PRESS RELEASE
“WALKING AWAY” FROM A MORTGAGE COULD BE COSTLY
ABA offers guidance to homeowners considering default
WASHINGTON (June 17, 2010) — Recent media reports describe the increasing tendency of financially stressed homeowners to simply “walk away” from their mortgage, a practice called a “strategic default” whereby the owner simply stops making mortgage payments and forces the bank to foreclose on the property. While turning in the keys and stopping payments to your bank may seem like an easy solution, homeowners should know that strategic defaults can result in costly consequences.
A strategic default/foreclosure can result in a credit score dropping 100 to 400 points, making it difficult to obtain other credit and nearly impossible to get another mortgage for at least three to seven years. Homeowners considering this solution should also be aware that many states allow banks to pursue the homeowner’s remaining assets such as bank accounts, automobiles or other investments. A strategic default can also have serious tax consequences.
“Homeowners in financial distress should contact their lender as soon as they know they may have trouble making their next mortgage payment. The earlier you contact your lender, the more options you will have,” said ABA Executive Vice President Robert Davis. “Most banks are eager to work out a mutually beneficial arrangement and borrowers should consider all the pros and cons before settling on any solution,” he added.
Better solutions for homeowners who are having difficulty making mortgage payments include short sales and mortgage modifications. Short sales, which allow homeowners to sell a house for the remaining mortgage balance, relieves them of monthly mortgage payments but they could be required to pay the difference between the selling price and what was owed on the original mortgage. If the homeowner is unable to pay the deficiency, banks may seek the homeowner’s remaining assets and the homeowner can face undesirable tax consequences and still need to find new housing.
Mortgage modifications, including those under government programs, may be the best solution for homeowners who can qualify. A modification can help borrowers achieve affordable payments without any court judgments and without requiring the homeowner to move.
Here are the pros and cons of each potential solution for homeowners in financial distress:
