Underwater homeowners have gotten some rotten advice.
If the lousy economy has got you struggling to make your mortgage payments, there’s a good chance you’ve entertained at least a passing fantasy about turning in the keys and closing the door on your housing woes states a Forbes Article.
You wouldn’t be alone. Some 27% of the 250,000 homes sold in November were unloaded at a loss, according to Zillow.com. What’s more, 21% of owners of single-family homes with mortgages–a total of more than 12 million families–were sitting on “negative equity” last fall, Zillow says.
Relief is available from lenders–in theory, anyway. The federal government’s Making Home Affordable incentive program is aimed at encouraging banks to lower interest rates for homeowners whose total housing payments (debt service plus property taxes and insurance) are greater than 31% of annual gross income. Unfortunately, such modifications are proving difficult to negotiate. What’s more, even a modification isn’t going to dig out of a financial hole people who have other big liabilities, like medical bills.
There is another way out, but not one your mortgage banker is anxious to advertise. For some homeowners, the smartest financial move is to hand over the keys. It may even be possible to hand them over to a renter instead of a banker, while both improving your near-term finances and maintaining long-term control of your property.
Not only would it benefit millions of homeowners to walk away, it would also benefit the economy. The money that homeowners save by not paying their mortgage is money that could instead be used to support consumption and boost the economy. If 5 million underwater homeowners saved an average of $10,000 each by becoming renters, this would free up $50bn a year for additional spending. This would have the same impact on the economy as a $50bn tax cut. If we assume a multiplier of 1.5 on these savings, the 5 million walk-aways will generate close to 750,000 jobs.
Ideally, you’ll want to arrange a short sale, which will deliver less of a hit to your credit rating than a foreclosure. You should expect either option to knock 100 points off your credit score, says Carrie Coghill Kuntz, president of financial advisory DB Root & Co.
If your bankers won’t agree to a short sale, consult an attorney. “Your lender doesn’t have to accept your property in release of your debt,” warns Kimberly J. Sims of Dallas law firm Riney Palter. Instead, you could end up without your property and with a judgment against you, she warns.
Of course, suggesting that homeowners walk isn’t the only possible outcome from all of this. If banks start to get the sense that there is an increased willingness among this group to walk, the banks may decide that it is in their best interest to find a middle ground — one that would potentially leave both the banks and the homeowners better off.