I’ve seen a bunch of articles lately about people mailing their house keys back to the lender and just walking away from the house. Presumably these people are in foreclosure or close to it.
Is there some significance in the mailing of the keys? Surely this is just a symbolic gesture- obviously the person could have another set of keys, I can get into my house with the code for the garage door opener, etc… Is there some kind of law about mailing the keys, is that why people do it?
A lot of people are “under water” on their house, in other words, they owe more for the mortgage than the house is worth. Let’s say you owe $170,000 on your house, and after you mail your keys in, the bank sells it for $130,000. Are you on the hook to the bank for the other $40,000? Is there any way for them to come after you for that money? The house was the security for the loan, so it seems like you should be free and clear, but banks seem to do everything they can to eliminate risk (forcing people to buy PMI, for example), so do they have some fine print somewhere that obligates you to make up the difference?
It depends on the state. I only know for Georgia. The answer is: possibly. In the event of a deficiency (what you described above), the foreclosing lender has to confirm the foreclosure sale in a court proceeding. The court will focus on the commercial reasonableness of the sale. Once confimed, the lender will have a deficiency judgment. Used to be, lenders rarely pursued deficiencies. With declining property values resulting in more and more “under water” homes, that is changing.
I think that “mailing your keys back to your lender” is code for moving out and sending a letter to your lender telling them that you will not be sending any further payments.
The letter to your lender would be the important part, and that is no “get-out-of-jail-free card,” because what you are basically doing is formally telling your lender that you are defaulting on the mortgage contract.
You owe your lender the full amount of the mortgage, regardless of what the bank gets for the foreclosed property. (The only caveat is that the lender has to make a valid attempt to get the highest market value they can get for the property.) They can certainly go after you for the difference. This is certainly not just in the "fine print,’ either–the amount that you owe, including interest, is in big, bold letters in the mortgage contract.
At least in Georgia, a lender cannot pursue a deficiency without confirming the sale. This is true even for guarantors. Failure to confirm the sale removes personal liability.
It was always my understanding that this described an arrangement whereby the borrower basically said to the lender “You don’t have to bother with foreclosure, here is the property”. This could save the lender a considerable sum in legal fees and perhaps get the property in better condition. In return for this consideration the lender agreed not to pursue the borrower in court. However, this agreement needed to be hammered out beforehand, and yes, the mailing of the keys is only symbolic.
After doing a bit of googling, I find that this arrangement is known as Deed in Lieu of Foreclosure. It may be that I am conflating two different situations, but it seems to me that mailing in the keys is, at the very least, a request by the borrower that the bank forego foreclosure.
As with all legal questions, it depends on your the law of your jurisdiction. In the jurisdiction I live in, provincial law provides that the lender has to choose: to foreclose on the mortgage and take the benefit of the security, or to sue on the deficiency. They can’t do both. YMMV considerably from jurisdiction to jurisdiction.
Big Bank has a mortgage on Little Guy’s house. Little Guy falls behind in the payments. Big Bank has a choice: it can sue Little Guy on the contract to pay, but not attempt to foreclose. Alternatively, Big Bank can foreclose and take the value of the mortgaged property. However, if it forecloses, and the house value doesn’t cover the amount Little Guy owes, there’s a deficiency. Since it chose to foreclose and take its security, Big Bank doesn’t have the option to sue Little Guy on the personal covenant for the deficiency.
It’s provincial legislation dating back to the Depression.
What’s the point of the suit, so you can get a judgment and levy against the property that you already have a lien on? Makes no sense. Are you sure about this?
The legislation in question is The Limitation of Civil Rights Act (which, despite its ominous title, is about property and contract rights, not what we would term human rights). Here’s the government’s summary of the provision:
This to me says the lender’s remedy is limitted to the collateral. It does not say anything about suing on the mortgage/note as an alternative remedy. Assuming such were the case, can you think of a single instance where it would make sense to sue rather than foreclosure if suing meant losing your right to pursue the collateral?
Perhaps we’re talking at cross-purposes. In our system, a mortgage has at least two key provisions: a personal covenant to pay the amount borrowed, and a statutory lien against the property. (It’s not a common law mortgage with an actual transfer of title to the mortgaged property.)
To enforce either right, the creditor has to go to court: either to sue on the personal covenant to pay, or to foreclose on the mortgaged property, forcing a judicial sale or possession. The creditor can’t enforce the mortgage lien without foreclosure proceedings in the Queen’s Bench. In fact, they even need permission from the Court just to file the Statement of Claim on the mortgage.
That’s the point at which the creditor has to choose. If the debtor has significant assets in addition to the mortgaged property, the creditor may decide to sue on the covenant. But if the mortgaged property is the debtor’s main asset, the creditor would likely choose to foreclose.
Once the Queen’s Bench orders foreclosure, the judgment acts to extinguish the personal covenant to pay the deficiency, so the creditor cannot pursue the debtor personally.
I can think of a few, but they’re all pretty much variations on a few themes:
Solvent mortgagor or co-signer
Low home value.
Slow real estate market.
Ordinarily a solvent mortgagor will pay the mortgage, but some folks have a steady income that is insufficient to pay the mortgage and others needed to move to take a job, but couldn’t sell the house. If the lender can’t sell the home relatively quickly they’ll have maintenance costs, and may still take a loss. If they get a judgment and the mortgagor has a reasonable income or other assets, it might be worth chasing them with a judgment.
