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Walk Away?
For people who are behind on their mortgages payments, walking away is an option but not one that should be considered.
Walking away may seem like the easy way out but it isn't. Foreclosure is one of those times when it is in the home owners best interest to fight. Walking away means ruining a credit record and a future. Banks look at credit histories and so do employers.
One of my clients got behind on her mortgage payments. We were able to negotiate a short sale with her lender. It wasn't easy and the process was stressful. She owed more on the property than it was worth and selling it was difficult.
She told me that with in months of the sale of her property her credit score improved. She wants me to let people know that it isn't easy to clean up the mess but it is worth it. She now has a future, and it started as soon as the sale on her home closed.
What is a short sale? It is when the bank will accept less than the total amount owed on the home as a payoff for the loan. It involves negotiating with the bank, and it still goes on the credit report but isn't as bad as a foreclosure. When the late payment notices come, or when the bank calls, the home owner needs to get involved. The very best time to take action is before the first late payment.
Why would a bank authorize a short sale? Because it can cost the bank more money to go through the foreclosure process than it does to accept less money from the home owner.
For homeowners who do not know what to do check out Hope Now , hope now is a cooperative effort between counselors, investors, and lenders to maximize outreach efforts to homeowners in distress. Even if it seems hopeless it is not.
There are now companies on the internet marketing to home owners who are behind on their payments. They offer a flat fee to help the home owner "walk away" Not a good idea, instead make a free call to hope now or visit their web site, or both.
Also try the home ownership center web page.
Related posts:
They don't understand what happened
Don't Talk to Strangers
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Hi, Theresa--I am a new real estate agent in TN. This topic was timely because last night I met a former agent who is writing a book for real estate agents about how to do short sales, since he says most don't understand the process. I like the case study you described, but what happens to the house when an agent negotiates the short sale? When an investor does them (I have done them as an investor) the investor buys the house and holds it or rehabs/resells. So what happened to the house in the situation you described?
Thanks,
Barb
Teresa, great post. I love the fact that you are endorsing the short sale. Anything is better than walking away (in most cases). What is scary is that people have become so complacent with the fact that walking away is a viable alternative. Its scary. We have a section of our office (2 agents) that deals with pretty much nothing but short sales, foreclosure, and REOs. The short sale seems to be catching on...
Seems odd to warn your readers that the walkaway option is "not one that should be considered." To the contrary, people should consider all their options, then pick the best -- and ignore anyone who tries to tell them what to think about or not think about!
In the case of someone who is behind on her mortgage, walking away might even be that best option. As you've noted many times, banks can be extremely slow to respond to any inquiry, especially short-sale requests. Moreover, banks often refuse such requests, even when granting them would appear to be in the banks' self-interest.
For instance, walking away and taking a hit to one's credit score almost certainly is better than draining one's 401(k) account -- better to rent for a few years, rebuild the credit, and let one's retirement savings continue to grow. Moreover, given the tsunami of foreclosures yet to come, the social stigma of walking away will be greatly lessened or even disappear.
It's irresponsible to say that "Walking away means ruining...a future." People who are in tough financial straits don't need to be frightened; they need rational advice.
@ Bubble_Up
I agree with everything you said to a point. I agree that in the given situation one must be aware of all the options and then decide which path will best suit them. My only concern ties to a statement you made above: "Moreover, given the tsunami of foreclosures yet to come, the social stigma of walking away will be greatly lessened or even disappear."
If this statements becomes true to any degree our country is in for a world of hurt. Unfortunately there are many people in this world that are ALWAYS going to take the easiest way out and if the "social stigma" lessens or disappears, then what is to stop people from throwing in the towel the minute they hit a rough patch. I think that the laws that govern the foreclosure process and the penalties around it will definately need to be evaluated/tightened so that it discourages people from casually accepting foreclosure. Therefore, only the ones who really have no other choice will go through with it. That may seem harsh but......
Bubble_up good point, but some do not even try and they do have other options besides walking away. I am not too worried about anyone taking the advice from my blog and ruining their life. I am just saying that it is worth exploring some possibilities and looking for some help. I don't see advising people to call hope now as bad advice.
Hi Teresa,
I agree that ALL options need to be explored, and contingency plans identified in case the first choice doesn't work out.
We've seen short sales work out great - similar to your example, but we've also seen short sales not get closed (on both the buyer's and the seller's end.)
And since they take so much effort, it's possible the homeowner misses a different opportunity beause his mind is wrapped around getting the bank's documents in order, etc. (that old Opportunity Cost thing!)
In addition, just because a seller wants to do a short sale and avoid walking away, doesn't mean the lender is going to agree, or that the short sale will get closed successfully.
In the end, we typically advise our clients to try like heck to get a short sale done (with our help along the way), but to be prepared for the possibility the lender says no.
My $0.02 anyway.
TB,
I received a very personal e-mail from a reader asking me if she was being a fool for not wanting to walk away. Apparently she is getting advice from everyone that it's "okay" to just walk away. Many people are doing just that and at the fundamental level it's the wrong thing to do. Thanks for making a case for it. A lot of people are asking this question right now and the mortgage debt forgiveness removes the tax consequence of it and has made walking away even more "attractive" - if you can call it that.
Bubble_Up makes a couple good points but ruins it at the end with basically the point that a damaged credit score for a few years isn't all that bad. What about the fact that letting a home go through foreclosure screws the bank that lended you the money? They almost always lose tens of thousands of dollars for a contract that the owner failed to follow faithfully.
When the owner can no longer pay the mortgage and there is no other choice, foreclosure is a necessary evil. For owners that can still pay their bill, the social contract (and mortgage!) obligate them to continue making payments. If we all took the easier(but not easy) way out all the time, what would our country become?
Personal responsibility people...
Actually, letting a home go into foreclosure virtually NEVER "screws the bank that lended [or 'loaned,' in English] you the money." Today, banks that make mortgages resell pretty much all of those mortgages, after which those mortgages are combined into big pools and investors buy pieces of such pools.
In other words, if you walk away from a mortgage, it's almost certainly not going to have any impact on the nice lady who worked for the bank which wrote the mortgage. In fact, she's unlikely to know the foreclosure even happened.
A mortgage is nothing more than a contract, and businesses, and people, walk away from contracts all the time. Walking away from a house doesn't mean one is a bad person, or even that one is irresponsible -- just the opposite, in fact. If walking away means that one can then feed one's family, or move to accept a new job, or purchase some health insurance, one should walk, quickly, toward the nearest rental office.
Look, the walkaway means that the lender made one of two mistakes: it either overestimated the buyer's ability or willingness to pay the mortage, or it overestimated the value of the collateral (i.e., the house) it needed to secure the loan. These sorts of misjudgements occur all the time, and the sooner we hurry up and get through this hurricane of foreclosures, the better off we'll all be, including Realtors....