Millions of homeowners are considering the idea of walking away from their mortgages. But walking away doesn’t necessarily absolve the former homeowner of responsibility. Beyond the damage done to your credit score, there’s the very real possibility of lenders coming after you for the money that was lost in a short sale or foreclosure. And the word is that lenders are getting increasingly aggressive in their pursuit.
Laws vary from state to state as to how—or if—mortgage lenders can pursue a defaulter’s assets. In California and Arizona, for instance, lenders have extremely limited rights in this regard, so most don’t bother going after defaulters—even if the lenders have good reason to believe the folks walking away are strategically defaulting, and they actually have the money. (You know, like if, say, they bought season tickets to Disneyland just as they stopped paying the mortgage.)
In some states, however, lenders can come after defaulters looking for moneys owed, and they can do so several years after the home has traded hands. The D.C. area, for example, as reported by the Washington Post:
In many localities — including Virginia, Maryland and the District — lenders have the right to pursue borrowers whose homes have sold at a loss to collect the difference between what the property sold for and what the borrower owed on it, also called a deficiency.
Before the housing bust, when the volume of foreclosures was relatively low, lenders seldom bothered to chase after deficiencies because borrowers had few remaining assets to claim and doing so involved hassles and costs. But with foreclosures soaring, lenders are more determined to get their money back, especially if they suspect borrowers are skipping out on loan they could afford, an increasingly common practice in areas where home values have tanked.
Lenders make money, quite obviously, by collecting money, not handing it out, and so debts aren’t forgotten or forgiven easily.
While giving up on mortgage payments has been seen as a quick fix for money woes—the “free rent” approach, it’s been called—the responsibility of homeownership doesn’t disappear in a snap. By walking away, the home is gone and out of your hair. You no longer have to mow the lawn or pay the electricity bill. But the headaches of homeownerhip, not to mention debt, may haunt you for years.
Related:
No One Said Homeownership Was Easy, or That It’d Make You Happy