topic "Strategic" Foreclosure effects on credit?? in General Credit Topics

"Strategic" Foreclosure effects on credit??

Anonymous — Mon, 04 Jan 2010 13:54:06 GMT

Greetings -

As my wife and I watch our home hemorrhage equity we think more and more about turning the keys over and trying to recoup the $$ we're throwing at the bank. However, we've worked super hard over the past 7 years to build up a solid credit score and pay off debt (FICO's are 776 & 782 respectively). We do not take our financial obligations lightly. We don't have an exotic loan or crazy debt - but are paying for a house that is worth $55k less now than what we owe, and based on our area, we really don't see a bounce back in the next 5 or so years.

Anyone else thought about, or done this? What are the credit ramifications? How long would we be haunted by the move if forced that way?

Thanks for any input,

Yota

Re: "Strategic" Foreclosure effects on credit??

Anonymous — Mon, 04 Jan 2010 16:31:35 GMT

Hi Yota! Welcome to the myFICO forums!

Yota wrote:
Greetings -
As my wife and I watch our home hemorrhage equity we think more and more about turning the keys over and trying to recoup the $$ we're throwing at the bank. However, we've worked super hard over the past 7 years to build up a solid credit score and pay off debt (FICO's are 776 & 782 respectively). We do not take our financial obligations lightly. We don't have an exotic loan or crazy debt - but are paying for a house that is worth $55k less now than what we owe, and based on our area, we really don't see a bounce back in the next 5 or so years.

Anyone else thought about, or done this? What are the credit ramifications? How long would we be haunted by the move if forced that way?

Thanks for any input,
Yota

Just as is with the case of an non-strategic foreclosure (default due to job loss, loss of income/under-employment, medical catastrophe/bankruptcy, divorce/separation, poor money managment/over-extension, ARMs adjusting, and the myriad of other reasons that people are unable to keep paying...) it's a major derog that will easily drop your score into the "risky" range. It's a public record (the worst derog), and the pain will last for 7 years.

Re: "Strategic" Foreclosure effects on credit??

MattH — Mon, 04 Jan 2010 22:40:27 GMT

@Anonymous wrote:
Hi Yota! Welcome to the myFICO forums!

@Anonymous wrote:
Greetings -
As my wife and I watch our home hemorrhage equity we think more and more about turning the keys over and trying to recoup the $$ we're throwing at the bank. However, we've worked super hard over the past 7 years to build up a solid credit score and pay off debt (FICO's are 776 & 782 respectively). We do not take our financial obligations lightly. We don't have an exotic loan or crazy debt - but are paying for a house that is worth $55k less now than what we owe, and based on our area, we really don't see a bounce back in the next 5 or so years.

Anyone else thought about, or done this? What are the credit ramifications? How long would we be haunted by the move if forced that way?

Thanks for any input,
Yota

Just as is with the case of an non-strategic foreclosure (default due to job loss, loss of income/under-employment, medical catastrophe/bankruptcy, divorce/separation, poor money managment/over-extension, ARMs adjusting, and the myriad of other reasons that people are unable to keep paying...) it's a major derog that will easily drop your score into the "risky" range. It's a public record (the worst derog), and the pain will last for 7 years.

Also, maybe the lender can go after other assets, garnish income, etc., depending on circumstances and laws that vary from State to State. In some States all residential mortgages are "non-recourse" so the lender cannot get more than the value of the house itself, in some States it depends. For instance your State laws might say only a mortgage used to purchase a residence is "non-recourse" so if you refinanced or have a second mortgage they can go after every dollar you have. I believe in some States the mortgage would only be "non-recourse" if you took specific action to declare the place a "Homestead" within X days of buying. There are so many complications in such laws that I strongly suggest you consult a local real estate lawyer as soon as possible before making any decision.

Re: "Strategic" Foreclosure effects on credit??

Anonymous — Tue, 05 Jan 2010 01:04:38 GMT

@Anonymous wrote:
Greetings -
As my wife and I watch our home hemorrhage equity we think more and more about turning the keys over and trying to recoup the $$ we're throwing at the bank. However, we've worked super hard over the past 7 years to build up a solid credit score and pay off debt (FICO's are 776 & 782 respectively). We do not take our financial obligations lightly. We don't have an exotic loan or crazy debt - but are paying for a house that is worth $55k less now than what we owe, and based on our area, we really don't see a bounce back in the next 5 or so years.

