February 4, 2011 Dylan Ratigan

Strategic Default

A Mortgage Isn’t a Life Sentence

That’s the segment I did with someone who walked away from his mortgage, his home, and his $120,000 down payment after wrestling with the bank for months.  It’s powerful, and it’s hopeful.

“It feels great,” Burton said without hesitation. “I’m starting again. I’ve still got my talent; I’ve got my intelligence. I’ve got my health. At least I’m free of the enormous amount of stress that I had and the frustration of doing the best I could and it wasn’t good enough. It wasn’t working. Ultimately, I made a decision that my physical and mental health was more valuable than this house and my investment in it.”

At this point in the housing crisis, if you’re having problems, it’s clear that no authority is coming to help you.  Not bank regulators.  Not Obama.  Not the Republicans or Democrats in Congress.  And especially not your bank.  But the good news is there is hope.  You have options.  Ryan Grim, Lucia Graves, and Arthur Delaney interviewed 50 people thinking of walking away from their mortgages, and then interviewed them a year later.  They wrote up what they found.  For those who were able to walk away, it was a profoundly liberating experience.

The hatred of the banks was searing, not because they owed money, but because the banks were often entirely unresponsive and dishonest.  A mortgage isn’t a life sentence, it’s a contract.  Your house is the collateral for that contract, and if you stop paying the bank gets the house.  That’s in the contract.  There’s nothing immoral about not paying your mortgage, you need to see your relationship with your bank as purely contractual.  The bank certainly sees you as a number.

If you’re thinking of walking away from your home, you need to consider a couple of things.  First, hire a lawyer who can give you good advice and negotiate on your behalf.  There are legal traps to be aware of.  For instance, depending on the state, if you stop paying your mortgage, your bank might be able to sue you for additional assets.  This isn’t common, but you should check out this list of states.  Some are non-recourse, which means banks can take your house and stop there, while some are recourse, which means that banks can take your house, and sue you for assets for the difference between the loan amount and what the house fetches at auction.  There’s also your credit score.  While it’s true that your credit score will get hit for walking away, the formula for calculating it is secret.  Some people report getting credit card solicitations within months of walking away.

There are many ways to walk away.  You can mail in your keys, you can do a “short sale”, or a deed-in-lieu.  If possible, it’s best to get your bank to agree to let you leave.  If you don’t, then you technically still own the home, and localities might be able to come after you for costs associated with an abandoned home.  I recommend this book by law professor Brent White, “Underwater Home: What Should You Do if You Owe More on Your Home than It’s Worth”.  There’s also the service YouWalkAway.com, which has a useful Facebook group.  Finally, you use this Meetup tool by the Huffington Post to find other homeowners in your situation.

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