Underwater Homeowner? How to Keep From Drowning

October 02, 2010 (Press-News.org) Property ownership climbed to 69 percent in 2004. However, the availability of subprime mortgages in years prior to that, combined with the inflated prices of houses in the United States, paved the way for the current national housing crisis.

RealtyTrac says that foreclosure filings were reported on 937,840 properties in the third quarter of 2009. This was nearly a 23 percent increase from the same quarter in 2008. Basically one in every 136 United States housing units received a foreclosure filing during the quarter. Arizona was among the top ten states with the highest foreclosure rates in 2007, with 6,339 filings (or approximately one foreclosure filing for every 401 households).

With default rates so high, a struggling homeowner may wonder how to get out from under mortgage debt, whether through strategic default or eliminating the mortgage loan in bankruptcy .

Strategic Default

In a strategic default, the homeowner purposely walks away from the mortgage debt. In some states, the lender may first foreclose on the house -- and if there is still a deficiency after the foreclosure sale, then pursue a judgment against the borrower. The lender may try to collect the money judgment by levying on personal property and bank accounts.

Arizona is one of 11 nonrecourse states, also called anti-deficiency states. Generally, the lender must recoup its loan in the foreclosure of the home and is not permitted to pursue other property of the borrower. If the home is the biggest source of debt and hindrance to solvency, some Arizona homeowners may consider strategic default.

After stopping mortgage payments, it may take time for the bank to complete the foreclosure process. While some try to stay in the home as long as possible, others quickly secure less expensive housing -- perhaps even in the same area, especially if neighborhood housing and rent are depressed.

There is some evidence that people may be morally disinclined to default on their mortgage. Many may not be aware that borrowers in nonrecourse states actually pay a premium for the right to default without recourse. Economist Susan Woodward recently estimated in a report prepared for the Department of Housing and Urban Development that buyers in such states pay an extra $800 in closing costs for each $100,000 they borrowed.

Homeowners should weigh their options carefully. The American Bankers Association (ABA) recently issued a warning about the consequences of strategic default. Whether it is due to a strategic default or not, a foreclosure negatively impacts a consumer's credit score and remains on a credit report for seven years. The ABA says a foreclosure can lower a FICO score by 100 to 400 points.

Additionally, voluntary foreclosure can affect a homeowner's ability to qualify for a mortgage for many years. Fannie Mae recently announced that borrowers who deliberately default on their mortgages will be ineligible for a new mortgage backed by the government-sponsored entity for seven years after the date of foreclosure.

The Mortgage Forgiveness Debt Relief Act of 2007 has been extended through 2012. However, it offers widespread protection against federal taxes only after a foreclosure. State taxes may still be due on unpaid debt.

Alternatives to Foreclosure

Many people are understandably reluctant to pursue strategic default. There are other options available to certain homeowners. An experienced attorney can provide guidance as to whether strategic default or an alternative may be beneficial in any specific circumstances.

Bankruptcy

Not coincidentally, the Administrative Office of the U.S. Courts reports statistics showing that bankruptcy filings rose 20 percent in the 12-month period ending June 30, 2010, compared to the preceding 12-month period. There were 1,572,597 bankruptcy cases filed in federal courts; less than 60,000 were business bankruptcies.

Whether under a chapter 7 or chapter 13 bankruptcy, people who can afford to make their monthly payments may be able to keep their homes even following a bankruptcy. Additionally, dischargeable debts will be wiped out following a liquidation of nonexempt assets under chapter 7 or after successful completion of the payment plan in a chapter 13.

Short Sale

Some banks may be willing to allow a homeowner to sell the house at a discount. That is, the bank might accept the proceeds of a sale in full satisfaction of the outstanding mortgage, even if the sale is for less than what is still owed on the mortgage. This enables "underwater" homeowners to get out from under their mortgages.

Renegotiate

Some banks may be willing to renegotiate with the borrower or his or her agent and adjust the rate or repayment terms. Especially if the lender is concerned about default, it may be willing to negotiate.

Homeowners lagging on mortgage payments or concerned about their ability to meet future payments should contact a lawyer to discuss their options. Whether strategic default or an alternative solution may be beneficial, an attorney can offer counsel and work to make the best out of a difficult situation.

Article provided by Joseph C. McDaniel, P.C.
Visit us at www.josephmcdaniel.com/