Mortgage trouble? Walk away.

Good morning. I'm splitting the Jim Cramer post in two, because the trashing of the Inland Empire (he says it's such a housing disaster it needs to be plowed over) is overshadowing his advice to upside-down homeowners: just walk away from the house and the mortgage.

Cramer on walking away: "When your house drops 20% in value, then it doesn't matter whether you're prime or subprime. It's better to walk away, even if you're wealthy. Because you don't want to lose your credit card, and you don't want to lose your car. Your house is the one thing that's fungible. It's smart to walk away... It's actually a good thing. I know that sounds a little counter intuitive. But if your home declines 20% in value, it's really important to sell it, or walk away from it."

Strong stuff considering this guy is probably the most prominent investment advisor on television today.

Your thoughts? Comments? Play investment advisor for a second: what do you advise someone who paid $500,000 for a house, still owes all the principal, and the house is now worth $400,000?

Comments

[vic]

All lies and jest; still a man hears what he wants to hear and disregards the rest. The Boxer - Paul Simon

If this is correct, then... as I mentioned before, we are all in this mess because of individuals like you.

Now instead of deepening ourselves into this black hole--let's find a solution to this economic downswing.

*I know you find this hard to believe.. But imagine this.. Open your mind. focus... "If we alllllllllllllllllllllllllllllllllllllllll started telling our friends, family, neighbors, clients, customers, business partners, etc etc etc, that the market is back!. the rates are LOW!, homes are down!—It’s a GREAT time to BUY!... Guess what? The market would return! It all Starts with individuals like you and me.

Now hear this... You have to be strong and don't get easily sidetracked by columnists who mislead you. BELIEVE IT--VISUALIZE IT-- WE control our own destiny. It's time to take back what the media took from us...Our equity in our homes! Look in the mirror...the time is NOW! Go!

:)

[Glenn]

I bought a condo in the I.E. for 300k in 06' now its worth 245k. I make my payments on time and my income has increased 45,000 from 06'. I wanna bigger home but the thought of selling is heart breaking knowing there's condo's in my complex that are still not sold from 06'. There's a lot of 4 rent signs and no renters. Im stuck w/ an upside down nightmare... What's my options? Any suggestions?

[Pat]

Your option is to save your money so that you can afford to dump your existing house at the current market price and have enough left over for the down payment on the bigger house that you want.

[Ro Flo]

Almost two years ago I thought that I had finally reached my dream of being a home owner. Though I did not have money for a down payment, a realtor encourage me that I could still make my dream come true with a full loan of 80/20 no down payment needed. I decided for a two bedroom townhouse and from the first month when the mortgage was due I struggled but everyone told me it was normal. I have struggled almst two years falling behind on credit card payments, car payments, utility bills here and there, borrowed money from friends and family to pay them and finally three months ago, I realized it would not get any better as once the two years hit my morgage payment would come up. Now I am behind three month, trying to decide what am I going to do. I ave talked to my mortgage company who asked me for harship letter and a financial statement. I conitnue to wait wondering should I wait to see what they have to offer or just walk away and I rent a place now before my credit gets worst. I am leaving a nightmare full of shame. My two teenage daughters are suffering as well by seeing that their mom for once does not knwo what to do.

[Grant]

Mortgage Walkaway Catch 22

The Government is collecting (or will try to collect) BILLIONS od dollars from home foreclosures - forgiven loans create a 1099-C filing by lenders - and this triggers with the IRS AN IMMEDIATE TAX LIABILTY for the owners of the home.

So instead of a 30 year expensive mortgage the Government hands you a "pay immediately" tax bill for the amount of the lenders loan or loss. If the lender sells the house at a fire sale that will INCREASE the tax liability that the homeowner will have to pay.

So in affect walking away from a mortgage will probably result in a Bankruptcy filing being necessary. I am not sure whether an IRS tax liability can be mitigated in a bankruptcy filing either so the tax liability of a walkaway could be a lifetime event.

[Ron]

What you are all missing is that this is systemic.
We are not talking about a couple of people walking away and having bad credit, we are talking about a very significant number.

Combine the fact that lending is becoming more strict with the overwhelming number of people taking a hit on their credit and guess what you get?
NO BUYERS OR RENTERS that qualify.
The next step in the process is that lenders and landlords will be forced to lower their standards or risk no sales and empty properties.

