KEYTLaw » Real Estate Law

Making the Decision to Walk Away: Morally Wrong….OR…Financially Sound?

Jeana Morrissey — Sat, 13 Feb 2010 00:00:16 +0000

Whether a homeowners ’s decision to allow his or her lender to foreclose is based on a presently existing financial hardship, anticipated financial strain over time, or to strategically divest themselves of a bad investment, the debate rages as to whether such a decision on the part of the borrower is morally wrong or financially sound.

It is important to examine this issue from an objective standpoint, weighing well-informed arguments from both sides of the debate. An excellent commentary on ‘strategic walkaways’ by Mike Bell and the ensuing robust debate on this topic can be found here: The Ethical Dilemma of Strategic Walk-Aways.

For another view, see Arizona Republic reporter Russ Wiles’ story in the February 14, 2010, called “Walking away’ comes with drawbacks.” The story says,

But the prospect of mass “strategic defaults,” where homeowners who can afford their payments nevertheless walk away, has sparked sharp words from both sides. That’s partly because these actions don’t just affect borrowers and their lenders, but other parties, too.

Update: See an MSN Money article called “Are you foolish to pay your mortgage?” and “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis” by Professor Brent T. White, University of Arizona College of Law. The abstract for this article states:

Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations – and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

Related Articles by Arizona real estate attorney Jeana Morrissey

For more information about Arizona’s anti-deficiency laws, see my article called “Arizona Foreclosure Law aka Arizona Anti-Deficiency Law.” For information about short sales, see “Arizona Department of Real Estate Publishes Short Sale Seller Advisory.” For information about the federal income tax consequences of a short sale or discharge from indebtedness income see “Mortgage Forgiveness Debt Relief Act of 2007” and “Federal Income Tax Consequences of Home Foreclosures & Cancellation of Indebtedness.”

Schedule an Arizona Foreclosure Law or Short Sale Consultation with Arizona Real Estate Attorney Jeana Morrissey

If you have questions about Arizona foreclosure law and the legal consequences of defaulting on a loan secured by a lien on an Arizona home or questions about short sales or short sale contracts, hire me, an Arizona real estate attorney to review your situation and answer your questions. I offer a one hour in office or over the phone consultation for $299. Call me, Jeana Morrissey, at 602-906-4953, ext. 4 or email me at jrm@keytlaw.com. To hire me for a consultation about Arizona foreclosure law or short sales, complete my online consultation agreement. To schedule a consultation, call me or my legal assistant Milena at 602-424-4159.

Federal Recession Aid Ending Soon

Jeana Morrissey — Tue, 15 Dec 2009 15:12:02 +0000

Some federal programs established to help people purchase homes and cars or to modify existing mortgage loans are set to end or wind down early next year. Some may be extended, but many may feel the impact of the end of these programs, such as higher interest rates for mortgages and car loans. See the Wall Street Journal article for more information.

New FHA Loan Rules for Condos Will Hurt Buyers & Builders

On the Net — Tue, 08 Dec 2009 14:45:04 +0000

Former President Ronald Reagan used to say that “government is not the solution, government is the problem.” The new FHA condo loan rules are an example of that concept. The Federal Housing Administration’s new lending rules for buyers of condominiums will reduce the number of loans made to condo buyers, which will cause economic problems for condo builders and owners of condos who are trying to sell their condos. Effective December 7, 2009, FHA loans will limit the number of condo buyers and eliminate loans for condos located in projects that have poor finances, too many condos for rent or too many lenders in default. Bottom line: There will be fewer FHA loans for condos and whether a buyer can get an FHA loan for a condo will depend not just on the buyer’s credit history, but also on the history of the condo project in which the condo is located.

New Federal Law Protects Tenants From Being Evicted After Foreclosure

Jeana Morrissey — Tue, 01 Dec 2009 22:02:51 +0000

A law passed by Congress and signed by President Obama, the Helping Families Save Their Homes Act, provides protections for tenants whose landlords lose the rental property through foreclosure. The law’s protections are effective immediately and expire at the end of year 2012. With the new law, tenants now have the right to remain in their homes after foreclosure for 90 days or through the term of their lease as long as the new buyer of the property does not intend on living in the residence.

See the Arizona Attorney General’s explanation of the new law. See also “Helping Families Save Their Homes Act of 2009. “

FBI Invesgating Hundreds of Mortgage Fraud Schemes in Nevada

On the Net — Thu, 19 Nov 2009 22:13:30 +0000

Las Vegas Sun: “Federal law enforcement officials in Nevada are launching a major offensive against mortgage fraud, with the FBI preparing hundreds of complex cases for prosecution against operators who have preyed on Las Vegas’ still-staggering boom-and-bust real estate market. Top sources at the FBI field office said a special mortgage fraud squad is assembling evidence in 300 cases, many of them involving a million dollars or more in ill-gotten gains.”

