Can you abandon a mortgage without repercussions?

Factual Questions
1

I was reading an article the other day about how screwed up the housing market is in my area. One issue that came up was that condo associations are taking huge losses when investor-owners abandon mortgages on condos. Paraphrasing from memory: It is common for owners to stop paying mortgages when the land is “under water,” that is, when the value of the property is lower than the amount left on the mortgage.

Is it that easy? Can you tell the bank “I’m not paying this anymore, keep it?” I would think the bare minimum is that you have to declare bankruptcy or take some huge hit on your credit rating.

2

You could also lose your job as a result of abandoning your legal obligations, and if you don’t have a job, you could kiss your job outlook goodbye for a very long time. In this economy, long time could be as bad as your lifetime.

One tactic that may work is to risk it by stop paying the mortgage, forcing a foreclosure and eviction. If your original mortgage paper was at some point sold, repackaged, ad infinitum, (and depending upon the laws at your location) force the actual mortgage holder to produce actual ownership documentation before you are evicted. If the sheriff doesn’t have the papers showing actual ownership, the delay tactic might succeed, for a while.

Sorry if this response sounds terse. We had a neighbor walk away on his mortgage. All of our homes took a hit on value because of this. We ended up calling the police several times because his abandoned house attracted undesirable elements. There are other issues we are dealing with because of his selfish approach. The neighbors all have a collective opinion that if he ever showed his face around here again, well, Board rules prohibit from continuing with a response.

3

Things are very different for a residential vs. investment property. I had an investment property that I could no longer afford to pay because the payment went up significantly due to the mortgage company severely underestimating my property tax withholding for the first 2 years I owned the property. The mortgage company wouldn’t do anything to make it possible for me to make the full payments every month, so I walked away.

I was allowed to write the whole thing off on my taxes as a business loss, and the only negative consequences are the loss of ~50 thousand dollars in down payment and monthly payments, and I assume a massive hit to my credit rating, although I haven’t actually checked my credit since the foreclosure went through.

I consulted a lawyer before walking away and he told me that the mortgage company could either just take the house, or they could take me to court and get a judgment for the entire amount I owed, minus whatever they where able to sell the house for. He also said that it was unlikely that I would be taken to court because the mortgage companies where dealing with so many foreclosures at the time that it was simply easier for them to take everyone’s houses.

4

Isn’t your legal obligation to make the payments as agreed to, or, failing that to turn the property used to secure the loan over to the lienholder? What about turning the house over to the bank strikes you as an abondonment of legal obligations?

5

Back to the OP: There are two kinds of residential mortgages in the US: recourse and non-recourse. Some states only permit recourse loans, whereas other states have both kinds.

In a recourse loan, the house is collateral for the loan. If the buyer can’t / won’t pay, the lender can (not must) seize the house (foreclose). The lender then sells the house for whatever they can get for it. If it sells for more than the loan amount, the lender gives the excess back to the borrower (net of costs). If it sells for less than the loan balance (good bet in most markets today) the lender can (not must) sue the borrower for the shortfall.

A non-recourse loan is exactly the same up until the moment the house sells for less than the loan balance. In a non-recourse loan, the lender has no ability to sue the borrower. They have to eat the loss, pure and simple. And the borrower has zero legal obligation to make up the bank’s shortfall. Walking away is 100% legal. Why is it legal? Because the contract they both signed when the loan was originated said they agreed to do it that way. The lender agreed to take 100% of the risk of coming up short.

In either case the borrower’s credit rating will take a hit.

But you can certainly see that if you had a bunch of other assets (e.g. stocks, bonds, etc), you’d be more inclined to stick with your loan if it was a recourse loan and less inclined if it was a non-recourse loan.

By some strange coincidence (not), non-recourse loans were legal is states which had the biggest booms and are now having the biggest busts. They’re illegal in most states for residential mortgages for the obvious reason.

If you have A) assets, B) a house underwater, and C) a non-recourse loan, then the only sensible, profitable, economically rational thing to do is walk away.

As **Duckster **points out, the problem comes in when somebody else, or a lot of somebody elses do it. As with so much in economics, if everybody acts in their own pure self-interest, the outcome is not some prosperous Adam Smith libertarian paradise, but rather a self-reinforcing race to a collectively disastrous bottom.

6

Late add … Going back to the recourse loan. …

If the foreclosed house sells for less than the loan balance, the borrower is required to pay the lender the shortfall. Immediately. All $50K or $500K or whatever of it. Why? Because the contract they both signed when the loan was originated said they agreed to do it that way. The *borrower *agreed to take 100% of the risk of coming up short.

If the borrower can’t / won’t pay the shortfall, then the lender’s recourse (hence the name) is to sue the borrower to get the Court to force the borrower to cough up the dough.

For a borrower who simply doesn’t have the money and, practically speaking, is never going to earn that much extra money, suing is pretty pointless.

But for a borrower with lots of money, or who is running a property business, suing them can be practical. Which is why those folks pretty much universally work with non-recourse loans only.

7

Walking away from a legal commitment like that would leave a stain on your credit report (a “charge-off”), which takes a long time to go away. It would make people/businesses reluctant to loan you money, making it very difficult to buy another home in the future. A charge-off is one of the worst things to have on your credit report.

However…

I don’t understand this. How could you lose your job over it, or have trouble getting a job because of it? Your employer doesn’t (well, “shouldn’t”) care what you do or don’t do with your money after you’ve earned it. In the past, I’ve hired many people who had financial troubles, including wage garnishments and bankruptcies. Giving them a job means that they get a source of income, and I get a loyal employee who really needs the work. It’s a win-win.