If only a very small number of people meet the credit requirements to purchase homes, lenders can't make new loans.
Lenders are in the business of making loans. Why do you think the Federal Government is bailing out Country Wide with huge amounts of money for them to make loans with?
Because if they can't make new loans, they have no customers and ultimately no business. They close the door.

When you discuss this issue you have to approach it holistically, and not just from your point of view. All perspectives need to be taken into consideration or the view is myopic at best.

[Jim]

In California the laws are favorable to the homeowner. As long as you have not refinanced the debt (difference) is absorbed by the lender. The debt forgiveness act of 2007 gives you a waiver for any tax liabilities incurred from a foreclosure or refinancing. In California it is easy to walk away. Let the lenders who made the bad loans eat it.

I was one of those borrowers who did a full documentation loan and have the income to pay but now find out loans were made to anyone who could sign. I am not paying for a bad investment.

The lenders deserve this for being irresponsible.

[AJ]

I have lived in the house we paid 250K for. we put 25K down on it 4 years ago during a company transfer to the area. Now, my company wants us to move again. the house has been for sale for over a year. the list is now less than what we paid; 240K. we are actually leaving the country and getting set up there. the problem is that with a highly unlikely offer of the most wishful thinking, 230K, the real estate fees are going to go deeper into the equity than what we currently owe on the home. the company is no help and we cannot wait too much longer. truthfully it is much much more complicated than this, but i need to know:
Could we walk away from the US home?
Does the US credit reporting go outside it's borders and cause negative impact?
does IRS go outside of it's borders for whatever may be owing?

[Kristi York]

We have owned our home in Seattle for 29 years. We have refinanced several times, the most recently 2 years ago. We refinanced for the max amount. We owe 560K on our mortgage and becasue of some circumstances we can no longer afford to pay the mortgage. It has been on the market for several months and we have since moved to a rental. We have been advised to "walk away" or sell for a huge loss. We also owe the bank 20K for interim loans (to pay our mortgage). Question: Should we walk away? Will we be held liable for the 20K to the bank and whatever the difference is between our 560 mortgage and what it sells for? (say 100K?) Should we declare bankruptcy? We are 63 and 67 years old, if that makes any difference. Thanks. K

[DG]

Bought a house in the IE December of 06 for $372,000. I see houses in the neighborhood same size going for 199,000 as of this week. I put $0 down, but I did have a full documentation loan through Countrywide. I can make the payments, but it is a huge financial struggle(I don't take vacations, don't go out to eat, don't really do anything other than sit at home when I'm not working). There are only 2 things keeping me in the home at the moment. A) Rents are still relatively high in my area, Rent for a same size home is 1600-1700 a month. I think a mortgage at 199,000 is actually less than renting at this time(investors where are you?). B) I have an 815 FICO that I don't really want to ruin. My understanding of the new Tax law that went into effect in December is that you don't have to pay taxes from debt forgiveness due to a home you live in. Even under the own law you didn't have to pay taxes if you have a negative net worth(which I am also in that boat hugely due to the house). I'm curious if anyone else in the IE is in a similar boat or has gotten out of their house with minimal damage? I highly doubt the bank would do a short sale with a looming 175,000 loss, but has anyone tried?

[JB]

I am basically in the same boat as DG. I owe almost 400k on my house and it just appraised for 270k. I have one of those very stupid ARM's that the lender convinced me was a good idea. I want to keep my home and refi to a fixed loan, but that is impossible due to the negative equity.

My first instinct is to try to buy a second home and then walk away from this one, but I am lost with regards to the tax ramifications involved. I know the credit score hit would really hurt, but I am afraid that will be coming anyway when the ARM adjusts in a few months. I know there is no way the equity will be back in a few months in time to refi out of that loan.

I really need just some plain english, straight answers...WHAT SHOULD I DO?!? Any sound advice and personal experiences would be appreciated.

[SMA]

My situation is similar in part to each of the above. EXCEPT that i retired one month before I put the house on the market, last June, 2007. Still hasn't sold. Now in a short sale option supposedly..and lender is Countrywide.
HOWEVER, I did a refi 4 years ago with a Lending Tree broker giving me Hunter Financial out of AZ. I live in MN. They convinced me an 80/20 , but blended mortgage- one part fixed (I asked for all fixed..biggest reason I even refied was so I'd be out of an ARM and ready with a fixed when I was ready to sell. Problem is that Wilshire, the 2nd mortgage co won't sign off with Countrywide to allow a short sale without a promise of some ?? money from them so the whole thing is a mess. and i don't know where I stand or for how long. I paid all utilities until just this month even though i moved an hour and a half away and pay rent after talking to the HOPE team sho recommended I find a place before my creidt went wrong with eith a short sale, deed in lieu, or a foreclosure. They all do about the same damage it sounds like.

