August 17, 2010
Nash Law Firm
By: Stephen J. Nash
Walking away from a house that is underwater is not an uncommon action but is it a smart action? Unfortunately, the term walking away is misleading because while you can walk away, you don't leave your troubles behind. The question is not, will my troubles catch up to me but, instead, is when will my troubles come back to haunt me.
It is extremely frustrating and time consuming to deal with lenders when you can't afford your home and/or are underwater. In many ways the outcome has more to do with the situation your lender is in more than the specifics of your situation. If your lender has insurance that will pay more than any short sale or offer that you can make, you will not be able to resolve anything with your lender. If TARP money is involved, a short sale is most likely not going to net the lender more than the TARP guarantee. If the lender you are dealing with is merely servicing the mortgage for an investor, the investor requirements are going to control the result.
When faced with the uncertainty and the impossible to understand actions of lenders, many homeowners simply decide to walk away from their home, their mortgage and their troubles. There has been much debate over the morality of walking away but little about the consequences of walking away. Many of these borrowers do not realize that they are not actually leaving their mortgage problems behind. Their misguided comfort is re-enforced because the lender has done nothing to them since they walked away.
Unfortunately, the silence is merely the lull before the storm.
Any debt that was not fully extinguished is still owing. In Minnesota, a foreclosure by advertising will wipe out the full debt on the first; however, in the following instances, the debt is not extinguished:
1. if the lender forecloses by action, and/or
2. the debt carried by lenders who do not participate in a foreclosure.
As of today, for residential properties, the debt that is of greatest concern is the mortgages and encumbrances that follow the first mortgage. Since the vast majority of properties being foreclosed today are underwater, few lien-holders following the first mortgage participate in the foreclosure. By not foreclosing or participating in a foreclosure, their only remedy remaining is to sue the debtor on the promissory note. The promissory note is the contract whereby the debtor agrees to pay the debt back.
As of today, there has not been a flood of such lawsuits but they are becoming more and more common. Many ask, if the lenders intend to sue, why haven't they done so? Some argue that the lenders are worried about the political fall-out if they start suing debtors to recover this debt.
Throughout the real estate and economic meltdown, lenders have not seemed too concerned about political fallout. These are the same lenders who routinely lose documents, have turned the short sale process into a death march, and who publicly embrace each new foreclosure/loan modification and short sale initiative only to sabotage the program in its implementation. Do we really believe that the lenders and investors are going to suffer losses and not attempt to recoup those losses? I don't think so.
Why have we not yet seen a flood of lawsuits? First, I suspect there are more lawsuits than we are aware of. Many of the debtors that are being sued are ignoring the lawsuit because they don't understand what is happening, are too numb to do anything, or just don't know what to do. As a result, they do nothing and the lawsuit is treated as a default. The court systems in the Twin Cities are flooded with default lawsuits, many of which are lawsuits to collect on housing-related debt.
The second factor is that the lenders who have insurance or TARP guarantees are not going to bring the lawsuit. They will process the debt so that they can submit the loss to the insurer or government. It will then be the insurer (think of AIG) or the government who will step into the shoes of the lender and either bring suit or sell the debt to third parties who will attempt to collect.
Why are the insurers or government not yet suing on these debts? The first answer is that they are at the tail end of the process. The lender does not recognize and define what their loss is until the process is complete and then the insurer will have to pay out the covered loss and step into the shoes of the lender. The second answer is that lenders may decide that strategically they are better off waiting until the economy improves. Why sue people over money, when those people are in the worst financial situation that they have ever been in? If the lenders wait for the recovery, everyone should be in a better financial condition which will mean the lenders will be able to recover more of their losses.
Of course, this will be a brutal blow to the "walk aways" who thought they had put these problems behind themselves, who have finally dug out of the economic quicksand that they found themselves in only to get hit yet again. They will then realize that after everything they went through, as they finally start feeling better about themselves, their gains are going to be wiped out and handed over to the lender they walked away from.
Before anyone walks away from their economic problems they have to clearly understand the consequences of their actions and plan accordingly. Since there are so many factors that can impact the potential consequences to an individual, there is no generic answer for anyone faced with these problems other than everyone does have options. None of the options is likely to be a "home run" but if you don't chose the best option that is available you often will end up with the worst of worst option.
Our office strongly believes everyone needs to understand the options available to them and make a plan based upon these options. The plan has to have flexibility because as factors change, different options are going to appear and some options are going to disappear. We recommend there be a Plan A, B, and C. Plan A is what the debtor wants to happen, Plan B is what most likely will happen, and Plan C is what will happen if everything goes bad.
Bill Keyes of our office will meet with people to review their situation, go through their potential options and propose a Plan A, B, and C for a flat fee of $200.00. A small price to pay for peace of mind.
|Practice Tip: If the lender is a local or regional bank it is much more likely that they will foreclose by action rather than by advertisement and they are much more likely to sue on the promissory note soon rather than later. National lenders tend to move slower than local or regional lenders but when they do move, it effects millions.|