Note: This post was originally published in May 2008, and has been re-posted due to spam problems.
Wondering what to do about your big fat mortgage? Well, who isn’t these days? It’s official. We are now in a recession. There is still no sign of a housing bottom and foreclosures are exploding. Things will likely get much worse before they get better
Many homeowners are just throwing in the towel and sending their house keys back to the bank (Jingle Mail). But is this a step you should consider? Let’s examine this option further.
“Foreclosure” sounds frightening, partly because of the unknown. So educate yourself now, and act accordingly, before it is too late. Too many homeowners use up all of their other assets in an attempt to save their home and when they are finally foreclosed upon, are so destitute that they cannot even afford the down payment for a rental. Analyze your financial situation, manage your emotions, and make the prudent decision.
Even the celebrities are being hit hard by the recession and facing forclosures.
As reported on May 1, 2008 in the Wall Street Journal Online. Mr. Canseco, 43, who retired in 2001, told the celebrity TV show “Inside Edition” that it did not make financial sense to keep his 7,300 square-foot home in the Los Angeles suburb of Encino. “Inside Edition” said it had foreclosure documents showing Canseco owed a bank more than $2.5 million on the house, Reuters reports. “I do have a judgment on my home and it to me is very strange because it didn’t make financial sense for me to keep paying a mortgage on a home that was basically owned by someone else,” he said.
This blog article will likely upset the more fiscally responsible types, but I actually agree with Jose Conseco on his actions. The banks this decade were driven by excessive greed and became overly aggressive in their attempts to sell mortgages. Additionally, the mortgage agreements have become so complex that very few attorneys can even understand them. The buyer, who is generally so excited about the purchase, trusts the mortgage broker and just signs where told. Joshua Zumbrun’s article “The Mortgage Industry’s Dirty Secret” in Forbes online puts is well. “The complexity of loan documentation is a major problem. “Trying to describe 100% of the details in legalese and bureaucratese results in essentially zero actual information transfer to the borrower,” says Alex Pollock, former president of the Federal Home Loan Bank of Chicago and fellow at the American Enterprise Institute. It’s a full-employment program for lawyers at closing as well.”
So now the banking industry is looking for a taxpayer bailout to help them out of this huge mess. Yes, many of these homes were bought by frenzied buyers looking to make a quick buck. However, the banks were just as greedily trying to flip securitized mortgages. The laws in every state are very clear and many states are “non recourse”. This means that if you take on a mortgage, the only collateral the bank can pursue is the home and they cannot com after your other assets. Yes, they will threaten and harass you, but in the end, all they can take is your home. If you have a non-recourse loan (see below) and you are sitting in a house that is underwater and can’t pay the mortgage, don’t feel guilty about living rent free for 6 months while you go through foreclosure and save your hard earned money for a rental deposit.
Recourse vs Non-Recourse Loans
The nature of the mortgage and real estate industries is such that there are a multitude of regulations. On the financial side, it is important to understand the difference between a recourse versus non-recourse loan. When a home is foreclosed on by a lender, they eventually sell it and apply the proceeds to the original loan amount. But what if the proceeds don’t cover the original loan amount? In a recourse state, the lender can come after the borrower for the rest of the proceeds. In a non-recourse state, the lender cannot. If you are considering buying a home, make sure you know what type of state you are in.
Here is a general list of non-recourse states:
Alabama
Alaska
Arizona
Arkansas
California (as long as non-judicial foreclosure is used which is the most common)
ColoradoDistrict of Columbia (Washington DC)
Georgia
Hawaii
Idaho
Mississippi
Missouri
Montana (as long as non-judicial foreclosure is used)
New Hampshire
Oregon
Tennessee
Texas (but even in a non-judicial foreclosure, the lender can pursue a deficiency judgment)
VirginiaWashington (as long as non-judicial foreclosure is used which is the most common)
West Virginia
These are states that also allow non-judicial foreclosure, and/or where non-judicial foreclosure is more common and deficiency judgments can be obtained more easily:
Michigan
Minnesota
North Carolina
Rhode Island (lender can seek deficiency judgment)
South Dakota
Utah (lender can seek deficiency judgment)
Wyoming
Now, because you have a mortgage in one of the above states does not necessarily mean that you have the get out of jail free card. Please review your loan documents and I also strongly recommend you consult an attorney who specializes in real estate law. There are a lot of laws to protect the consumer and educating yourself as to your rights will help you greatly in deciding a course of action. If you have refinanced or have a 2nd mortgage, they are usually recourse loans so your options there are more limited, however not insurmountable. Banks are hurting so bad right now that for those that are in distressful situations (ie you have very little assets), you have some good negotiating leverage. From the banks perspective, something is better than nothing.