Anyone else thought about, or done this? What are the credit ramifications? How long would we be haunted by the move if forced that way?

Thanks for any input,
Yota

Are you unable to make your payments?

IMO, to "turn over the keys" merely because current market values are lower than the balance owed is not an appropriate reason to consider allowing to go to foreclosure.

Even if values take 5 or more years to recover, you still have something at the end of that time. And you have to live somewhere anyway. So unless you plan to substantially downgrade and rent, what is the point of letting it go?

Now, if you are being transferred in work, cannot afford to pay two payments (new location and current location) and you can't sell for what you owe, then you may want to talk short sale with the bank once they understand the predicament.

The damage to your credit, the cost of living elsewhere (you won't be able to buy, you'll have to rent for at least 2 years at which time you might not get as good of rates or prices), I don't see how you come out on top.

IMO: Refinance for the absolute best rate you can get (possible to get in the 4's now) and wait it out. You will eventually recover. You don't take a loss (just like stocks) until you actually sell.

Look at the stock market. Those who sold 2 years ago lost their butts. Those who bought made huge profits last year. The same will be the result of real estate. Any investment has it possible short term highs and lows. You have to look at the term of the note and ownership. In 10 or 20 years what will it be worth?

Well, just IMO.

Re: "Strategic" Foreclosure effects on credit??

Anonymous — Tue, 05 Jan 2010 12:40:03 GMT

Thanks for the welcome - and the advice.

To txjohn's points: as far as we've been able to ascertain, there is no re-fi option for us (123.7% LTV and a positive income stream), so we're stuck there. The two driving forces are a) when we bought the house kids were not a consideration, but as time has progressed, we now do want to have them, and the locale isn't so hot for critters running wild; and b) we are trying to relocate to another state for family reasons in the very near future. Do banks do short sales for over 25% of value? Do you have to have that worked out prior to going into teh sales process? Does a short sale hit my credit report in the same fashion as a forclosure, for the same time??

Re: "Strategic" Foreclosure effects on credit??

Anonymous — Tue, 05 Jan 2010 12:48:52 GMT

@MattH wrote:
@Anonymous wrote:
Hi Yota! Welcome to the myFICO forums!

@Anonymous wrote:
Greetings -
As my wife and I watch our home hemorrhage equity we think more and more about turning the keys over and trying to recoup the $$ we're throwing at the bank. However, we've worked super hard over the past 7 years to build up a solid credit score and pay off debt (FICO's are 776 & 782 respectively). We do not take our financial obligations lightly. We don't have an exotic loan or crazy debt - but are paying for a house that is worth $55k less now than what we owe, and based on our area, we really don't see a bounce back in the next 5 or so years.

Anyone else thought about, or done this? What are the credit ramifications? How long would we be haunted by the move if forced that way?

Thanks for any input,
Yota

Just as is with the case of an non-strategic foreclosure (default due to job loss, loss of income/under-employment, medical catastrophe/bankruptcy, divorce/separation, poor money managment/over-extension, ARMs adjusting, and the myriad of other reasons that people are unable to keep paying...) it's a major derog that will easily drop your score into the "risky" range. It's a public record (the worst derog), and the pain will last for 7 years.
Also, maybe the lender can go after other assets, garnish income, etc., depending on circumstances and laws that vary from State to State. In some States all residential mortgages are "non-recourse" so the lender cannot get more than the value of the house itself, in some States it depends. For instance your State laws might say only a mortgage used to purchase a residence is "non-recourse" so if you refinanced or have a second mortgage they can go after every dollar you have. I believe in some States the mortgage would only be "non-recourse" if you took specific action to declare the place a "Homestead" within X days of buying. There are so many complications in such laws that I strongly suggest you consult a local real estate lawyer as soon as possible before making any decision.

Yeah - we did think of that. My understanding (and we would seek out a lawyer if we went this route) is that the house stands as the sole piece of collateral for the note to the bank.

