As this dog-tired economy continues to drag on, with no relief in sight and no bounce-back in home prices appearing anywhere on the horizon, the single question I am asked most frequently is “Should I walk away from my mortgage, and if I choose to do that, what are my options?”

Usually it comes in the following form.  “We bought our house in 200_, for $_______.   It’s now worth less than what we paid, and less than the outstanding loan amount.  We’re considering our options, but are not sure what to do.”

Sometimes this question comes up because someone has lost a job, or is in the real estate business and hasn’t been able to generate much commission income in the past 2 to 4 years, although sometimes it’s just the economics themselves that trigger the inquiry.

The question about what to do, however, is less a legal decision than it is an economic decision.  Of course, once you decide to walk away, then the follow-through becomes a purely legal act, and should only be undertaken after consulting with legal counsel and obtaining a full understanding of what is likely to happen.

First, should you?  That all depends on where you think housing prices are going to go in the future, how long you’re willing to tough it out and what your other housing options look like.  Obviously, you have to live somewhere, so if you’re not going to own, then you have to have a good understanding of what your rental options are  Example:  A family of four, with two teenagers, living in a 1,500 square foot house in an expensive neighborhood is going to be looking at a very different set of concerns than a childless couple living in a 4,000 SF home in an affordable location.  That seems obvious, but to many folks it apparently isn’t.

So it’s not a straight dollars and cents analysis.  Just because your home is worth 20% less than the balance on your loan, no lawyer can advise you on whether you should keep the house and keep paying, or let it go and brave the consequences.  All a lawyer can do is tell you what is likely to happen under any particular course of action.

Next, if you do decide to walk away, what is going to happen?  Well, we all know that such a decision is going to cause significant credit problems.  It’s inevitable: If you walk away from a home loan, your credit is going to suffer.  But what else?Fortunately, we don’t have debtor’s prison, so despite the loss of the house to foreclosure–another inevitability although the timing may vary depending on circumstances–you may get sued.  Obviously that’s no fun, and is something that you should try to avoid, but whether that is likely to happen or not is a very good question to take up with a lawyer.  We’re lucky in California as there are very powerful anti-deficiency laws, about which I have already blogged rather extensively.  (See California anti-deficiency rules and statutes: When can a mortgage lender in California recover a deficiency after foreclosure?, California Mortgage Deficiencies: What is a Purchase Money Security Interest? and Second Mortgages in California: Deficiencies Not Usually an Issue for full treatment of the subject.)

Last, what about staying and trying to complete a mortgage modification?  I’m sorry to say that I’m a cynic on this subject.  The process seems capricious and arbitrary at best, and since my experience leads me to the unshakable and firm conviction that, as a class of people, consumer bankers are among the dumbest clowns wandering the planet, the percentage likelihood of any one homeowner or family successfully completing a mortgage modification is nearly microscopic.  This is especially true here in Northern California where incomes and home prices are among the highest in the country.  They’re not much interested in modifying mortgages for people with six figure incomes and seven figure home prices.  And of course, whether that is right or not is beside the point, but you need to understand the reality if you’re going to test the water.

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