by Nancy Osborne, COO of ERATE®
April 22, 2008 - As foreclosure rates climb throughout the U.S., compounding problems for strained mortgage lenders and investors, it appears that many programs launched for the purpose of assisting homeowners and preventing foreclosures may have missed the mark as many distressed homeowners are finding the path of least resistance is to leave rather than try to work things out with the lender and remain in the property. This so called “flee phenomenon” may be occurring for a few reasons: 1) Borrowers have little to no equity in the property and therefore nothing (presumably) to lose by walking away. 2) Property values are now on the decline and many of these homeowners had hoped to cash in on the American dream and profit from the surging real estate values of the past. 3) Many distressed properties are located in the outskirts of metropolitan areas where property values have tended to be the weakest and the commute times to work the longest for these homeowners and with gas prices skyrocketing, it makes the case for abandoning ship that much stronger. All three of the aforementioned reasons have given many distressed homeowners little reason to stay and seemingly valid arguments for bolting in spite of any mortgage payment concessions their lender is willing to make. As for the lenders involved, abandoning traditional underwriting guidelines by lending to borrowers with little to nothing down, and consequently not requiring them to have some proverbial “skin in the game” has come back to haunt them as real estate prices have now proved they do not always move in an upward direction.
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Perhaps making matters worse are the number of websites that have sprung up instructing distressed property owners on how to go about walking away from a property and the lender, even providing step by step advice on how to remain in the property for as long as possible without paying the mortgage and then further advising these borrowers on how to rebuild their credit profile after the damage is done and the foreclosure (or deed in lieu of foreclosure) has occurred. However the developer of the fico scoring model, Fair Issac, is warning homeowners who think they will be able to quickly recover from such an adverse scoring event quickly, to think again. Foreclosure can have the same negative impact as a bankruptcy filing and can dramatically impact ones ability to obtain any type of credit, secured or unsecured, as well as the potential to impede ones ability to apply for insurance or employment and should never be taken lightly. Additionally Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac are putting distressed borrowers on notice not to consider walking away as a solution to their problem as this could result in other problems only beginning for them as they may find it difficult to obtain home financing for some time in the future, up to seven years, and that the down payment requirement for a previously foreclosed upon borrower may be stiffer in the new lending environment that is sure to come. Additionally borrowers who reside in states where deficiency judgments apply may be pursued in those cases where it makes financial sense for lender to do so. Another consideration for potential walkers could be that of federal taxes, while borrowers who receive authorized debt forgiveness (or principal reduction) from their lenders may avoid being taxed on this amount (which was previously treated as ordinary income by the IRS up until recently) it has yet to be determined whether this same taxpayer friendly treatment will be afforded those borrowers who willingly choose to walk away. The best advice for distressed homeowners might by to strip the phrase “walk away” from their vocabulary as it could prove to be a misnomer.
Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
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