This all may be moot...I honestly can not imagine going through with it, but its always an option nibbling at the back of my brain. My pride says "don't do it!" My spreadsheet says "hey, but the time your credit is on the rebound you'll have saved $XXXXXX.XX and been able to move back home.I just figured I'd float the idea here and see what others had to say on the topic.

Re: "Strategic" Foreclosure effects on credit??

MattH — Tue, 05 Jan 2010 15:49:21 GMT

@Anonymous wrote:
@MattH wrote:
@Anonymous wrote:
Hi Yota! Welcome to the myFICO forums!

@Anonymous wrote:
Greetings -
As my wife and I watch our home hemorrhage equity we think more and more about turning the keys over and trying to recoup the $$ we're throwing at the bank. However, we've worked super hard over the past 7 years to build up a solid credit score and pay off debt (FICO's are 776 & 782 respectively). We do not take our financial obligations lightly. We don't have an exotic loan or crazy debt - but are paying for a house that is worth $55k less now than what we owe, and based on our area, we really don't see a bounce back in the next 5 or so years.

Anyone else thought about, or done this? What are the credit ramifications? How long would we be haunted by the move if forced that way?

Thanks for any input,
Yota

Just as is with the case of an non-strategic foreclosure (default due to job loss, loss of income/under-employment, medical catastrophe/bankruptcy, divorce/separation, poor money managment/over-extension, ARMs adjusting, and the myriad of other reasons that people are unable to keep paying...) it's a major derog that will easily drop your score into the "risky" range. It's a public record (the worst derog), and the pain will last for 7 years.
Also, maybe the lender can go after other assets, garnish income, etc., depending on circumstances and laws that vary from State to State. In some States all residential mortgages are "non-recourse" so the lender cannot get more than the value of the house itself, in some States it depends. For instance your State laws might say only a mortgage used to purchase a residence is "non-recourse" so if you refinanced or have a second mortgage they can go after every dollar you have. I believe in some States the mortgage would only be "non-recourse" if you took specific action to declare the place a "Homestead" within X days of buying. There are so many complications in such laws that I strongly suggest you consult a local real estate lawyer as soon as possible before making any decision.

Yeah - we did think of that. My understanding (and we would seek out a lawyer if we went this route) is that the house stands as the sole piece of collateral for the note to the bank.

This all may be moot...I honestly can not imagine going through with it, but its always an option nibbling at the back of my brain. My pride says "don't do it!" My spreadsheet says "hey, but the time your credit is on the rebound you'll have saved $XXXXXX.XX and been able to move back home.I just figured I'd float the idea here and see what others had to say on the topic.

My gut feeling is, in your situation I would probably keep making the payments, and also find ways to cut other expenses and make additional principal payments to bring the principal below the current value of the house, but I cannot say for sure what I would do because I am not in your shoes (my wife and I bought our condo in 2002 and after a roller-coaster up-and-down market similar units right now are selling for about what ours would cost had it just kept pace with inflation over that time period).

Re: "Strategic" Foreclosure effects on credit??

Anonymous — Tue, 05 Jan 2010 16:29:34 GMT

I just made an appointment to meet with our real estate broker this weekend to discuss options...It will be interesting to see what the spring brings vs. what the prognosticators are calling for.

Its taken 3 long years to get from the low 600's up to the high 700's....I'd hate to blow that now.

Re: "Strategic" Foreclosure effects on credit??

Lel — Tue, 05 Jan 2010 16:48:57 GMT

Yota wrote:

Thanks for the welcome - and the advice.

To txjohn's points: as far as we've been able to ascertain, there is no re-fi option for us (123.7% LTV and a positive income stream), so we're stuck there. The two driving forces are a) when we bought the house kids were not a consideration, but as time has progressed, we now do want to have them, and the locale isn't so hot for critters running wild; and b) we are trying to relocate to another state for family reasons in the very near future. Do banks do short sales for over 25% of value? Do you have to have that worked out prior to going into teh sales process? Does a short sale hit my credit report in the same fashion as a forclosure, for the same time??

I believe you can refinance through the Making Home Affordable program with LTVs up to 125%. It used to be 105%, but the website indicates that the government has increased the ratio.