Talked to both lenders for more than 6 months with no real answers or help of any kind. Boils down to fact that I retired I guess doesn't give me anough income to even do a loan modification and didn't want to continue living in that area anyway. Is there really anything I should be doing at this pointthat I haven't already tried? My realtor knows this all, does his part, but I continue to hear nothing is moving. 6 offers were made to Countrywide and all were turned down..so much for a short sale there!

I think thy're all crooks and we, the government are funding the 'big' guys and the little homeowner is getting NOTHING from all the news about help they say is out there. Try it..you'll see it just goes around in circles.

[PM]

I'm in the same boat as JB with even further complication.

My specs is for $350,000 mortgages ($280k at 7.875% / 70k at 12.5%), bought in June of 2006, and the appraisal value is about $220k. I've lost about $130,000 in value in this condo, about 35%. I've been able to pay the interest-only amount on my option loan, but not into the P&I at all. There's no way that the value will come up high enough to refi at a reasonable rate in the next 3 years before the ARM resets to the 7.875% rate (that the Interest-Only, and 30-yr Amortized rate is based on).

My additional complication is that I am planning to transfer(to a sister company) for my job out of state. There's no way I can sell this for even half of the amount I owe.

Am I a good candidate to walk away from this mortgage? I figure I would be saving about $3500 per month (incl. HOA fees and taxes), and if I put even only $1000 per month into a high yield savings account, in 5 years I will have about $60,000 saved up which should make a very attractive down payment regardless of my credit rating, yes?

Please help, time is of the essence to make my decision!

Thanks!

[AA]

I purchased my house in CA 3-1/2 yrs ago for $445,000, 85/15, zero down, 5/30 yrs fixed for 5 years. Today it is worth $260K. My mortgage is $2930/mo, and it will adjust in 1-1/2 yrs. I decided that my best option is to walk away and have missed 3 mortgage payments already. Prior to missing any mortgage payments, I purchased and moved into another house, and rented the first one for $1700/mo. Since then, my income decreased by 20% due to poor business conditions. I am definitely walking away, but I still worry about tax consequences. Is it true that in CA, I don't have to worry about that as long as it is purchase money?

[iron king]

Any consequences to your saving account, IRA acount or 401K if you walkaway from your mortgage?

Thanks.

[The Best Advice]

Your thoughts? Comments? Play investment advisor for a second: what do you advise someone who paid $500,000 for a house, still owes all the principal, and the house is now worth $400,000?

In California, no taxes involved in a sale when you are selling it less than what you bought it for... (how can you be taxed for something when you are losing money, just think about it)

The best thing to do would be to stop paying the mortgage, however stay in the place as long as it is legal to do so. You save more money rather than renting or buying somewhere else for a few months or years depending on what the bank does.

So who ends up paying for the difference of the loss? U.S. taxpayers, not the banks, lets make that one clear.

[Thomas]

Plain and simple, here are the facts for those of you in California. If you walk away, foreclose, or short sale your home, and it was a purchase-money home (original purchase on your primary residence), then you will find yourself in a non-judicial circumstance which means the bank can not come after you for the difference in short-sale or loss on auction. The bank will file a 1099-C with the IRS saying they forgave you the difference. The IRS will look at that money as untaxed income, in addition to your earned income through employment. Thanks to the 2007 Mortgage Forgiveness Debt Relief Act and Debt Cancellation, you can file a form 982 with the IRS with your tax return, and that will forgive you the income... in essence, it becomes a non-taxable income. Remember, this is only an option on your primary residence for a loan that is/was purchase money.

