Mortgage Issues

25 Oct Can Chapter 7 Debtor Who Did Not Reaffirm Mortgage Walk Away Without Penalty After Discharge?

With home values flat or even trending downwards in recent months, many Chapter 7 debtors who have been discharged are asking what happens if they stop paying their mortgages and walk away from homes that are worth less than the outstanding mortgage. If you entered into a reaffirmation agreement during your Chapter 7, you remain liable for the mortgage personally and the lender's continues to have a first priority lien against the property. If you pack your bags and walk away, your default will negatively affect your credit and you could find yourself liable for a deficiency balance if the lender sues you on the promissory note that accompanies the security instrument (mortgage). Note that under the Bankruptcy Code debtors have a set time (60 days or prior to discharge, whichever comes later) to cancel their reaffirmation so if your situation changed right after you signed the reaffirmation you do have time to change your mind - talk to your lawyer immediately. If you did not sign a reaffirmation agreement, I believe that you have a good argument that you have no personal liability if you simply stop paying, pack your bags and move away. In my view, a reaffirmation constitutes a renewal of the promissory note that personally obligates you to pay monthly payments to the lender. If you do not sign a reaffirmation, your bankruptcy discharge serves to eliminate this obligation. This is why debtors who do not reaffirm their mortgage obligations stop receiving statements from the mortgage lender and why lenders no longer report positive or negative information about mortgage payments on the homeowner's credit reports.
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28 Sep HUD Identifies Source of Increased Foreclosures and Delinquencies

In HUD's Interim Report to Congress on the root causes of the foreclosure crisis, the conclusions reached by the panel are a searing indictment of the mortgage and investment banking industries:
... [I]t seems clear ... that the sharp rise in mortgage delinquencies and foreclosures is fundamentally the result of rapid growth in loans with a high risk of default—due both to the terms of these loans and to loosening underwriting controls and standards. Mortgage industry participants appear to have been drawn to encourage borrowers to take on these riskier loans due to the high profits associated with originating these loans and packaging them for sale to investors. [Internal citations omitted.]
Borrowers, or at least some of them, come in for their share of the blame, too:
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