Reader Question: I purchased my home 8 years ago expecting some appreciation in the value before I retire within the next year. However, now my home is worth 35-50 thousand less than I owe. What choices do I have, since at retirement I am not sure if I will any longer be able to afford a mortgage with my retirement funds? Is there a respectable way out of this? Larry.
Monty’s Answer: Hello Larry. Many people are asking this question. In my opinion, there may be multiple choices to consider. The “respectable way” has different meanings to different people today. Some people in this situation have no choices; they lose the home in foreclosure, they declare bankruptcy, or both.
However, there are many people who have means to choose what course of action to take. What will drive their decisions depends on a variety of circumstances and attitudes. State and Federal laws, their overall financial position, the attitude and financial strength of the lender, the mortgage document, the presence of a private mortgage insurance company in the transaction and its financial strength are the main considerations.
The bankruptcy and foreclosure route may be an unwise decision if it can be avoided. What I have observed through my research and anecdotal evidence is all homeowners have unique circumstances. As I follow this saga I have noticed the people with the resources to make choices have different attitudes and convictions. I see three different groups. Here, is a brief description of each:
Ride it out. This group will keep the property and continue to pay the mortgage, if they have a mortgage, as long as the property fits into their original plan. Most of the people in this group believe housing prices will recover over time, and they are prepared to accept responsibility for any loss. They want to maintain their credit. They believe by having made the buying decision on the property, they are responsible for the consequences.
Negotiate a settlement. This group wants out of the mortgage. The group believes the lender, because they played a role, should share the pain. The method employed to facilitate this “out” is the short sale. The lender participates in lieu of the possibility of foreclosure and the fear of Federal backlash if they do not participate in the solution.
Walk away from the house. This group believes the primary fault lies with lenders, Wall Street, regulators and Federal government policies. They simply stop paying and wait for the lender to take the house back. In some states, there is no recourse available to the lender as the home is the sole collateral. Other states allow the lender to take a deficiency judgment. This means the lender has the right to collect the difference between the mortgage due and the sale price at foreclosure from the defaulting homeowner.
Which group is correct? I am not judge or jury to take a position. Each group believes their actions are proper. Every player in this debacle has culpability with where we are today in the housing market. There are no winners.
I have authored several articles along the way that provide more detailed information to consider and links to other sources. The article closest to yours, is “Our home is underwater; what should we do?”. The article runs through the gamut of solutions that homeowners face. It will be helpful for you to learn the basics.
This real estate work out situation is constantly evolving. Learn about the choices and consult your attorney and/or your accountant to understand your options. Then, decide for yourself what is respectable and act on that decision. Thanks for asking. Let me know if I can answer other questions. Good luck to you, Larry.