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Upside down? Consider the costs of your options
Thursday, April 23, 2009 | 2 a.m.
Consider this hypothetical: Three years ago, you bought a house for $400,000, financed with a $320,000 mortgage that costs $2,240 a month. But the home is now appraised for half the purchase price — so you are upside down — and the most it could fetch on the rental market is $1,200. And the lender won’t refinance. Do you honor your contractual commitment, pursue a short sale or simply walk away?
Sun Topics
Sun Archives
- Homebuilders finding it tough to hang on (4-17-2009)
- Nevada leads nation as foreclosures set record in March (4-15-2009)
- Whether to walk away: Housing's moral minefield (3-22-2009)
- Builder: It is 'rational' for homeowners to walk away (3-13-2009)
The decision isn’t an easy one: The three choices almost certainly will hurt your wallet.
Opting for a short sale — when the lender forgives a major portion of the loan principal to facilitate the sale — may mean you can’t buy again for three years. But at least the size of your loss is minimized.
If you walk away and let the home foreclose, your credit report will reflect it for up to seven years. This probably precludes you from buying another home over that period. And you will take a credit hit. If your rating was already low, the hit could be small. If you had a flawless credit record before the foreclosure, that act could prompt a drop of 100 points in your score, says Craig Watts, spokesman for FICO, a company that measures consumer credit risk.
But while those two alternatives — as long as the loan is worth no more than $2 million — carry financial penalties, they could have been worse. Until the Mortgage Forgiveness Debt Relief Act of 2007, Americans had to report canceled debt as taxable income. The act, stretching through 2012, waives canceled debt as taxable income in most cases involving primary residences, according to the Internal Revenue Service.
For a time, a fourth option also would have likely prompted a financial hit, but a potentially smaller one: buying a second home, with a more manageable mortgage, and then relinquishing the first to the lender.
Federal housing officials call this “buying and bailing.” They attribute a chunk of 2008 foreclosures to this practice.
Here’s how it works: Homeowners buy a second property as an investment, indicate they plan to lease out one of their homes and follow suit or perhaps dummy up a fake lease of their upside-down residence and then ditch it.
“They get a 30-year fixed mortgage on the new home, let the other home go and then say, ‘Well at least I have this house,’ ” mortgage specialist Chris Clements says. These homeowners also would take a credit hit.
Housing and federal agencies, including Fannie Mae, minimized this practice in recent months. For example, if homeowners with Fannie Mae mortgages don’t qualify for a second property, the only way they can buy another home is if they have 30 percent equity in the first. Fannie Mae handled about a third of mortgages nationally at the end of 2008.
These new guidelines greatly discourage buying and bailing: If you have that much invested in your home, you’re unlikely to bolt.
Besides the financial implications of the question — “Do I stay or do I go?” — there are legal ramifications to consider: Nevada is a deficiency state, meaning the lending institution can go after the debtor for the unpaid loan.
Christopher Reade, a real estate attorney whose clients include 25 foreclosed homeowners, says it’s uncommon in the valley for banks to go after such debtors, though not unheard of. If a deficiency judgment is approved, a bank could seek wage garnishment, among other remedies.
More common: Lending institutions send tax forms to former homeowners of investment properties, driving some to bankruptcy protection. Remember, only unpaid loans on primary residences under $2 million aren’t subject to being taxed as income.
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Add one more. The bank coming after you for the difference. That's right in Nevada if the bank forecloses then sells your home for less than what you owe they can come after you for the difference. So you owe $300,000 and the bank forecloses and sells for $200,000 they can come after you for the difference of $100,000 plus collection fees. If you are walking away be sure to hire an attorney to keep this from happening.
Very well written article. I've had to walk away from 2 houses over the years, one from a job location change, and one from a divorce. And never had any financial repercussions of any kind. Yes, I had to live in apartments for a while, but back in the day, if you had 20% to put down, you could still get a mortgage easily. With a slightly higher payment. Just talked with a friend who is going BK. The banks aren't negotiating-they're simply keeping the government handouts to make their bottom line look better. He's doing the right thing.
LV2009 is wrong as usual-he has no clue-Walking away will not result in any legal action. When you gotta' go, you gotta' go....
nednougat: I suggest you read before telling people its ok to walk away.
http://www.associatedcontent.com/article...
Here is the Law in Nevada
http://www.foreclosurelaw.org/Nevada_For...
Harry Truman went bankrupt in his haberdashery in Independence, Mo., and over the years repaid all of his debts. I know of some other small business men who did the same. Perhaps people should consider trying to make whole those who lend to them in good faith. Yes, there are difficult decisions to be made - walking away is a severe tax on those who meet their obligations.
We are not talking about people who can't afford to pay. We are talking about people who have the ability to pay what they owe. We are talking about people who are walking away simply because the value has dropped and they do not want to pay because they are upside down. Just like a car repo the bank gas a right to collect the difference in Nevada. Banks are going after people in Nevada for the difference and the SUN needs to report on that.
Banks may have the legal ability to seek full payment, but that doesn't necessarily mean they're going to exercise it. Yesterday a report said that 1 in 22 houses in Las Vegas currently has a foreclosure action against it. I highly doubt the banks will go for full compensation on each and every one of those houses. It would be an enormous waste of their already-strapped resources. All they care about in this apocalyptic environment is clearing the houses off their balance sheets as quickly as possible.
The lone exception is the homeowner who intentionally trashes their house on the way out. I've read banks are going after such people, in order to discourage such behavior in the future.
