I get many calls and emails from my blog, mostly from people near or in foreclosure.
This week, I spoke with a guy who bought a condo in the city in 2006 (generally considered the market peak). Then, and now, he had a good job, but the Chicago neighborhood where he lives is overrun with foreclosures. The neighborhood was “up and coming” in 2006, but now it’s downright dangerous, he said.
In fact, he is now the only owner left in the 4-unit condo building, the other three owners having been foreclosed upon and the units standing vacant with no offers.
His mortgage amount: $275,000.00. He was current in the mortgage payments. The biggest problem (among several) was that the other foreclosed units in the building were now on the market for $99,000.00! His unit was hopelessly “underwater” and it might take three lifetimes for him to get back to the price he paid in 2006.
We talked about the options and he admitted that he already decided on a “strategic default.” A strategic default is when an owner quits paying on a mortgage when he or she otherwise could afford to pay and just walks away. Most of the questions I get now are from people considering, or in, strategic defaults.
He decided to quit paying the mortgage in June and was going to move out right away, due to the unsafe neighborhood. What are the consequences of walking away from this unit?
- Since this was his primary residence, the main effect of his coming default will be that his credit will drop to about 520 (FICO) and he will not be able to get another mortgage for at least two years (probably more like 5 years or longer).
- He will get a 1099 for the forgiveness of debt from the lender after the foreclosure, but since it is his primary residence there will be no tax due.
- We discussed that there is the possibility of the lender getting a deficiency judgment, but it was not likely. Illinois allows deficiency judgments, but few lenders are pursuing them. Most just issue 1099s and leave it at that.
- Walking away from a condo can be problematic because the condo association will file suit against you for the unpaid assessments (and will tack on their attorney’s fees). But, in this case, there was no condo association left to pursue him, so that was not an issue.
Strategic defaults are everywhere now (just take a look at the 400 plus comments in this WSJ story on Strategic Default). There are forums online for homeowners to discuss with each other the many aspects of a foreclosure.
I am especially surprised at the number of senior citizens considering strategic defaults. Many seniors on tight incomes maxed out home equity lines and are walking away from their homes (to rent) because market values dropped like a stone (but that’s another story).
In the next few posts, we will take a look at what homeowners in Illinois have to consider before going down the strategic default path? I am not encouraging strategic defaults and I think that this should be done as a last resort.
There is a debate on the morality of strategic defaults. Some say that strategic defaults are immoral and will drag down our system. I agree with Professor Brent White that in some cases a strategic default is not only morally acceptable, but the right thing to do.