4 dangers of walking away from your mortgage
Homeowners who skip out on their loans face a slew of consequences.
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Some homeowners who are "underwater," or owe more on their mortgage than the home's current value, are turning to "strategic defaults" in which they simply walk away from mortgage debt.
But financial experts warn the cost of skipping out on mortgage debt can be high.
The American Bankers Association recently informed homeowners about the consequences of strategic default, including the possibility of the bank obtaining a judgment to pursue the homeowner's assets, such as bank accounts, cars and investments. (Bing: Which states allow deficiency judgments?)
Here are four dangers of which homeowners should be aware and more information on the strategic-default environment.
1. Wrecked credit
Regardless of whether a foreclosure is because of a strategic default or other circumstances, it damages a consumer's credit score.
"A foreclosure is one of the stronger predictors of future credit risk," says Craig Watts, public-affairs director of FICO, a credit-rating company.
Foreclosures remain on a credit report for as long as seven years, with the impact gradually lessening over time. Watts says FICO scores "generally begin to recover after a couple of years," assuming the consumer stays current on all payments and other credit accounts.
He says the impact of a foreclosure on a credit score depends on other factors in the borrower's credit history. The ABA says a foreclosure drops a FICO score by 100 to 400 points.
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2. Difficulty getting new mortgage
A voluntary foreclosure also can affect a homeowner's ability to qualify for a new mortgage for years to come.
Peter Fredman, a Berkeley, Calif., consumer attorney, says Fannie Mae and Freddie Mac will not approve a mortgage for four years after foreclosure, while the ABA says it can take three to seven years to qualify for a new mortgage.
In addition, Fannie Mae this past summer announced a tough new sanction on people who deliberately default on their mortgages. These borrowers will be ineligible for a new Fannie-backed mortgage for seven years after the foreclosure date.
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3. Taxes still due
Tax liability is another potential danger of defaulting.
Although the Mortgage Forgiveness Debt Relief Act of 2007 offers protection from federal taxes after a foreclosure through 2012, state taxes still may be due on unpaid debt.
4. Deficiency judgment
A lender can also pursue the remaining debt from an unpaid loan by obtaining a deficiency judgment against the delinquent borrower, or it may work with a collection agency to recoup losses.
Ethical questions also surround strategic defaults. A survey by Trulia.com and RealtyTrac found that 59% of homeowners would not consider defaulting, no matter how much their mortgage was underwater, although the other 41% of homeowners said they would consider a default.
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Less risky in some states
Despite the potential negative consequences of a strategic default, the move is less risky in some states than in others.
"The first question for anyone considering a strategic default is whether the homeowners will be liable for the debt anyway," Fredman says. "Each state has different rules."
Nonrecourse laws protect homeowners in some states. According to research from the Federal Reserve Bank of Atlanta, the 11 nonrecourse states are Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington and Wisconsin.
When a borrower defaults in one of these states, the lender can take the home through a foreclosure but has no right to any other borrower assets. Home-equity loans are ineligible for this protection unless they were used as part of the home purchase.
In some areas, lenders are so overwhelmed with defaulting customers that homeowners can live in their homes for free for a year or longer before the foreclosure is complete.
The average length of time from default to eviction is 400 days in California, Fredman says.
Price of freedom
The potential consequences of strategic default cannot deter some homeowners from taking the plunge, says Frank Pallotta, executive vice president and managing director of the Loan Value Group in Rumson, N.J.
"While everyone understands the credit-score impact of a strategic default, most borrowers don't seem to care," Pallotta says. "They think a 200-point hit on their credit score cannot offset the benefit of living for as long as 18 months rent- and mortgage-free. They see strategic default as a form of financial freedom, especially if they live in a nonrecourse state and know someone who has done this."
Fredman, who developed the Should I Pay or Should I Go online calculator to help consumers evaluate a strategic default, says homeowners considering a strategic default should research tax laws and state regulations about loan defaults. Even nonrecourse states' laws can affect defaulting borrowers, he says.
"I also think everyone should consult an attorney and probably an accountant, too, because the relative cost of these professionals is not nearly as high as the potential cost of making a mistake," he says.
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Your loan no longer qualifies as a loan!
Federal National Mortgage Association (FNMA) is one of many, Government Sponsored Enterprises (GSE) who have purchased a large percentage of the notes. FNMA was started by CEOs of several large national banks. They devised a way to collect from your note by converting it into a stock and selling it to ignorant investors. But then when they began collecting from the note through the stock market your note was by then changed and no longer a loan, but a stock.
The GSE, as its name indicates, siphons money from the taxpayers through government entities, to pay for the notes. The money is then paid to the servicer of the loan. This exchange is procedurally improper because the servicer is listed as the lender on the DOT, without actually lending the funds. The bank is really just a loan servicer who purports its self as the lender while the taxpayers are the true lenders via the GSE.
The beneficiary is defined as the one who owns/holds the note. The owner/holder of the note is the one who has paid for the note. This is not a complicated process. If you want to find out who the beneficiary the note is you find out who paid for the note.
So, who should the notes beneficiary, or owner/holder really be?
1. The Government Sponsored Enterprises
2. The loan servicer (Bank)
3. The electronic registry service (MERS)
4. We the people
In the case where the GSEs are funding the notes #4 would be the correct answer to the question.
Did banks twist anyone's arms to force them get loans??? Do you want a house? Pay cash and don't blame banks for your problems. If you think that they are the "monstrous, greedy bastards" that are only looking for profits, look at yourself in the mirror and put yourself in their shoes. Do you work for free to bring happiness to others or do you work to make money for your own happiness? If you don't then stop whining. And do not try tell that their incomes are not same as yours. Compare your income and style of life with those who don't have even what you have, those in Haiti, Mexico, and even fellow Americans that live on the streets. Better yet, consider lending money to your neighbor who refuses to pay back and feel the pain.
I believe that all these bail outs and zig zagging going on is just a giant ponsi scheme between the US government and the banking industry and is so entangled I bet even
Bernie Madoff can't figure this out. So if you are a victim in this scheme, you will lose like others did, so it is best to cut your losses now and rebuild your own life because this government we have (although the best of the worst) does not have your interest at heart unless everyone sticks together, refuse to pay, and definitely stop paying your taxes and see who is important. It is un-american for americans to treat americans this way, hurt where it will hurt the most, you will still survive.
Walk out and don't look back, take your money what you have left and leave, this is what the banks did and we bailed them out with our tax dollars and now they don't want to help you, can you see the painted or tainted picture.
Look it comes down to two choices ..........Pay up or get out ! Does anyone out there think the banks care one way or the other ? My wife lost her job two yrs ago and was out for 1 1/2 yrs before she got a job that paid her 1/3 of what she was making ! And I dont want to talk about my job .All ill say is it was in construction of new houses !!!! We are trying to live on about 1/2 of what we were making before everything went into the crapper !! You know the economy ! But do everyday people have any control over what wall street and the banks do ? No !!!!!!!!! So if you cant make it work ....... I dont blame you if you walk away from your mortgage ! You do what you have to do to provide for your family and tell anyone who says you are wrong to ....KISS OFF ........... Because guess what they are not the ones in your shoes !!!!!!!!!!!
I think it is soooooooooo easy for those that are blaming the people that had to leave their "HOME" because of this economy!!!
I guess they just have not been hit by it YET!
If you can no longer afford it, you gotta MOVE!!! They bank took the house as collateral so I do not see ANY PROBLEM AT ALL.
Don't you think IO would have loved to stay in my home of 19 YEARS! It's the only home my children ever knew! We tried to do the right thing, BOA just refused to work with us, PERIOD! They strung us along for 13 loooooooooong months!
Finally we threw in the towel. It was pay the note and go BROKE, than be out in the street with ZERO money, or file for the Bankruptcy and at least be able to afford the basics to live!
The industry did it to everyone......NOW THEY ARE PAYING THE PRICE! iT IS me LAUGHING ALL THE WAY TO THE BANK NOW, NOT BOA!
BTW - I have 2 new credit cards, a home with NO mortgage and money in the bank. To me, THAT'S SUCCESS.................
WOW! Banks are still trying to push scare tactics and propoganda. Give you food for thought. My uncle was terribly upsidedown and in an abusive mortgage. He walked away from his home and ultimately filed a Chapter 7 bankruptcy. Before his bankruptcy was even filed, his mail box was flooded with credit card offers and car dealership offers trying to get him back into the food chain. The reason for this is simple (and something that a lot of people seem to try to flood the population with MIS-information on) when you file bankruptcy, you are actually MORE bankable to creditors. Your income to debt ratio is much more favorable and creditors know you cant bankrupt against them for another 10 years. After 24 months of using his credit card for all his intended cash purchases, and paying the balance in full EVERY MONTH, he was actually able to RE-BUY the house he walked away from at fair market value.
sounds like a lot of hoopla from banks to me trying to scare people into continuing to allow themselves to be royally screwed by the wealthiest 1%
I'll have to agree with Derek68! We had the same problem.
Osteoarthritis forced me onto Disability (LOSS of 60% of income) and couldn't afford the payment, AFTER 19 YEARS! BOA screwed around and screwed around for an ENTIRE YEAR!!! Promises, promises. All they did was SUCK another 12 months payments out of us!!!
I wasn't going to use my 401K $$$, TO KEEP UP ON PAYMENTS AND LOOSE THE HOUSE ANYWAY - EVENTUALLY! FYI - My wife had an 816 Credit score, mine was 812!
I would be broke AND out of a house, had I done that!!! We filed chapter 7 Bankruptcy to avoid the "Deficiency judgment" and went on with our lives.....
Here we are 9 months later, bought a new place CASH, for 1/2 what was owed on the other. NO Mortgage payment or obligation the the GREEDY SOB'S @ BOA!
All you, who think individuals like ourselves are wrong....can stick it. It's a matter of financial "sense" and survival. Do you think these banks CARE...If you do, I have a wonderful Bridge for sale......Call me!