The real deal about Los Angeles real estate.....really!

Scenarious change according to states and lien holders.  Some lien holders are basically holding homeowners hostage to the their 401ks or pensions.  But, as a general rule, you are correct.  Don't just give up without exploring the alternatives. 

HAFA at B of A has not been treating me well. All my deals are falling into the HAFA abyss where they sit for weeks at a time.

Hi Ralph... foreclosure should almost always be the course of last resort in my opinion, and only decided on after consulting with an attorney.

Ralph, excellent post.  You should have conked him on the head (just kidding).  No, really, thanks for correcting him.  It's advice like that distressed homeowners hear and think it is better for them to walk away.  It's not!!!  I like all your points, and especially, #6 "and as a LAST LAST resort,...deed-in-lieu of foreclosure."  I would add any homeowner considering deed-in-lieu should consult with an attorney as Steve suggested.  I'm suggesting this for a feature and will re-blog.  Thanks,

Foreclosure is something that makes little sinse when there are many other options.

Foreclosure should be the last option.

With HAFA in place a short sale is the way to go. You get $3000 to move with and walk away clean. Its a no brainer.

I always consider foreclosure the last resort.  However, in Michigan, our foreclosure process is one by advertisement or judicial, whichever the mortgager decides to take.  Eventually a sheriff sale occurs, and if the mortgage company buys it themselves, which they normally do, then there is no deficiency in Michigan according to the Michigan Association of Realtors Attorney. 

A major news network produced a report tonight stating that half of all loan mod "help" attempts had failed. 

It's important to seek legal counsel in a situation like this. 

What happens to you as a landlord when your renter stops paying?  You either have to work things out or use the law to help you recoup what is yours. 

In the oversimplified world, a bank is an investor, taking a risk for a measured (and very profitable) reward (esp given their accounting loopholes).  When the investment goes sour (i.e. the payments creditworthiness of the mortgagor plummets), they get left holding the bag, just like a normal investor. 

The mortgagor doesn't get off "scott free."  His creditworthiness is busted for years, and he's out of a home.  What the bank wants is a sure fire guarantee for their investment to never fail, with FDIC buyouts/takeovers, federal (taxpayer) bailouts, and legalized usury when values plummet. 

They love their compound interest, now they can love their compound problems.

Ralph, it should be last resort, certainly not first choice in a distressed property state.

Ralph, honestly you just want to ask people what planet are they on with some of the boneheaded suggestions they come up with. BTW, I also love istockphoto :)

Another vote for consulting an attorney first. Though your post opinion is more correct than not, I think hearing it from an attorney as to what the best option is for each individual is best, so that I can do the job of real estate professional and facilitate the process with experts at hand to help negotiate and get things done as professionally as possible.

I completely agree.  As a distressed seller, I think they hear so many different opinions from co-workers, family, lenders, attorneys and of course, all of the articles online.  It can be overwhelming and I think that many sellers throw up their hands and just let their home go into foreclosure.

It makes sense to look at the options to foreclosure rather than just walking away.

I think at the earliest signs of trouble a home owner should start to explore their options.  

I met you at Raincamp, Portland!  Hello!

I respectfully disagree.  NPR had a great story the other day on how more than 50% of the people entering into the Obama administration programs to help save their homes end up falling out of the program.  In short, the current programs are not viable alternatives for most people and, in fact, the programs are only delaying the inevitable foreclosure rather than preventing it outright.

Personally, I think strategic default is the way to go. Homeowners should walk away from their properties and let the banks be stuck with them on their balance sheets.  Once the banks realize this is the new modis operandi for people and start raising a stink with the government, only then will some meaningful programs be put in place.  Until then, I say WALK.

Tim: You must not be a home owner. If you were a home owner, you would understand that if your neighbor, or the guy on the next block just "walks away" then you are losing value and equity in your home. Do you want to personally give up 10% or 20% or 30% of the value in your equity because the guy next door decides to WALK away?

How in the world can you think that  having "banks be stuck with homes on their balance sheets" is reality? Banks don't have balance sheets that represent anything tangible like hard assets. Banks lend money based on leveraged value of assets. If banks guess wrong, the shareholders lose their investments. There is not some big money fountain in the sky that money pours out of.

Most loans in the US are backed by the US government, which means the TAX PAYERS. What should we taxpayers do....perhaps run a lottery that lets 1 out of 5 homeowners walk away? 1 out of 3? Who decides? But understand, every single homeowner who walks on a government secured loan is adding to the national debt. The value in equity loss that those homes represented are losses that absorbed by the tax payers.

The balance of the loans are owned by mortgage backed securities, which represent investors who in turn represent pension funds, retirement funds, college funds, and yes, the occasional profiteer.  Thousands of pension funds and retirement funds are broke, or going broke because of the dramatic loss of value in mortgage backed securities. People who worked all their lives have nothing to live on now because of people who recommend that their clients make a "business" decision to stick it to the banks.

Sheesh.

Hi Ralph,

My latest foreclosure listing was listed and had a short sale on it. The bank foreclosed right in the middle of that process!

Phil

Ralph: This is a terrific post. Thanks!

Tim, comment #16:

I think your advice is dangerous. I hope you don't tell it to clients. While I can understand the thinking behind strategic defaults, it certainly is not something for a licensed professional to recommend to a client. And rules are changing fast to punish those who do it.

And sure, it's easy to pile on the lenders. But people who got in over their heads made a decision to stretch and push and do whatever it took to buy a house they couldn't afford in the first place. Lenders created products to answer market demand.

alph,

I give my clients four options to take when they consider a strategic default.  After I discuss their oprions with them we will decide what they can do with proper guidance.  My feeling is if they made the mistake of a refi in the crazy runup in value and have the funds there are many paths to take.

 We buy the note from the banks Secondary Marketing dept. When we close with the asset managers We take the banks position so we are the bank. we can do what we want with the loan. We usually sell the house back to original home owrner and they get a new loan.  Since there was no foreclosure they usually can without any problems provided they have the 20% down which most of them do.

we can do a subject to purcahse where we purchase the house subject to the curent loan and we can get a loan mod so we can get the loan down to current value.  We sell it back with a new loan to the homeowner. since there was no foreclosure we do not have any problems.

We can not do this with a short sale because we can not allow the seller to remain in the house after the sale even if we buy the house out of the short sale which we do sometimes do.

They can walk away from the house but I do not suggest this as it has long term consquences. It will destroy your FICO score and stick on there for seven years.   I have had people who are so angry you can't  reason with them and they won't even discuss the situation with reason or they have their heads underwater just like their house.  I have talked with many people like this. there is no reasoning with them.

I am not against strategic default if done in the right manner.  I explain this on my profile in detail.

Art Martin

I completely agree Ralph. Foreclosure is the worse case scenario. Although I have had a couple of sellers where it was the best option. In both caes it was due to their age and their health. The stress was literally killing them and since they were in their 80s and had no need for credit and their assets were protected they just walked away and closed the door. But these cases are rare.

Ralph:

People who find themselves in distressed home ownership situations need to be presented with all of their options.  Only after weighing everything out can they make the right choice. I cringe at some of the advice that is being given to people. Foreclosure should be the road less taken, if possible.

In some cases. . when people are so severely underwater with no possible prospects that their homes will be worth what they owe in 15 to 20 years. . even a foreclosures is much better option than that.

Ralph, I agree  with you but I'm a little confused about your first point about anti-deficiency.  I thought that the whole point about an anti-deficiency state was that they can't come after you for the loss even if it went to foreclosure.  I thought the home was the only collateral for those mortgages and nothing attached to you personally.   

Ralph - I agree, I think your points drive home some of the main problems with walking away. I also believe that the AR community has brought up other issues that reinforce our stance on using a foreclosure as a bad financial tool. It has negative impacts on so many facets. The media has done a great disservice in not bringing to light all the bad associated with it...

Silly me, I still don't understand the part about people not meeting their obligations. When I went  through a divorce and had all the obligation of the house, car etc, I took on two additional jobs to get through and continue to pay my bills. It was tough times, but that is what we did in the 70's.

There are certainly lawyers out there who are advising foreclosure, but this is a good recap of the benefits of a short sale.

Always explore all options and ramifications before walking away. Foreclosure does not go away when you walk away. There are lasting ramifications for you, the community and the lender left holding the bag.

I think that lawyers should give legal advice. 

Like Tim M. (#25), I’m a little confused about your first point, too, Ralph.  Are purchase money loans no longer protected by California’s anti-deficiency law if the home is foreclosed? If so, then what’s the point of the law?

I don't think there are any blanket statements that cover "what's best" for a homeowner.  My advice is that distressed owners consult with their mortgage company, a realtor, and an attorney to get honest answers to hard questions.  Every situation is bound to have it's own unique set of details and nuances.  To state that 'foreclosure is always the last option' is silly.  I could list half a dozen hypothetical situations in which it would be a very, very good decision - perhaps even the best in some of them.

Sadly, foreclosure is pretty much ALWAYS going to negatively impact the neighborhood.  Locally, foreclosures have destroyed some of our neighborhoods.  Areas that have historically been near 100% homeowners, have had foreclosures snatched up by investors and repopulated with renters.  In my humble opinion, there's no faster way of wrecking property values.

Wow. I just read in the comments above that someone said that strategic defaults are the way to go? I almost didn't comment what so ever just so I couldn't be linked in the same blog post to something like that!

Remember, we are NOT lawyers or accountants!

BTW, I'll help someone with a strategic default if that's what THEY decide, but I'll Never suggest it.

Ralph,  You didn't  respond to my question about your #1 point:

1. Although states differ in their approach to mortgage loan deficiencies, in the state of California, we are an anti-deficiency state.  Meaning, unless you have done something funky with the equity on the property (refi, etc.), then the deficiency on the sale of your property should not legally follow you.  With a foreclosure, it most likely will!!

I did some research on the topic and I can't  find anything that says a foreclosure does anything with the anti-deficiency issue.   Can  you clarify what you are referring to with foreclosure and anti-deficiency?  I just want to make sure I understand what anti-deficiency really means.