Can A Lender Come After Me For Loan Default?
SOME affluent homeowners have been walking away from a second home or investment property that is worth less than what is owed on the mortgage, even though they can still afford to make the payments.
But dumping that beach condo or country cottage, or even a home bought for an adult child — a practice known in the industry as a “strategic default” — is not the same as discarding a poorly performing stock or bond. Among the lingering effects is wrecked credit that can prevent the homeowner from getting another loan of any kind for 7 to 10 years.
In July, a study by researchers from the European University Institute, Northwestern University and the University of Chicago concluded that the strategic default trend was “large and rising” among homeowners with an equity shortfall of $100,000. As of last March, it said, strategic defaults accounted for 35.6 percent of all foreclosures, compared with 23.6 percent a year earlier.
“I’m increasingly seeing people who are middle class or higher on the pay scale coming to the conclusion that ‘I may be able to carry it, but should I?,’ ” said David Shaev, a bankruptcy lawyer in New York who assists homeowners in distress.
“But the question is, can the bank come after you, and if so, what is your position? What is your liability?”
The answer depends largely on where the property is.
In “recourse” states, a lender can come after you, and usually other assets like a primary residence, for the full mortgage amount. In “nonrecourse” states, a lender agrees to accept whatever the property fetches at a short sale, foreclosure sale, or a deed-in-lieu, in which the property is taken back but not formally foreclosed on, and generally can’t sue for the full loan amount. Florida, Connecticut and Arizona are among the nonrecourse states, while Colorado, Maine, New Jersey and Hawaii are recourse states.
There is a third category of state, called “single-action” or “one-action,” which allows the lender either to foreclose on the owner or file a civil lawsuit for the full loan amount. New York, California and Idaho are in that category.
Even in a nonrecourse state, however, those homeowners who opt for a strategic default on a previously refinanced property may not be protected from lenders, because the mortgage in such a case was not accorded for a first purchase, said Philip Faranda, a mortgage broker for J. Philip Real Estate, in Briarcliff Manor, N.Y.
When home-equity loans are involved, he added, it gets more complicated. In nonrecourse states like Florida and Connecticut, the lender cannot sue to collect any home-equity loan taken out on the property. But in nonrecourse states like Arizona and California, the lender can still sue for repayment of a second mortgage or line of credit.
Filing Chapter 13 bankruptcy protection, in which the homeowner arranges to pay off debts at lowered amounts over a maximum of five years, is typically the only way to avoid being on the hook for the second loan, mortgage experts say. Affluent homeowners who strategically default on a second home often don’t qualify for Chapter 7 bankruptcy, which leads to liquidation but limits eligibility to those earning no more than state median income levels.
Though not illegal, strategic defaults are controversial, because they are viewed in some circles as unethical. The practice is common among property developers.
For homeowners under water, experts say, it can make economic sense. “It’s a business cash-flow decision,” Mr. Faranda said, “but the risk is that you’re rolling dice with your future credit.”
A foreclosure from default stays on a homeowner’s credit report for 7 years, while filing for bankruptcy stays on the report for 7 to 10 years, he said. A default can lower a credit score by 85 to 160 points, according to FICO, the company that created the scoring method.
With that said, there are still hundreds of homeowners that are legitimately under water and are struggling or unable to make their mortgage payments each month. For these homeowners there are solutions, and that is where we come in.
We have committed to helping 100 homeowners save their homes from foreclosure this year. Whether they want to keep their home or need to sell their home we have solutions! The best part is, there is no charge to the homeowner for our help.
Who might you know that is facing a financial hardship and maybe struggling to keep their home? Send them this information and have them give us a call right away to determine which solution will be best for them.
Pam Parton and Joanna Woolley
Windermere Exclusive Properties
760-580-1615 or 760-580-1630
Lynnley Brown of New York Times
Contributed to this article
Minimum Down Payment
The only remaining option for a homebuyer with less than 20% for a down payment is to pay for mortgage insurance. In certain areas such as California and Florida, most companies that provide such insurance have limited the maximum coverage to 90% (or less) of the purchase price. In addition, they have tightened their underwriting guidelines and it is indeed more difficult to actually qualify for the insurance.