As an employer, I’m hesitant to hire people who have a record of theft (for example), but I really couldn’t care less whether they have bad credit reports.

8

It depends on the job - several financial positions (such as an accountant) run credit reports (IIRC) on potential employees. Bankruptcy or poor credit can be used as a determining factor for not hiring someone. That’s if I recall correctly. I seem to recall in my prior position (financial analyst) that we were going to hire someone but because they had a bankruptcy (or poor credit, I can’t remember which) my boss wouldn’t hire them. That’s kind of third hand though, as my boss mentioned it to me in passing and I didn’t really have anything to do with the hiring process.

9

If you work in any industry that might require you to get a security clearance, financial issues can (I think will) prevent you from getting a clearance.

10

There is sometimes another option: Some companies will just accept the keys from the owner and leave it at that. Going thru a foreclosure is time consuming and costs money. The bank might see that it is financially better to just let the owner off the hook in return for the house with no other fuss or muss involved. They don’t even have to do an auction, they can turn it over to their broker for sale. (Which might get a higher return on the house.)

This of course requires mutual consent from both parties.

The advantage to the owner is that there is no foreclosure on the credit report.

11

Bankruptcies are not usually an automatic “no.” They are usually looked at and are one criteria. I worked for a very large hotel company and serveral of our hotel controllers declared bankruptcy.

People do tend to look at personal bankruptcies as a personal failure but it really should be viewed as a tool as it is with large companies. No one says a bankrupt company is a failure. They say, “Well it’s a tool to reduce their debt”

But there are stubborn people who will automatically disallow bankruptcies or other things when hiring.

12

You can lose your security clearance (which may be required for companies doing buisness with/for the government) if you have a negative financial history or large debts.

Edit: Sorry, I’m too slow.

13

What of an owner who has a loan out, and bought the house decades ago, died, then their heirs live there? I know of a situation like this. The kin recieved foreclosure notices in the parents names, then it was just dismissed.

14

Although people can go into foreclosure without being bankrupt, or they may declare bankruptcy so they can discharge other debts and avoid going into foreclosure.

Both foreclosures and bankruptcy will be a huge red flag on your credit report.

15

That’s a very elitist and self-centered attitude. How is it this guys fault that property values plummeted in your neighborhood? How is it his fault that he no longer felt comfortable making payments on a severely devalued house? This guy is supposed to go into deep debt and bankruptcy just so his neighbors can keep their property values?

CEO’s, businesses and entrepreneurs walk away from bad investments all the time and it’s considered “good business”. Hell Donald Trump just did it here in Tampa and left a bunch of people with promise deeds to “Trump Properties” that never materialized. How is that different that what this guy did?

16

I have an SCI clearance. Please re-word your post as “**serious **negative financial history” (multiple bankrupts) and “large, unpaid debts”.

Large debts and legitimate bankruptcies/foreclosures are not a major criteria. I should know, as I had absolutely shitty credit at the time of the SCI interview, and I specifically asked this question and was given the above answer.

17

There are two sides to this argument but in answer to this question, when he bought the property he was making a choice, and when he found out it wasn’t such a good choice he decided to shift the impact to the lender. How is it the lender’s fault that values went down? How is it the lender’s fault that the borrower can’t live up to his commitments?

The two sides to this argument generally boil down like this:

A. When you borrow money, you have to pay it back. You signed a contract promising to would pay it back, and it’s the ethical thing to do. Your your country, God, and your mother would want you keep your promise. Walking away means you are a Bad Person.

B. Mortgage contracts contain default clauses. If you decide that you are better off defaulting and suffering the associated penalty instead of continuing to pay, then you have made a business decision. Donald Trump and Bill Gates would be proud. Walking away means you are a Smart Businessman.

18

There is a third option some people are using: stop paying and stay in the house. Banks are so far behind on foreclosures now that they don’t get around to doing anything about it for months, which is time for the homeowner to accumulate money for an apartment, or to preserve money if unemployed.

The impact of the hit to a credit rating depends strongly on the future lender. Given the large number of people who have been foreclosed on, I can imagine some banks in the future being willing to make loans given current employment and a higher interest rate. Otherwise they might be giving up market share. They made worse loans not that long ago, after all.

19

My apologies. I gave the answer I thought was correct.

I have a security clearance as well, although I don’t have any credit score problems.

Every year I am required to take an annual refresher security training. (A pretty generic online presentation.) That training mentions that being in financial difficulties may affect your clearance (as in: not getting approved, or having it revoked). It did NOT have the qualifiers you insist on, although I suspect that every individual’s case is judged on it’s own individual merits. In other words, there is some subjectivity to the process. But why take the risk?

20

Here’s why:

Duckster’s neighbor found a house that he liked, and determined that he could afford $X per month to pay for it. He took a risk by taking out a loan. Some appraiser somewhere declared that the property is now worth less than it originally was. It’s the same house that the neighbor liked, and the same $X per month that he determined he could afford. He hasn’t lost any money, and won’t unless he sells the property. He’s just bailing on a commitment because at the moment, someone has declared the value of the property to be less than he wants it to be.

Prices of things fluctuate. I have a collectible book that might be worth $200 last month, $100 this month, and $300 next month. That doesn’t mean I’ve lost money this month unless I choose to sell while the market’s down.

ETA: In a nutshell, I’d be hesitant to ever do any kind of business with Duckster’s neighbor, because he has demonstrated that he’s willing to sign a legally-binding document, and then bail out on it with no concern for the other party as soon as the agreement becomes inconvenient.