I must first preface my upcoming blog remarks with the following disclosure: The views of the this blog are my personal opinions based on numerous personal research. understandings, seminars with Real Estate Lawyers and CPAs, of which none involved me being professionally qualified to offer Legal or Tax advice for your specific circumstance, and therefore I recommend anyone reading this to obtain such Legal and Tax counsel before making a decision, based on my writings, to default on your mortgage loan. And NO I am not going to get a law degree or become a CPA before commenting because many times, especially Lawyers, they will not totally agree! Reader beware.
More and more, I come across upset homeowners frustrated with the current value of their home and the steep mortgage payments they continue to pay month after month. Many have considered walking away, a few have, and others worry about the impact on their futures and of course the social stigma of just not paying and bailing out of what I would call, a bad situation. You can bet your mortgage lender is having restless nights wondering if you do decide to walk away or stop making your mortgage payments. But let’s be realistic, in most cases if you are around 50% upside down on your home’s current value, to your outstanding mortgage balance, defaulting could make very good financial sense.
Almost two years ago Brent T White, UofA Law Professor, created a firestorm of commentary when he recommended in most cases defaulting on highly underwater home loans. He makes a very good case in his paper titled “The Morality of Strategic Default” dated May, 2010. Brent even went on to write a book titled “Underwater Home” that further explains his reasoning and why you might consider it.
I am constantly told stories by stressed homeowners of the difficult situation they find themselves in and how they have a hard time making a decision to default. It goes against a lot of what they are told they should not do! We have the lessons of childhood, our parents, sometimes religious, and not to mention the dread and doom outlook from your mortgage with threats of credit score declines! How will our friends view us? These fences are designed to keep us from making what I call an informed decision. And to be informed, you need to do a little looking, poking, and research. For instance, very few people in America really understand WHY the home market crashed. They would be very surprised to learn that there was enormous greed and self dealing by Lenders and Securities Dealers, who played both sides of mortgage-backed securities investment game.
Major financial institutions were taken down and spun off, or saved by your tax dollars. Many of the same people responsible for the crash were then employed at very huge salaries to clean up the mess they created! The ultimate losers were Investors and homeowners. Lenders were suppose to help homeowners as part of the huge government bail out money (actually your tax dollars), called TARP funds which the Lenders received to keep them from going down, or under. Some like Wells Fargo stated they were required to take TARP funds to remain in good standing with government regulators in a quasi political cooperative arrangement so the other major banks would not look like losers. Only token home loan modifications took place as very few homeowners were actually assisted, much to the dismay of the federal government who just handed these guys truck loads of your tax dollars! These tax dollars, the ones your government took from you during the good years, went to the wrong group to help you out! It seems it was OK for the government to bail out a huge number of financial institutions when they made some risky financial decisions, yet the financial institutions want you to believe you should suck it up and just learn to deal with it. Something none of them even considered as they asked for government assistance. So they pretty much held on to the cash! And what you might not know is that many of these entities walked away from expensive commercial loans on commercial properties so as to reduce THEIR expenses! Residential Foreclosures skyrocketed followed closely by Short Sales. So why Short Sale rather than walk away and allow foreclosure?
Government, Lenders, and most everyone (except of course all Lawyers) agree that Short Sales (getting the Lender to agree to accept a sale price of your home for LESS then the remaining balance of your mortgage) is a much better preferred tactic then massive foreclosures. Short Selling provides less negative economic impacts to Lenders, local communities, and of course less devastation to the credit impact of the Homeowner. In fact in June 2010, Fannie Mae announced that borrowers who walked away and allowed foreclosure on their home, when they could afford to pay the mortgage, would be ineligible for another Fannie Mae back loan for 7 YEARS from the date of the foreclosure! Smart Homeowners realized they could attempt a successful Short Sale, usually get more time in their home, and if in the end it did not work out, allow a foreclosure. If they succeed in Short Selling, the personal immediate and long-term impacts are much more significantly better than a Foreclosure. Unfortunately, most Lawyers forget to explain or do not understand the long-term impacts. They just look at the immediate impact of the possible deficiency protection under Arizona law.
Numerous additional government programs have popped up to support Loan Modification (which initially failed badly) such as the HAMP program, and Short Sales such as the HAFA program. Still the results have not been as good as hoped, but somewhat better. Continued tweaking of the HAFA program, federal political pressure on financial institutions (especially those receiving TARP funds), and now recently a new Obama executive directive for refinancing of upside down mortgage loans has all been designed to alleviate the housing crash and subsequent economic downturn. Remember, this is your federal government at work, so expect them to get it right….after we have started to recover on our own.
So what is actually working to alleviate this mess?
Agree, or disagree, I have personally seen, and actually strongly believe, that Short Sales are still the answer to quickly turning both the housing market AND economy around, in the quickest manner. Here is why.
A while back there was a documentary made to look at the housing collapse. It is very entertaining and gives you a sense at who the people are behind this mess and some very interesting questioning. Take a look, the documentary is called Inside Job
Then give me a call or shoot me an email. I will be happy to discuss your personal situation and can refer you to knowledgeable professionals in the Legal and Tax fields that stay current in this area. Short Sales are not the right answer for everyone, just most everyone!
by: Thomas Jambor 10/26/11
