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Not So Fast, Say Creditors

By Faye Mergel
Published: Sunday, January 31st, 2010

Several consumer advocates have recently called out on homeowners to walk away from their mortgage if their property is way underwater. Despite the damage it will cause on a credit report, it will at least free consumers from an enormous financial burden. But John King knows things are not that easy.

Not So Fast, Say CreditorsTwo years ago, he stopped paying the mortgage for his home in Coral Gable, Fla. He thought reaching a foreclosure was the end of it all: no more monthly payments, no more collectors, and no more obligations to his creditor. However, collectors started chasing him last month for the $44,000 that comes from his default as they got permission from a Miami-Dade County court.

King is among the growing number of homeowners across the United States who are finding out that walking away from a mortgage is one thing, while walking away from a creditor is another. More and more lenders are practicing their rights to pursue unpaid balances after a crisis that stripped the industry of $6.4 trillion. Creditors and real estate investors suffered the multi-trillion loss as the value of properties went down by 28 percent from their peak in 2006. To collect the rest of mortgage payments, lenders get court approval to tap bank accounts, seize wages, and put liens on other properties held by their borrowers.

39-year old King is not happy with that. After all, the banks and other financial institutions received huge aid from the federal government during the economic crisis. He is left wondering why small guys like him are still waiting to be rescued.

According to the Federal Deposit Insurance Corp., mortgage recoveries rose by 48 percent during the first nine months of 2009 compared to that same period in 2008, allowing creditors to recover $1.01 billion from homeowners who walked away from their mortgage.

Courts issue deficiency judgments to allow creditors to pursue defaulters for the balance on their mortgage. Lawyer Larry Tolchinsky says the most likely candidates for such judgment are rational defaults, people who were current on their mortgage payment but decided to walk away because they owe more than their property’s worth.

Tolchinsky reminds consumers that the cost of a default is greater on those who have good credit. If a mortgage default appears on a credit report, it could prevent a person from getting loan approvals. Such negative item could remain on a credit report for seven years.

Experts also warn homeowners that it is not just default could damage a credit report or trigger a deficiency judgment. Courts can likewise allow creditors to pursue borrowers after a short sale, even years after a homeowner has moved on.

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