“Walk Away Mortgages.” A “new” Federal Program? Nope. A new financial reality.
When houses are worth less than the debt owed against them (“negative equity” in bank parlance), it becomes a sound financial decision to simply ‘walk away” from the house, and rent the same model down the street for about half the cost. Sure, it trashes your credit rating, for about five years. But, what the hell, you’re likely already late on several payments, and your credit is already trashed. Is the “moral” obligation to keep making payments worth the additional $150,000- $200,000 in value difference? Not to most people. And that’s the problem the Feds and the Banks are facing.
Every contract (like a loan agreement) can be breached. The “consequences” in many cases, is the loss of the security – the house. In some cases, the loss to the Bank is more than the house is worth (negative equity, indeed), and in some of those cases, the Bank has the ability to go after the defaulting homeowner/borrower. That’s called “recourse.”
In some states, California among them, if the loan was purchase money in a 1-4 unit, owner-occupied property, the Bank loses the right to go after the homeowner/borrower for any deficiency. But, in an era where re-financing to take money out was common, many homeowners lost that protection, because a re-finance is NOT “purchase money” – even when the amount re-financed was the exact same as the original amount borrowed.
In cases where the original “purchase money” loan is being modified, some banks take away the “non-recourse” protection as part of the modification.
Where the loan is non-recourse, is it the smart thing to “walk away?” In some cases – yes! Is it the “moral” thing to do? Hey, I’m a California real estate lawyer; can you define “moral” for me?
Before you do, let me ask you if the same definition applies to Countywide, or Washington Mutual, or any number of sub-prime lenders. I can’t help but think it’s hypocritical of the Banks that just got billions of dollars of Federal Bailouts, that created the lending environment that originated these loans, and that are now at risk of being shut down and put out of business, to claim the “moral” high ground.
Example – Homeowner is only underwater because of a HELOC. If they stop paying on the HELOC – and eventually the bank settles with the homeowner for a percentage of the debt – years later when the homeowner sells the property, does the bank have any recourse on a debt they “settled” previously?
No clear cut answer based on your question. It depends on the terms of the “settlement” the borrower had with the bank.