Nicolas Cage Lost Homes in Foreclosure

On the Net — Wed, 18 Nov 2009 14:26:07 +0000

Yahoo News: “Even Academy Award winners are suffering from financial woes this recession. Actor Nicolas Cage lost two homes in New Orleans worth a total of $6.8 million in a foreclosure auction . . . .”

Confusion about Short Sales and Arizona’s Anti-Deficiency Law

Jeana Morrissey — Tue, 17 Nov 2009 05:25:21 +0000

I consult with property owners several times each week concerning their risks, protections and obligations under Arizona’s foreclosure laws, as well as the legal, tax and practical implications of alternatives to foreclosure, such as short sales, deeds in lieu of foreclosure or loan modifications. One recurring issue that I address has to do with misinformation people are receiving from real estate agents and other sources – even legal professionals- concerning short sales.

A common assumption of many home owners and real estate agents is that Arizona’s anti-deficiency statutes always apply to protect borrowers in a short sale as well as a foreclosure. This is incorrect. The anti-deficiency protections clearly apply where a purchase money lender forecloses on an Arizona property. In a foreclosure situation, Arizona statutes and case law define the circumstances in which a lender is prohibited from pursuing a deficiency action against the borrower. In many situations, the statutes allow the lender to pursue such an action against a borrower after foreclosure…

When a borrower short sells a property, there is no automatic protection from a lawsuit by the lender for the balance of the note. Although there are cases that suggest a purchase money lender may be not be allowed to obtain a judgment against the borrower for balance of the note if the property also qualifies for anti-deficiency protection, the borrower must be sure to negotiate for a release from the lender to be protected. I am aware of situations in which a home owner, ecstatic to obtain the bank’s approval of a short sale, quickly signs the approval agreement without carefully reading and understanding its terms. In many cases, the bank has a right to sue and reserves its right to sue the borrower in the future for the balance owed on the note. It is also important to note that the 90 day limitation after a trustee’s sale for filing the deficiency action against the borrower/home owner does not apply in a short sale situation. Normal statutes of limitation apply and can run for up to 6 years in cases where the bank has the right to sue.

It is critical that all homeowners and realtors are aware of this important distinction and do not rely on misinformation when deciding whether to consummate a short sale transaction.

Schedule an Arizona Foreclosure Law or Short Sale Consultation with Arizona Real Estate Attorney Jeana Morrissey

If you have questions about Arizona foreclosure law and the legal consequences of defaulting on a loan secured by a lien on an Arizona home or questions about short sales or short sale contracts, hire me, Jeana Morrissey, an Arizona real estate attorney, to review your situation and answer your questions. I offer a one hour in office or over the phone consultation for $299. Call me, Jeana Morrissey, at 602-906-4953, ext. 4 or email me at jrm@keytlaw.com. To hire me for a consultation about Arizona foreclosure law or short sales, complete my online consultation agreement. To schedule a consultation, call me or my legal assistant Milena at 602-424-4159.

Phoenix Church Loses Appeal: Can’t Feed Homeless

On the Net — Tue, 10 Nov 2009 13:44:47 +0000

Arizona Republic: “A Phoenix ordinance banning charity dining halls in residential neighborhoods withstood a challenge by a north-central Phoenix church. . . . a hearing officer, ruled Monday that feeding the homeless at a place of worship can be banned by city ordinance. The decision affects all Phoenix churches with underlying residential zoning. . . . CrossRoads United Methodist Church, 7901 N. Central Ave., violated Phoenix zoning code by feeding the poor and homeless on its property, a use that can only occur in commercial or industrial zones.”

Arizona Bankers Sue to Challenge Repeal of Change in Arizona Foreclosure Law

On the Net — Sat, 24 Oct 2009 14:47:02 +0000

All Business: The Arizona Capitol Times is reporting that the some Arizona banks filed a petition with the Arizona Supreme Court asking the court to throw out the law passed by the Arizona legislature and signed by the Governor that repealed a change in Arizona’s foreclosure law that would have become effective on September 30, 2009. The new law that was repealed would have made thousands of people who borrowed money to buy residential homes in Arizona liable for deficiencies after a foreclosure that did not pay the lender in full.

New FHA Loan Rules Devalue Condos

On the Net — Sat, 10 Oct 2009 15:01:43 +0000

Arizona Republic: “New federal loan-guarantee rules imposed to fend off future government losses from plummeting condominium prices have rendered condos utterly worthless, Valley real-estate experts said. The Federal Housing Administration rules, which took effect Oct. 1, prohibit any new FHA-backed loans on condo units in projects that include more than 25 percent commercial space. . . Because of the new rules, local and national experts seem to agree that owner-occupants in half-empty condo buildings are now practically doomed to foreclosure. [Jill] Hoogendyk said the last thing Arizona’s real-estate market needs is government decisions that hinder its recovery.”