The first issue is whether you owe more than your house is currently worth. When I ask people this question, they often don't know, but knowing the answer is critical. What your house is worth now is NOT what you paid for it, NOT what it was appraised for, NOT what the property tax records show. It is worth only what you could sell it for TODAY. Right now, that is probably a very low number. Are there houses like yours in your neighborhood that have recently sold (in the last six months). That is the best indicator. Older sales are too old to be of any real value. There is a good website, www.zillow.com - it is not perfect, but should help to give you a general idea of values in your neighborhood.
DO THE MATH AND CHECK ON YOUR STATE'S LAW ON DEFICIENCY JUDGMENTS
If you are upside down, by how much ? You may be shocked at how large the number is. In many states, if you walk away and are foreclosed on, the lender will still be able to hold you responsible for that shortfall. This is called a DEFICIENCY JUDGMENT. The term "deficiency judgment" refers to a judgment for a debt, the amount of which is the shortfall that is created after foreclosure, when the collateral taken back by the lender (your property) has a current market value that is less than your current debt to the lender. Since the lender was not made whole by taking the property back, the law may allow it to come after you for the difference.
The laws vary from state to state. Some are very liberal, some are the opposite. If your state allows for the lender to get a deficiency judgment, you are in a dangerous position. Your state's statutes are probably available online.
WHAT IS MY RISK OF DEFICIENCY JUDGMENT ?
If your state's law allows your lender to get a deficiency judgment, unless you proceed carefully, and assuming that your mortgages are upside down, you are at very real risk of facing a deficiency judgment. For example, here in Florida, it is entirely feasible (even easy) for the lender to foreclose and then to get a deficiency judgment against you for the entire shortfall, to which it is allowed to continue adding interest, costs, realtors' commissions, etc. Florida has the second highest foreclosure rate in the US, Florida mortgages are heavily upside down, and Florida law makes the process of pursuing deficiency judgment quite simple. This means that the odds are very high that the lender will not realize enough through foreclosure to pay itself back in full for the amount owed, and therefore it will still show a substantial balance due from the borrower. Florida also has a 5 year window after the foreclosure for the lender to even begin to ask for one.
I HAVE HEARD THAT LENDERS ARE NOT SEEKING DEFICIENCY JUDGMENTS, SO WHY WORRY?
Some people are telling me that they have been advised by attorneys and realtors not to be concerned about the risk of deficiency judgment, that lenders do not pursue them. With all due respect, THAT IS INCORRECT. In the states where they can, they probably will. I had a new client in my office just YESTERDAY with a demand letter from a collection law firm relating to a deficiency judgment they were seeking from him from a recently completed mortgage foreclosure. It is already happening, and I assure you that there will be a great deal more of this happening. Deficiency judgment did not used to happen, because until very recently, people were not upside down on their mortgages, so there was not much chance there would be a deficiency and there were few foreclosures. However, that is all different now. People bought or refinanced when the market was high, and now that it has dropped, many are seriously upside down, and if they are foreclosed on, there is usually a shortfall.
I KNOW OF PEOPLE WHO HAVE JUST WALKED AWAY AND GOTTEN AWAY WITH IT
Maybe - and maybe not. It depends on the state in question. I know of people here in Florida who THINK they have gotten away with it - but they are probably wrong. The lenders are focusing in many cases in getting the property back and getting it sold. THEN they will follow up with deficiency judgment claims. In Florida they have FIVE YEARS after the fact to do that. Many people will have an unpleasant surprise, just don't know it yet. If your state permits deficiency judgments, once obtained, they last a very long time (controlled by state law), and can follow you if you move to another state. Some states permit garnishment of wages. All states permit levy by the creditor against your non-exempt assets (bank accounts, vehicles, real estate, etc.)
WHAT SHOULD I DO?
This depends on your own situation. If you have little in the way of assets and a moderate income, you may be able to file Chapter 7 bankruptcy, and include the mortgage debt. This would, assuming the bankruptcy goes through successfully, discharge the mortgage debt.
If you can't or don't file bankruptcy and if you have a mortgage in a state where deficiency judgments are available, you run a very significant risk of being forced to pay that difference. If that is the case, you should consult a local attorney who is knowledgeable in foreclosure defense. Your best defense against a deficiency judgment is to get an attorney who is a specialist in foreclosure defense to find as many issues as possible that the lender has done wrong, and to aggressively defend the foreclosure action. It may be possible that this will ultimately lead to a negotiated resolution where the issues you have are resolved and the lender agrees to waive a deficiency judgment in return.
WHERE SHOULD I GO FOR HELP?
DO NOT GO TO COMPANIES WHO ADVERTISE THAT THEY CAN "MODIFY" YOUR MORTGAGE. There have been many problems with these outfits; all over the US prosecutors are shutting them down, due to many complaints from people that they took money from them and never delivered. You may be bombarded with solicitations by mail. This is also very risky. There are a very limited number of attorneys who may be able to help you. This is a very highly specialized area of law. The National Association of Consumer Advocates is a non-profit consumer advocacy organization. NACA maintains a web site at www.naca.net where it lists geographically consumer law attorneys all over the US. Please look there for someone in your area who specializes in foreclosure defense to advise you.
Additional resources provided by the author
In Florida, we handle foreclosure defense for people in many parts of Florida. We started in South East Florida, Broward, Palm Beach and Miami-Dade Counties, but due to client request, have expanded our efforts throughout much of Florida. Our contact information is on our web site, www.golantlaw.com
The National Association of Consumer Advocates is a non-profit consumer advocacy organization. NACA maintains a web site at www.naca.net where it lists geographically consumer law attorneys all over the US. Please look there for someone in your area who specializes in mortgage foreclosure defense to advise you.