Most people today have forgotten the savings and loan debacle of the 1980’s when many of the nation’s largest savings and loans failed as a result of poor lending habits. In many ways, the recent financial meltdown involving our largest banking institutions is very similar.
There is one important similarity that must not be forgotten by homeowners who are underwater with their mortgages who have otherwise had difficulty making payments. During the 1980’s, as major savings and loans failed, the government formed the Resolution Trust Corp (RTC) to absorb the bad debt that was held by failed savings and loans. Many homeowners who had the ability to pay chose to walk away from mortgages because prices had dropped so dramatically. For many years nothing happened, leading these borrower’s to believe they could avoid responsibility for mortgages they had taken. Unfortunately, for these borrower’s, debt collection agencies purchased the bad debt from the RTC for pennies on the dollar and aggressively pursued collection efforts. Their strategies included filing suit for outstanding balances, aggressive phone calls, and garnishment of wages. Borrower’s who could afford to pay suffered emotional distress and embarrassment and ultimately did pay.
How does this apply to the present situation? Even though banks were part of the problem, they still had all of the rights and remedies afforded under U.S. law to pursue delinquent borrowers. Many delinquent borrowers are under the impression that banks have to offer short sales and loan modifications to assist delinquent mortgage holders. This may not be true. Homeowner’s thinking about taking advantage of generous bank offers should jump at the chance while the banks are still being flexible. Most offers presently being made by the banks include a full release or satisfaction of the outstanding balance owed as part of the short sale terms. If the banks change their mind they could decide to aggressively pursue deficiency judgments. Aggressive collection efforts or assignments of deficiencies to collection agencies could easily lead to a great deal of pain and suffering to borrower’s who otherwise could have exploited short sale opportunities.
It’s imperative homeowner’s who are considering short selling their property take advantage of the opportunity to walk away from this obligation while they still have the chance. Otherwise, they could find that history repeats itself with devastating financial consequences.