Your Home Is Underwater: Should You Stay Or ‘Walk Away?’

House-underwaterIt can be a difficult call. It’s estimated that more than a quarter of all homeowners with mortgages are underwater  – their home is worthless than the unpaid balance of their mortgage. And about half of this unhappy group is 20 percent or more underwater. In pre-recession times, it would have been unthinkable to stop paying your mortgage and risk losing your home. Even now, homeowners with mortgages larger than the value of their homes who can afford to continue mortgage payments should keep paying if they want to stay in their homes and hope for a housing recovery.

But what if you’re having difficulty making the mortgage payments and are not tied to your present home for job or family reasons? Because you have negative equity in your home, isn’t making mortgage payments just throwing good money after bad?

And disregarding any moral obligation or stigma you may feel about not paying your debts, if there’s little hope for recovering your equity, isn’t cutting your losses by walking away the rational financial decision, especially if you can rent for less than you were making in mortgage payments and related homeowner costs such as taxes?

Not so fast.

If your lender forecloses on your home and sells it for a price that’s insufficient for the lender to recoup the unpaid balance of your loan, the uncollected amount or “deficiency” can haunt you. If you’re located in one of the many states that allow lenders to collect deficiency judgments, debt collectors can pursue you for years, perhaps getting garnishments on your employment income or attaching bank accounts for your unpaid debt. And, of course, your credit rating is negatively impacted, making credit more expensive and difficult to get.

There may be better alternatives than walking away.

If you want to stay in your home, you should check out whether you are eligible for mortgage assistance through the government’s Making Home Affordable program. Under this program, eligible homeowners can get mortgage relief either in the form of a refinancing of their mortgage on more favorable terms or through a loan modification agreement that makes their mortgage more affordable.

If you’re ready to leave your home, you may be able to make a deal with your lender that lets you leave without worrying about a deficiency judgment. You can contact your lender, make it clear that you cannot make further mortgage payments and offer to transfer your home to the lender if the lender agrees to waive any deficiency judgment against you. This process, known as a “deed in lieu of foreclosure,” can get you off the hook while saving the lender the time and costs of foreclosure.

Another approach is to do a “short sale.” This is a three way deal in which you sell your home to a third party, pay the proceeds of the sale to the lender and the lender waives any deficiency judgment against you. Short sales can be difficult and time consuming to arrange, but sometimes a useful exit strategy for underwater homeowners.

As previously noted in this column, there’s another alternative: you can stop mortgage payments but stay in your home by fighting foreclosure. If you actively resist the foreclosure proceedings you might not be forced out for months, even though you make no mortgage payments and pay no rent. In some cases you even may be able to get a mortgage modification while foreclosure proceedings are pending, allowing you to stay in your home permanently.

Foreclosure is a slow and expensive process for lenders. Several months usually pass after you stop making payments before your lender begins foreclosure proceedings. After proceedings are begun, the case may be stuck in the court for many more months.

And foreclosure isn’t a slam dunk when your original lender isn’t the plaintiff in the foreclosure action. Often your original lender will have sold your mortgage note to a financial intermediary who put your mortgage note together with many others in a package of notes sold to investors. In the process, your mortgage note, together with thousands of others, may have gotten lost in the shuffle. Lost notes are commonplace and can greatly complicate the foreclosure process for plaintiffs in foreclosure proceedings.

That can be lucky for you.

If your mortgage note has been lost, the plaintiff has a foreclosure problem because without the note, it may be unable to get a foreclosure judgment against you. So the first thing you should do if you get served with foreclosure papers is to check whether a copy of your note is attached to the complaint. If it’s not, or if the plaintiff is not the same as the lender identified in the note, you may be able to get the foreclosure action dismissed.

Even if you can’t get the foreclosure action dismissed, it’s likely you can get it delayed. The flood of foreclosures has clogged the courts and there are various ways to slow the foreclosure process down while the paperwork drags through the system.

Check with a lawyer about resisting foreclosure or, if you can’t afford a lawyer, check with your local legal aid society to see if you can get free assistance.

Should you walk away? Consider the multiple choices, then weigh how the pros and cons of each will affect your financial and personal life.

Gerald J. Robinson, Esq., formerly tax counsel to the New York City law firm of Carb, Luria, Cook & Kufeld, is a member of the New York and Maryland bars. He received his B.A. degree from Cornell University, an LL.B. from the University of Maryland and an LL.M. in Taxation from New York University. Prior to entering private practice he served in the Office of Chief Counsel, Internal Revenue Service. He is the author of the treatise, Federal Income Taxation of Real Estate, now in its sixth edition, and wrote the monthly newsletter, Real Estate Tax Ideas, both published by Warren, Gorham & Lamont. He is also a frequent lecturer and contributor to various professional journals. NJN

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