Walk-away borrowers have been a problem in a few markets (luckily, not so much in Atlanta). The government and lending industry are both looking at ways to keep borrowers from just walking away.
So, here is the situation…
Someone buys a home with a 0% down loan. The market turns a bit south, and now the property is worth less than the mortgage balance. The ARM is getting ready to reset, or does reset to a higher rate. The payment is no longer comfortable.
At this point, the borrower is faced with a tough decision. They can stop paying… it will take a few months for the bank to foreclose. They can try to sell the home in a short sale. Or, they can try to find a way to refi or keep on making the higher payments.
The problem is that a lot of borrowers are choosing to ride it out as long as possible, and then walk away. There are even websites and groups promoting this. They tell people facing these choices that they can “save” thousands of dollars and not face any negative consequences. They are right that one could bank up a goodly amount of cash (house payments for 3-12 months)… but there are going to be negative consequences.
The government and the lending industry are taking aim at “walk-away” home owners who stop making payments and months later send the house keys back to their lender.
Such borrowers will not be able to get another mortgage through Fannie Mae for five years, unless there are “documented extenuating circumstances.” In that case, the prohibition is three years. Even after the prescribed time has elapsed, a borrower with a foreclosure in his file will have to make at least a 10 percent down payment and have a FICO credit score of at least 680 to qualify for a Fannie Mae loan.
Freddie Mac, which counts foreclosures as major credit black mark for seven years, is now aggressively pursuing walk-away borrowers where permitted under state law, a senior official said.
Federal legislation enacted last year allows home owners who negotiate loan modifications with lenders and have portions of their principal debt eliminated to escape income tax liability for the amount forgiven.
Walk-away borrowers, by contrast, have nothing forgiven, and the Internal Revenue Service may demand taxes on the balance they never paid, the IRS says.
Source: Washington Post Writers Group, Kenneth R. Harney (04/12/2008)
There are some very good short sale agents (I’ll tell you flat out that I am not one of them… it is a specialty that requires more than a 4 hour class to do well… and a complete focus on just short sales) and a good short sale agent can negotiate a loan modification to sell the home.
Do yourself a favor. If you are in trouble, get help. I’ll be happy to help find a good short sale specialist wherever you are. If you want to stay in your home, contact your bank. Talk to them. It won’t be fun, but it will be way better than having the Sheriff do an eviction.
