From the Detroit News:
Can’t sell, so owners give bank the homes
Alan and Alyson Wirgau live in a cute ranch on a quiet suburban street next to an award-winning school. There’s a new roof above their heads, a new deck in back and a For Sale By Owner sign in front.
Instead of weighing offers, the family is weighing an option that seemed unthinkable a year ago: If they don’t sell their home soon, they may turn down the heat, load their possessions in a U-Haul and drive away.
With a job in Indianapolis and dim prospects for selling their home, the Wirgaus are considering handing the keys back to the bank and walking away from their home.
They are among a growing number of Michigan families asking lenders to take their homes off their hands. That trend, paralleling a rapid rise in foreclosures, illustrates the desperation some families feel as home values fall below their mortgage debt.
That process, called a deed in lieu of foreclosure, is an agreement to give up all ownership rights in a home or piece of property to the lender.
It’s not a good option for anyone, but it’s often better than the alternative. Homeowners’ credit ratings are hurt, but not as much as in a foreclosure; the lenders lose money on homes now worth less than the outstanding loan, but lose less than the cost of a foreclosure proceeding.
There is no state or national data on deeds in lieu of foreclosure because it is an internal agreement between lenders and homeowners.
…
Two years ago the Wirgau family’s 1,500-square-foot home was valued at $210,000. Today, it’s for sale at $180,000 — just enough to pay the mortgage and the closing costs.No one has made an offer in the three months it’s been on the market. At the full asking price, “we’d just break even, and I’d bend down and kiss their (the buyers’) feet,” Alyson Wirgau said.
If this family is thinking about giving the house back to the bank aftr only 3 months on the markert they must have stretched to buy it and probably have no savings (unless one of them lost a job and they burned thru their savings).
If they had zero savings when they bought the place why would a bank lend them money? Cheap money and loose lending standards got them into a house, now a bt higher rates and a change of public sentiment leave them stuck with it.
During the oil patch real estate collapse, many “homeowners” with negative equity simply mailed the keys to the bank if renting a comparable home was cheaper than paying their mortgage.
We are already in a position today where renting costs less than ownership in many areas, even without price declines. The driver for paying a premium for ownership has been the expected future value of the home.
So, what happens when a buyer has negative equity (i.e. no skin in the game) and the expected future value is expected to decline or even stay flat? The ownership premium now becomes the cost of maintaining one’s credit rating. How much is this worth to most people? Assuming you can pay the bills, is it worth hundreds or even thousands a month?
Many people will suck it up and pay. I would bet many others chose to walk away and take the hit to their credit rating. The short term increase in borrowing costs, lack of access to credit and stigma of having bad credit would, in many cases, be offset by the savings on the mortgage payment.
During the oil patch real estate collapse, many “homeowners” with negative equity simply mailed the keys to the bank if renting a comparable home was cheaper than paying their mortgage.
More commonly referred to as “jingle mail”, during the collapse.
jb
“So, what happens when a buyer has negative equity (i.e. no skin in the game) and the expected future value is expected to decline or even stay flat?”
Renting,
Their free option [call] expires, they walk.
I was wondering, so how does credit score of the partner affect the mortage post marriage?
Example Mr.Bankrupcy has a poor credit score. He marries Miss GoodCredit.
Can they just buy the house stated income on her score and ignore his. Figuring the BK will make them pay much more than the stated premium?
Secondly I thought it was changed so that you cannot surrender the house anymore? Is this true?
A bad credit rating doesn’t block access to credit;
it just blocks access to affordable credit (i.e. higher interest rates).
We’ve probably all heard stories about people who have filed for bankrupcy getting unsolicited credit card approvals in the mail.
“Secondly I thought it was changed so that you cannot surrender the house anymore? Is this true?”
I think you can if it is a first mortgage. But for HELOC or piggyback loan, someone on this blog said you would have a tax liability for the forgiven amount of the load. Other than that, I don’t know if it is harder to walk away from a second mortgage.
Re: my post #6
This used to be called usury (loan sharking).
Now it’s all perfectly legal.
it is not just fro Heloc’s it is for any mtg. If you have a mtg, and the bank forgives a certian amount of that, that is considered incoem for IRS purposes, and you will owe taxes on it.
But I guess if people get that far along, many do not care.
Heard this was happening to a lot of house flippers looking for the quick dollar but not getting it.