Meet 5 homeowners who walked away

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As the housing crisis wears on, more homeowners are forced to consider handing their keys back to their lenders. Here’s what happened to 5 who did just that.

By Sally Herigstad

MSN Money

Three years into the housing crisis, nearly 15 million homeowners owe more than their homes are worth, and an estimated one in four mortgage defaults is voluntary. A recent poll found that a third of respondents would do the same — walk away — under similar circumstances.

And some experts wonder why strategic default rates aren’t even higher. In October, University of Arizona law professor Brent White published a provocative paper (.pdf file) saying that homeowners are letting fears of wrecked credit and reputations cloud decisions about their financial best interests.

So we put some questions to five homeowners who did walk away. Was getting out from under the mortgage worth the hit to their credit ratings? What about the guilt and disgrace we’ve been warned about? Are the lives they have today better or worse than the lives they left behind?

The answer: It depends — on both their individual financial situations and their personal values. Few expressed regret, though it’s worth pointing out that all but one asked that their last names not be used.

Kathy: ‘We’re incredibly happy’

Kathy, 34, was single when she bought her 600-square-foot San Diego condo for $235,000 at the height of the real-estate frenzy. After she married Darren, 42, she and her new husband decided that the condo was too small. By then the market had collapsed, and the condo was worth less than she’d paid for it.

Kathy continued to make payments while foreclosures piled up in her building. In the end, her condo’s reduced value was not why she decided to walk.

The mortgage double standard?

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“The people in the building changed,” she says. “It went from young homeowners to squatters. Genuinely, squatters and drug dealers. It was this horrible situation.”

Still, the couple stuck it out for two years before strategically defaulting in 2009. Kathy was scared to call the bank to cancel the automatic mortgage payments. However, she says: “They were lovely. There wasn’t any of the drama that I was afraid of.”

The financial relief was immediate.

Kathy and Darren didn’t have much trouble renting. Their 20-pound dog was a bigger problem than their default record. In San Diego, she points out, landlords are used to foreclosures.

The rent on the more spacious two-bedroom condo unit, which includes a garage, is the same as the mortgage on their tiny former home. “It’s got birds; it’s got grass and no drug dealers,” Kathy says. “We’re incredibly happy.”

Because California is a nonrecourse state, Kathy does not face a deficiency judgment, the biggest threat to defaulters. In recourse states, a lender can come after a former homeowner for the difference between what was owed and what the lender was able to get for selling the home.

Some people had asked Kathy whether she felt she had a moral obligation to the bank, but she said she didn’t feel they were being judgmental. Several of her friends have also walked away, and others have told her they wished they had the courage to do so.

“In California, everybody gets it,” she says. “People have been incredibly supportive.”

Kathy hasn’t checked her credit scores and doesn’t intend to. She and her husband plan to avoid using credit as much as possible. (Foreclosure can lop off as much as 160 points from a top-notch 780 credit score, according to Fair Isaac, the creator of the FICO score.)

“After the debacle with the condo, the concept of homeownership is meaningless to me,” she says. “It’s about happiness.”

Patty: One stress lifted, but life’s still hard

New Yorker Patty Sayles, 66, was doing fine until her husband began suffering from Alzheimer’s disease. She had to choose between paying for his nursing-home care and paying her mortgage.

With the help of an attorney, Sayles might have held on to the house for another year. But the constant phone calls from creditors, debt resolution specialists and foreclosure prevention companies wore her down.

“I couldn’t take the phone calls,” she says. “Every day I got phone calls from lawyers saying, ‘I can take care of it.’ It’s all fraud stuff.”

Sayles walked away from her house in October. She also filed for bankruptcy.

Sayles moved in with her daughter, which has been difficult on both of them, but she doesn’t feel she had any other choice. Otherwise, “I’d be in the park,” Sayles says.

Her husband’s nursing home gets paid first, and that takes his entire pension. Sayles’ other debts were discharged in the bankruptcy, but she doesn’t have the income or savings to rent a place of her own.

