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Reconsidering Walking Away From a Mortgage
The effects of the collapse of the housing bubble in 2008 are still reverberating in today's economy.
July 09, 2011 /Mens Interest PR News/ -- The effects of the collapse of the housing bubble in 2008 are still reverberating in today's economy.The effects of the collapse of the housing bubble in 2008 are still reverberating in today's economy. The evidence is all around: one in every 205 housing units in Arizona -- one of the states hit hardest by the steep downturn in home values -- received a foreclosure filing in April 2011. Over 89,000 homes are in foreclosure across the state. Often mortgages that go into foreclosure are "underwater," where the amount that the borrower owes to the lender is more than the house securing the mortgage is worth. According to City Journal, 15.2 million Americans have underwater mortgages and 51 percent of mortgages in Arizona alone are underwater.
After the bottom fell out of the housing market, many found themselves with underwater mortgages and no hope of reversing the negative equity situation for decades. To compound the problem, lenders refuse to discuss loan modifications or short sales as long as borrowers remain current in their mortgage payments. "Strategic default," where people choose to walk away from their mortgages even though they could afford to make payments on them -- at least in the short term -- appear to some homeowners to be the only way out of the financial trouble in which they find themselves.
Traditional Notions About Strategic Default
Media reports on the rise of strategic default across the country portray those who choose that option as distinctly selfish or even immoral. Stories about people who walked away from mortgages depict people using the money they save by defaulting on their mortgages frivolously, such as a December 16, 2009, Wall Street Journal article reporting that one family used some of the money they saved each month to buy season tickets to Disneyland and go on a cruise to Mexico.
There are those who argue that strategic default makes the housing market and, by extension, the economy worse for everyone and society should discourage people from doing it. The greater the number of borrowers who walk away from their mortgages, the more depressed housing prices become as lenders auction more houses in foreclosure actions. If housing prices fall further, more mortgages go underwater and even more people default on their mortgages.
Additionally, some predict that the more often people default on mortgages, the more expensive future mortgages become for borrowers because lenders need to recoup the losses they have suffered in the past and to ensure against future losses on the new mortgages. As a result, more people are priced out of the mortgage market and cannot qualify for a mortgage, stifling the country's economic recovery on a large scale because fewer people are able to buy houses.
Reimaging Strategic Default
Some have argued that it is time to start thinking of the choice to default on a mortgage as a sound economic decision, not an irresponsible one. More often than not, walking away from a mortgage that one can continue to pay in the short run makes more financial sense for the borrower in the long run.
Those considering walking away from a mortgage generally find themselves in the situation where they have lost their jobs but can manage to keep paying all of their bills for a set period of time because of money they have in savings. After that money runs out, however, they risk foreclosure on their homes and depleted savings if they have not found new jobs.
Alternatively, if a suddenly-unemployed person stops paying a mortgage instead of expending all of his or her savings, he or she will be able to stay in the house cost-free for up to 24 months while the bank institutes foreclosure proceedings. The person can then go into rental housing for less money per month than the mortgage payment, allowing more time to find a new job before all of his or her savings runs out and leaving the person potentially better off financially than the person would have been had he or she kept on paying on the mortgage.
Defaulting on a mortgage is not a decision to be taken lightly. Serious repercussions exist for defaulting on a mortgage. The borrower's credit score lowers dramatically and he or she may not qualify for another conforming mortgage backed by Freddie Mac of Fannie May for at least seven years or a FHA backed mortgage for three years. However, the borrower who uses up all of his or her savings making mortgage payments and then still ends up needing to default on the mortgage is in the same situation -- and no longer has any savings.
However, there are fewer legal incentives today to make a person keep making payments on a mortgage that is draining him or her financially. While 39 states allow mortgage lenders to pursue deficiency judgments against borrowers for the difference between the amount that the borrower owes on the mortgage and the net amount that the bank realizes for the house in a foreclosure sale, few lenders pursue such action given the cost involved.
Furthermore, in December 2007 Congress changed the tax code in a manner which makes walking away from a mortgage less costly. Normally, a person needs to pay taxes on a debt that has been forgiven, as if the amount were income. Congress changed the law so that people no longer need to pay taxes on cancelled debt if the debt involved a personal residence, with the aim of encouraging lenders and borrowers to renegotiate underwater mortgages.
If you are struggling to make your mortgage payment and are considering defaulting on your mortgage, contact an experienced attorney with whom you can discuss all of your options and the potential consequences of your actions.
Article provided by Charles M. Sabo, P.C.
Visit us at www.charlessabo.com/
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