Dear Steve,
I bought a home two years ago that's now worth $120,000 less than I paid for it. Ouch! What's more, the bank won't touch a refinance. But I do have about $80,000 in savings. If I used it for a down payment to buy another home, then let the other go into foreclosure, could the bank come after the equity in the more recently bought home? Yes, it's a shady thing to do, but I feel it's my only option.
--Stephen K.
Dear Stephen,
I have been besieged with similar questions. First, it's unlikely but not impossible that the bank would go after your equity in such a scenario. That said, I can't in good conscience just say go ahead and arrange such an "intentional foreclosure," even as the practice becomes increasingly common, particularly in parts of the country that saw huge artificial run-ups in home values earlier this decade.
The first effort on the part of borrowers should always be to seek loan remediation agreements with their lenders/servicers. However, based on media and trade reports, there have been relatively few good outcomes from attempting to do this. The reality is that there are tens of thousands of people out there in similarly challenging situations who are watching as homes just like theirs sell for far less than what they still owe.
I must note that there's no absolute guarantee in most states that a buyer can just buy another house and walk away unscathed from the other one, aside from absorbing that big, ugly credit splotch, of course. That's because states often give lenders latitude to sue borrowers in such cases.
However, such "recourse" practices are seldom employed these days because of the expense and the fact that people in these upside-down situations typically have little nonhousing wealth to pursue. Ironically, some credit experts say it will be faster and easier to re-earn a decent credit score after a foreclosure than after a bankruptcy -- especially if you have established a new mortgage in the interim.
There are numerous blogs dedicated to the practice that you're considering and some businesses, such as San Diego-based You Walk Away. Opponents to your strategy have called this "underhanded," "cheating," "unethical" and say that agents who facilitate this practice are just coaching people into bigger mistakes. Others say it's the only way for some people to emerge as homeowners out of this mess.
Hopefully, there's an important history lesson here for an industry that aggressively marketed so many risky low-down-payment or 100-percent loans with ARMs attached and a government that at least tacitly encouraged them. It's actually an old lesson: The less skin you have in the game, the easier it is to walk away from the table.
If you do proceed, you would be wise to spend a little of that $80,000 nest egg on a legal representative to review your loan documents to determine if you will be on the hook for anything.