New York allows deficiency judgments, but filing for bankruptcy protects Sayles from facing one. Such judgments are considered the most significant hazard of walking away from a mortgage.

“If you didn’t do a bankruptcy and you don’t do a deal with the bank, you will definitely get hit with a deficiency,” says Sayles’ attorney, Edward Nieger. “It may take a year or two because they are so backed up, but they will get you.”

Like Kathy, Sayles hasn’t looked at her credit score. As long as her husband is in the nursing home, she won’t be buying or renting a home or doing anything else that would require a good credit score.

Kristen: A smaller life, but the worst is over

A high-end interior designer in Santa Barbara, Calif., Kristen, 33, bought a luxury condo near the beach for $877,000 in 2005. She used $200,000 in savings to add improvements. Then her business slowed, and she could no longer make her payments.

She tried to sell for $1 million. By the time she called on Jeffrey J. Fritz, a Coldwell Banker real-estate agent in Green City, Calif., the market was falling drastically. She got an offer for around $700,000, but the bank declined it.

Kristen had become depressed during her attempt to sell the house, says Fritz. But “once we knew the ax was going to fall, she switched from being stressed to being relieved,” he says. “The worst had happened.”

Kristen lost her down payment and the savings she’d put into upgrades when she walked away. But because she hadn’t been living on credit cards or running up additional debt, her immediate financial crisis was over.

Life post-default, however, hasn’t been entirely smooth. She rented an apartment, but a year later her landlord couldn’t make his own mortgage payments. The bank foreclosed on the property, and Kristen had to move again. “That was traumatic because she had already gone through it,” Fritz says.

The apartment Kristen rents now, though nearby, isn’t glamorous like the condo she’d owned when money flowed so freely in California. But her living expenses are a fraction of what they were, so she feels it’s the right place for now.

With a foreclosure on her credit report, Kristen may have trouble buying property for seven years under current lending conditions. But Fritz says there are ways around that restriction. If Kristen were to marry, her spouse could get a loan in his name. Or she could buy a house with a nonrelative as a business partnership. People with good cash reserves who can’t get a loan often team up with people who can.

Getting a loan to buy a car would be a challenge. However, Fritz knows “walk-aways” who were able to buy cars by getting co-signers. “The auto industry wants to sell cars,” he says, “and a large segment of the population now have foreclosures on their credit.”

When foreclosure was imminent, Kristen’s biggest fear was what the neighbors would think. Her clients were high earners, and she projected a successful image to attract and keep them. But, as Fritz says, “It’s not like they put a big red sign on your door” after you default. Kristina now seems comfortable letting others know her story. “Once the worst happened, there was nothing else to be scared of,” Fritz says.

Jennifer and Andrew: Quick relief, continuing guilt

In their late 30s and the parents of two children, Jennifer and Andrew had second thoughts after walking away from their Phoenix home. As conservative, religious people, they felt guilty about reneging on their financial obligations. So they contacted Jeremy Brandt, the CEO of 1-800-CashOffer, but it was too late — the house was too far along in the foreclosure process.

Jennifer and Andrew paid $350,000 for the house in 2005. By the end of 2009, it was worth $270,000. But they loved their home and say they would still be there if Andrew hadn’t lost his job.

Friends advised the couple to walk away. At first, Jennifer and Andrew resisted the idea. They tried to make it on Jennifer’s income as long as they could.

“They could afford to pay it if they cut every expense,” Brandt says. “But that wasn’t realistic — they couldn’t live like that.”

In January, Jennifer and Andrew put their keys in an envelope along with a letter telling the bank it could have the house back. They didn’t have any trouble getting into an apartment because they signed a lease before they missed payments and damaged their credit.

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Andrew is still looking for a job, but walking away did help the family’s immediate cash flow. The apartment isn’t nearly as nice, but the rent payment is about half their old mortgage payment. And, like California, Arizona is a nonrecourse state, so they don’t have to worry about the bank coming after their other assets.

