Photo from Microsoft Office
The National Association of Realtors® in their Daily News wrote that borrowers are walking away from their houses, not making any more mortgage payments and months later are sending their house keys back to their lender.
In a recent poll conducted by CNN/Money, 48% of Americans —and the number is still growing — believe that homeowners in trouble should not be bailed out. Congress has also been split on the issue and President Bush is still promising to veto the bill.
In SmartMoney Jonathan Hoenig argues, among many things, that:
“...the real reason to oppose a bailout isn’t that it’s impractical, but that it’s immoral.”
He goes on:
“In America, we have the right to “life, liberty and the pursuit of happiness,” but not the guarantee we can live in the four-bedroom Colonial that’s priced way beyond our means. It might sound cold, but homeowners who can’t pay their mortgages should not expect to be able to keep their homes.”
Where has individual responsibility gone? Why are buyers not held responsible for the financial decisions they’ve made? Some of these people who took out sub-prime mortgages should never have bought houses to begin with and over extended themselves. Many wanted a bigger house than they could afford and bet on constantly rising home prices. Some were, in fact, speculators hunting for a “quick buck”. During the 1980s recession, I don’t remember having short-sales to fall back on. Nothing was “forgiven”. People had to bring money to the closing table to get their houses sold if they purchased for more than their houses were worth or if they could no longer afford to keep their house; otherwise, they went into foreclosure. We didn’t have government bail-out programs either. Who’s going to be saved next? Is no one responsible for their actions anymore???
I don’t care who you want to blame for the sub-prime mortgage mess, (and I know there were/are some shady lenders out there) but ultimately it was the buyers’ decision! No one forced these borrowers to take the loan…or that they had to sign on the dotted line. It was their decision, their decision alone, and now they can just walk away? I was in the same position as these homeowner’s in the ’80s, but I didn’t get bailed out. Instead, I went and got 3 part-time jobs plus still working my full-time job as a Realtor® in order to pay my bills.
Further, there has been story after story from all across the U.S. of borrowers who are not only taking all the cabinets, toilets, mouldings, appliances with them but they are also vandalizing the properties that they are walking away from. A recent video from CNN showed pictures of houses recently vandalized in Las Vegas where walls were damaged, houses were stripped of everything and destroyed by borrowers who walked away from their mortgages.
Those borrowers who have chosen to walk away will not be able to get another mortgage through Fannie Mae for 5 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% 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 a major credit “black mark” for seven years, is now aggressively pursuing walk-away borrowers where permitted under state laws.
Federal legislation enacted last year allows homeowners who negotiate loan modifications with lenders and have portions of their principal debt eliminated (short sales) to escape income tax liability for the amount forgiven. “Walk-away” borrowers, however, will have nothing forgiven and the Internal Revenue Service may demand taxes on the balance they never paid.
© Copyright 2008-2009 Betty Jung. All Rights Reserved. Use of this article, photos and images without permission is a violation of federal copyright laws.
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Betty Jung
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April 6, 2009 at 6:24 am
DG
I believe you are incorrect about the tax liability. Whether you walk away or not you do not have tax liability. Either way if you are like me and have a non-recourse loan because it was never refinanced the foreclosure is treated as a capitol gain and as long as you lived in the place 2 years you have 0 liability both at the state and federal level. Not everyone who bought in the past 5 years was a speculator. Some of our first house in 2006 because we were afraid of being price out of the market forever. I realize now that this logic makes no sense when you are making above the median income, but a lot of this was going around. This time around is a lot worse than the 80s. In the 80s people were down maybe 20%, yet in my market values have already dropped 60% and continue dropping. Its difficult to act like this is similar to the 80s.
I can see how a Realtor would think that we should keep paying as your job depends on it, but for those of us not in the “biz” it makes absolutely no sense. In an economy like our current one many are lucky to hold down 1 job much less 3. Its easy to point blame at homeowners when you were part of the system that screwed us all over in the first place. Did you really think that the homes you were selling to people were worth the price they were paying?? Don’t you feel some responsibility for selling someone a home in 2006 that they now owe $200,000 more than what their loan is worth? Personally I put the banks lending policies primarily at blame, but everyone who works in the “biz” bears some responsibility for what has happened. I do agree that homeowners bear some responsibility, but most of them only do what their Realtor and bank tells them.
April 6, 2009 at 12:04 pm
Betty Jung
First off, thank you for your comment. I do appreciate hearing from you. Let me say that I never “tell” my clients what to do. In my 34 years of selling real estate, my goal has always been to present all sides to my clients, present all the information I have available to me so that they can make the best decisions they can for themselves and their families. I have, over my career, suggested to my clients, many, many times, either not to buy or not to sell at particular times that may not have been beneficial to them. In addition, there are many of my clients still in the homes I sold to them in the 1970s. All investments have inherent “risks”, including real estate. Where the idea came from that real estate always goes up, that you can always make money, that you can tap into your equity all the time and never have to pay is beyond me. Inasmuch as I sold real estate in the 1980s, starting in 1975, I can tell you today it is much better for sellers who have been caught in the cross-fire. In the 1980s we did not have short sales, we did not have loan modifications, we did not have lenders wanting to work with sellers who were in a negative position on their mortgages. Instead, sellers had to bring that cash in to closing in order to get out from under their debt/loans. We had higher unemployment rates and we had 21% interest rates during that time. Yes, things are bad – no denying that. Yes, many people are losing their houses. Yet, those people should have never purchased to begin with nor is it a large percentage of the overall homeowners who are in default. Foreclosures are higher today than they were in the past, unemployment continues to climb and things could get worse. Values, are dropping but they were over inflated to begin with. I never have taken a “gun” to any clients and told them they “had” to do something. It amounted to the greed of the purchasers, the lenders who had no scruples and to deregulation of the financial system. I feel everyone’s pain. I did not take out a sub-prime mortgage, I have lived in my home for 22 years, and have a “used” 10-year old car yet as a self-employed, independent real estate agent, I am hurting along with everyone else. We are all hurting and it is easy to blame others for your own decisions. I am sorry for any loss or problems you have endured. I know some people who are hurting didn’t take advantage of the system, paid their bills on time, etc. but we are all now caught in it together. And yes, I too had 3 jobs in the 1980s as a single mother, so I do understand. Also, any debt that is cancelled can be viewed as income and may be subject to a tax liability. Thanks again for your comment.