Help me default on my mortgage.
March 4, 2010 10:44 PM   Subscribe

I need practical (not moral) advice about strategically defaulting on a mortgage.

I am considering a "strategic default" on my mortgage. I live in a non-recourse state. I've concluded that a hit to my credit score is far preferable to wiping out my 401K, racking up more credit card debt, and then likely defaulting anyway in the future under more desperate circumstances. I don't have nearly the income that I did when I "bought" the house, and won't for the foreseeable future. I've lined up a new place to live that's much cheaper, and don't desire to keep the house via refinancing or other means. What should I know that can help the process go more smoothly? What, if anything, should I be communicating to my bank? So far, I've missed just one payment. (By the way, I am convinced by the work of Brent White that this is not a moral issue, and while accusations of being a deadbeat go along with the package, I'm hoping for a minimum of those in reply to this question.)
posted by anonymous to Work & Money (8 answers total) 5 users marked this as a favorite
There was a recent episode of the Planet Money podcast where they interviewed people who give out this type of advice. You'd have to find it and listen yourself for the details. The main thing I remember is that a lot of people are having a hard time getting their lender to foreclose. If it's in your advantage to get foreclosed-upon, it might be in your bank's advantage to just let it ride for a while.
posted by Stylus Happenstance at 1:00 AM on March 5, 2010

I may be missing the point, but have you thoroughly investigated whether you could sell the house? You might have to sell it for less than you paid or end up a bit in debt, but you might also avoid problems with credit in the future.
posted by Lucie at 1:53 AM on March 5, 2010

Yeah, seems like you'd want to simply stop paying... stay there for free, begin boxing stuff up slowly... plan on moving eventually, they won't be able to get rid of you for quite a while... just save your money (pay down debt if that's your plan vs. waiting for forclosure to get started before filing bankruptcy). Goodluck getting back on your feet.
posted by Jiff_and_theChoosyMuthers at 6:01 AM on March 5, 2010

Why don't you just sell the house? Certainly that would be more strategic than any other option.
posted by anniecat at 6:44 AM on March 5, 2010

Really, there's nothing much you need to do to help it go smoothly. If you can afford to, keep paying any HOA dues and property taxes until the bank takes over. Move to your new place a month or two before foreclosure, so you can transition with mail, utilities and so on.

If you want, you can ask the bank for a modification that would make the mortgage affordable, but they seem unwilling to compromise unless you can show extraordinary financial hardship. Their loss, I guess (really -- they'll probably lose more in the foreclosure than they would in a modification).
posted by Chris4d at 6:51 AM on March 5, 2010

If you are underwater on your mortgage (meaning you owe more than your house is worth), ignore those advising you to sell. You are correct that, in that case, the best financial option is often walking away.
posted by ewiar at 6:54 AM on March 5, 2010 [2 favorites]

You didn't ask for moral advice so I'm limiting this to strategic.

You believe the house today is not worth what you owe - you are "upside down."
You can pay some / all of the mortgage payments but if you spend all your available income to do it you believe you'll just be postponing the inevitable foreclosure.

If those are true note these things:

From the time of the first missed payment to the actual moment of sheriff at the door telling you to get out is many months.
In fact, many lenders today have such a glut of unperforming / underpforming loans that they look better within the regulatory scheme they live in if your loan is in default but they DON'T foreclose. Thus, you may be able to hang out in default limbo for a LONG time.

Thus, you can, as Jiff said above, stop paying, keep living there and save the monthly mortgage payments for a LONG time. If you are otherwise financially responsible this will let you eliminate other debt, maximize contributions to your 401(k) [which can't be attached by creditors] and / or save a pile of cash. All of these are good things.

IF you pursue this route depending on your lender, your circumstances you may end up with more than 6 months of 'cost free' living in this house before foreclosure begins. Even then, foreclosure takes a few months. After that there's a redemption period where, even though the house has been foreclosed, you as the owner still have the right to show up, pay the arrearage and redeem the house [I hear that you are not looking to do that but it's a further period of some months of 'cost free living.']

Basically - you will have at least a month and more likely 3+ months of notice that the move out day is coming. Until then - why move and pay rent when you've got cost free housing here?

As others have said, your bank / lender may very well let you do a short sale - you sell for less than the debt, they take all the sale proceeds and forgive the rest of the debt. So consider that strategy while making your decision.

Be aware, however, that this route can result in you having taxable 'imputed income' - you may be taxed on the debt forgiven as if it were income to you. This also may result from your 'stop paying and wait to be foreclosed on' approach. That usually isn't an issue for most folks foreclosed on because they are at that point broke anyway. In your strategy you won't be.

Thus, strategic advice - talk to a tax professional / CPA in your state about the tax impacts of your chosen strategy before you begin. You don't want to get foreclosed on, move to an apartment, then find out you owe tax on thousands of dollars of phantom income. That would suck.

Finally, if you take the approach of staying there, saving money, not paying the mortgage and waiting for foreclosure it's always possible that home prices, the economy, your circumstances may turn around so that you want to, and can, refi or pay the arrearage and stay there.

Basically, just because the boat is leaking today doesn't mean we know it will sink tomorrow.

Good luck.
posted by BrooksCooper at 8:50 AM on March 5, 2010 [2 favorites]

Related Planet Money links:

Blog entry

Something to note that they discussed on the podcast. One reason that the banks are stalling on foreclosure is that once they foreclose, they are responsible for the property taxes. If they stall on the foreclosure process, the homeowner is still responsible. One person they interviewed was already moved out of their house, yet still paying taxes on their old property because the banks were stalling on the foreclosure. So, something to keep in mind.
posted by chrisroberts at 9:05 AM on March 5, 2010

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