A recent New York Times articles, No Hope in Sight, More Homeowners Walk Away, talked about the phenomena of homeowners just “walking away” from their properties and their mortgages. This occurs most often when home values fall below the amount of their mortgage. In common vernacular, they are “upside down” in their house.
These aren’t people who have lost their jobs or their ability to pay; they are just choosing, as a so-called strategic measure, to quit paying. The critical threshold seems to be when the values drop to 75% of the mortgage amount. It is estimated that 4.5 million homeowners had reached this threshold. Fortunately, for the most part, this is not a problem here in North Texas.
The article points out that bloggers are quick to say that large scale real estate investors walk away from properties and mortgages quite often when they are upside down and the investment no longer makes economic sense. This is true but there is a vast difference between the two situations. The difference is personal liability.
In the case of investors, the lender is looking to the investment itself as collateral for the loan. In the event the borrowers default, the lender will repossess the investment property and not hold the investors liable for any deficiency that may occur.
That is not the case with a home owner. When the homeowner signs a mortgage or deed of trust, they are pledging to be personally liable for the debt. So the lender is not only looking to the property to secure his loan but also the individuals themselves. In the event of a foreclosure and a subsequent deficiency, the lenders may pursue the borrower’s personal assets for satisfaction of the deficiency.