I posted a while ago about being underwater on a property and was seeking advice on whether to do a short sale. The advice varied: some people thought a short sale was the way to go and others thought it wasn't worth it to ruin one's credit score. I am curious what people think the tipping point is when it comes to good credit. How much would you have to owe the bank on an underwater property to just walk away and ruin your credit score? How much would you be willing to pay the bank to keep a good credit score? I guess I am really asking what everyone thinks a good credit score is worth. We may be in a position to have to make this decision and have received different advice from our financial adviser, accountant, and others.

the current foreclosure process in NYC is approx 3 yrs. if you can save enough money to:

1 - retire on it by purchasing a property cash
2 - save enough to pay 2 yrs rent in advance while your credit is being rebuilt
3 - the credit of 1, not both, is being ruined.

i would go foreclosure. short sales are time consuming and most of the time don't pan out in NYC. if none of the above work and you can "afford" to sell and take a loss, do it and move on.

sorry, meant to say "to live rent free for 3 years while the foreclosure is taking place"

(1) We're young, so retirement is a long way off.
(2) We can't actually live in the property now (it's really too small and we're renting elsewhere already) so we wouldn't recognize any benefit from living for free during a long foreclosure.
(3) Only my DH's credit score would be shot, but I feel badly asking him to do that unless it's really worth it. 10 years is a long time to wait to get his score back up.

We can afford to pay the bank back, but not easily - it will make a huge dent in our savings, about $100K. So the question is what's more valuable: keeping that $100K in the bank, or my DH's good credit score? I just am not sure.

I should also add that we have good future income earning potential. So while $100K is a ton of money to us now, it's not necessarily going to have a huge impact on our longterm future.

your credit is shot for 2-4 years. at 7 yrs, it's like nothing happened.

you just have to put blinders on one of the idiots from Manhattan who can't afford to live in Manhattan. they go to neighborhoods that they know nothing about and pay 10-30% over market.

have you had your apartment on the market to see what it can bring?

Depending on your state, the bank may have recourse to your personal savings. In NY they do, so I would ask a lawyer. Also, if it is a co-op & you don't pay the maintenance, they can cancel your lease. That process usually winds up in court, but it's often faster than a foreclosure.

A short sale will stay on your credit report for 7 years. A foreclosure, as well, but it is worse for your credit score.

Moreover, after December 31, 2012, unless Congress renews it, any amount a bank writes off as part of a short sale you will owe income tax on.

It's been on the market for over a year and we've had zero offers. We just dropped the price substantially, so we're expecting some offers may roll in. If we do get an offer, we'll have decide whether to jump on it and eat the cash so we can just be done with the process quickly. Or whether we try to do a short sale, which could be long and annoying. It's not being advertised as a short sale, so that may deter buyers if we go that route.

short sales in NY and NJ are definitely anything but short on time. most people want an amazing deal to have to put up will all of the bs involved with it.

i was in a short sale buyside twice on the same property in Bklyn. first time for 1 1/2 yr, second time, 3 months after, for 9 months. the short was only 20% of the loan amount or even less.

It is a co-op. I was wondering what happens if we just stop paying the maintenance. Whatever action the board takes, I assume it's functionally the equivalent of a foreclosure on my husband's credit report.

Does the credit score slowly improve over those 7 years? Or it stays bad until it's suddenly wiped off at the 7-year mark?

Your credit score will slowly improve.

19NYC78 - Think about the type of person you want to be in society, and if that does not motivate you to honor a debt legally incurred, think about your reputation. Down the road you may want to join some group of people in any number of contexts (maybe school for children, maybe another coop, maybe a club), and that group might not look favorably on someone who dumped their debt on others when they had the resources to pay it back. In other words, this is more than a question of credit rating; it is a question of character.

Please check with an attorney. I heard in NY, the bank can go after you for the balance even if they agree to a shortsale or foreclose. To the extent you have assets, the bank may be able to pursue restitution not only immediately but in the future unless they waive and forgive.

If you are sitting on cash that exceeds the likely foreclosure deficiency, I have no idea why you are assuming that the bank will not seek recourse for the deficiency, which is going to include all of their costs, etc. as well as the larger deficiency incident to a foreclosure fire sale. Banks do not ignore large deficiencies that result from strategic defaults. Does your coop permit rentals?