The MHA modification program is not doing well. But little is said about the refinance program. It's been a while since I reviewed the rules, but I believe that for a Home Affordable Refinance you can go to any participating lender. That is, you don't have to stay with your current lender.

Re: "Strategic" Foreclosure effects on credit??

Anonymous — Tue, 05 Jan 2010 17:09:58 GMT

@Lel wrote:
@Anonymous wrote:
Thanks for the welcome - and the advice.

To txjohn's points: as far as we've been able to ascertain, there is no re-fi option for us (123.7% LTV and a positive income stream), so we're stuck there. The two driving forces are a) when we bought the house kids were not a consideration, but as time has progressed, we now do want to have them, and the locale isn't so hot for critters running wild; and b) we are trying to relocate to another state for family reasons in the very near future. Do banks do short sales for over 25% of value? Do you have to have that worked out prior to going into the sales process? Does a short sale hit my credit report in the same fashion as a forclosure, for the same time??

I believe you can refinance through the Making Home Affordable program with LTVs up to 125%. It used to be 105%, but the website indicates that the government has increased the ratio.

The MHA modification program is not doing well. But little is said about the refinance program. It's been a while since I reviewed the rules, but I believe that for a Home Affordable Refinance you can go to any participating lender. That is, you don't have to stay with your current lender.

Would this be true is the borrower isn't in financial straights? We can - and will continue to - make our payments, but its like shoveling it into a furnace (which yes, we do need to replace!). Hopefully our broker (he does mortgages too) will be able to fill in the blanks a bit.

Thanks.

Re: "Strategic" Foreclosure effects on credit??

cdtotten — Tue, 05 Jan 2010 19:56:55 GMT

I am not trying to be rude, but it seems insane to just default on your home and give it back to the bank because it is upside down. Home values have severely decreased across the country, but if every person did what you are contemplating, banks would stop making loans with LTVs higher than say 50% to protect themselves. Hell 90% of car loans are upside down the moment people leave the lot, should that person just give the car back after a year and move on.

You made an investment that did not turn out the way that you would hope; that was part of the risk of the purchase. Don't ruin your credit and your moral standing to get out of a jam that was partially your own fault.

Re: "Strategic" Foreclosure effects on credit??

Anonymous — Tue, 05 Jan 2010 20:27:51 GMT

@cdtotten wrote:
I am not trying to be rude, but it seems insane to just default on your home and give it back to the bank because it is upside down. Home values have severely decreased across the country, but if every person did what you are contemplating, banks would stop making loans with LTVs higher than say 50% to protect themselves. Hell 90% of car loans are upside down the moment people leave the lot, should that person just give the car back after a year and move on.

You made an investment that did not turn out the way that you would hope; that was part of the risk of the purchase. Don't ruin your credit and your moral standing to get out of a jam that was partially your own fault.

Moral standing...interesting. It really only means so much when my family's well being is in the mix. Due the very depreciation you refer to, if we are in a position where we need to move, there are only so many options. I'd also make the argument that there is upside down, and then there is a tipping point of 'not getting it back.' I'm not so sure the analogy to a car loan is quite in line with the single largest investment we have....

Again, this is an option of last resort that my wife and I have put on the table along with a few other semi-realistic options (short sale, renting, having the folks move in with us etc). I simply want the sounding board a forum like this offers. Thanks for the $.02.

Re: "Strategic" Foreclosure effects on credit??

Lel — Tue, 05 Jan 2010 22:09:17 GMT

I do not believe one has to have a new financial hardship to refinance through Making Home Affordable. In fact, borrowers are required to be current on their mortgages. This is one thing that distinguishes it from the MHA modification program. The refinance program will only be of benefit if it cuts your interest rate. The rates for MHA are supposed to be the same as the prevailing market rates, as I understand it.

Folks, let's to refrain from assigning blame to anyone regarding their own personal financial issues. People come to these forums because they have problems that need to be addressed - they don't need to be reminded of it.

A deed-in-lieu of foreclosure, in the eyes of the future creditors and in the FICO scoring models, is no better than a plain vanilla foreclosure. In addition to a drop in score of as much as 150-200 points, you will be restricted from obtaining a new mortgage for at least 3 years for FHA and 4 years for most conventional mortgages. Even after this waiting period is over, there's no guarantee that you'll be able to get a new mortgage, since you're required to disclose the DIL on your mortgage application form. Underwriters may be hesitant to approve a loan, regardless of time and score.

