- Real Estate
Are You Willing to Walk Away From Your Home Mortgage?
You may be one of those who are considering just walking away from your home mortgage because it is worth much less than the loan. Many do it. Others feel it is your moral duty to try to complete the contract.
If you home is worth only $300K and your loan is $400K, this is the reverse of what normally should be happening. It may make sense to walk off. You have no moral obligation to keep paying them just because you agreed to it. You can terminate the contract, return the house, and face the financial consequences afterwards. The bank will recover, you may not financially. However, doing so does damage your credit rating for many years just like a bankruptcy does. Until time passes, forget about credit and loans, except for the ones already existing.
There are some States that have recourse mortgages which means that even though you are done with the house they can come after you for the difference in what was owed and the short sale price. California is a non-recourse state. But under certain scenarios, a non-recourse loan may be converted to a full recourse loan if a loan is refinanced. Purchase money loans are non-recourse, but if you refinance, even if you don’t take a single dollar out, that loan is full recourse. Some had to “walk away” but they are still liable for the difference in what was owed and the short sale price.
Also, there is a difference between a short sale and walking away. A short sale means that the bank agrees to accept a sales price that is less than is owed on the mortgage. Walking away means that the borrower lets the bank foreclose on the property. The bank then attempts to resell the property to recoup its losses. If you enter a contract, you should pay if you can. Many are walking away when they technically can, that is wrong.
As to moral guilt, a borrower is not agreeing to make the required debt payments. He is agreeing to abide by the contract that is signed by both parties. In the contract, both the borrower AND LENDER agree that if the borrower does not or cannot make his mortgage payments, FOR ANY REASON, the bank may take possession of that home. In other words, defaulting on the loan and walking away from the home are well within the confines of the agreed upon contract, legally speaking. The bank gave you a loan in exchange for a house. If you stop repaying the loan, they get back the collateral (the house). I see it as business. Those that argue ethics and morality are simply incorrect. It is simply their point of view.
Why do we expect that individuals and families are going to behave irrationally when groups and corporations quickly act to sever contracts that are no longer in their best interests? Why is it immoral for an individual or family to benefit from acting financially rational, but good if those same people benefits from a group they’re involved with or invested in doing so?
The long time delay between going delinquent and being foreclosed on is primarily due to the enormous numbers of foreclosures in the system and the severe documentation problems that the banks have created, as well as issues with mortgage securitization creating financial incentives for the people involved in the mortgage chain of ownership to draw the process out as long as possible. It is usually almost a year before the owners may have to leave.
If you have tried to keep your home in good faith, yet, are unable to work with the bank, then it is business. If you choose to walk away, you should not feel guilty for it.