My wife and I bought an investment property in 2007. We probably never should have gotten it since it was a $900,000 building and the two of us were only making $150,000 a year. But we figured that if we could carry it for a few years, we could ride the appreciation up then flip it for a big profit. That’s what our mortgage broker told us, too, when he was getting us the loan. Well, the monthly nut was higher than we thought it should be, we never had 100% occupancy so the income was lower, and now we’re underwater on the value of the property and losing money every month on it.
We have two questions: can we just walk away from this property and let the bank have it? And can we sue the bank or the broker for giving us a loan we never should have gotten in the first place? Thank you.
Answer: (1)
To take your second question first: the issue is not whether you “should” have gotten the loan, but rather whether there was any fraud involved in issuing it. If your broker or the bank lied to you about the terms, refused to provide the good faith estimate, lied about the interest rate, concealed costs or charges from you, or falsified your income, assets, or liabilities in applying for the loan, then you may have a lawsuit against them. Fraud is fraud; it is a tort that can be sued over, whether it happens in the context of a mortgage or otherwise.
However, there is no general cause of action for unwise lending; there is no recovery available simply because the original loan should not have been approved. If there were no lies, deceit, or misrepresentation involved in the loan, then you will be unable to sue and recover something. The law does not generally protect people or banks from the consequences of their decisions.
In terms of whether you can safely default and let the bank have the property—probably not. In many states, if a property is foreclosed upon and, when sold at auction, brings in less than the remaining balance on the loan, the lender can then sue the property owner for what’s called a “deficiency judgment.” That’s the amount remaining after applying the proceeds from the foreclosure auction. In some states, there is protection against a deficiency judgment for property owners who themselves lived in the property, especially if it was a smaller property (e.g. four or fewer units), but there is generally no such protection for nonresident owners of investment properties.
You should consult with an attorney, who can (1) evaluate whether you may have a claim against your bank or broker; (2) let you know, based on your situation, if you are at risk from a deficiency judgment if you default; and (3) advise you as to other options you wish to consider—such as bankruptcy.
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Posted by Steven Sweig on 22 Apr 2010