Considerations and Consequences of Walking Away From a Mortgage
It’s a question being debated about on the nightly news, on radio talk shows and in community forums across the country: should homeowners in the throes of foreclosure simply walk away from their home and mortgage?
Whether fueled by someone weighing the value of their investment or by populist angst associated with “The Great Recession,” leaving the home is a concept that is rapidly gaining traction in the public square.
And while the negative stigma once attached to foreclosure is diminishing, homeowners should think long and hard about the prospects.
At the housing counseling level, two recurring situations seem to be presenting themselves:
-A homeowner is current and can pay their mortgage, but wants to walk away because they owe more than the home is worth.
In this situation, the homeowner seems to have purchased a home thinking they were making an investment with a guaranteed return. And while this seemed to pass as conventional wisdom—particularly over the past decade--homeownership has always carried risks even beyond a potential loss of equity.
This homeowner also needs to realize that walking away has risks beyond a foreclosure on your credit record. In Colorado, for instance, a bank can pursue a deficiency judgment against a borrower in the amount of any loss the institution takes on the loan. Other consequences could include inabilities to secure government loans and an inability to pass a credit check as part of an unemployment background screening process.
-Another common situation we encounter? A homeowner experiences a financial hardship and is facing foreclosure and wants to walk away because the bank isn’t offering to help.
In this situation the homeowner should explore all potential options to avoid foreclosure or walking away, because there are other options.
In fact, the Colorado Division of Housing recently reported that the total proportion of foreclosure filings that ended in a solution other than foreclosure last year increased by 51 percent. In 2007, 37 percent of foreclosure filings ended in a result other than foreclosure such as short sale, loan modification, refinance or other solution. By 2009, this total had increased to 56 percent. The result has been fewer completed foreclosures even as new foreclosure filings have increased.
A Housing Counselor can help explain the benefits and repercussions of each of these options.
Could walking away from a home remain a viable option? It’s possible.
But as a homeowner and a consumer, it is important to understand that every family has a unique financial picture. Before you leave the keys on the counter, discuss your situation with a HUD-approved Housing Counselor. --Shannon Peer