subject: Walking Away From Your Home Mortgage? Is That A Good Strategy? [print this page] I come across a lot of home owners that are under water and they dont really know what would be their best option. Basically, their home values are less than the loan amount that they owe. I like to categorize these home owners into 3 groups. One group consists of individuals that cant afford their mortgage payments because their adjustable loan rates have gone up or have some sort of financial hardship. There are people that can barely afford their mortgage payments but it would be a huge help if they lower their rates or sell their homes. There are another group of people that can afford their mortgage payments but it just doesnt make business sense to pay for it. For example, I have a client that wants to sell his condominium and upgrade to a bigger house. He cant sell his condominium because he is underwater and he cant handle two mortgage payments at same time even if he rents out his condominium. And of course, homes are affordable these days so it makes sense to buy something now. Some of these homeowners bought their properties when the rates were higher and they cant even refinance to a lower rate because they dont have enough equity to do that.
There are reports that there are increasing numbers of home owners that are walking away because it doesnt make sense for them to pay for their mortgage. And these people are in addition to homeowners that cant afford their payments. I thought about this a little and why shouldnt these homeowners walk away? There are investors that owe $30M+ on a single property and they stopped their mortgage payments. There are investors that are in strategic default if you call it that and are partnering up with another group of investors to buy their own non performing loans at 50% or so discount. Think about it. They are saving $10M, $20M or $30M in their loan. So if these investors do it, why shouldnt you walk away?
I am sure that most lenders are worried about additional influx of defaults but why dont they do anything? Some argue that banks are backlogged with foreclosures and short sale properties that they have and dont have the man power to deal with strategic default situation. Ive also heard that lenders are in no rush to go after delinquent borrowers. Of course there are short pay and/or loan modification that property owners can do to sell or reduce their mortgage rates or payments. However, no lender would start negotiating with you if you are not in default or if you dont have a financial hardship. What that means is that you need to stop paying your mortgage and ruin your credit in order to be able to negotiate with the lender. It seems logical to me that a property owner should be able to call his lender and let them know that he wants to sell his property but its underwater and do the short sale; or just ask the lender to simply reduce the rate.
My suggestion is that you give short sale or loan modification a try. I know some may think that they cant prove financial hardship to the lenders or it is a very difficult process but foreclosure is even worse than loan default. Ive seen a case that a Beverly Hills physician was able to short pay his home and walk away. As hard as the process may be, I think its worth trying.