With the foreclosure process continuing, the couple won’t know the full effect on their credit for some time. Foreclosures are among the worst things that can happen to a person’s credit scores; only bankruptcy is worse. If Jennifer and Andrew want to buy another house, they will probably have to wait at least a few years.

“No law says you couldn’t buy a house tomorrow,” Brandt says. “But the banks would have to be crazy to give you a loan because you’ve shown a propensity to walk away.”

Brandt says it remains to be seen how banks will view loan applicants with foreclosures on their records in the next few years, now that so many people have gone through them.

Published May 26, 2010

26 Responses

  1. […] this: Like Be the first to like this post. Filed under: foreclosure « Meet 5 homeowners who walked away Caveat Emptor Questioned on Wall Street: Fraud […]

  2. Read the WSJ article, which is loaded with Maden Lane trusts foreclosing on both commercial and residential holdings.. this can not go on forever as Neil points out there simply is not enough money to cover these defaults and toxic assets… we are well over 3 years into this mess and things are getting worse by the day… as they wait for the system to right itself… HELLO!

  3. PJ

    Posted on another topic – you may find interesting regarding government repurchase forcing.. See –

    http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748704499604575407584128526218.html

  4. Hi PJ

    Agree – we are in very sad state. All is political.

    Maybe the stock market will hang in there – as some corporations are earning some profit on international business and by American job layoffs, but, the US economy is in bad shape – and so are the American people. And, most of us are very proud – afraid to say what is happening to us. It is not a pretty picture.

    And, after 9/11 – do you remember what was said by the perpetrators? They said – that they will attack America next in other ways – ways in which we may never even know what is really hitting us.

    Home is where the HEART is – for the majority of Americans.

    We have been hit again – whether we know or it not – and maybe without Wall Street/the government – ever realizing the full extent of what they have done – and continue to do – to the American people – and their hearts.

  5. 2 Anonymous… it is quite fascinating how this administration can not own up to the fact of decline “consumer” confidence… for in all corners of American people are pulling back and will remain very cautious for year’s to come…

    The one sad thing that I have been seeing is people that have saved for a rainy day are near out of money… under employed or unemployed and are facing foreclosure… yet the second tier of wealth extraction from the middle-class… it is becoming quite apparent that they will not be happy until each and every Middle Class American is labeled a “dead beat”.

    As far as Geithner… smart guy… but he never met a payroll in his life and has lived in an insular world that is not reflective of the day to day life of the average individual.

    While I suspect IMO, all is being held off for political reason’s, mid-term elections and so forth it is becoming apparent each and very day that that is all that matters to the ruling class and WS….

    I have a suggestion for the “bail out” team in DC… start paying Social Security NOW to anyone that has worked for 20+ year’s… that’s not a bailout it is the peoples money!

  6. By the time anyone does anything it’ll be too little and too late for so many of us.

    Yes, it is definitely interesting that the rumor was so widespread and a matter of discussion.

    I should run for president. I got this all figured out. Rewrite all underwater loans to reflect today’s market value and give a tax credit to those homeowners that are not underwater. Renters should also get a tax credit.

    Vote for me in 2016. I promise you all a presidential cramdown. LOL

  7. PJ

    Thanks for article post. Interesting. Congress and President Obama just do not know what to do – but, fact is, we – as a country – are in very bad shape.

    If they do not do something to stop the flood of foreclosures – the problem will escalate out of control. Just as Mr. Henry Paulson got down on his knees to beg Congress to bail out the banks, Mr. Geithner will, I predict, eventually get down on his knees to ask for help for the American public – he will have no other choice if things continue as is.

    There is no getting around the fact that our GDP is composed of 70% consumption. Economy will continue to fall as more and more people lose their jobs and homes. This is not about the peoples bad decisions – this is about a Wall Street that was allowed to run wild. There can be no band aid temporary “stimulus” cures – President Obama has to face reality – Wall Street destroyed Main Street. .

  8. Beyond an economic problem.. this is economic nightmare if the projections for next 3 years are accurate… lets hope they aren’t.

