”. It is time for this world to grow up and accept whatever responsibilities they have and make the most of it. Good; Bad; and/or Ugly!
May 17th, 2010 / 10:49 am
Many people feel that way until they find themselves in a similar situation.
The thing about contracts is, always be sure there is an exit going in, no matter what side you’re on. The banks were supposed to be lending on something they felt had value. They should have always made sure the borrowers had a significant down payment so they would want to stay and make the deal work. And, the lender would then have protection if the borrower did walk. We do the same in our contracts, even the rentals. If the tenant doesn’t put money down when they move in, chances are greater they will trash the place and leave without paying because they have nothing to lose.
In mortgage contracts, the banks do allow turning the property over to them as payment. So, many borrowers are choosing to do this.
A very sad state of our current morals is that, as you point out, our word is no longer binding. That being the case, make sure you have good contracts.
Thank you for your comment.
May 17th, 2010 / 10:58 am
I own my personal residence “free and clear”, so I don’t have to worry about foreclosure. However, the value of my property has declined along with everyone else’s. Do I expect someone to reimburse me for the value I have lost? HELL NO!
Can you name any item other than a house that you can buy on credit, where the lender will let you walk away from the debt because the item is no longer worth what you owe on it? Of course not! What makes a house any different? Bottom line – I don’t think lending institutions should forgive a dime of the PRINCIPAL on ANY loan. You bought it – you pay for it – PERIOD.
The interest rate is another matter. One can argue that some banks made stupid loans and that some consumers were stupid for agreeing to them, but the fact is that interest rates are now at historic lows. While I disagree with any reductions in PRINCIPAL amounts, I think the banks are crazy for not renegotiating the interest rates on these loans in order to keep them current. There should be some tough qualification guidelines for having your interest rate lowered – it should only be used as an alternative to foreclosure – not just because the house is worth less than what is owed on it.
That is my opinion about how things SHOULD work. Now for the shocker! The real world is under no obligation to conform to the way I (or anyone else) thinks it SHOULD work. The do-gooders who whine about how things SHOULD be, end up getting screwed. If I owned a house that was worth $100,000 and I owed $200,000 on it, and the banks would not lower the interest rate on the loan to work with me, I would definitely walk away from it. Instead of standing back and complaining about how the system works, elbow your way to the front of the line and “get yourself some”. The clowns in Washington are going to make your children pay for it whether YOU get any or not. At least your children will be paying for YOUR share, instead of everyone else’s.
May 21st, 2010 / 11:28 pm
Wow, Steve, so well said.
I love the part about what should happen, what you want to happen, but you totally understand “elbowing yourself to the front of the line to get yourself some.” Amen to that. I felt a bit that way when I had Section 8 houses – I was getting some of my tax dollars back from the government.
Thank you for your comment.
May 22nd, 2010 / 9:05 am
I’m employed full-time at a nice salary. My husband is already retired on nothing but SocSec (no pension). 10 years ago, this was to be my retirement year. After losing half of my nest egg, working until I’ll 65 or 66 is now my fate. We have a beautiful house in NC that we can no longer afford. Half of my take-home pay per month goes to the mortgage; another 5-10% goes toward the HELOC (which we unwisely also use to pay bills!), so I’m thinking of walking away. We’ve been trying to sell the house for nearly 4 years. I can’t get even an unreasonable offer! Since my mortgage was a re-fi about 4 years ago, do I understand that I’m not eligible for deficiency protection?
Aug 14th, 2010 / 3:21 pm
Katie:
The best thing always is communication. You’re correct, you are not eligible for deficiency protection. However, banks make individual decisions and they may be willing to work with you if you contact them and discuss your situation. Hopefully, because you’re such a good and responsible borrower, they will work with you through your tough time.
There is also something called “deed in lieu of foreclosure” where you simply sign the deed back to the lender so it is theirs, not yours, and you can move on. You can let them know that this is what you are considering as your final option.
In the meantime, while you work with them, where is your house? Maybe we know an investor near you who can work with you and your lender to help solve your dilemma.
Thank you so much for your question and I look forward to helping you resolve this. I know it doesn’t help to hear this, but you’re certainly not the only borrower caught in this mess. I definitely care that you’re going through this and I will give any advice I can.
Aug 15th, 2010 / 10:40 am
I own a vacant 2 acre lot in a gated community in North Carolina, I purchased the property 5 years ago on a Balloon. The Balloon came due October 2010 the bank did an appraisal on the property and the value came in at $16,500 I owe $37,000. The bank said they would work with me so they offered me another 5 year Balloon. It was hard to understand because the LTV is just rediculous the interest rate was lower, the balance was lower, the term was the same but the payment was alot higher than it was with the original Balloon. I just don’t make the income I did when I purchased the property I don’t know what to do I’m considering a Strategic Default or Deed in lieu of or would it be better to just walk away. I’m just concerned about what the bank is going to do or what I’m ultimately going to be held responsible for. Any advice would be greatly appreciated. Thanks.
Oct 27th, 2010 / 9:08 pm
It is heartwarming to know so many citizens prefer to stand on principal regarding their debts – i.e, to “do what my pappy taught me”. But the sad reality is the lenders do not reciprocate in kind, and there is still the small matter of the bleak US job market that further muddies our ethical waters.
Until my recent layoff I too held the above lofty attitude and dutifully made every mortgage payment through the economic recession, even with the knowledge that I was upside-down by nearly 50%. The day after my dismissal I “did the right thing” and contacted my mortgage holder to announce my dilemma and discuss relief options, seeking an equitable short-term solution to help me stay on my feet and under my roof. Guess what? They offered nothing and openly stated they have no interest in helping me protect my credit. It’s a recorded conversation now – there can be no dispute.
If the lenders have no principals to guide them other than maximizing profit or at least minimizing losses, then why should ours be any different? We signed the same contract, after all. Pick a religion and stick to it: Capitalism or Ten Commandments – one can’t adhere to both these mutually exclusive ideologies.
While employed, I was already “throwing good money after bad” from my moral high ground, something any savvy Wall Street investor would walk away from without another thought. One could argue, in fact, that we’re only having this discussion because of the actions of said investors. Now that I have no income and no expressed interest in compromise from my lender, I cannot further burden my conscience with an unwinnable ethical battle when I have mouths to feed.
Nov 28th, 2011 / 12:56 pm
Richard: I am so sorry for your position!
Isn’t it interesting how, when our circumstances change, so does our perspective. That’s why I caution “don’t make a judgment, really think about it. What would you do?”
We have worked many times as negotiator between banks and borrowers. We have been refused because the owners still had jobs so did not qualify for help.
We have been refused because the owners had lost their jobs so did not qualify for help.
The banks get bailouts and still get to make the rules. Frustrating is not a strong enough word.
Many people quote “there are no victims.” Well, it certainly feels like there are.
Good luck to you with your situation. Please let us know how things turn out.
Nov 28th, 2011 / 1:19 pm