"If you are sitting on cash that exceeds the likely foreclosure deficiency, I have no idea why you are assuming that the bank will not seek recourse for the deficiency.."

fwiw, what if OP moved the apt (let's pretend co-op sublet regulations permitting) to say an LLC to rent out, would the bank only be able to go after LLC's unfunded cash balance?

The property can't be transferred without first satisfying the mortgage. Even if it could, the mortgage includes a personal obligation of the mortgagor (unless this property is not in NY or there is a peculiar mortgage), which is not going away.

I long ago stopped giving a crap about my credit. I have enough cash on hand for everything and anything I'd want or need.

Fuck the banks.

NYCNovice: Sorry, I completely disagree that reaching on a compromise with the bank that makes the most financial sense for all parties involved, be it a short sale or something else, is a judgment on character, especially in this current market. It is merely a contact -- nothing more. Businesses break contracts all the time when it makes economic sense. Morality does not come into play, in my opinion. We have moral obligations to save for our retirement and our children's educations, which should come first.

Several people have mentioned that the bank could come after for us a deficiency judgment. Obviously, we would not pursue a short sale unless the bank expressly agreed not to do this in the paperwork. This is very standard now. The government has set up all sorts of programs and incentives for the banks to approve short sales, principal reductions and other measures. They're not coming after people for $100K deficiency judgments.

NYCMatt: If we were wealthy, I would agree. I don't think we have enough cash though to feel that way.

Also, my husband is not sitting on any cash to pay the deficiency. The mortgages are in his name only, but I would be the paying back the bank, not him.

There MIGHT be a moral argument if the benefits of incremental adherents accrued more directly to everyone else but they don't - mortgage spreads vary widely based on other market factors - they are very wide right now - so paying it off for moral reasons only benefits the mortgage provider.

The lack of ability to rent makes it a cash drain to hold on- it doesn't matter if the OP makes good income.

I think a short sale presuming it can be negotiated for no personal recourse is the best solution. Won't be easy and will take a lot longer than a typical sale and will probably depress the price further but I assume the required return from the current hole to make up the inability to make income is way too high to be realistic.

There are ways to minimize the problem from the credit rating- take out other necessary credit now.

Yes, because the government set up all these mortgage programs to help the wealthy (yes you are wealthy according to our president, actually you are a millionaire according to him). Banks are just itching to forgive loans and incur losses for rich people with half a million dollars in savings (with over 100k of that in cash) that can afford to pay both their mortgage, as well as the rent on their new house they moved to because they outgrew the first place.

19NYC78 - How does a short sale make sense for the bank (or whoever is holding the MBS that the mortgage is likely a part of) when the borrower can afford to pay their debt? This is not a case of efficient breach. This is the case of a well-educated individual who made a poor purchase decision and is trying to avoid the consequences of that decision by blaming the institution that gave them the rope to hang themselves. In addition, are you aware that if you stop paying your common charges in the coop that your former neighbors will have to pick up the slack? You have no moral qualms here? Wow. Yours is one of the more disturbing brazen posts I have read.

Op, NYC novice said something very valuable - character is important. Many companies do credit checks before hiring. I would never hire a person with a blemished credit.

300 Mercer - Thank you for letting me know I am not alone here. I might give prospective employee chance to explain the blemished credit (maybe crazy medical expenses for terminally ill family member), but I'd kick them out of my office if they gave me this explanation.

Trump is not looking for a job at any company but the op may have to. Hence the importance of character. Also, the lenders factor in his history and charge higher rates. Some lenders will not lend to people or countries who have defaulted in the past or will require higher collateral.

That individual-versus-entity difference is interesting. For instance, Extell's $375M mortgage at the Belnord is in special servicing, but that doesn't deter lenders from working with them. It's just the usual win some, lose some understanding of how the business works.

There must be other developers who'll never be able to borrow another nickel, but it's hard to say what goes into making a reputation.

Most commercial loans are limited liability and are not personally guaranteed by the owner. Believe, new York state mortgage loans are recourse to the borrower (nwt , is that correct?). Hence the difference in expectation.

