Between A Rock and A Hard Place? There is Hope.
It’s virtually impossible for a homeowner who’s behind in mortgage payments or is underwater (owes more than what their home is worth), to solve the problem by themselves. Take a look at the five scenarios below to see how dangerous this can be for a homeowner:
Scenario 1- Short Sale
Jim and Helen Smith Bought their home at the height of the market for $300,000. Confident that prices were skyrocketing, they overextended themselves. Why not, their mortgage broker had told them that if they couldn’t afford the home, they could re-sell it and make a big profit. Now, they are 6 months behind in their $290,000.00 mortgage and the bank has begun the foreclosure process. They listed their home for sale and sold it two months later for $220,000.00. With the help of an attorney, the Smiths were able to get the bank to release them of their liability on both the mortgage on the property and the promissory note. The Smiths did lose all of their money and had to move, but, they didn’t have to bring a dime to the closing table. They were also released from all liability, including for the mortgage deficiency and back payments. They now owe nothing and can move on with their lives.
Scenario #2- Foreclosure Consequences
Bob and Mary Edwards, both have great jobs. At the urging of a neighbor, they decided to cash in on big real estate profits by buying an expensive investment property for $700,000.00 in 2006. When the market lost over 40% of its value, they looked at the investment and decided to walk away from it. They weren’t willing to take a $300,000.00 loss on a bad investment. The bank foreclosed and obtained a deficiency judgment for $280,000.00 which included the mortgage balance, interest fees, foreclosure, and attorney expenses. The Edwards didn’t feel this was a problem. Unfortunately they were wrong. Many investors in the 1980’s could have told them what would happen next. Back then, the government had to form the RTC to take over bad loans from Savings & Loans that went out of business. The RTC sold these non-performing loans as bad debt to collection agencies for pennies on the dollar. The Collection companies (even investment groups) then aggressively pursued repayment of the debt from delinquent property owners. They obtained deficiency judgments, took very aggressive collection action which included embarrassing debtors and garnishing their wages. Unfortunately, the same thing happened to the Edwards. Where the Edwards could have negotiated a settlement with the bank and saved tens of thousands, maybe even hundreds of thousands of dollars, they chose to ignore the debt, and are now paying the full amount to a vulture fund that could care less how much pain and suffering the Edwards experience.
Scenario #3- Strategic Short Sale
Bill and Angela Martin, were also investors with good jobs. They had decided to buy a second home in Florida as an investment and to use for a couple of months each season. They bought their condo for $1.2 Million, also at the height of the market. As luck would have it Bill was downsized and lost his job. He did find another one, but it took some time. Not surprisingly, Bill and Angela ended up behind on their mortgage payment. They consulted a Realtor and decided to list their home for sale at the market value of $650,000.00. They still owed $1 million on the property but did not feel they were in a position to take a $400,000.00 loss. The property did sell for $620,000.000. With guidance, the Martins were able to bring $50,000.00 to the closing table and get a release of all liability. This was not bad, considering that they had showed liquid assets of over $200,000.000. Like the Smiths, the Martins had no further liability and were able to move on with their lives.
Scenario #4- Foreclosure & Bankruptcy
Miles & Stacy Hanover both had good jobs in Real Estate and Auto Sales. They purchased their dream home in 2007 for $329,000.00, believing they would be able to afford the payments, not realizing things were about to go terribly wrong. They both lost their jobs and had to get jobs at a Restaurant to survive. The bank began foreclosure proceedings in September of 2009. The Hanovers stopped paying their mortgage and also ended up behind in every credit card and loan payment they had. At wits end, they consulted a Bankruptcy Attorney who advised them it may be best to file for bankruptcy. With no hope of recovering from their disastrous financial situation, the Hanovers had the attorney also represent them in the foreclosure proceedings. They stopped paying their mortgage, and used the money for other things, including getting some of the other creditors off their back. They have now lived in the home with no payments of any kind being made to the bank for almost two years. They feel uncomfortable paying nothing to the bank before they lose their home to foreclosure, but also feel the bank could have been more understanding. With the help of an attorney, they believe they are getting at least some of their money back by not paying the mortgage for almost two years. At least the savings has allowed them to afford the costs associated with going bankrupt.
Scenario #5- Loan Modification
Butch and Cindy Simpson also bought their dream home for $500,000 when homes were selling at a premium. They, too, lost their jobs and ended up almost 8 months behind in their mortgage payments. When the bank filed a lis pendens action to foreclose on the property, the Simpsons, made every effort to resolve the situation by contacting the bank dozens of times. Butch was rehired and Cindy found another job that paid enough for them to make their payments. But, they were unable to catch up on their back payments and late fees. After exhaustive efforts dealing with the bank, the Simpsons were able to renegotiate a much lower interest rate and obtain payments they could afford. True, the bank had tacked on over $80,000.00 in past due fees and missed mortgage payments, but the Simpsons had no additional fees, could afford the mortgage and were happy with the home. It may take 5-10 years before their home is worth the $580,000.00 they owe with the modified mortgage, but the Simpsons feel this is better than the foreclosure alternative.
So, what’s the best answer for millions of homeowner’s that are behind in their payments? It’s never to do what a great majority of homeowners are doing by ignoring the problem. It takes an expert to figure it out. By making homeowner’s aware of the possibilities, you just may help them make the best decision (with the help of a good attorney, if necessary.)