Welching on your debts or, “strategic foreclosure”

Another story, this one in the WSJ, about borrowers walking away from their mortgaged property. The people profiled aren’t incapable of paying their mortgages, they just don’t want to. And in many states, they’re free to do so. Connecticut is not one of those states, unless the law has changed since I was familiar with it (and it very well may have – ask a real lawyer). As I recall, Connecticut lenders’ recourse is not limited to just the property, so they can chase after your bank accounts, cars or, worst of all, turn your account over to a collection agency who will make your life a living hell for the next ten years. Bt as I say, my knowledge is dated, so check with a lawyer who’s up on this area and see what your options are. the morality of the act I leave to you and your conscience.

11 Comments

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11 responses to “Welching on your debts or, “strategic foreclosure”

  1. Greenwich Ex-Pat

    “Brent White, an associate law professor at the University of Arizona who has written about this issue, says homeowners should make the decision on whether to keep paying based on their own interests, “unclouded by unnecessary guilt or shame.” He says borrowers can take a cue from lenders that “ruthlessly seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility.”

    Amen, Brothah Brent! What’s good for the goose is good for the gander. A year or two ago I wouldn’t have said that, but “the law” in these United States has been completely perverted in so many ways, “the rule of law” no longer exists. I wish it weren’t so, because I believe in it, but the system is broken, being a system that is applied according to whim.

    “But it isn’t just a matter of the borrower’s personal interest, says John Courson, chief executive of the Mortgage Bankers Association, a trade group. Defaults hurt neighborhoods by lowering property values, he says, adding: “What about the message they will send to their family and their kids and their friends?”

    Washington and Wall Street have already sent the message, John. People are just following the example set by their “betters”.

  2. NHRR

    Morality is not in it, in my view. A mortgage is a contract with a lender, which has legal recourse should you decide to break the contract. Broken contracts happen all the time in business, with no one saying “shame” on the breaching party for not continuing with what became a bad deal. Why should a borrower whose property is underwater be treated differently?

  3. Old School Grump

    Hmmm,

    You walk away from a restaurant without paying the bill, and you get arrested.

    You don’t pay a utility bill for a few months, and the utility is cut off.

    You don’t pay your car loan for a few months, and the car is repo’d.

    You don’t pay your rent for a few months and you get evicted.

    You don’t pay second semester private school tuition for your child, and your child is “not invited back.”

    But you decide you won’t pay your hundreds of thousands of dollars worth of mortgage anymore, and you abandon the property, and you get … what … no meaningful consequences at all. A temporary ding to your credit rating that apparently doesn’t interfere with your ability to find a desirable rental and hold onto a good job.

    The people pulling this stunt know it is morally wrong, although of course they’ll never admit it. That leaves us solid citizen/sucker types to pick up the tab … until we up and decide not to.

    So, what can we do to rise up in protest in an effective way? I’m game for just about anything, as long as it’s not coupled with a socially conservative agenda. No anti-gay, anti-abortion or Obama birther rants, please; no Rush Limbaugh or Fox News inputs. Is there any hope?

  4. Anonymous

    A high percentage of people living in Greenwich are employed by the same financial institutions who lent them money to buy the houses. If they fail to pay their mortgages, not only they lose their houses but their jobs as well. That may be one of the reasons foreclosures levels are lower than in other cities.

    • christopherfountain

      Tht didn’t help the Bear Stearns employees in New Canaan o Lehman workers here (althogh Dick Fuld’s spread on North Street still looks just fine – passed t yesterday).

  5. shoeless

    Chris,

    I found this online:

    http://www.loan.com/home-loans/how-non-recourse-loan-laws-vary-from-state-to-state.html

    CT is a non-recourse state, with a smal wrinkle

    Connecticut

    Connecticut only offers a judicial foreclosure, using a “strict foreclosure” or “decree of sale.” With the “strict” option, a right to redemption is available, but the lender can sue for the debt owed. If the property is valued higher than the current balance of the loan, a deficiency lawsuit cannot be filed, but the lender keeps the extra money.

  6. PAN

    Chris, Shoeless:

    Connecticut is a recourse state. Your source is incorrect. If the lender does not get paid back its money in full, it has the option to ask the court for a deficiency judgment, after the foreclosure, and can go after the debtor’s other assets, whatever they may be–stocks, cash, real estate, etc.

    Conn has two forms of foreclosure: by auction or by strict foreclosure. If the liens on the property exceed the value of the house, the foreclosure is by “strict”, meaning that the lien holders, in reverse priority, can pay the lien holders ahead of them and get title to the property. If they don’t redeem, their lien is extinguished and they are out of luck.

    The auction method is that anyone can bid on the property and the winning bid is deposited in the court and the lien holders are paid from said funds in order of their priorities, i.e. first the first mortgage holder, then the second, etc.

    In either form of forclosure, if the funds realized or the appraised value is not enough to make the lender whole, it can apply for a deficiency judgment and go after the debtor’s other assets.

    • christopherfountain

      Hi PAN – Yes, I straightened Shoeless out on that, I hope, in one of my comments, but glad to have it verified by a real lawyer – thanks.

  7. Xpat

    The fact that CT borrowers cannot simply walk away like it happens in some other states should help sustain house values better, no?

  8. shoeless

    Xpat,

    I think it probably only prolongs the agony, as default and foreclosure still occur in a lot of these cases, only at more glacial speeds. Places like Arizona are actually seeing an uptick in transactions as a floor is likley in place since the REO houses have created an equalibrium price point.