meet-5-homeowners-who-walked-away.aspx

By Sally Herigstad

Three years into the housing crisis, nearly 15 million homeowners owe more than their homes are worth, and an estimated one in four mortgage defaults is voluntary. A recent poll found that a third of respondents would do the same — walk away — under similar circumstances.

Should you walk away from a mortgage?

And some experts wonder why strategic default rates aren’t even higher. In October, University of Arizona law professor Brent White published a provocative paper (.pdf file) saying that homeowners are letting fears of wrecked credit and reputations cloud decisions about their financial best interests.

• Check out mortgage rates near record lows

So we put some questions to five homeowners who did walk away. Was getting out from under the mortgage worth the hit to their credit ratings? What about the guilt and disgrace we’ve been warned about? Are the lives they have today better or worse than the lives they left behind?

The answer: It depends — on both their individual financial situations and their personal values. Few expressed regret, though it’s worth pointing out that all but one asked that their last names not be used.

Kathy: ‘We’re incredibly happy’

Kathy, 34, was single when she bought her 600-square-foot San Diego condo for $235,000 at the height of the real-estate frenzy. After she married Darren, 42, she and her new husband decided that the condo was too small. By then the market had collapsed, and the condo was worth less than she’d paid for it.

Kathy continued to make payments while foreclosures piled up in her building. In the end, her condo’s reduced value was not why she decided to walk.

“The people in the building changed,” she says. “It went from young homeowners to squatters. Genuinely, squatters and drug dealers. It was this horrible situation.”

Still, the couple stuck it out for two years before strategically defaulting in 2009. Kathy was scared to call the bank to cancel the automatic mortgage payments. However, she says: “They were lovely. There wasn’t any of the drama that I was afraid of.”

The financial relief was immediate.

Kathy and Darren didn’t have much trouble renting. Their 20-pound dog was a bigger problem than their default record. In San Diego, she points out, landlords are used to foreclosures.

The rent on the more spacious two-bedroom condo unit, which includes a garage, is the same as the mortgage on their tiny former home. “It’s got birds; it’s got grass and no drug dealers,” Kathy says. “We’re incredibly happy.”

Because California is a nonrecourse state, Kathy does not face a deficiency judgment, the biggest threat to defaulters. In recourse states, a lender can come after a former homeowner for the difference between what was owed and what the lender was able to get for selling the home.

Some people had asked Kathy whether she felt she had a moral obligation to the bank, but she said she didn’t feel they were being judgmental. Several of her friends have also walked away, and others have told her they wished they had the courage to do so.

“In California, everybody gets it,” she says. “People have been incredibly supportive.”

Kathy hasn’t checked her credit scores and doesn’t intend to. She and her husband plan to avoid using credit as much as possible. (Foreclosure can lop off as much as 160 points from a top-notch 780 credit score, according to Fair Isaac, the creator of the FICO score.)

“After the debacle with the condo, the concept of homeownership is meaningless to me,” she says. “It’s about happiness.”

Patty: One stress lifted, but life’s still hard

New Yorker Patty Sayles, 66, was doing fine until her husband began suffering from Alzheimer’s disease. She had to choose between paying for his nursing-home care and paying her mortgage.

With the help of an attorney, Sayles might have held on to the house for another year. But the constant phone calls from creditors, debt resolution specialists and foreclosure prevention companies wore her down.

“I couldn’t take the phone calls,” she says. “Every day I got phone calls from lawyers saying, ‘I can take care of it.’ It’s all fraud stuff.”

Sayles walked away from her house in October. She also filed for bankruptcy.

Sayles moved in with her daughter, which has been difficult on both of them, but she doesn’t feel she had any other choice. Otherwise, “I’d be in the park,” Sayles says.

Her husband’s nursing home gets paid first, and that takes his entire pension. Sayles’ other debts were discharged in the bankruptcy, but she doesn’t have the income or savings to rent a place of her own.

New York allows deficiency judgments, but filing for bankruptcy protects Sayles from facing one. Such judgments are considered the most significant hazard of walking away from a mortgage.

“If you didn’t do a bankruptcy and you don’t do a deal with the bank, you will definitely get hit with a deficiency,” says Sayles’ attorney, Edward Nieger. “It may take a year or two because they are so backed up, but they will get you.”