A DIL will affect your credit life in other ways. You could see your credit cards canceled, have your credit limits slashed, or interest rates increased. If your car gets totaled, it could be difficult to get a new car loan, and if you do get a loan, the interest rate will most likely be lousy. Even finding a place to rent may be difficult, since many landlords check credit before offering a lease.

So be careful about the decisions that you make. You don't want to make a bad situation worse. Good luck.

Re: "Strategic" Foreclosure effects on credit??

bugg03 — Thu, 07 Jan 2010 03:37:43 GMT

The problem is when you miss a mortgage payment, it makes the credit card companies scared. They will then lower/close your accounts, which will further hurt your score.

Re: "Strategic" Foreclosure effects on credit??

Anonymous — Thu, 07 Jan 2010 12:33:24 GMT

@bugg03 wrote:
The problem is when you miss a mortgage payment, it makes the credit card companies scared. They will then lower/close your accounts, which will further hurt your score.

The ripple effects are daunting.

We're meeting with a real estate / mortgage broker this weekend to hash out possible options - which should be interesting.

Re: "Strategic" Foreclosure effects on credit??

MattH — Thu, 07 Jan 2010 16:59:48 GMT

@Anonymous wrote:
@bugg03 wrote:
The problem is when you miss a mortgage payment, it makes the credit card companies scared. They will then lower/close your accounts, which will further hurt your score.
The ripple effects are daunting.

We're meeting with a real estate / mortgage broker this weekend to hash out possible options - which should be interesting.

In addition to meeting with a broker, you should also talk with a good fee-only financial planner and/or a good lawyer (possibly both).

As you consult various people for advice, make sure you know the answers to the following questions about every expert you consult:

What are your credentials?
How do you make money (fees that I pay, fees that somebody else pays, commisions, or other)?
Do you have a fiduciary duty towards me?
Do you or others at your company in any way represent the interests of any party other than me in this situation?

There is nothing inherently wrong with people who make their income from commissions, I have had many positive experiences with such folks myself, but you need to know where their interests lie in order to understand how those relate to your best interests.

Re: "Strategic" Foreclosure effects on credit??

Anonymous — Fri, 08 Jan 2010 11:36:02 GMT

@MattH wrote:

As you consult various people for advice, make sure you know the answers to the following questions about every expert you consult:
What are your credentials?
How do you make money (fees that I pay, fees that somebody else pays, commisions, or other)?
Do you have a fiduciary duty towards me?
Do you or others at your company in any way represent the interests of any party other than me in this situation?
There is nothing inherently wrong with people who make their income from commissions, I have had many positive experiences with such folks myself, but you need to know where their interests lie in order to understand how those relate to your best interests.

Excellent points. I guess I've always associated a financial planner with those with 'extra' money to work with - we're not there.....definitely something to look into though.

Re: "Strategic" Foreclosure effects on credit??

MattH — Fri, 08 Jan 2010 17:30:54 GMT

@Anonymous wrote:
@MattH wrote:

As you consult various people for advice, make sure you know the answers to the following questions about every expert you consult:
What are your credentials?
How do you make money (fees that I pay, fees that somebody else pays, commisions, or other)?
Do you have a fiduciary duty towards me?
Do you or others at your company in any way represent the interests of any party other than me in this situation?
There is nothing inherently wrong with people who make their income from commissions, I have had many positive experiences with such folks myself, but you need to know where their interests lie in order to understand how those relate to your best interests.
Excellent points. I guess I've always associated a financial planner with those with 'extra' money to work with - we're not there.....definitely something to look into though.

Financial planners can be especially useful for people who don't feel they have choices, because they can help you think outside the box and find choices you did not realize you had.

Re: "Strategic" Foreclosure effects on credit??

Anonymous — Sat, 09 Jan 2010 02:43:18 GMT

@Anonymous wrote:
@cdtotten wrote:
I am not trying to be rude, but it seems insane to just default on your home and give it back to the bank because it is upside down. Home values have severely decreased across the country, but if every person did what you are contemplating, banks would stop making loans with LTVs higher than say 50% to protect themselves. Hell 90% of car loans are upside down the moment people leave the lot, should that person just give the car back after a year and move on.

