"We're so upside down on our mortgage that it will take us ten years to break even."
The Foreclosure Scenario
The homeowner on the phone was calling me to see how soon after a foreclosure they could hope to qualify to buy a home.
"We're thinking about letting the bank keep the house, and renting until we're able to buy. We think it makes good financial sense, because our mortgage payment is $1,830. and we can rent a nicer house for $500. a month less than that!"
"That's like a $6,000 raise," the homeowner continued. "Even if it takes us four years, we're going to come out better in the long run. We're just throwing money down a rathole right now."
The Short Sale Scenario
The REALTOR on her cellphone in the next booth at lunch was talking with the owner of a potential short sale listing.
"You know, I can't give you legal advice, but what I'm hearing is that the banks almost never come after you for the difference between the short sale price and what you owe on your mortgage. And look how far underwater you are with what you owe. Getting out from under that debt will give you a fresh start, and won't that feel good? Let's get together and talk some more..."
In many states, the lender has the right to pursue the defaulting homeowner for a deficiency, and they did that last year to the tune of more than a billion dollars.
Let's take Florida as an example. Let's say you are upside down on the home you purchased in 2005 with that 80/20 mortgage by nearly 50%. The "jingle mail" philosophy of just sending the bank the keys and walking away sounds real good to you right now, even though the foreclosure will be on your record.
You walk away in 2010. The bank sells the house as REO. Years pass. It's 2014, and the foreclosure is a distant memory. You've re-established your credit and bought a new house in another part of the country where you moved back in 2011 because you got a great job...finally! Your daughter is planning her wedding. Life has never been so good.
January 27, 2014 You get a registered letter from a bank you never heard of. The letter says that they have purchased the assets of the bank that held your mortgage back in 2010, and includes a demand for $83,000 ~ the amount of the deficiency.
"They can't do that!" you shout across the room to your wife. "We can't afford to pay this; we're just getting back on our feet."
As a matter of fact, they CAN do that. In the state of Florida, the system allows mortgage holders to seek a deficiency for up to five years. And if the deficiency is granted, they have up to twenty years to collect.
- Know the law in your state. Some states, Arizona among them, have anti-deficiency statutes on the books for a primary residence.
- Realize that laws are changing. Don't rely on what you knew to be true last year.
- Don't necessarily believe what your real estate agent tells you about short sales. Do your homework; it's your life.
- If you're a REALTOR, be careful how you talk to your clients. A disclaimer such as the one in the scenario above will not protect you or your broker from an expensive lawsuit farther down the road.
For further reading: Bloomberg Article
I'm Mike in Tucson, your preferred Tucson Mortgage lender.
SUNSTREET MORTGAGE llc
Offices in Scottsdale, Tucson, and Nogales, AZ, and Albuquerque, NM.
Call me on my Blackberry (520) 349-9090
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