I have dwelt on this topic before and my post is still on this blog. However, this is an evolving matter and needs continuous discussion all the time. As you know, our homes in Nevada are continuously depreciating and losing its value and this is also decreasing our emotional attachment–euphemistically called an American dream. It is becoming an American nightmare! Folks: You have plenty of company in this matter as millions of people have lost their value in their homes. In 2009, Reecon Advisors released a national survey indicating that nearly one out of 10 homeowners, 9.2% or 7.4 million, would likely choose to default if they were in that situation. More and more people are seriously thinking of walking away from their home and they call it “strategic default” on their mortgages.
First American Logic did a recent study that suggests when a home falls below 75% of the amount owed on the mortgage, the homeowner begins to think about walking away, even if he or she can pay the mortgage. We are not behind on Credit Card Payments? Why on Mortgage? However, a recent study just concluded by a financial survey which indicates that people generally have priority on their credit payments in some order. Mostly, people maintain car payments as their first priority credit cards as second and mortgages last. The national average for 60-day delinquent auto loans was 0.81% for the third quarter of 2009. For credit cards, the national 90-day delinquency average was just a bit higher at 1.1%. But for mortgages, the national 60-day delinquency rate was six times higher at 6.25%.
What Can Be Done When Million Underwater Homeowners? This is the crux of the problem when so many million homes are under water. First American reports that by third-quarter 2009 an estimated 4.5 million homeowners reached that point. A rough estimate is that if prices continue to fall as they have been in the past, this number may exceed 5 millions which of course is very very high. We had stated in our many posts on this blog that the sole panacea to handle this crisis is to reduce arbitrarily everyone’s mortgage to 2% for five years, and all documentation which is creating too much havoc with loan modification should be waived. In other words, no documentation should be needed for loan modification. This documentation opens a pandora box, a nightmare for both the lenders and the homeowners. It does not reaches in times, get lost, the faxes machines are jammed, out of ink, out of papers. Again, what is the purpose of this continuous papers swaps. Your lenders already has all these documents when you originally bought homes. Is your ownership being challenged? No. We all are under waters. So stop this paper nonsense.
Everyone should be qualified. No questions should be asked. If you need to raise the homeownership value, both primary homes and secondary homes should be included in any loan modifications. Who Should Be Blamed? There is no single entity, however, it is a collaboration between banks, lenders, mortgage agencies and loan officers along with undying appetite of builders to continue construction unabated without any dire necessity. They all should be blamed including the homeowenrs. When it was not that a TV pundit did not tell us continuously to buy real estate, to buy real estate, to buy real estate. Why the city of Las Vegas keep on issuing permits? Why the inspectors keep on ignoring construction defects? If you go to the crux of problem, each of them is guilty by commission or omission. Short Sales Not Easy Borrowers made mistakes, too, but the “lenders did it thousands and thousands of times, and made billions of dollars” doing it. For many in the hardest hit areas, working out a short sale is often not an option when the home value is so low that a buyer starts considering walking away. Stricter guidelines from the Treasury Department may get the banks to make a faster decision and put short sales back on the table as an option.
Always check with your bank to discuss your options before thinking about a short sale or walking away. Some banks, especially a smaller community bank or a credit union, may be willing to work out a deal. In fact, some banks have even been willing to negotiate a reduction in mortgage principal, so it never hurts to ask as you develop your strategy. Just a Business Decision? Today, Maddux helps thousands of people “strategically walk away” from their loans. While many people may think a borrower has a moral obligation to pay the mortgage even if the home is $100,000 or more underwater, Maddux disagrees. He says if the mortgage were a moral obligation, that would be stated in the contract. He sees mortgages simply as a business deal, and the decision to walk away as a business decision. People who are stuck in a home that doesn’t have a chance of regaining its value in 10, 20 or maybe more years, get guidance on how to strategically default, but the site does recommend people to work with an attorney in their home state. Each state has different laws that can make strategic default easier or more difficult. Credit Scores Can Recover Essentially when people strategically default, they stop paying their mortgage and instead put all their cash toward paying down other debt, such as car loans and credit cards. Since in many states foreclosures take 12 to 16 months, this gives people a significant amount of cash to pay off their other debts. Yes, it’s true the borrower’s credit score will be harmed initially: However, the credit can be built back slowly. The best healer for a credit report is the time and plenty of time. Your credit score can gain anywhere 100 to 150 points.
A foreclosure will stay on your credit report for eight years, but as it ages, it has less impact on the score. There Are Many Risks So what are the risks? You do face the possibility that a bank will try to collect any shortfall on the amount due on your mortgage. But if you work with an attorney, you may be able to minimize the likelihood of being chased for the money. Prior to the recent tax law change, you risked having to pay taxes on any debt that a bank forgives, but that provision has been waived until 2012. However, some states still expect you to pay taxes on any forgiven debt after a short sale or foreclosure, so be sure to check with a tax adviser to find out the laws in your state.
The big question for many will be: Can I ever buy a home again? Surprisingly, yes. Some financial institutions even specialize in “mortgage repair” loans. Mortgage-Repair Programs If you’ve defaulted on a loan and would like to take advantage of some great foreclosure deals out there, look for similar mortgage repair programs in your state. Also, now that millions of people have defaulted on their mortgages, it’s likely that when the economy recovers and banks are ready to start lending again, the stigma of a foreclosure stemming from the housing bubble will likely fade. But in today’s economy, most banks won’t agree to lend to someone who recently foreclosed. While I wouldn’t advise anyone to strategically default, it is an option you may want to consider if you’re stuck in a home with a huge loss that you don’t expect to ever recover. This can be especially helpful in these tough times if you live in an area where there are no jobs and you need to relocate in order to work again. Okay, let us in the end, ask yourself few questions:
1. You bought this home because you liked the home and the neighborhood. Yes or no?
2. Your loved ones pictures are hung on the walls in this home, and is decorated with cherished memories, yes or No?
3. You still need to live somewhere, you can’t live on a tree? If you need to live somewhere, how much rent can you afford? Yes or NO?
4. There is no rent deduction in taxes. So, if you getting a big tax refund, deduct it from you monthly mortgage statement. Let us say if you are getting 2400 dollar rent, divided by 12, it would be $200 per month. Now, deduct it from your monthly mortgage payment of $1600. In net, your mortgage payment should be $1400. It looks better now? Yes or No?
5. Your children can walk to the neighborhood schools which you and they liked. If you walk away, where they would be going to school?
6. You did not buy this home to sell in few years. You wanted to make this nest for longer years. Why are you worried if this is underwater. The prices had gone down, they may come back in few years.
7. More later.