[Hangin in]

It's nice to see all those who made poor decisions on either when they bought their home or how they financed it, are now looking to take the easy way out. If the house rose in value you would smiling all the way to the bank. Now when its time to take responsbility you look for the exit and the rest of us are paying for it. FYI...Im upside down on two properties, even on one, and up on my residence. I'm calling my bank before it goes too far and riding this out

[superdad35]

I hope someone can help me. I purchased a home in southern california in 2005 with a 5 year ARM. The house was purchased for 580,000. It was 80/15/5 loan arrangemend from just one lender. My first loan was for 464,000. My second loan was for 87,000 HELOC. The third loan was an equity loan from another home that I owned free and clear for 50,000. Altogether, the sum of the loans was 601,000. From the 50,000 equity loan, I used 34,000 as a down payment. Then, I used the remaining 16,000 for home improvements before I moved in. Later, in 2006, the second and third loans were combined in to one loan for 137,000. If I was to walk away from this house, are the loans considered purchase money ? I'm worried that the second loan is not considered purchase money and the lender could come after me for that amount. Thank you in advance for any suggestion or advice.

[Cal]

superdad35,

-- This isnt legal advice--
From the details you provided the second is not purchase money and you can be liable depending on several factors. If the first forecloses and the second gets wiped out, that is where your liability comes in. If the second forecloses you aren't liable, but from the sounds of it they are not likely to foreclose.

Your options are short sale, short refi, loan mod, deed in lieu, foreclosure or keep the house. Since keep the house is out the other options fall around:
Short Sale - You can work with the lenders and possibly come up with an equitable arrangement for the 2nd to get a small sum and release you from liability.

Short Refi - Doesn't happen often but you may be able to refinance everything into one loan. This would have the future benefit of being able to walk away liability free. Since California has the single action rule, a loan holder can take the house or go after you for the loan, the 1st liens just take the house and be done with it.

Loan mod- Depends on the mod but most are really bad deals that just stretch payments over 40 yrs instead of offering any real relief.

Deed in lieu of foreclosure - Give the house back without going through foreclosure. Doubtful the first would take a deed in lieu because of the other liens but you might be able to get those released with some negotiating.

Foreclosure - Already covered. If the first forecloses you can be liable for the 2nd if they ever decide to come after you.

I'd start calling your servicer. Then if you decide to stop paying, keep the money saved from not paying in an account. You might be able to use it to release your liability in the future. Keep calling your servicer weekly even if they don't say they can help, you might just get someone who can. Ask for the loss mitigation department. If you post who your servicer is I might be able to get the loss mit direct line for you.

-- This isnt legal advice--

[superdad35]

Cal,

Thank you so much for taking the time to post your advice. I was hoping the now second loan would be considered purchase money. I will try your other options. My lender is Wells Fargo.

[Cal]

superdad35,

Definitely talk to your servicer. Wells is huge servicer but still has a pretty good customer ratings. They must be doing something right.

The number I have for the loss mit department is for Wells Home Mortgage is 877-216-8448, for Wells Fargo Financial I have 800-275-9254

Sometimes it is called the home retention department. Also maybe check over at loansafe.org forums (generally loan mods, but they have short sale forum) as well.

Just be careful to read and understand everything before signing anything. You sound like you have a good understanding of the issues and will be able to get a good resolution to your problem with a some work.

Best of luck.

[Scott]

Hi,
I was wondering if you could tell me if my loans are purchase money loans in Ca. I have a 1st of $650k and a 2nd that is $240k taken out at time of purchase, a70/30 that was 100% financing. However, the 2nd was called an equity line of credit. It came with a credit card which I used back $5000 of the equity that I had paid on the loan.
Is it still a purchase money loan?
Thanks,
Scott

[Cal]

Scott,

I don't know. My guess would be its purchase money since the lien was placed at purchase but I think you might want to talk to someone who specializes in this type of thing to be sure.

[Kim Holloway]

I am a school teacher and a single mom of four kids in Maryland. I got divorced four years ago, and our agreement stated that my ex. pay a certain amount of money for child support and alimony. With that amount in mind, I made up a budget and lived by it for the last three years. In the past six months, he has begun to pay me less at his own discretion. I have no extra money to take him to court to get him to pay me the agreed upon amount. (he does make sure he pays child support but that is only half of what he is supposed to pay.) Now I've been late on my mortgage and one month I had to skip the payment to get caught up on other bills. I did a "probationary" plan with ASC where I must stay current on my payments for 5 months and then I'm up for loan modification if I qualify. The last two checks from my ex barely covered child support. Again, I could not make my payment. Recently ASC sent me a letter stating that due to me breaking our deal and missing a payment, the probation is over and I am in default. Even if they modified my loan to 6% I still couldn't afford the payments. I need to get out of this house but I don't know whether to quickly get an apartment before the foreclosure hits, or to wait it out and let them kick me out and not make another payment. How will I get a place to stay then? HELP! I'm scared for my kids.