According to new research by First American CoreLogic, homeowners whose homes are worth less than 75% of the mortgage owed are most likely to just walk away from the property and let it fall into foreclosure - even if they can afford to pay. So, if you have a mortgage of $400,000 on your home, and it is now worth $300,000 or less, you will begin to seriously consider what, these days, is being called "a strategic default" - even if you are fully capable of making your payments. In essence, you are choosing to preserve capital as opposed to throwing good money after bad.
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The report goes on to say that more than 4 million homeowners are currently underwater on their mortgages - i.e. the mortgage amount is higher than the property is worth. With the slow recovery and the housing market's long trek back, many of these homes may never recover their value. And that number - 4 million - could jump to over 5 million as the recovery continues to lag. 5 million homes represents 10% of the total number of homeowners in America!
And while it may seem like a good idea to simply "mail your keys back" to the lender, most states allow the lender to come after you for a deficiency judgment for the difference between what they get in a foreclosure sale vs. what you owe. That means - using our previous example - if you owe $400,000 and, in the foreclosure process, the bank ends up with $200,000, they can come after you for the balance owed. They are able to attach your other assets. And, of course, not only will they look at what the property sold for vs. what you owe, they will add in late fees, penalties, interest, attorney fees, holding costs, etc. to that final number.
Now the final amount can always be "settled" - and it seems likely that the lender will accept something less than the total amount they say you owe. (Although what makes sense and what banks actually DO seem to have little to do with each other.) No doubt, you will need to hire an attorney to represent you in the lawsuit - so you will incur legal fees as well. In the meantime, you are playing Russian Roulette with your entire asset portfolio - looking down the barrel of a loaded gun waiting for the trigger to be pulled. Not an easy scenario for most people to live with.
And, of course, your credit history will also take a beating - though once the lawsuit is settled, you can rebuild that over time. However, you could easily be looking at a 5-10 year window of negative credit consequences.
So, the consequences of "just walking away" are pretty severe. It seems like a better solution would be to work with the bank to negotiate a short sale - assuming you have decided to move on and abandon the home. Otherwise, you may want to negotiate a loan modification. And while those programs have not met with much success (the lender is not likely to agree to a loan modification if you are still able to afford your payments), it is always worth a try.
Another option you may want to look into is declaring bankruptcy. Now, if you can afford to make your payments and you still have a positive net worth after deducting the liability of your home, bankruptcy is NOT a practical solution. However, a bankruptcy does have the advantage of more quickly getting you out from your 'underwater' mortgage and MAY even allow you to restore your credit more quickly. Of course, you will want to consult with an attorney that specializes in bankruptcy before taking such a drastic step.
If even 20% of the 5 million homeowners that are underwater choose to 'strategically default' on their homes, it will most likely change the mortgage industry as we know it. The days of buying with only a down payment of 10% - or even a 20%! - may disappear forever.
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