Like Kathy, Sayles hasn’t looked at her credit score. As long as her husband is in the nursing home, she won’t be buying or renting a home or doing anything else that would require a good credit score.

Kristen: A smaller life, but the worst is over

A high-end interior designer in Santa Barbara, Calif., Kristen, 33, bought a luxury condo near the beach for $877,000 in 2005. She used $200,000 in savings to add improvements. Then her business slowed, and she could no longer make her payments.

She tried to sell for $1 million. By the time she called on Jeffrey J. Fritz, a Coldwell Banker real-estate agent in Green City, Calif., the market was falling drastically. She got an offer for around $700,000, but the bank declined it.

Kristen had become depressed during her attempt to sell the house, says Fritz. But “once we knew the ax was going to fall, she switched from being stressed to being relieved,” he says. “The worst had happened.”

Kristen lost her down payment and the savings she’d put into upgrades when she walked away. But because she hadn’t been living on credit cards or running up additional debt, her immediate financial crisis was over.

Life post-default, however, hasn’t been entirely smooth. She rented an apartment, but a year later her landlord couldn’t make his own mortgage payments. The bank foreclosed on the property, and Kristen had to move again. “That was traumatic because she had already gone through it,” Fritz says.

The apartment Kristen rents now, though nearby, isn’t glamorous like the condo she’d owned when money flowed so freely in California. But her living expenses are a fraction of what they were, so she feels it’s the right place for now.

With a foreclosure on her credit report, Kristen may have trouble buying property for seven years under current lending conditions. But Fritz says there are ways around that restriction. If Kristen were to marry, her spouse could get a loan in his name. Or she could buy a house with a nonrelative as a business partnership. People with good cash reserves who can’t get a loan often team up with people who can.

Getting a loan to buy a car would be a challenge. However, Fritz knows “walk-aways” who were able to buy cars by getting co-signers. “The auto industry wants to sell cars,” he says, “and a large segment of the population now have foreclosures on their credit.”

When foreclosure was imminent, Kristen’s biggest fear was what the neighbors would think. Her clients were high earners, and she projected a successful image to attract and keep them. But, as Fritz says, “It’s not like they put a big red sign on your door” after you default. Kristina now seems comfortable letting others know her story. “Once the worst happened, there was nothing else to be scared of,” Fritz says.

Jennifer and Andrew: Quick relief, continuing guilt

In their late 30s and the parents of two children, Jennifer and Andrew had second thoughts after walking away from their Phoenix home. As conservative, religious people, they felt guilty about reneging on their financial obligations. So they contacted Jeremy Brandt, the CEO of 1-800-CashOffer, but it was too late — the house was too far along in the foreclosure process.

Jennifer and Andrew paid $350,000 for the house in 2005. By the end of 2009, it was worth $270,000. But they loved their home and say they would still be there if Andrew hadn’t lost his job.

Friends advised the couple to walk away. At first, Jennifer and Andrew resisted the idea. They tried to make it on Jennifer’s income as long as they could.

“They could afford to pay it if they cut every expense,” Brandt says. “But that wasn’t realistic — they couldn’t live like that.”

In January, Jennifer and Andrew put their keys in an envelope along with a letter telling the bank it could have the house back. They didn’t have any trouble getting into an apartment because they signed a lease before they missed payments and damaged their credit.

Andrew is still looking for a job, but walking away did help the family’s immediate cash flow. The apartment isn’t nearly as nice, but the rent payment is about half their old mortgage payment. And, like California, Arizona is a nonrecourse state, so they don’t have to worry about the bank coming after their other assets.

With the foreclosure process continuing, the couple won’t know the full effect on their credit for some time. Foreclosures are among the worst things that can happen to a person’s credit scores; only bankruptcy is worse. If Jennifer and Andrew want to buy another house, they will probably have to wait at least a few years.

“No law says you couldn’t buy a house tomorrow,” Brandt says. “But the banks would have to be crazy to give you a loan because you’ve shown a propensity to walk away.”

Brandt says it remains to be seen how banks will view loan applicants with foreclosures on their records in the next few years, now that so many people have gone through them.

Published May 26, 2010