Underwater? Just walk away from mortgage and wait to be kicked out of your home? (RE market, tenants)

[I'm Retired Now]

One of my sisters is way underwater in her home and decides she can't afford to live there anymore. Her plan is to just stop paying her mortgage and keep living there until the Sheriff comes and kicks her out of her home.

In her State there is an average time from stop paying and being kicked out of the house of 300 days. In her twisted logic, that would give her almost a year to save the money she sends in for her mortgage to use on a rental and other expenses.

Don't tell me this is immoral or crazy, I have already told her that. Do you know anyone who has done this and how would she be able to rent an apartment after this?

(She lives alone and declared Chapter 7 Bankruptcy 3 years ago, but was able to keep her house for some reason after her bankruptcy.)

[Virtual Prof]

I know a doctor who did this. He had only stopped paying the mortgage for about 5 months and was in negotiation with his bank for a short sale. He was able to rent an apartment with no problem, but I suspect his profession and padded savings account helped immensely. His credit is tanked, but he didn't care, he just wanted out.

How underwater is your sister? Is she open to a short sale? You said she lives alone, could she take in a renter to help out with the expenses? Unless I was planning to rent for the next seven years, I would be wary of wrecking my credit like that. Especially with a ding already from a bankruptcy.

[jghorton]

Unfortunately, there are many people taking the same approach ... because they can get away with it. IMO, the banks may not have created the problem, but, they certainly perpetuate it by:

1) Unwillingness to discuss alternative arrangements until loan is 3-4 months delinquent;
2) "Sitting-on" delinquent loans for 1-4 years before taking foreclosure action;
3). Failing to follow-up on deficiency judgments.

It seems both immoral and unethical to simply 'walk away' from a loan that one contractually agreed to, but, this RE market is new ground for all of us. The government has worked to protect the banks, but, the banks have apparently not responded in good faith by working with their customers. We've never defaulted on a loan or mortgage, but, I have empathy for the folks facing financial ruin as a result of this mortgage mess.

[johngolf]

Why is she such a deadbeat, user of the system? Are you enabling her?

[Enigma777]

In Florida there were a massive amount of people underwater. Many of the people who stopped paying their mortgages lived free for years (I've heard up to 5) and saved their money. They now have deposits for their next home and yes, banks are giving them mortgages and their credit did not take the hit you would think. Those of us who continued to pay our mortgages until we dug out (which is now--7 years later) are not in as good a shape financially as the people who walked away. We'll sell for enough to get out of the house but certainly don't have the amount of money as those who saved for years while not paying their mortgages. It is a disgusting situation. I also know "investor landlords" who continued to collect rent from their tenants for months and years after they stopped paying the mortgages.

[cully]

A few years ago I heard about tons of people underwater. I guess it was new then. Now it's more common.

Has your sister pursued short sale or loan modification?

I have heard of 'friendly foreclosures' where the person does just walk away, letting the lender know they can't afford the payments anymore or just that it's not financially wise any more.

I know a Realtor in a large city where he knows professionals making good salaries who did this, based on the deal not being financial wise (in their minds) any longer in this crazy upside down world.

One this that happened at that time was that people in that large city no longer got to see their home as a great investment. So now paying the mortgage just because it was a debt was more an issue of morality, honor and ethics. (Still talking about people who still made great incomes).

So, has your sister lost her job? That's why she can't make payments? Or because the house is upside down?

Would a foreclosure damage her credit to rent? She could save up all that money to rent and pay several months in advance....but she still could not use the money now if she's really going to save it. If you're concerned she may not save her money but spend it on other things....whatever got her in bankruptcy for example...and if you think she may come to live with you you may point out to her she should rent now.

[Sherifftruman]

Lots of people have done the exact same thing. However, the average days to foreclose is probably going to go down now that the backlog is easing up in most places, so just because people were able to live a year for free recently, doesn't mean it will work now.

This really burns me as someone who bought a house they could afford in 2006 with actual money down and paid all our payments and have still lost value due to the craziness, but its the way things work out sometimes.

[Electrician4you]

I know two people who did. What they called a strategic financial decision. One has been living rent free for 4 years. Kept loan modding and then tried to refi and then finally let it to in foreclosurez he rented a house a while back and then rented his house to someone for the same amount he was renting the new house for. so he literally lived rent free for 4 years. Put the kids on low income for school food because he qualified for it due to low income. He did a lot of cash jobs so his in one was at least on paper below poverty level.

Whoever said that you can't get ahead is the guy who has no clue how to use the system for their benefit.

There are some people who simply got in over their heads and then some catastrophic something happened. Those people I feel sorry for.
The ones who heloc'ed their equity away squatted and walked and knew exactly how to game the system I don't fel sorry for

[CarolinaWoman]

I know someone who did that too. They tried to work with the bank to no avail. They remained in the house for over a year without making any mortgage payments. Eventually they moved out into a rental house.

Just before Christmas their mortgage company sent them a check just over $2k from the sale of the house. That surprised me when they received a check from the bank, proceeds from sale of the house.

[yousah]

I always find it laughable that somehow having negative equity makes a person unable to afford their house anymore. The amount of equity has nothing to do with their monthly payment. It's just an excuse to ripoff the lender, and ultimately, fellow taxpayers.

The banking industry really messed up when it started changing the way things work with foreclosures. It used to be that they would get a deficiency judgment against someone that would stick with them. That meant that they would file a lawsuit for collection once they got the deficiency judgment. Someone like your sister who still apparently has a job would then get her wages garnished. That sort of action by lenders prevented these strategic defaults. Not only that, but it was nearly impossible to get a new mortgage for a long time if you defaulted on a prior one.

Now, we are just faced with immoral people like your sister who are bringing our country down because of their childish decision making.

Next time, she can actually buy a more affordable house and put down 20% so that there is some equity in order absorb future losses. If she can't do that, the she's better off renting.