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June 7, 2010

Foreclosure as free rent

As some homeowners desperately try to stave off foreclosure, others are happy to take advantage of the possibilities. It's a numbers game: With lenders waiting longer and longer to repossess homes and kick out the former owners, months -- even years -- can go by with defaulted borrowers living in the properties mortgage- and rent-free.

The New York Times had an enlightening story on the subject last week, noting that one attorney in Florida has made a business of helping owners drag the process out as long as possible for just that purpose. He has 350 clients, and every week brings about 10 more.

Even for homeowners who aren't trying to prolong foreclosure, the time line has lengthened:

"The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics," the Times reports.

A crisis as large as this one will bring out all sorts of responses from people. Besides the foreclosure free-renters, you have homeowners who can't really afford their mortgages but are cutting corners everywhere else just to stay current. And homeowners who can afford their loans, but -- for various reasons, including plummeting home values -- have chosen to mail their keys back to their lender and walk, betting that the credit damage is worth it.

Not to mention homeowners who can afford their mortgages, are continuing to pay them and are steamed at the banks, the foreclosure free-renters and the strategic defaulters alike.

Talk about a mess.

Much has been said about whether homeowners should default on their mortgages from a financial standpoint. I'm curious what you think is the most ethical move for borrowers in these situations, and whether ethics and financial sense are in concert or at odds:

Person 1: Cannot possibly afford the mortgage payment. Might qualify for a loan modification.

Person 2: Can barely manage to pay the mortgage. Might qualify for a loan modification.

Person 3: Can afford the mortgage and doesn't qualify for a loan modification, but home's value has fallen 20 percent or more.

Thoughts?

Posted by Jamie Smith Hopkins at 7:00 AM | | Comments (6)
Categories: The foreclosure mess
        

Comments

Im fairly old-fashioned. I have always paid rent or mortgage first. My electricity bill second .and then all other bills after that.

I can sympathise with someone who has lost thier job and cant pay rent or mortgage.

But i have very little sympathy for anyone who CAN pay ,but wont.

I bought a house with a high interest rate[10.25 %]. I paid it for a couple of years and then was able to refinance it down to 7.25%.

My point is that even though it was way too high[the lender doubled it the day before closing ] i still knew what i had to pay and i did whatever was necesarry to pay it.

Im sorry, but in my opinion if someone can pay their mortgage, but walks away because of home value reduction then they are acting immorally.

I bought a home in 2006 at the top of the market. Soon after the real estate market started its downword slide. I also have a career in real estate and my income was dramatically affected.
Jobs were none existent in the area and I after 8 months I realized that I had to move to survive. I tried to sell my house for $30,000 less than I purchased it, no takers, reduced more and once more. No offers. I then rented the house for less than the mortgage payment, moved and have tried to pay for a new rental and the mortgage. I have tried to modify but I have been in the process for over 7 months and don't hold any hope that I will get the modification. I will then be forced into foreclosure. I want to do the right thing and have held on as long as I can but I cannot refinance, my credit is ruined because of my lack of income and paying bills late. The house is now not worth anywhere near what I paid. So what would you do. Any ideas??

I am with Pete on this one. One should truly understand the risks, consequences and commitment when buying a home. If I was unable to make a commitment to make payments for the duration of the loan, regardless of the market, I simply would not buy.

If there is a way to save money by loan modification, refinancing, etc. then I'd definitely do so. But I think it is unethical to walk away from a financial commitment simply because I just don't feel like paying anymore.

Of course, if there is some unfortunate event like illness, unemployment, etc. then it's a different story.

So in the example above I think Person 1 will have to foreclose and move on (and most likely should not have bought in the first place). Person 2 should try to stay afloat and Person 3 should keep paying.

To Lynn - I'm truly sorry you have to go through this and I just hope I never will. But I would, first of all, try to minimize my expenses (moving in with relatives; renting cheaper, etc.). I'd also try to do a short sale and would reach to the local elected officials for help with loan modification and, possibly, some other financial assistance (this may sound naive but there is no harm in trying). If all else fails, I would cut the losses and go through foreclosure. Sh*t happens. This is just money.

All of the above should walk away if they choose to do so. You sign a contract promising to repay the loan, and if you don't, the bank takes the property. It is not immoral to hand in the keys when banks can do it to get out of their bad deals. Commercial properties are being handed over too. Should businesses who can afford to pay their mortgage be held to different standards then people? I don't think so. The banks would rather foreclose on people instead of reducing principal balance. They would rather sell the home as an REO for the lower amount than work with the homeowner. That is their decision. Why should the homeowner be at the mercy of the bank so they always win? The bank will win anyway. Walk away and let the homeowner win too. Claim the Debt Forgiveness Act as soon as possible before it expires. You won't have to pay any income tax. Just watch out for a deficiency judgment (3 year window and unlikely).

Going through foreclosure leaves the distressed mortgage owner open to future collections of the mortgage deficiency.

Much better to short sale and get the investor to stall the sale anyway.

Don't do HAFA. It's a trap.

It's definitely a mess. Since you wrote this, there has been even more troubles that have bubbled to the surface in regards to foreclosures. How do you think the 'freezes' will affect the state of the economy? Do you see a silver lining behind all of this? I'm curious to see what others think about this...

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie
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