Walking Away from a Mortgage

I read an article yesterday in the magazine "kKiplinger's", Oct. 2010 about "Walking Away from a Mortgage" which might be interesting for you to know. It told about a man who decided he would not pay for his mortgage anymore as the value of his houses had gone down dramaticly. He lived in Florida.

Some 1.65 million homeowners received default notices in the first half of 2010, according to Realty Trac, an online marketplace of foreclosed properties. It's impossible to tell how many of those defaults were strategic, but one recent study from credit bureau Experian and Oliver Wyman, a consulting firm, estimates that fewer than one-fourth of homeowner defaults are discretionary.

Meanwhile, about 20% of mortgages, or roughly 15 million homeowners, are underwater -they owe more on their mortgages than their homes are worth - and are candidates for default, strategic or not.

Homeowners who can't keep up with payments can pursue a mortgage modification or, if that doesn't work, a short sale (selling their home for less than they owe on the mortgage with the lender's okay).

But some decides just not to do anything, just not pay their mortgages and live in their house as long as they can.

There are benefits to defaulting. While the bank pursues foreclosure, borrowers pay off other debts and save money as they live in their homes free.

In this case with the man in Florida, it took nearly a year after his last mortgage payment for his property to be auctioned off and then again it will take time before it is necessary for the homeowner to leave the house.

But walking away will make it harder to buy a home in the future. Under new rules, Fannie Mae, which backs loans from lenders, prohibits borrowers from receiving government-financed mortgages for at least seven years if they default when they can afford to pay. (You will have to wait three to five years after an involuntary foreclosure and two to four years after a short sale).

Defaulting also torpedoes your credit score - at least temporarily. You can expect a 100-150 point drop for the foreclosure and extra points subtracted for late payments.

A foreclosure can stay on your credit report for up to seven years. But if a default is your only blemish, then you might revive your credit score in as little as two years.

The man from Florida said that his fico score dropped 180 points.

Depending on where you live, banks can also pursue a deficiency judgment - that is, they can come after you for the difference if your house is sold in foreclosure for less than the loan amount. About one-third of states prohibit or limit banks' suing borrowers who walk away. These are know as non-recourse states. Unfortunately for this man in Florida, Florida isn't one of them so he had to make a settlement with the bank once his foreclosure was finished.
(part of the text is by Thomas M. Anderson) ML