Homeowners unknowingly paid more in closing costs because their state laws prohibit the lender from coming after them on underwater or “negative equity” mortgages.

If you live in one of these 8 states:

Alaska, Arizona, California, Oregon, Minnesota, Montana, North Dakota and Washington.

Your lender may have charged you more closing costs because of this law.   Please consider this New York Times article:

In fact, borrowers in nonrecourse states pay extra for the right to default without recourse. In a report prepared for the Department of Housing and Urban Development, Susan Woodward, an economist, estimated that home buyers in such states paid an extra $800 in closing costs for each $100,000 they borrowed. These fees are not made explicit to the borrower, but if they were, more people might be willing to default, figuring that they had paid for the right to do so.

How does it feel to know that you may have paid higher closing costs than other homeowners, just because your state literally blocks and prohibits the lender from coming after you for anything other than the house.  In the lenders defense, they knew that if anyone in those 8 states were to default, it would be more costly for them, so they had to charge more.  Does that make it more justifiable to strategically default? Possibly…but not necessarily, but it does make you think… Why does the law in those 8 states prohibit personal recourse against borrowers?  Just because I live in Oregon or say California, why can I walk away without recourse, when someone in Nevada can’t?

The truth is, During fiscal year 2007 FHA had insured 532,494 single family mortgages.  For simplicity if you take 15% (which is roughly 8 states divided by 52) of 532,494 and you have 79,874.  Then times the average fee increase on each of these loans to offset for the risk of the non-recourse loans: 79,874 x $800.  FHA had collected in excess of 63 Million dollars in additional fees while originating and funding these loans in just 1 year.  I imagine that number is much higher since California was a large contributor to FHA mortgages.  Now take that number and times it by all the years during the housing boom.  I would say around 7 years.  We are talking about somewhere close to a half a billion dollars in extra fees to offset the non-recourse problem. I’m no mathematician,  but I do agree with the New York Times that knowing this…more people might be willing to default, figuring that they hadpaid (close to a half a billion dollars) for the right to do so.  If you live in a recourse state or judicial state, there are laws that can protect you as well.  When considering a strategic default, It’s important to consider all the possible strategic default consequences that there might be.   Also here is a simple guide on strategic default how to.

Closing thoughts

Non-recourse mortgages may be looked at as financial transactions in which the borrower has the option of giving the lender back the house. Under these types of circumstances, deciding whether to default might seem no more controversial than deciding whether or not to file a claim for insurance after your house burns down.  You in the same respect have paid extra for “essentially” default insurance.

After all, if you have had a claim on your insurance, doesn’t that count against you?  I personally know someone who has had a claim on a house, and now it is very difficult for him to get insured.  Sounds a lot like credit. Maybe it really isn’t that much different.

Jon D. Maddux is the former CEO of YouWalkAway.com. Although there has been a bit of controversy with the company name, the entrepreneur passionately believed that homeowners across America would desperately need foreclosure advice and so he came up with the Walk Away foreclosure help website. Having over 11 years of real estate and finance experience, Maddux realized with the burgeoning credit crisis, many homeowners in adjustable rate mortgages and high LTV loans were unaware of what they were about to face. With that understanding, Maddux developed an affordable business model that allowed homeowners to know their rights and use the law to their advantage. Beyond the monthly foreclosure monitoring service and cease and desist letters, You Walk Away provides attorney consultation in each state and CPA consultations. Homeowners are armed with the knowledge and peace of mind they need to go through possibly the toughest experience of their lives.

Since January 2008, You Walk Away, LLC has helped over 8000 customers navigate through the hardship of foreclosure and / or a short sale. You Walk Away has been featured in news publications and TV programs such as: ABC Nightline, CNN,Yahoo Finance, Time Magazine, The Wall Street Journal, front page of The New York Times, Bloomberg, Forbes, Fortune,Money Magazine, NPR, AP, NBC, CBS and Fox News among many others. Many of these publications have used quotes from Maddux about foreclosure, short sales and mortgages as well as obtaining a mortgage after foreclosure or short sale.

More recently Jon has launched http://www.afterforeclosure.com, a free website that helps people find out if they are eligible for a new mortgage after foreclosure or short sale. There are free resources available on the site to help consumers get back into homeownership. At http://www.afterforeclosure.com and now https://www.loansafe.org, Maddux writes about foreclosure, short sales and getting new financing after foreclosure or short sale. Jon specializes in hard to get Jumbo mortgages after foreclosure and short sale. As you can imagine, with helping thousands of customers go through this process, there is special insight and first-hand knowledge that he gets and is able to share with his readers. Jon Maddux is a licensed mortgage professional focusing on helping people that have gone through foreclosure or short sale buy again with better market timing.