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)

Thinking of buying a condo?

With all the great prices on condo units right now, I found this article timely:

Things Condo Buyers Should Consider
Buyers who are considering the purchase of a condominium should inspect the health of the home owner’s association before they close.

The seller should provide the buyer all financial documents relating to the association in time for an attorney for the buyer to review them before closing.

Here’s some advice from Leonard Baron, professor of finance at San Diego State University, about the information that the seller should consider:

Does the association budget include money for operating expenses such as water, lights, elevator maintenance, and landscaping?
Is there extra money set aside in a reserve fund for long-term maintenance? If there is an outside reserve study, that should be provided. If not, there should be adequate money in the reserves right now to cover 50 percent of the estimated cost of repairs over the next 30 years.
Do the condo’s expenses exceed revenues due to a high foreclosure rate or other reasons that owners’ debts go unpaid?
If there is a shortfall, does the association have a plan besides cutting back on services for making it up?

Source: The Wall Street Journal, June Fletcher (10/17/2009)

Women on the forefront

The majority of my clients right now are women...single women, and single moms who are ready and able to own their own homes. They are working women who aren't millionaires but have stable jobs and have managed to save up some money for a down payment and can take advantage of this real estate market.

FHA loans are what's really making this possible for them. FHA loans aren't FICO score driven so there's no need to worry about having "good" credit. 3.5% of the purchase price is required for your down payment however a portion or the entire 3.5%can be gifted from someone else. What this means in real numbers is that you would need a down payment of $7000 on a $200,000 residence (yes, there are single family homes and condo's in this price range in L.A.!). There are closing costs when you buy a home, but sellers are willing to pay a big portion of or all of the closing costs for you.

In light of what seems to be an emerging group of homeowners, I'm putting together a one hour session just for women. It will be packed with information on what women need and can do to capitalize on the current market conditions and become homeowners. Details and date to follow in an upcoming blog.

Congratulations to all you women who are making it happen!