Don’t Walk Away

Weigh the pros and cons before you walk away from your home

George and Mae Hicks

Until recently, owning a home was the wealth-building move. These days, many homeowners are contending with more mortgage than the home is worth, joblessness, and other financial challenges and deciding to simply walk away from a dream home turned nightmare.

“We were hanging on, but for what?” asks Clovis, California, homeowner George W. Hicks, 64, echoing the thought process he and his wife, Mae, 62, went through in 2009. Three years earlier, the Hickses paid $555,000 (borrowing $380,000) for their home, chosen because it would be big enough to accommodate their daughter and grandson.

But 2009 turned into a calamitous year for the Hickses. Their home dropped in value from its peak of $638,000 to around $320,000. It wasn’t simply that they were “under water” in their mortgage. The Hicks’s investment portfolio had plummeted the year before and was generating only a tepid recovery. Making matters worse, both George and Mae were diagnosed with cancer. At the time, a “walk away” seemed like a good option. A strategic default, or “walk away” as its known colloquially, is different from the average foreclosure. It involves a homeowner who can afford to continue paying his mortgage but consciously chooses not to.

“We were getting by, paying everything on time. But the house was huge and so were our utility bills. At the end of the month, there was nothing left.” George explains. “We realized that, eventually, everything would come crashing down. We had to decide whether to walk away or find some other way to get out from under this.”

Walking away from the home would be difficult for George. He prided himself on “a lifetime of doing things exactly the correct way.” Though the stigma to walking away may be diminishing as foreclosures increase, many homeowners still attach guilt or shame to the idea. Like the Hickses, they may feel duty-bound to honor their obligations. “Even though there was no monetary upside in it for us, we gave our word, and our word meant something,” says George.

In that sense, he is like more than 80% of U.S. homeowners who believe “it is morally wrong to walk away from a house when one can afford to pay the monthly mortgage,” according to Moral and Social Constraints to Strategic Defaults on Mortgages, a University of Chicago and Kellogg School of Management, Northwestern University study. But studies also show that many homeowners have a breaking point at which “strategically defaulting” on their mortgage becomes a serious option.

Who Walks, and Why?
The Hickses are not alone. About a quarter of U.S. mortgage holders (11.3 million homes) are currently in a similar situation. According to mortgage data firm First American CoreLogic, when homeowners reach the point where they owe at least 25% more than the home’s value (for example, owing $375,000 on a home now worth only $300,000) they become just as willing to walk from their own homes as an investor. For some, the final straw is a serious illness or job loss. For others, there’s a critical point at which dwindling or negative equity turns walking away into a worthy consideration.

In the states hardest hit by the mortgage crisis (Arizona, California, Florida, Nevada, and Michigan) mortgage holders have an average of 40% negative equity—and no clue if their homes’ values will ever fully recover. It’s no wonder that 26% of U.S. foreclosures are estimated to be strategic defaults.

The national stalemate between banks and borrowers over loan modifications and principal balance reductions also influences homeowners considering a default. David Daniel, a certified mortgage planner specialist in Oakland, California, finds that the average potential “walker” is exasperated after waiting six months or longer for their lender to respond to a loan modification request. “Then they contact me and want to talk about refinancing or, as a last resort, walking away.” Antioch, California, real estate agent Tique Lee Caul sees the same thing in the underwater homeowners she counsels: “Some people feel screwed that they paid double, sometimes triple, what their neighbors are paying now. Some feel that the banks were rescued but are unwilling to work with borrowers” to reduce their payments or principal loan balances.

Consider the Consequences.
Walking away can create a whole host of problems for borrowers. George Hicks researched his options and discovered that the credit consequences are severe. The “walk away” would ruin his valued 840 credit score, prohibiting him from buying another home for roughly five years. “I wanted to be able to have the credit to do whatever we needed to do in our final days,” notes Hicks.

Nate Anderson, a licensed real estate agent with offices in Chicago and Philadelphia, also warns clients to be aware of the looming possibility of a “deficiency judgment.” That’s when the lending bank seeks to recover the difference between the balance left on the mortgage and the fair market value of the home.

Anderson says that in many states, “A lender can and will sue a homeowner for a deficiency judgment.” Those who walk away may be exposed to a deficiency lawsuit for as long as six years following the foreclosure in some states. Accordingly, Anderson advises homeowners in mortgage distress to instead work through their mortgage troubles with a real estate attorney “so that you are completely off the hook with the lender.”

The legal ramifications of a walk away vary from state to state. Even in the few states where borrowers can’t be sued by mortgage lenders, walking away can expose a homeowner to significant state income taxes if the state’s tax laws count debt forgiveness monies as income. So says California tax and real estate attorney and CPA Scott Haislet, who has counseled more than 200 homeowners on their personal mortgage crises since about 2007. Haislet also points out another big misconception homeowners have regarding a walk away: that both first and second mortgages will be extinguished if they default on the home. Rather, Haislet explains, the standard scenario is that the second mortgage simply becomes an unsecured loan, the balance of which the lender can sue the homeowner to collect up to four years following the foreclosure, under California law.

Available Alternatives

Many homeowners who consider walking away eventually decide to take another route. Those include negotiating a loan modification, a short sale, or a deed-in-lieu of foreclosure—where the borrower hands over the deed in exchange for the bank extinguishing the debt.

A member of George Hicks’s church purposely defaulted on his home and regretted the devastating credit consequences. The man cautioned the Hickses not to do the same. So instead, George and Mae opted for a short sale. The process turned into a drawn-out battle with their lender, but in the end, the home sold (for $315,000). George Hicks was able to move his family. The short sale left both George and Mae with credit scores just above 700, lower than they’d like, but still well above the national average of 671.

Caul finds that very few clients elect to walk away after she lays out their options. “Folks usually are willing to fight rather than to just give up when they know someone cares enough to work with them,”  says Caul. Likewise, the Hickses credit their real estate agents for helping them through the nearly eight-month short sale process. They were able to move their family, and they’re glad they didn’t completely wreck their credit  by walking away. After enduring their own personal mortgage crisis, the Hickses have also completed a round of cancer treatments. Says, George: “We’re going to be just fine.”

Tara-Nicholle Nelson is a real estate broker, attorney and author of two real estate guides. Tara is the Founder and Chief Visionary of REThinkRealEstate.com.

ACROSS THE WEB
  • http://thecreditwoman.com Tara Colquitt

    Very informative and timely article. This will crisis will effect homeowners for years. They need information that gives them choices. Real choices. Thank you Tara for providing it.

  • http://www.jroark.com Jackie Roark

    Yes, the best thing a homeowner can do is NOT walk away. There are other options, seek a professional for help. As a licensed realtor, I’m available to help.

  • http://www.abundanthomeinsepction.com Simone Christine Cartwright

    I’ve performed several inspections on home being sold for this very reason. This is real. Great article.

  • john simons, black enterprise

    I thought this was an important piece for Black Enterprise to do. Recently, there have been quite a few publications and websites presenting “strategic default” as a legitimate option for struggling homeowners. There are so many other options. Thanks for reading…

  • http://www.calgreene.com Cal Greene

    As a Realtor and investor this article is spot on! Many people have gotten into this situation and think they are alone and without viable options. I regularly advise clients in this situation to explore their options with a Real Estate attorney and they are usually surprised at the help that is available. Best of all the lawyer’s fees usually come out of the proceeds of the sale and not from the seller’s pocket!

  • RB

    I disagree with the previous comments in that I thought this article presented a poor case for not defaulting on their mortgage loan. Given the author is a lawyer with a background in real estate I would have thought the information would have been more thorough in answering many of the questions that I still have. I’m curious to know where the Hicks moved after they gave the previous homeowner a $175,000 down payment and the bank a $315,000 house of which they owe the bank a $15,000 deficiency balance and taxes on $15,000 worth of income not to mention the loss of homeowner income tax deductions that they are no longer entitled to. In other words they gave away over a half million dollars in cash, property and tax benefits to move where? Are they now living in a homeless shelter? Freeloading off of relatives? Are they renters paying someone else’s mortgage and are the accommodations far better than the house that they owned that may one day be worth more than the $315,000 value that the bank was able to sale it for. Please follow up on this article and explain the benefits of recommending a short-sale as opposed to making payments on a house you can afford. Thank you.

  • john simons, editorial director/personal finance, Black Enterprise

    RB, you raise some interesting points. But, I want to be clear here: Black Enterprise is by no means recommending short sales for everyone who’s underwater on their mortgage. This piece is specifically aimed at presenting options to homeowners who are both underwater AND unable to afford their current monthly mortgage bill–people who are considering simply skipping out on their loan obligation.

