Home mortgages: To stay and pay or just walk away and make the best of it
As a local real estate broker, I see a bad moon rising down the road regarding the current real estate market. Homeowners are increasingly faltering in their home mortgage payments to their lender/servicers.
Many of these homeowners face a strategic decision: To stay and pay or just go away and let their homes go into foreclosure. This now becomes an ethical and moral decision, one that nags at a person's soul. I'm seeing many homeowners who are either current or behind on their mortgage payments, pursuing the short-sale route rather than let the property foreclose.
The short sale, for owner-occupants, is where the lender absorbs all the seller's costs, including realty commissions, and approves a sale based on the current market price. Tax consequences may apply, but if you decide to throw the towel in, it's a smarter way to solve the problem since the short sale will reflect negatively on your credit report for approximately three years and prevent a home purchase until then, depending on your credit history. An outright foreclosure may stay on your credit for up to seven years.
However, just walking away isn't risk free. A foreclosure can drop your credit score as much as 160 points, according to Fair Isaac Corp., a company that provides tools for analyzing credit reports. This can affect furniture, appliance and car purchases, among other items, in the future.
A large number of people in the high foreclosure areas of the West are making the "strategic default" decision, walking away from their mortgages because it is in their best financial interest, even though they can afford the mortgage payments. Find out if it makes financial sense for you to walk away and rent by logging onto www.youwalkaway.com.
I recently have been contacting homeowners on behalf of a partner company working with the major lenders to assist the homeowners with any modification paperwork. What I'm seeing is troubling. I have seen firsthand that the lenders are willing to keep people in their homes by reducing their mortgage payments temporarily, then modifying the loan, in most cases, by extend the term from 30 to 40 years and adding the deficit payments onto the back end of the contract.
But the real lender strategy, I believe, is to keep the lower modified payments in place indefinitely, until the borrower's income situation improves, or the market rebounds, then pursue foreclosures more aggressively when the borrower defaults on those reduced payments.
Right now, the banks are reaching out to keep everyone in their home, because if all of these banks instituted foreclosures now, the real estate market would plummet. As a result, lower values would ultimately cost the lenders even more in diminished refinances and new loans. Banks would be cast in a more negative light than what they are facing now, with congressional hearings, bad press, etc. The foreclosures we are seeing now are primarily abandoned and or rented-out properties with no hope for the lender to work anything out with the borrowers who have defaulted.
I've even seen where one major lender has foreclosed on a property, not recorded the deed, and sent me out to see if the homeowner's financial situation has changed for the better. If it has, the lender would renegotiate new terms with that foreclosed homeowner. That's one extreme way to modify loans -- after the foreclosure!
So if you're upset about your home being upside down between $50,000 and150,000 in value, you need to decide which path to take, whether to throw good money after bad and ride it out, or short sale, or default and take your loss now and move on. Tough decisions in tough times.
Property values will come back, but not any time soon. If you don't plan on selling your home within the next three to five years, and you can make the monthly payments, stay and don't worry about the value. You'll sleep better and your neighborhood will benefit from one less distressed property on the market.
James "Steve" Urner has been a broker for 20 years and is owner of Urner Realty. He is a retired Kern County senior deputy sheriff and primarily deals with the law enforcement community. He is also a GRI (Graduated of the Realtor Institute) and a member of the Bakersfield Assoc. of Realtors Professional Standards Committee.
