The Denver Post recently ran an opinion piece about underwater homeowners who decide to walk away from their obligations entitled “The Wisdom of Walking Away From Your Mortgage.” In one case, the owner – who made a $100,000 annual salary and invested in multiple real estate clubs – walked away from his $435,000 mortgage to rent a less expensive property.
The tone of the piece indicates some owners believe they are entitled to walk away from a bad bargain because so many banks took bailout money. It neglects to acknowledge that many banks did not take bailout money, but are still being lumped together with the evil corporate behemoths that did. The sense of entitlement that permeates the article is offensive to anyone who still believes that parties should abide by the agreements they make. Perhaps I’m old fashioned, but as a lawyer, and as a community association lawyer with an emphasis in covenant enforcement, I tend to think that contracts are a good thing that should be respected by both parties.
This piece calls walking away from an underwater mortgage “wise,” and in some sense it could be. Without the investment costs attendant to home ownership a person will have more disposable income to spend on day-to-day expenses, like rent.
Wait, what?
The author also does not mention that if you walk away from your underwater mortgage, the bank will likely sue you for the deficiency – that is, the difference between the amount owed on the property and the amount the bank gets from the property during foreclosure. If you walked away from your home and let it fall into foreclosure, chances are good that you won’t show up or file an answer to the deficiency law suit. When you fail to file an answer, the bank’s attorneys will obtain a default judgment against you.
Even if you do file an answer, you probably aren’t going to win. The bank will take a judgment against you for thousands of dollars you should have paid over the course of the mortgage.
With that judgment, they will garnish your wages and reduce your disposable income – which seemed so much higher after you walked away – to as little as minimum wage. The judgment will enter on your credit report, which already bears the scars of the foreclosure.
When the garnishment takes you down to the point of losing your “cheaper” rented apartment (which, of course, will never build equity), you may be evicted. That’s another hit on your record. And when you can’t take it anymore, you’ll file bankruptcy.
The individuals in the article walked away because they didn’t want to be in debt their entire lives. Instead, they will be spending their lives fighting to get out of their chosen roles as “deadbeats.”