    This piece speaks to homeowners who are between a rock and a hard place. There are no perfect choices in these situations. Our intention is to show the dangers of walking away from a mortgage, while presenting readers with alternatives.

    The article points out that Mr. Hicks, confronted with mounting medical costs and a shrinking home value, was seriously considering a walk-away. The decision he made was to enter into a short sale, which we contend is better–and less damaging–than a default-by-choice.

    In other articles over the past year, Black Enterprise has suggested that homeowners who are underwater continue making their monthly payments–if they can afford them–and ignore the ups and downs of local property valuations. The Hicks’s unfortunately were not in that situation.

    I’ll ask Tara-Nicholle Nelson, the author of the piece, if she can weigh in and give us some information about where the Hicks’s are living now–whether they’re renting, or living with relatives, etc. I hope this clarifies our intent. Thanks for reading, RB.

  • john simons, editorial director/personal finance, Black Enterprise

    Also, RB, I want to make sure I’m addressing all of your questions… You eluded to the possibility
    that the Hicks’s might face a deficiency judgement. That is, you imply that the Hicks’ might be liable for the $15,000 difference (deficiency) between the amount of their loan, and the amount they sold their home for in the short sale. That’s not something the Hicks’s have to worry about. Since, California is a non-recourse state, banks are unable to collect deficiencies on the vast majority of [first] mortgages in that state–once they conduct the short sale or foreclosure proceedings.

  • klcf2009@aol.com

    Great Article!
    I’m a in the real estate business…dealing with the accually notes…this family was very lucky for quick/short selling the home and there credit ending up at 700. I deal with home owners all the time that not only don’t want to sell there note, but don’t wan’t to consider”Owner-Financing”! I do think its a better option, but it’s not for everybody.

  • Robert

    I’m in the can afford the mortgage but don’t feel it makes economical sense. I’m roughly $230,000 upside down and this is not counting the $180,000 down I put on my house of which I paid $665,000 originally. With these losses, If I were running a business I would close shop today. In addition, I have 5 years left on an interest only loan which my lender will not refinance because I don’t have 5% equity, it’s more like 50% inequity; if that’s a word. I can see if someone is underwater 50-75 Thousand, however, a quarter of a million dollars underwater requires a lot of faith and patience in our economy which is batting way below average. Bottom line is I’m holding on for now because I gave my word even though it seems as though I’m throwing my money into the fire.

    • Christine

      Robert, you ARE throwing money into the fire, and you already gave us SEVERAL good reasons for walking away. Why are you still there? Until enough of us in the same position “vote with our feet” and force banks to renegotiate (yes, they can do this, but most won’t), nothing will change. For now, they still hold the power, because there are enough people more desperate to own their home at any cost, than there are people who will draw a line. Think about it, we (the home-buyers) are allowing the mortgage/lending companies to make money from our purchase. Of course, we get to live in the home, but they are the ones making a profit from the loan. We are doing them the favor here. How about demanding some customer service? I, for one, am tired of this type of tyranny, and NO house is worth being beholden to the debt-collector mentality that presently exists in the mortgage industry. To quote an old country song, my bank can “take this house and shove it.”

  • http://Modification JANET

    My husband lost his job we decided to call metlife and ask for modification. They gave us 6 months of half our mortage and we pay faithfully. After that we never receive a letter if we were going to be approve for the modification or not, it is 11 month now with no answer this is January 2011. They also told us we can not continue to give the forebarance amount because the agreement was completed. If I knew what I know about modification it drags on forever I would have try to refiance with an other company. But any way our house is under-water I don’t think we can refiance with an other company. We do not want to short – sale or walk away. We calll metlife several times in a month with the same answer “your loan is in review”. Customer service rep are very very rude. We don’t want foreclosure and in Maryland their are million homes on foreclosure or bank own. Since I was the only one working I can of caught up with the mortgage and we are two to three months behind now still. My husband got a job but paying less than his previous job. We receive letters stating your are in default or you are in the process of preforeclosure. We paid about 10,000 to caught up but still own about 7,000 more even though we paid all that back up money metlife still does not want to help us at all. We don’t know what to do but we want to continue our mortage even though is 100,000 under water right now. We bought the house for 520,000 put 60,0000 in down payment and right now it is 416,000. We are paying at others said more for our house than our neighbor.