Right, NY is a recourse state, but the lender is limited to either foreclosing or suing to collect, not both. So in effect it's non-recourse.

I think this borrower is in New Jersey and the whole discussion is likely academic because chances are that the mortgage has been sold off and the bank will not have authority to agree to short sale (and even if they did, bank would not agree in this case unless the borrower lied in their hardship letter). What so many people don't understand about current situation with underwater mortgages is that banks are not the ones holding the debt; the debt is spread across institutional investors like pension funds, etc. Banks do hold a significant amount of MBS (I am not going into go into the reasons why lest I trigger Brooks/Stevejhx debate), but it drives me nuts that so many people think that the loan originator is the entity that loses when somebody defaults on their mortgage. I find this situation particularly troubling because the poster throws around some legal concepts (like efficient breach) completely out of context where they have no application whatever. In an efficient breach situation the non-performing breaching party pays damages to make the performing party whole; they don't just say "sorry, I don't feel like paying because I'd rather spend the money on myself rather than give you the benefit of the bargain I struck." For example: I order carpet from a vendor and decide that I don't need the carpet anymore; rather than pay for carpet that I don't need, I simply pay the vendor their lost profit and they keep the carpet. Concept has no application in lending context where other party has already performed and the borrower is trying to renegotiate their debt. The original poster came here seeking information, and I could have just advised her to not even bother trying because it won't work, but because she volunteered that she is young, I thought it might be beneficial to try to get her to think about the bigger picture. That was a bust. I do take heart that I sense some reluctance from the husband to pursue the course the poster is trying to chart for him - he may be an honorable person who understands the bigger picture.

NWT - I consider you the dean of Streeteasy, and I believe you may have served on your coop's board at some point? How does your coop board feel about people who have declared bankruptcy in the past?

Crescent22 - This is the first time I have seen a post from you that I don't understand. Do you really see no moral issue with a person who can repay their debt trying to circumvent it? This is not the situation of someone who cannot actually pay their debt; this is the situation of someone who can pay their debt but is simply trying to find a way to avoid doing so. The gentleman who purchase the coop can continue making payments even if does not have cash to take the loss on a sale right now; the situation is simply that his wife thinks the place is too small and does not want to live there, so she wants to take someone else's money and spend it on her children and herself.

Again, this whole discussion is academic because given that the borrower can repay their debt, if the holder of the loan is represented by half-way competent counsel, the borrower will be repaying that debt unless the borrower lies on a petition for relief. I hope we can all agree that that would be a blight on someone's reputation were it ever discovered, not to mention a crime.

HB - Hopefully Learning Annex's attorneys can find a way to pierce corporate veil with Kiyoski.

Thanks, but that'd be west81st and kylewest.

I don't have a board temperament, among other things. Was a board spouse for many years, though. Nobody noteworthy came through that I can remember. I'm pretty sure a bankrupt wouldn't have gotten as far as an interview, so no danger of the board being swayed by charm or a sob story.

BTW, here's an example of nothing being too far in the past to count. Somewhere in all the exhibits to that 1107 Fifth case, there's an e-mail from the managing agent to the applying buyer, wanting more info about a disorderly-conduct charge (or maybe it was DWI) from 1993. Could've been a same-name story or youthful indiscretion or something, as the buyer was approved.

I remember the op's original thread about the small co-op (in Jersey, wasn't it?) that her husband had purchased & now that they have a child it's just too small to reside in. Boo hoo. If she's so spoiled & special to put up with a less-than-ideal situation, I say she should eat the loss & move on. Boo hoo.

AH - You are right that financial hardship is not the only type of hardship that lenders consider, but I have seen nothing in OP's story that would get past compliance. A short-sale specialist may help her concoct a new story, which brings me back to the integrity issue.

