Consequences of walking away from mortgages

October 29, 2010 10:47:22 PM PDT
Do you owe more than your house is worth? We have heard a lot about loan modifications, but there is another option: walking away.

It is called 'strategic default' and that's when a homeowner -and not the bank- decides to allow the home to be foreclosed upon. It is an option getting a lot of scrutiny these days.

Peter Safronoff is packing up and moving on.

"Emotionally, I am very sad about this whole situation. Logically, it would be absurd for me to continue on this death spiral," he said.

He has money to pay his mortgage, but has decided against it.

"Staying here would be the equivalent of financial suicide," Safronoff said.

It is called a strategic default, and that's when a homeowner allows their home to be foreclosed upon, because it is worth less they owe.

Attorney Chad Ruyle's website has a strategic default calculator and offers help for those who decide to walk away from their mortgages.

"I believe there is less of a stigma on homeowners that are walking away from their properties, even with people who are strategically defaulting," he said.

Maybe less of a stigma, but it's a stigma none the less.

"A lot of people when they hear talk about walking away it makes them uneasy, it even makes some angry because they think this is immoral," Stanford sociology graduate student Lindsay Owens said.

Owens has been looking into defaulting and morality and says your take on the situation usually depends on how much money you make. The wealthy tend to see it as simply as a business deal, and the middle class see it as a moral obligation.

"We are basically letting the middle class take one for the team and hold up the economy by paying their mortgages while the wealthy are moving on to a new house and saving up money for the future," she said.

Ruyle is siding with the homeowner and sees no moral dilemma at all.

"If they don't make their payments they are not breaking their word. The contract says if they don't make the payments, the bank gets the house back," he said.

The bank does and the contract is enforced. Still your credit will take a hit and the mortgage holder could hound you for the money it lost.

"Let's just say your loan is for $500,000 but your home is only worth $400,000. What happens to that $100,000 difference? That's what you need to be worried about," consumer attorney William Kennedy said.

If you have the original loan that came with the house the lender can't sue you for the money they lost. However if you have refinanced the lender can sue you for their loss.


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