This question has caused much controversy not only among realtors but among the general public.
At issue here is this…. A homeowner, who is not in distress, has kept up their house payments and watched as the value of their home and neighborhoods continue to plunge and neighbors walking away from their obligations.
OR a homeowner whose present mortgage is getting ready to shift upwards and cannot afford the adjustment could afford a lower mortgage of a home purchase priced far below their present home.
Many homeowners have chosen to purchase a new home at a much lower price while keeping up the payments on their current home and then when escrow closes walks away from the higher mortgaged home with loss equity.
Is this legal? Is it ethical? What do the lenders think? Is this fair to the other homeowners who maintained responsibility for their investment and/or obligations.
The short sale process was instituted for those who had a hardship…..Hardship can mean anything from loss of job, illness, death in family, job relocation. Anything that would take away funds that were used to support a present mortgage and was used as legal income as disclosed in the loan application.
Is this illegal for distressed homeowners to purchase and walk away from their original mortgage obligation? I don’t think unless there was fraud committed in presenting hardship. But then I am not an attorney, but there may very well be moral and ethical issues involved. Granted each homeowners case is different. Further, may open them up to litigation from those lenders to recoup losses down the road.
I can certainly understand the frustration and desparateness of those homeowners whose terms were changing increasing their monthly mortgage obligation and their banks or lenders not cooperating with them to modify their loans. Most have families and need to provide and survive and that means making some decisions that could jeopardize their credit even more so.
However we are seeing many who are NOT in distress purchasing new and then walking away from original mortgage obligation.
Today lenders on new homes loans and purchasing are requiring,if the borrower presently has another mortgage to qualify for both mortgage payments and they will NOT count rental income to qualify.
They are scrutinizing much more. Further the consumer needs to be aware that the loans in default have been sold in mass to collection agencies and attorneys. Depending on those who walked away from their original homes will depend on whether or not they are non recourse or recourse loan but I do believe many of those who have chosen this path may very well be in for a surprise in the next few years.
The lenders have up to 4 years to come back and sue for judgment from the date of short sale or foreclosure.The homeowner in default will have their credit scrutinized for the next 4 years. It has been intimated that these collection agencies will be ready to pounce if they see more income coming in or assets all of the sudden show up even up to the last minute of the 4 year process.
We have very angry consumers who see those around them walk away from and appear to be clear from any further financial obligation or tax penalties who have kept their own commitments.
I believe the backlash from this will last several years. I believe a consumer MUST check with legal counsel and/or a CPA before just walking away from their present mortgage to understand the implications that may be involved. No one case is the same.
I personally believe there will be many shocked consumers down the road due to decisions made without adequate legal counsel.
We have had requests to list homes supposedly in distress who want to go out and purchase another home before short sale. What we do is to direct them towards a reputable lender and tell them to explain in detail their situation and whether or not it is possible for them to get a loan and to consult with a real estate tax attorney before proceeding with anything. We will never knowingly partake in anything that would appear to be fraud or unethical.
If their attorney gives the go ahead then we will follow the legal guidelines as provided.
Typically speaking after short sale if your financial situation stabilizes as well as credit you should be able to purchase again in 2 yrs or so. Foreclosures they are predicting within 4 years. Obviously everything depends on the consumers stability at that time and history of paying credit obligations after the incident of short sale and /or foreclosure.
So the bottom line is if you are a homeowner in distress contemplating short sale, purchasing before short sale and/or foreclosure PLEASE make sure you have spoken with a real estate attorney and know what may or may not result in your actions. DO NOT listen to family and friends who are not qualified legal counsel.
Above all do not listen to any real estate agent who promises you the world without checking with legal counsel.
Disclaimer: I am not an attorney and cannot give legal advice and nothing that I write should be construed as such.