You made an investment that did not turn out the way that you would hope; that was part of the risk of the purchase. Don't ruin your credit and your moral standing to get out of a jam that was partially your own fault.
Moral standing...interesting. It really only means so much when my family's well being is in the mix. Due the very depreciation you refer to, if we are in a position where we need to move, there are only so many options. I'd also make the argument that there is upside down, and then there is a tipping point of 'not getting it back.' I'm not so sure the analogy to a car loan is quite in line with the single largest investment we have....

Again, this is an option of last resort that my wife and I have put on the table along with a few other semi-realistic options (short sale, renting, having the folks move in with us etc). I simply want the sounding board a forum like this offers. Thanks for the $.02.

I think what the post was referring to is that the bank loaned money, not a house and "turning over" the house to the bank, knowing they will take a loss on your behalf is a "moral" choice if one is in a position to pay but merely chooses to improve their own finances at the detriment to somebody else. Banks are owned by shareholders, who are mostly individuals through mutual funds via 401k, IRA, etc. Every default actually is a default to indivduals down the line.

I also encourage anyone who has the capacity to meet thier obligations, to do so. Without lenders and investers able to have faith in the borrower, the whole system has a problem.

I would recommend the MHA, or renting the home if you need to move in the mean time. Eventually the home value will come back. It may just take some time, like 3 to 5 years.

Re: "Strategic" Foreclosure effects on credit??

Anonymous — Mon, 11 Jan 2010 21:31:09 GMT

We completed a short sale on our home about 6 months ago. The house was upside down about 125K, and could only rent for 50% of the mortgage payments. The short sale dropped my husband and my credit score about 120 points. The reason we had to go forward with the short sale was due to needing to relocate out of state for work (we were living in California). We did try to rent it out but just couldn't afford it as his new job paid quite a bit less. This was a terrible stressor on our family, it went beyond "just credit issues". There is a lot of shame, especially for my husband, that came with it -this experience almost ended our 14 year marriage. No one in our family knows about it as we have kept it a secret. Here are some things that I have learned from the short sale, of course each state is different:

1. If it is a "nonrecourse loan" the bank will not be able to come after you for the balance. Each state has different laws about non recourse loans, in CA the loan bought to purchase a house is nonrecourse, if it is refinaced with cash out - it then becomes a "recourse loan".

2. Short sales are not guaranteed. The bank may or may not approve a short sale without a hardship reason - saying that you are 50K in the hole is not a reason for the bank.

3. You may be responsible for debt forgiveness tax. Congress passed a bill making debt forgiveness tax exempt on primary residences, but I believe it may have an expiration date. Because we tried to rent it out, we will have to pay those taxes which will be about 20K - our accountant says that we can take a capitol loss which should offset that tax...but until I see it, I'm not certain what we will owe.

I certainly understand how it feels to be paying for a home that is worth less then you owe. However, I would wait before doing something drastic. If you need to move out of state run the numbers for renting out your home - it might not be great, but it would at least buy you time before you do something that has long lasting effects on your future. Here are some of the consequences we have already faced:

1. Most of our credit cards have been cancelled even though we paid them on time, the two we still have now have 29% interest rate.

2. Our cars have about had it, and we have been turned down for loans...we've been keeping them together with band aid repairs (5,000 worth) while we could be putting our money into a car that has decent reliability.

3. We got lucky and found a rental, but had been turned down by a couple other places.

4. Who knows when we will ever be homeowners again, we lost all of our money in that CA house - we actually put money down, it wasn't one of those exotic loans. Supposively you can get a loan through FHA after 3 years with short sale, and 5 years with a foreclosure - but that doesn't mean you'll actually get approved...plus you'll need a down payment.

5. Finally another thing to consider is that a future employer might want to see your credit report, depending on the type of profession you are in, this could be a big deal for them.

Good luck in making the best descision for your family. Run the numbers closely....yes renting may be cheaper, but what about tax savings, higher interest rates due to poor credit, having to move more often and pay a security deposit each time- the grass may not be much greener on the other side.