  9. 2 Kickboxer.. this WSJ OP/Ed was interesting… the mere fact that they are all discussing this is interesting to say the least…
    http://online.wsj.com/article/SB10001424052748703748904575411553343672456.html?mod=rss_opinion_main

    Think we can all agree that this is now a systemic economic problem… especially when people that have lived within their means, are not underwater are losing home to foreclosure due to income reduction or extended unemployment which has not been reduced through the bank cash out/bailout.

  10. It is partly our fault that we are viewed as “deadbeats.” At the onset of the mortgage “crisis”, we allowed the government to fail us while they bailed out the big banks – and the media projected us as the villains.

    As I have said before, once Mr. Henry Paulson determined that the people were not to get help – and only the banks would get help – there was no turning back. Mr. Paulson determined our fate. This was at a time when the entire world knew that the mortgages – originated during a certain period of time – were laced with fraud.

    While the investors are being made “whole” from the period mortgage fraud and the banks were bailed out, the people were left with nothing – and no power in court to even force exposure of that fraud. We do not have large and powerful law firms representing our interests. it was up to state Department of Justices to do their job and expose the fraud – they did not. It was up to the FBI to investigate the fraud – they did not. We got no support to back our claims in court.

    Further, as the mortgage crisis unwound, Congress considered only one major source of relief for homeowners – bankruptcy reform. And, twice bankruptcy reform was turned down by Congress – because the banks told Congress – NO – and few stood up to their representatives.

    Those that resent homeowners getting relief are less resentful if homeowners suffer some consequence such as a loss of future credit – and I am sure that homeowners really do not care about credit at this point.

    Consumer organizations sat back and did nothing for homeowners. No one stood up for us as a group – and we only stood up for ourselves in a court stacked against us from the onset. We simply do not have any power. I do not care what avenue one takes to prove the mortgage fraud – it is a very tough battle in court when you have no power.

    While it is fine to fight our individual battles, we also needed to come together – in some manner – we needed a voice. We failed.

  11. @ PJ,

    I was thinking that ‘IF” Obama forces GSEs to forgive principal it will probably be on loans that are underwater yet current. Imagine the riots that would take place if they reduced the principal on loans that are in default! So many people are unsympathetic towards those of us going through foreclosure. They see us as irresponsible deadbeats who are trying to game the system and are undeserving of a bailout.

    It would be nice if they gave all middle class American homeowners a principal reduction. We were robbed of our wealth.

    Like the A MAN says, “NEVER AGAIN.”

  12. 2 Kickboxer… they sure are doing their best to “squelch” that rumor of the “August Surprise”… but nothing that this administration attempts is of no surprise… however having the GSE’s write down it’s “underwater obligations” will cause an out right riot (IMO) if they then do not categorically lower principle for every mortgage obligation that they own regardless of loan to value ratio…

    In the meantime all should be downing loading their loan status with Fannie/Freddie to see if they actually own the loan… you might be surprised.

  13. please this site conorix.com and learn who we facing in this forclosure

  14. By now, there is nothing ‘strategic’ about a default.

    The only thing ‘strategic’ is and always has been:

    strategic ignorance (of judges)

    strategic amnesia (mill lawyers)

    strategic predation (of debt buyers, with your money).

    Remember, banks are never the real party in interest. “THEY got the money, didn’t they” – at least twice over.
    Foreclosure-mills and their law suit insurers are debt buyers and, for a few bucks, perhaps the only real party in interest).

  15. BSE

    Who knows – but my guess is that “investors” would be able to rake in millions more in lawsuits. The people were duped – but only the investors keep winning. Normally, investor lawsuits are very difficult because of the sophistication of investors. But, some of these lawsuits show the actual fraud – fraud cancels sophistication.

    Repurchases were used in connection with mortgage loans that were sold to banks (Wall Street) but had flaws, which allowed the bank to sell back to originator. Almost all of these “originators” are now gone.
    So who will actually repurchase the loans?

    Article says – “Federal Reserve Bank of New York on Wednesday said it may try to force banks to “repurchase bad home loans backing securities it holds.”
    Therefore, the FRBNY will ask the banks to repurchase the loans because the banks purchased the loans from the originators – that are now gone and not cannot repurchase the loans – because they are gone and because they sold the loans to the banks anyway.