AR - Of course a lot of Americans would be better off financially if they didn't pay their bills. And corporations that breach contracts pay damages or declare bankruptcy; the price is paid entirely in the commercial context. Despite what Mitt Romney says, corporations are not people; their sole purpose is to maximize shareholder value. The double standard makes a lot of sense from where I sit; corporations do not have moral obligations; people do. My sharing my judgment of OP's proposed course of action is intended to illustrate that there are considerations beyond the credit rating. I feel confident that OP's path and mine will never cross, but I am not alone in my thinking, so even though OP does not share my point of view, she needs to be aware that there are people out there who have this point of view. She is free to not associate with them and may be able to live her life entirely surrounded by people whose thinking is like her own.

AR - Now you have totally confused me when you say "if it were a huge problem mortgage rates would reflect it. What? Banks are simply not lending at all to the majority of Americans. Are you saying the individuals defaulting on their mortgages is not a huge problem right now? What exactly do you think all those toxic ABS are comprised of? Why has the government stepped in with the programs to which OP refers? As I believe I have stated in the past, I value your posts and would like you to educate me here because this makes no sense to me, and you usually make a lot of sense to me.

Okay, one last thing - (feel free to chime in both Brooks2 and Stevejhx), over the last ten years, in the great majority of instances, a bank did not continue to own and bear the risk of the mortgages it originated; I now see the flaw in AR's thinking, but I am open to clarification. As I always note, there is always a possibility that I have not understood someone's post.

AH - Corporations duty is defined by law. Nevertheless, I like your thinking here and agree that too many corporations are short-sighted. I view this as an agency problem - the executives are only there temporarily and do not care about the long term brand of the corporation. So the question then becomes, do you invest in or patronize corporations whose behavior does not meet your personal standards, profitable though they may be?

HB - Essentially managers are under the business judgment rule. Doesn't matter what I think. Only way I can make myself heard in those issues is through investment and purchases, and I don't have enough money to make a difference through either path.

AR - You are correct that the pure mechanics of whether OP can get out of the particular debt is matter of contract law. However, my point is that there are repercussions for individuals who don't pay their debts in everyday life, and OP should be aware of these if she ever wants to purchase in another coop, apply for a job, join a club, get her kids into certain activities. Again, she can try to avoid people like me who will judge her, and more power to her if she can live her life independent of people who think like I do. Again, I feel confident that I will never be in a position to influence OP's life, so what I personally think is of no consequence to her.

AR - I respect your difference of opinion here. Again, OP may be immune from ever having to deal with people who share my point of view, in which case she can completely discount my opinion, which is that my credit rating is worth more to me than any amount of money; I would rather live in a hut than not pay a debt.

HB - I agree re pre-employment credit screening; indeed, I have clients who use it as a factor in hiring decisions. For an exceptionally talented candidate, they will give the individual a chance to explain, but for a run-of-the-mill candidate, any negative will put the candidate in the "pass" pile. I can think of only one person who got past the hardship test, and their Hurrican Katrina story should be made into a movie.

Forgot to address the OP's husband's need to file for bankruptcy prior to getting relief. This is getting into the mechanics of whether this individual will be able to get relief; we don't know enough of the facts, but I don't see relief coming in the absence of a declaration of bankruptcy in this case, and I don't see bankruptcy being an option in the absence of this individual's losing their job, but again, we don't have all of the facts here. My sense here is premised on the my assumption that the mortgage was sold off and that the entity servicing the mortgage will not have legal authority to approve a short sale.

Actually, even if holder of mortgage is still originating bank (which I highly doubt), I still don't see relief coming on facts presented absent declaration of bankruptcy. So again, I think the whole discussion is academic, but if OP is so inclined, I'd love to hear the outcome down the road.

CC - Said I don't know enough of the facts here; can only go on what has been presented in this and a previous thread. As for my qualifications, I am not a short-sale specialist but had two situations referred to me that I referred on to a short-sale specialist. Those situations were not dissimilar to the one described here and both ended in declarations of bankruptcy (one situation spouses got legally divorced to keep her credit rating in tact while husband's was destroyed). I also live in Washington, DC with more than one friend who has devoted immediate future to writing financial regulations; there is no way to avoid this stuff in discussions down here these days. Not an expert, but also more informed than your average Joe. Best of luck to OP.

Agreed - don't know anything; just trying to address AR's question re why I was assuming bankruptcy. I think I know how this will turn out, but I would love to hear how it actually turns out for a reality check.