Saturday, January 10, 2009
Foreclosures, "jingle mail", nonrecourse laws and deficiency judgments
The Washington Post Real Estate Section, on p F01, has a story today on “people who walk,” by Alejandro Lazo, titled “Walking Away, and What It Leaves Behind: The Wide and Lasting Impact of Quitting a Mortgage,” link here. The print version has an amusing graphic of blue footprints.
People with upside-down mortgages are sometimes walking away with “jingle mail”, partly because they had regarded their homes as investments rather than just as places to live. They are exerting a lot of political pressure to demand that the bailout money help them.
But a foreclosure can drop someone’s FICO score by as much as 200 points, quickly into the Fair or Poor category for many people. Presumably a short-sale or workout leaves the borrower's credit in much better shape.
States like California and Arizona have “nonrecourse laws” to prevent banks from pursuing people for deficiency judgments. However other states, including Virginia, Maryland and Texas allow deficiency judgments, even if in practice not many lenders are trying to pursue them, since subprime borrowers probably had few assets.
During the previous real estate bust, in Texas and the southwest in the late 1980s and early 1990s, many homeowners were pursued, however, particularly those with conventional notes. (FHA and VA loans tended not to do this even then.) It was even possible for original owners to be pursued after unqualified assumptions (which FHA stopped allowing around 1994). The orange paperback James A. Wiedemer: "A Homeowner's Guide to Foreclosure: How to Protect your Home and your Rights", Dearborn, Dearborn Financial Press, 1992, gives some gory details. I was caught in the downdraft (caused by falling oil prices, savings and loan problems, and illegal land-swap speculation bubbles busting) when coming back from Texas in 1988, and sold the home-condo at a small loss under unqualified assumption, but still a default followed later. I made good and was eventually paid back all the money with interest, so my situation eventually turned out well (although it was traumatic when it started). Condos in Dallas sometimes were down in the teens in the early 1990s, to recover only toward the middle or end of the Clinton boom decade. My impression is that Texas is in better shape than a lot of the rest of the country now this time around.