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Just walk away - from the American dream

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A younger generation might hear Kelly Clarkson sing her song, Walk Away, while an older crowd may relate that phrase to lyrics from The Left Banke hit of 1966, Walk Away Renee. Unfortunately, "walk away" is also the lament of many current homeowners holding mortgage obligations that far outweigh the current value of their property.In fact, about 588,000, or about one in five borrowers who default, have done just that and walked away from their homes and mortgage obligation. They have decided that it's better to cut losses than keep pumping cash into an asset that has decreased dramatically in value with little chance of that purchased value returning in the near future. After all, why would anyone want to stay in a home that was appraised for considerably more than it's now worth? Those mortgages are considered upside down or underwater. A "walk away" or strategic default is much more likely in the housing bubble states of Florida and Nevada than in my area of western NY, but it happens in NY as well.

Job loss is a major reason for walk-away defaults, since banks do not count unemployment compensation as income if you are trying to refinance for a lower payment. I'll have more on unemployment and walking-away later in the article.

Before I go any further, this isn't a recommendation to walk away from a mortgage obligation. Consult an attorney before deciding if a walk away default is the right move for you.

There are both benefits and downsides to the "walking away" or strategic default approach.

The main benefit is that you can start over without the burden of paying for a home that is upside in equity, while the main drawback is that your credit score takes a hit for a few years.

Jon Maddux, CEO of YouWalkAway.com wrote the following to Mike Shedlock concerning strategic defaults:

Hello Mish,

I hope all is well. I thought you might want an update. About 90% people who sign up for our service now days, are "A" paper good credit borrowers who can afford their mortgages, but they just don't think it makes sense to keep paying. The rest either already got a loan modification and didn't get a principal reduction or just really can't afford to own any longer. I wish you the best!

Kind regards,
Jon Maddux

I had some questions about walking-away so I asked Jon Maddux, CEO of YouWalkAway.com if he would like to discuss his company's services with me and he readily agreed to do so.

Mr. Maddux is a thirteen-year real estate, financial and mortgage professional who saw in 2007 that the housing bubble was about to pop and realized that homeowners and many real estate professionals knew very little about the foreclosure process. As home refinancing became more difficult, underwater homeowners were left with few affordable options. Mr. Maddux realized that there was another option that could help stop the financial bleeding of underwater homeowners and that was to just walk away.

Over the last two years Mr. Maddux has helped over 4000 clients make the decision to walk away from a financially crushing mortgage. Most of his clients are in California, but he has clients throughout the country, including New York. Many who walk away are upside down $100,000 or 30% (the amount borrowed is $100,000 or 30% more than the home is now worth).

YouWalkAway.com appoints you an attorney that is familiar with your state's mortgage laws and walks you through the process while covering the pluses and minuses of walking away. You make the final decision after weighing all the information.

Mr. Maddux indicated that walking away is an option for both recourse and non-recourse loans. I found that recourse loans allow a lender to attempt to go after what you owe, even after they have taken collateral. Non-recourse loans don't allow the lender to pursue anything besides the original collateral (the house in a mortgage loan, for example). New York is considered a one-action state - a bit of both recourse and non-recourse. "In New York, for example, a lender must choose between the actions of foreclosing on the property or suing to collect the debt."

I asked Mr. Maddux what percentage of his clients contacted him after they became unemployed and he said that at one point about 45% of his clients said that unemployment was the main reason to consider a strategic default. Currently about 20% of those who walk away say it's because of unemployment, while most walk away because they are upside down on their equity.

Below is a list of walk-away pluses and minuses that should be considered:

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Mike has spent the past two decades as an environmental remediation specialist and technical writing consultant. An Environmental Sciences graduate of SUNY Brockport, Mike has been writing for the past year about unemployment and workplace issues. (more...)
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