how easy is it for lenders to just "walk away"?

[sniglet]

Does anyone have an idea as to how easy it is for a lender to just "walk away" and avoid taking on the liability for a property where the value is less than what they can hope to make from it after deducting expenses?

Calculated risk pointed out that some lenders are declining to even file for foreclosure on defaults and it got me wondering as to how this kind of thing would work.



Maybe a lender could just decide not for foreclose but not actually foregive the loan in the hope that at some point in the future the place might appreciate: kind of like a call option with no risk. Or would this kind of hands-off approach (using the outstanding mortgage as an option) expire after some period of time, allowing the municipality to sieze the place for back-taxes, maintenance fees, etc?

[sniglet]

[Alan]

Eventually the state will place a tax lien on the property and then sell that lien at auction. The person who buys the lien will get to take ownership of the property if the lien is not paid by a certain date.

[sniglet]

[Alan]

I am pretty sure they get it free and clear. In this respect the lender is just as responsible for property tax as the owner. You will notice that most mortgages include an escrow amount to pay for property tax.

Anyone with a lien has an incentive to make sure property taxes are paid.

[Alan]

Some information from wikipedia: http://en.wikipedia.org/wiki/Tax_lien_sale

I am sure the laws vary from state to state. It sounds like some states handle unpaid tax liens by allowing the lien holder to go through the foreclosure process. In that case the property would be sold through public auction and the lien holder would get the proceeds.

I am pretty sure that AZ allows the lien holder to directly take ownership. I do not know what the laws in WA are or even how tax liens are sold here.

[Alan]