I have a friend who is in collections. He said the banks are selling these papers to his company. His company is planing on making this there new cash cow. According to him they have been able to garnish wages. They get paid even if you dont wanna pay them because they take it out of your check before you get the money. Don't think the bank is not coming after people, remember these are the same folks that put all this paper together. Just like the credit card companies now raising rates and minimum payments the banks are not on your side. They may not go after all of them but they will sell all the paper and let the debt collections companies do it. If you want to walk away make the bank sign a form saying that you will not owe the difference when they sell it. Thats the only way to protect yourself. I would hire an attorney to do it.
buying and bailing should be prosecuted to the fullest extent. I know of several people who did this. "Who cares about what it does to the economy as a whole - I got mine." - very selfish. Should not have been allowed to happen in the first place.
Debtor Prison for people who walk away. Make them work off their debts before they return to civilized society.
I'm linking this from a Denver news station. This is in regards to people walking away from their homes and selling all of the appliances before the forclosure. They are Criminals!
http://www.9news.com/news/article.aspx?s...
The appliances belong to the Homeowner not the Bank. and there is nothing to prosecute for buying and bailing because no laws were broken.
In this enviroment you have to take care of yourself.
No way the water heater and lighting fixtures belong to the home owner. Not until they actually own the home when the note is paid off. Some of these people are pulling up the tile on the kitchen floor and selling off the cabinets. They have had people pulling the wires from the walls. No a homeowner has no rights to those things.
There are many resources available for those who are facing foreclosure, you just have too look. One of the main reasons people give up so easily when trying to attempt to modify a loan or work with there lender is because it is not an easy road. Lenders are difficult to work with and do not make it simple for those who want to stay in their home. The key is persistence because it is possible and I have seen people who were first denied by their bank be granted a loan modification later and they were able to stay in their home. Even if your home is upside down right now, at the very least, a lower payment may help out until the market bounces back. It's not going to happen over night but you have to remember that real estate is a long term investment.
http://www.newhomerealtylasvegas.com/fac...
I can't believe what I'm reading here.
Hey Mumbles, I mean LV2009, I have a house, it's $100,000 underwater, I'm out of work, I got a job offer in BF Egypt. I can't sell the house, the bank won't do a short sale, the neighborhood is in complete decline, but you think I should keep paying and paying.. You must be a deranged Jimmy Swaggart donor. Based on your posts, however, I do think you're catching on about the real world. Slowly. If the banks can stick it to us, we can stick it to them. Two way street. Glad you're waking up.....
nednougat, your problems are your problems. The only people your "sticking it to" are the American people.
If you want to stick it to the banks don't take out any loans, that's how they make money.
Bulletin-
"The number of so-called prime borrowers at least 60 days behind on mortgages owned or guaranteed by the companies rose to 743,686 in February, from 497,131 in January, and is almost double the total for December, the Federal Housing Finance Agency said in a report to Congress today."
Guess we'll have a lot of lawsuits. Right, LV2009? Damn, we don't have enough debtors prisons. Plus we need to ban cell phones, so the collections idiots can contact us every hour. Wage garnishment is unheard of, unless for child support. But I know you're catching on, LV. Best of luck....
As LV2009 pointed out, the collections industry is looking at the current crisis as a cash cow. Banks will sell these loans to the vultures for pennies on the dollar and walk away. In the past the amount of money to be made was miniscule and so the odds of getting sued were small. But with billions at stake those sell your mothers soul vulture collection agencies will multiply like rats at a garbage dump. Those of you who walked away in the past may have skated but I wouldn't count on it in the future. You people are about to find out how low a collection agency will go to get that money and how they can make your life a constant nightmare. Three ways to get away from the collection agency are bankruptcy, pay the bill, or die. These guys go the extra hundred miles and then some so hiding out almost anywhere on the planet and being undiscovered would be a miracle.
Well written, Odeman. I remember the debt scum collectors calling me from out of state years ago. But they just filled up my answering machine. I actually liked to check the calls-same 8 buck an hour dope droning on and on. LV2009-the chances of having your wages garnished are about the same as the US reaching Mars with astronauts by 2020. Or in your case, reaching Uranus.
I find hard to believe that some of the comments on here are made by responsible adults ... Juvenile delinquents?
The bottom line is that , while the banks and mortgage companies MAY have engaged in shady practices , you still signed a contract and when you did you knew that you would have to repay that contract and nothing changed there ... except your attitude towards your responsibilities ...
How many people used their home equity as a gift from heaven and borrowed against it for all the toys necessary to keep up with the Jonses?
If you observe the vehicles at the typical red light in LV you will know where many homes went.
well said "pmmart"
Yes, well said pmmart. The money from the homes also went to the "Ultra Lounges" on the Strip where with the cover included, it costs forty bucks to have one drink!
this country is a large part the shape its in right now because of people not being responsible, inmature , selfish people.....they dont feel they are responsible to pay what they agreed to, just because they are upside down now....if somebody loses his/her job and cannot make ends meet we are talking another story...but those that just refuse to pay and walk away need to be in debt to the borrower until the dept is paid off....wages garnished, property taken and auctioned, no federal, state assistance and never allowed to borrow any money again until paid in full...the selfish pigs in this couutnry are driving the economy even further into the ground with no reguard for anybody but themselves.....its time to start getting back to some responsibility again in this country
If the bank is going to get the house back and then sell it to someone else for less I don't know why the bailout wasn't designed for the banks to renegotiate that price with the current owners (if they've been trying hard to 'keep up') and then the difference between the new 'value' and the previous loan amount would be paid via bailout money to the bank. This would require more a procedure set in place to deal with each situation on a one on one basis but at least the bailout money would actually be used as intended - to help the homeowners to not lose their home. Instead the banks just got the money, gave out bonuses, had parties and as someone else mentioned just use the money to make their bottom line look good again.