Anatomy Of An Intentional Foreclosure

(CBS)  This is the latest in a CBS series "Hitting Home" that explores how the weakening economy affects people.

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For Karen Traynor, buying a condo closer to her job in San Francisco seemed like a sound financial decision.

"We have always owned our homes," Traynor said.

But in the last year, this home seemed to drop in value by the day - forcing Traynor to make a much more devastating decision, CBS News correspondent Sandra Hughes reports.

"It would be an intentional foreclosure," Traynor said.

Meaning Traynor will walk away from her mortgage and let the bank foreclose on her property.

Her adjustable-rate mortgage will be reset in June. And although she can afford the $900 increase in payments, she doesn't think it makes financial sense.

"I am not doing anything illegal. I am not scamming anybody," she said.

When real estate was booming, Traynor bought her 2-bedroom condo for $505,000 after it appraised for $520,000. Although she took out a 100 percent loan, she figured she had some equity.

Now, she would be lucky to unload her property for $340,000. That's a $165,000 loss.

"Everything is negotiable in business," Traynor said. "And so this is just another business decision. I just don't see why this is anything different."

Neither, apparently, do dozens of angry e-mailers on the blogosphere. Calling herself "condoblue," Karen Traynor wrote about her personal decision to walk away from her mortgage on the very popular Los Angeles Times real estate blog, L.A. Land.

Moderator Peter Viles couldn't believe the response.

"Tremendous anger against the lenders, remember the lenders made a lot of money off this," Viles said.

He expected readers would be angry with Traynor's decision, judging it as unethical and financially short-sighted. But after he created a poll asking whether it was a decision of integrity or business, "more than 60 percent said the smart thing to do was walk away," he said.

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Guest blogger Peter Viles shares more reader reaction at Couric & Co.

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But how smart was it?

"We own another home. We really don't need credit,'' said Traynor.

Even with a fall-back position, Traynor is making a financial decision that will affect her for some time.

"It is devastating to think that my credit scores are going to drop 200 points," she said.

Experts say a foreclosure is a black mark on your credit for five years - a barrier for future borrowing - and attaining another mortgage.

[iwozhere]

Why do you guys think we have to pay for failed business transactions like this one. Unless we are forced to bail out the lenders with taxpayer money, all that will change is that credit will be harder to come by. Reliance on credit is not a good thing anyways. Start saving and invest when you see an opportunity!

I totally agree that it is a good business decision to let the condo go back to the stupid lenders who gave her the money. They are the speculators in this game. How naive of them to expect to get their money back! Shame on those egg heads who sold these irrational mortgages as AAA rated investments. Foreigners paid a large chunk of this $165,000 loss. Don''t expect them to ever come back and give us credit for our lavish lifestyle.

[dobbsj]

Karen Traynor should walk away. But why doesn''t stop paying her mortgage. She can live rent free for a few months.

Congress, banks, investment houses made this mess. Now there is no penalty for walking. Such as paying taxes on forgiveness. That was real bright move on congress part.

Again live rent free for months.

[finlwhiz]

mickster,

A house and stocks aren''t the same thing. That''s like asking would you borrow money and go blow it all in Vegas. Uh oh, wait - I guess somehow houses are stocks now. Funny I didn''t realize that or hear about it until all prices started falling.

I''d bet most folks that bought a home in the last 5 years didn''t realize the inflated prices they were paying weren''t due to their actual value but only due to the fact that their homes had become the new trendy commodities to sell on Wall Street.

[rudyvassallo]

you are better saving money than looking at your score...your score help but your money help a lot more,,americans...Did you forget what SAVINGS means?......do not overspend..do not get in debt..SAVE..SAVE..AND SAVE...There are only three ways to get BETTER...SAVING!!!!!!!!!is it to hard to understand?...and remenber..the faster way to get rich is slowly....PEACE ...FREEDOM AND PROSPERITY..RON PAUL PRESIDENT 2008

[marie311-2009]

This is what is wrong with our society today! Borrow money with no sense of obligation to pay it back. She would have absolutely no problem selling it and pocketing the profit but since it is losing money she feels no remorse for walking away from something she promised to pay back! And we wonder why our economy is in such a bad state!

[psguy1]

%u201CFor Karen Traynor, buying a condo closer to her job in San Francisco seemed like a sound financial decision%u2026.That%u2019s a $165,000 loss.%u201D

Why doesn%u2019t it make financial sense now? She can still afford it, afterall. Oh that%u2019s right, when it%u2019s making money it%u2019s all hers and when it%u2019s losing money it%u2019s someone else%u2019s problem. I seriously wish they would ban these people from buying any real estate again for 15-20 years.

Does non-recourse in CA mean that she won%u2019t get a 1099 either? Please tell me that she will at least get a 1099 for this.

[bjreal-2009]

This kind of behavior is very discouraging and shows how Americans are more and more frequently taking no responsibility for any of their actions. I was in a similar situation with a property that I bought in 1988, stuck it out and continued to pay the mortgage while renting out the property at a loss. Finally was able to sell it last year for 2/3 of what I paid for it, but felt that I had a responsibility to pay back the mortgage. People might consider that to be foolish, but I feel I made the right ethical choice. People need to understand that real estate isn''t the "guaranteed" investment that many think it is, and take responsibility for their actions so (as someone else posted) that we don''t all end up paying for their decisions.

[mickster52-2009]

If you bought stocks for half a million and borrowed the money to buy them,,and the stock dropped to 340k. you have the same options, sell and take the loss or keep it and hope value goes back up.In any event YOU STILL OWE the money you borrowed, Would you give the lender the profits if the value doubled? (as many houses did in the last decade)I doubt it. Get real ,you made a bad investment no one forced you to buy. and the lender has every right to go after you for the deficit, If i''m not mistaken California has wage garnishment laws to enforce judgements.better get legal advice before you take any actions.

[mickster52-2009]

If you bought stocks for half a million and borrowed the money to buy them,,and the stock dropped to 340k. you have the same options, sell and take the loss or keep it and hope value goes back up.In any event YOU STILL OWE the money you borrowed, Would you give the lender the profits if the value doubled? (as many houses did in the last decade)I doubt it. Get real ,you made a bad investment no one forced you to buy. and the lender has every right to go after you for the deficit, If i''m not mistaken California has wage garnishment laws to enforce judgements.better get legal advice before you take any actions.

[finlwhiz]

Now condos are McMansions? I don''t think anyone plans on a taking a $165,000 loss in a couple of months time. This is going to become more and more prevalent, it doesn''t have to do with ''manning up''; it has to do with an artificially inflated market. Reality sets in if you''re the one holding the bag and if others on the sidelines don''t see this is reasonable, it''s the only way prices will come down.