Foreclosure advice

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Sep 13, 2009 11:08 pm

Would you ever advise a client to foreclose on his mortgage?
For example, client is 60, owes 200k on his home that would sell for 150k. He's paying 2,000 a month for his mortage, interest, taxes. His property value is most likely not going to recover.
Would you advise him to mail the keys to the bank, rent a nice apartment for 1k a month and use the extra 1k a month for insurance or investments?
It seems to me that makes financial sense. What would the financial and or legal consequences be?

Sep 13, 2009 11:16 pm
buyandhold:

Would you ever advise a client to foreclose on his mortgage?
For example, client is 60, owes 200k on his home that would sell for 150k. He's paying 2,000 a month for his mortage, interest, taxes. His property value is most likely not going to recover.
Would you advise him to mail the keys to the bank, rent a nice apartment for 1k a month and use the extra 1k a month for insurance or investments?
It seems to me that makes financial sense. What would the financial and or legal consequences be?


 
I try to avoid giving advice that would enable a client to easily sue me later.
Sep 13, 2009 11:35 pm

How do you know the property value won't recover?

 
For the record, a consultation with a bankruptcy attorney is the best course of action.  I would not give any advice on declaring BK or not.
Sep 14, 2009 10:26 am
buyandhold:

Would you ever advise a client to foreclose on his mortgage?For example, client is 60, owes 200k on his home that would sell for 150k. He's paying 2,000 a month for his mortage, interest, taxes. His property value is most likely not going to recover.Would you advise him to mail the keys to the bank, rent a nice apartment for 1k a month and use the extra 1k a month for insurance or investments?It seems to me that makes financial sense. What would the financial and or legal consequences be?





That is a terrible idea. First off you are leaving out some key points. That $1k/month is only going to go up. Plus he now can't deduct property tax and interest. But more importantly how many years does he have left? Why not short sale it or rent it or sell it, take the loss and go buy a similar house for the $150K his is worth.



I think foreclosure like bankruptcy should be the last idea.. And if he does that i think the chances of him saving $1k/month for investments(what does insurance have to do with this?) is unlikely.

Sep 14, 2009 8:01 pm

I think you'll see a lot of people doing this in the next year. Starting to hear advertisements on radio for this strategy.
I had a prospect last week show me her monthly equity statement -- it was about $1200 and damn near most of it was interest and property taxes.
The property tax deduction means nothing to somebody living on a fixed income and not paying any income taxes.
And no, I don't think property values are coming back in my city or probably yours, either. Maybe when the NASDAQ comes back.
Chief, the insurance comes up when a client says that they plan to leave the house to their kids. Well, first of all, what parent wants to leave their kids with a house they will have to bring money to the closing. Insurance would be a better way to solve the inheritance issue.

.

Sep 14, 2009 9:08 pm

Your argument makes no sense. What does the value of his home have to do with anything? If you are saying that he can't make his mortgage payment, that's one thing. But $2,000/mo. all-in is not outrageous. I don't care if his house is worth $20 bucks. If he wants to live in it, and he can make the payments, who cares what it's worth? He pays for it now or he pays for it later.   But do you realize that foreclosure is worse than even bankruptcy? You say he could rent for $1000/mo. and invest the difference. Seriously? If he can go from $2000 to $1000 bucks a month and invest the difference, he has no business foreclosing. If you said he could pay $1000/mo. and try to get back on his feet, that's different. Hopefully you are leaving out some details.

Sep 15, 2009 1:25 pm

Something stinks here.  So what if his house is worth less than what he owes.  Would you advise him to sell out of his investments if they were down 25%?  If his concern is leaving debt to his kids, two things easily come to mind...he could get (more) life insurance or focus on paying off the debt.  Maybe that should be his focus and not discussing trashing his credit so he'll be talked into investing $1k a month that he shouldn't be.  

Sep 15, 2009 1:30 pm

Advising this client (with current information) to file bankruptcy or let his house be foreclosed upon is negligent at best. I can't understand why his property value wouldn't come back, but I guess anything is possible. Depending on his health, and if he pays his mortgage for another twenty years, his children should be fine and not be saddled with debt.



This client should be advised that his goals are out of whack. You don't worry about leaving your kids an inheritance when you need money to live on. I had this argument with my grandmother who decided she wanted to leave all seven of her children a nice little nest egg.



Ridiculous!

Sep 15, 2009 5:48 pm

Guess I'm in the minority on this one. While you guys are right about advising a client  to foreclose because of the legal headaches, I do see a lot of people who are way upside down in their homes. It's a bigger issue for most people than the stock market losses. They want to move, but can't, or they're throwing money into a hole.
Of course I wouldn't advise anybody to sell their investments if they were down 25 percent. Except in real estate, they don't actually own the investment and so much of the monthly nut can be interest payments.
Again, it's simple math. The house is worth 150. You owe 200. It ain't coming back (you can study the history of bubbles and see that, or check out the demographics, or study the history of housing and you'll see that) and the interest is going to kill you. First thing we tell clients is to get rid of their debt, but here they are putting a chunk of their income into interest payments.







Sep 16, 2009 9:50 am

BH, I think the point is, for MOST people, a home is not really an investment - it's a place to live.  So unless you could sell and spend CONSIDERABLY less on your next home, why would you sell at a loss or foreclose/go bankrupt?

 
And even if you do think of your primary residence as an investment, walking away from a mortgage doesn't just "wipe away" your losing investment.  Once you sell, that loss is locked in.  Buying another home doesn't make it go away.  SO unless your new home is somehow going to appreciate in value MUCH faster than your previous home, it's like selling the Vanguard S&P 500 ETF to but the I-Shares S&P 500 ETF because you have lost money on the Vanguard Index.
Sep 16, 2009 3:46 pm

The problem with walking away is recourse. Few states protect the mortgagee from recourse if the bank decides to go after them for the mortgage deficiency. The bank can go to court to obtain a defeciency judgement. Even Homestead states like Florida don't protect or protect fully from a DJ. Once obtained the mortgage holder can seize other property owned by the mortgagee. This includes bank accounts, investment accounts, cars, household furnishings etc. They can also go after their income by garishing wages. So, possibly no free walk for the mortgagee.

 
I say possiblly because the decision to obtain a deficiency judgement is really up to the numbers crunchers at the the bank or finance company . If nothing else they are realist. They know that a person who walks on an owner occupied property only did so as a last resort, not as part of a financial strategy. Knowing this they realize that recovery or substanial recovery is unlikely, and they reason the cost of further legal action will push them further into the red in a non recoverable situation. The decision is also influenced by the likelihood that a court will grant relief. Even in open and shut cases, legally, a judge is unlikely to take money, income, or goods away from a family struggling to feed itself. Still, it could happen.
 
While i agree your client is a candidate to walk I wouldn't be the one advising him to do so. That's a call for well versed legal council.
Sep 17, 2009 10:44 pm

why not just short sale???