Friday, January 29, 2010

Walking Away From Your Home May Have Consequences

I read an article earlier this week* that encouraged distressed homeowners to walk away from their homes if they owe more than it's worth. The rationale was that a mass walk out would cause the industry to really address the problems with the housing and mortgage industry and claimed that it was actually an ethical solution to a problem created by the unethical practices of the mortgage lending business that got us in this situation in the first place.

As a philosophy minor and an enthusiastic student of Kantianism, I'm on the fence as to whether or not I agree with a mass walkout. If the premise is that walking out is for the greater good, then more concrete research would need to be done to determine the true numbers in terms of the people who are in distress or will be in distress soon and the actual resulting effect on the economy if these homeowners walked away.

In addition to the philosophical and ethical considerations of walking away, there are also possible financial consequences that should be taken into consideration as well. Here is an article that I read today that discusses the financial impact of walking away or short-selling your home:

Banks Seek Payback from Walkaways
Increasingly aggressive mortgage lenders are seeking to collect deficiencies from former home owners who walked away from their properties or sold them in short sales.

Many states, including Florida, give mortgage holders as long as five years to seek a deficiency judgment. If granted, the bank gets up to 20 years to collect and the option to renew for another 20 years if the debt isn’t paid.

About one-third of U.S. states, including California and Arizona, prohibit collection efforts after foreclosure, but home owners usually waive that protection in a refinance.

Most states allow collection on unpaid home-equity loans.

Banks are most likely to try to collect from people who walk away from a property in which they are still making payments.

“The bank is going to pull your credit report, and if you’re current on your other bills they are going to come after you and potentially ruin you,” says Larry Tolchinsky, a Florida real estate attorney.

Source: Bloomberg, Kathleen M. Howley (01/28/2010)

No comments: