Your Mortgage: When to Walk Away
A very reputable publication, the San Francisco Chronicle, recently posted a story on their website that is a true sign of the times; “Your Mortgage: When It’s Time to Walk Away.” Wow. Only in America.
This comes on the heels of a new government initiative to incentivize and streamline short sales. The new HAFA (Home Affordable Foreclosure Alternatives) program is scheduled to go into affect on April 5, 2010 and encourages borrowers to work with their loan servicers for reaching an alternative to foreclosure. Many critics foresee this legislation to be counter-productive to our country’s real estate recovery because it will encourage borrowers to walk away from their mortgages.
Proponents of this newest form of government intervention into our free market economy would say that borrowers are already walking away from their mortgages. And they’re right. The fastest growing segment of defaulted borrower population is surprisingly those who are current on their payments. Strategic Defaults, as they have been dubbed, is the latest trend puzzling mortgage underwriters across the country because they are trying to assess a new loan applications and the standard rules of risk are being turned upside down.
Only time will tell. You’re encouraged to post your point of view on the new HAFA program and whether you think it will help or hinder a real estate recovery in the comments section below.
There have been some very high profile organizations in this “strategic default” catagory recently. Among them is Tishman Speyer Properties, who  performed the largest residential strategic default in history in January 2010. They walking away from $4.4 Billion that was borrowed to acquire the sprawling Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan encompassing 56 buildings and a total of 11,000 units. And the company remains in business. Only in America. Another organization that saw the benefit of walking away was the Mortgage Banker’s Association who strategically defaulted on their headquarters. That story was highlighted in a previous blog post titled, “Embarassing Short Sale.”    Â
If you are Beverly Hills 90210 star Brian Austin Green however, deciding to stop paying the mortgage may relieve some short term burdens but unfortunately, may not release the responsibilites quite as easily as with Tishman and the MBA. A sad injustice indeed. It would seem that the bigger the default, the fewer the long term reprecussions.
So when is it a good time to walk away from a mortgage? The article penned by Lisa Smith mentioned at the beginning of this post posits that one should run their life like a business. But it is extremely important to point out that choosing to stop making mortgage payments is a serious decision and shouldn’t be taken lightly. Despite the injustices of big banks and their ability to incur big losses and pit that on taxpayers. Despite the unfair ability for businesses such as Tishman Speyer Properties or the MBA to walk away basically scott free. The average borrower in Anywhere, USA is not a business and defaulting on a mortgage is not a light matter.Â
 Just ask folks in California.   This tax season many were shocked to find out that even though they may not have had a federal tax liability on the losses incurred from a short sale or foreclosure, they did have a state income tax liability. I guess California was so broke that they were willing to kick their people while they were down. The governor of CA has vetoed an appeal on this subject but the debate ever wages and many believe the Californian government will lift this tax burden soon.Â
For those of you who have always paid your mortgage on time, have never defaulted on a loan and have always paid debts back, sorry to say, but you’re not the big winners here. In fact, it seems the rewards have gone to the Tishman’s of the world who gambled big and lost big. (And the loan brokers who pushed those loans through and earned percentage commissions on the close.) But hopefully you learned a mighty fine lesson about our banking system from all this. If you owe a bank $50,000, you have a problem. If you owe a bank $5,000,000,000, they have a problem.
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Well may I be spanked, horse wiped and hog tied,
but I will not stop paying my mortgage and just
walk away. To me it is a sence of pride to be on
time.
I’m in the redemption period,how can I save my home.
Dear Phil,
You’re a great writer - I love your stuff.
And I am often amused and entertained at the same time.
THAT’S a complement, from another very gifted writer.
KEEP it UP!
And thanks too, for your acknowledgment of the biggest historical event of all time!
In Respect & Appreciation,
Trisha L. Hogan
* P.S. I’d love to work with you, but after my research, I don’t think
I have the patience or tolerance for short sales. Too bad.
Dear Phil,
Im very excited to be involved in the discussion. I believe
there will always be a large number of forclosures from today forward
because their are people that just can’t be responsible with their money.
My concern goes back to the recent repeal of the “Glass / Stiegall Act” having been put
in place due to banks unethical behavior which caused our first
depression, now banks are being handed money they aren’t willing
to loan with, for the reason of having it called back by the Government. They are
sitting on it and waiting for that day. This program concerns me because
of the cost being covered by each tax payer. I want to keep the majority “not the minority”
portion and at this program and big government developing rate there can only
be one thing in the plans. Higher taxes and more bankrupcy for business. If people don’t
have jobs they can’t spend money. They also can’t buy a home and apartment dwellers don’t
make good prospects for short sales!
Great article Phil. It wouldn’t surprise me if HAFA did as little as the whole Making Homes Affordable Program and any other “workout” program has done. My biggest hope for HAFA is that it incentives the banks enough to be reasonable and get the short sales done quickly. In my limited experience, it always seems like the investors who really care about the mortgage in question tend to analyze and get back to you quickly….it’s the servicing banks that don’t seem to care and take FOREVER. HAFA is being nicer than I would be. Instead of giving the banks money for processing a short sell, I’d say you servicing lenders don’t get paid if the loan is behind in payments! We can only hope…
I’ll forward your information to one of our students in Michigan that can help you.
Since Wall Street began sinking money into mortgage backed securities, credit default swaps and derivites and congress decided to remove the rules that channeled Wall Street’s greed, and Americans respond to the “Me, Mine First” why would this not be the out come? Banks that were “to large to fail” were saved by TARP money claim they had a banner year, now are giving them selves those HUGE bonus’s, what the hell is going on!! Last year they would not have even existed if the Tax Payers had not bailed them out! It’s time to dismantel that greed driven system!! What has changed? The rules are still the same at the top. It’s time to put common sense back into the mix, for everyone. It’s time to clean ALL the corruption in Washington out and demand those who do go back to Washington, to stay out of bed with Special Interest!!