    Nowhere in the securitization chain is it revealed that the loans were first sold to the banks. Except we know this because all the certificates to the trusts are sold to stated security underwriter(s) – who are are subsidiaries of the banks.

    The government’s purchase of “toxic assets” – that is certain tranches of the SPV Trusts – from the banks – which are the securities that were backed by the loans – has artificially kept defunct SPV trusts “alive.” The government and the security underwriters (banks) are the only remaining “investors” in the “remnants” of dismantled trusts there are likely now back on the banks balance sheets due to new accounting rules.

    But, a forced repurchase would mean that performing loans no longer back a security – non-performing loans already cannot back a “pass-through” security because they are not current.

    All of this tells us that the (Wall Street) bank who purchased your loan and securitized the loan receivables is your creditor (and TILA amendment says we have right to know our creditor) – unless the bank has already disposed of your loan to a third party.

    Judges never question repurchases – that is, if loan was ever repurchased. Only Judge Schack of NY was onto to this.

  16. What happens if these loans are bought back ? Any ideas ?

  17. @ Anonymous,

    Yes, I was thinking about those with non GSE loans. Also what about those that have already lost their homes? There has to be a remedy and relief for ALL borrowers. Unfortunately, government only has control over Fannie and Freddie at this point. I don’t know what could be done to force all other lenders to reduce principal on underwater loans.

    I first heard of the rumor on MSNBC news. It’ll be interesting to see what happens.

    It is all so exhausting. *sighs*

  18. Kickboxer

    Great info —- with one in four homeowners under water – the President really has to do something. But, what about non-agency paper????

  19. Is Obama about to forgive billions in mortgage principal?

    Supposedly an August surprise.

    http://hotair.com/archives/2010/08/05/is-obama-about-to-forgive-billions-in-mortgage-principal/

  20. Hey Neil! have you posted Zeenat Ali’s story ? this girl is kicken Duesche bank’s butt in Federal and State court!

    http://www.latimes.com/business/la-fi-foreclosure-battle-20100805,0,3410289.story

  21. Those guys at the top of the rotten tree have made their money to last more than 20 yrs leaving what’s left of the carnage to bottom feeders who would buy a home right now who would sign Loan documents

  22. Be a patriot! Stop your payment.
    Stand up to these usurious bastards

  23. This is refreshing especially because it is in the Mainstream media about a daughter who is going up against the big bad wolf Deutsche Nazi bank

    http://www.latimes.com/business/la-fi-foreclosure-battle-20100805,0,3410289.story

  24. THIS IS WHY I EMPHASIZE COMMUNITY CITY DISTRICT ATTORNEY CITY COUNSEL AND MAKE ORDINANCES.

    THE ONLY WAY. DONT BLAME THE BANK THEY LOOK AT IT IN THE INTERNATIONAL (DEUTSCHE BANK) AND NATIONAL LEVEL COUNTRYWIDE, INDYMAC WELL FARGO ETC…

    THIS IS WHY WE CAN TELL THE JUDGE THAT WE WOULD NEVER HAVE SIGNED THE CONTRACT IF WE REALLY KNEW WHAT WE WERE SIGNING?

    ASK THE JUDGE TO TELL YOU WHAT YOU SIGNED GIVE HIM/HER 3 DAYS TO FIGURE IT OUT.

    WHY ALL THE SMOKE SCREENS BY THE CONTERFEIT BANKERS

    WHY STONEWALLING INFORMATION?

    CITY OF BELL IS THE BEST CASE STUDY.

  25. It is so sad that the bank would not accept the 700K offer… instead they put the homeowner through H** and the foreclosure on credit rather than short sale. Waht is worse is that the bank will probably sell it for a fraction of that 700K. Bailout money? Banks are for customers? I think every homeowner forced into walking because bank did not work with them should FIGHT FIGHT FIGHT. It takes a lot of effort though and not everyone CAN do that.

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