. The adjustable rate mortgages combined with falling income and job losses in the auto industry, construction, retailing, and many other businesses have played a tremendous part in the incredible foreclosure rates we are seeing throughout most of the United States and many other countries. What sounded like a great deal a few years ago (a low adjustable rate) has become an unmanageable nightmare today.



For many years homeowners felt secure when buying a larger home because they had 2 "safety nets" as I call them. The first safety net (let's call it Plan A) was the refinance option. Housing values increased steadily for many years and many people used their home like an ATM (automated teller machine). When extra cash was needed/wanted or credit card balances rose too high, it was very common to do a "cash-out" refinance. No big deal...housing values will always rise...right? Wrong, as we have now found out. If the low "teaser" rate on an adjustable rate mortgage was drawing near, you could simply refinance into a fixed rate and the problem will go away. This is exactly what many mortgage companies told their customers. What? Property values can fall? Yep...So much for Plan A.

Plan B was to sell the house if it became too expensive. Just buy a lower price home and wait until things get better. No one worried about the value dropping below what was owed...until now. If you owe more than the house is worth, you have basically 6 choices: Keep it, rent it, write a check at closing for the difference between the value and the payoff, do a short sale, do a Deed-in-Lieu of foreclosure, or simply walk away. If the payments are no longer affordable, then keeping it isn't a good option. Many people go further into debt in order to stay afloat, but that usually results in an even bigger problem. Some even take money out of their retirement savings which is a huge mistake. An early withdrawal from a retirement account usually triggers a 10% tax penalty PLUS the funds are taxed at the borrowers current tax rate. Most people don't know that money in a retirement account is exempt from creditors and it is even protected in a bankruptcy. DON'T TOUCH IT is my advice.

The next option is to rent the house and move into a less expensive house. There are many pitfalls to being a landlord and many people learn that lesson the hard way. Late rent, evictions, vacancies, broken toilets at midnight, and damaged property are just a few. This is not an option for the faint of heart.

OK...now we are at the 3rd option...write a check. This can work if the amount is relatively low and the homeowner has a source for the funds. It may even make sense in some cases to borrow the money in order to avoid a foreclosure.

The remaining 3 options can be even tougher to swallow...

You can ask the lender if they will allow a "short-sale" which means that the lender agrees to allow the home to be sold by releasing their lien for less than what is actually owed. This is much harder than most people realize because only about 30% of the attempted short-sales actually close. First, the lender will require that you have a "qualified financial hardship" before they will even consider a short sale. The mortgage must usually be at least 3 payments in arrears, but that is slowly changing because lenders are beginning to realize that it can cut their losses if they don't require that borrowers be past due. A short-sale will require extensive documentation to prove that there is a financial hardship. This documentation typically includes recent paystubs for 30 days, 2 yrs of W-2s, Tax Returns for the most recent 2 years, 2 months of bank statements, a hardship letter, proof of assets, and a detailed budget. Even if the lender agrees to allow a short-sale, they still can pursue the homeowner for any deficiency (unless they agree to waive it). Once a buyer is found and an Purchase offer is submitted, there is still about a 70% chance that the deal won't close. That's because it often takes several months to get the proper approval(s) from the lender/investor. If there is more than one lender, all must agree to participate. If there is PMI (Private Mortgage Insurance) an approval from the PMI company will probably be needed. Furthermore, it can often be difficult to determine who actually owns the "note" because mortgages were often bundled together and sold on what is called the secondary market. Wall Street Investors packaged many mortgages together and sold them as AAA rated investment securities to mutual fund companies, pension plans, CDO's (collateralized debt obligations), MBS's (mortgage backed securities) and other creative investment products. Foreign investors also own many of these securities. Many investors prohibit principle reductions. Does this all sound complicated? It is. The delays in obtaining the necessary approvals are often the reason that the buyer backs out. The property value has probably fallen even more so they have second thoughts. Or, they may find another property that is even a better deal. If you want to try a short-sale, I strongly recommend that you work with a seasoned Realtor who has successfully closed at least 10 short sales. Ask for evidence.

Did your short sale fall through? Now what? You can attempt to surrender the property and title (deed) back to the lender by a process known as a "Deed-in-Lieu of Foreclosure". Most lenders require that the house be listed for sale (short sale) for at least 90 days. Remember, if the mortgage was 3 months behind when the property was first listed so you may not have 90 days. The lender is under no obligation to wait and may already have started the foreclosure process. It is important to know that foreclosure laws are established by each state and that there can be considerable differences between them. Even if the lender agrees to accept a Deed-in Lieu, they probably still have the right to pursue the borrower(s) for any deficiency balance. If you work with a reputable Foreclosure Assistance Company, they can often negotiate a release wherein the deficiency is waived by the lender. This also can apply to the deficiency from a short-sale.

Is all of this too much to handle? Why not just "walk away"? Many people are doing just that, but there can be serious consequences. If the property is abandoned, many state foreclosure laws allow the lender to take immediate possession so they can secure the property. Since there is no agreement to waive the deficiency, the lender is allowed by most states to obtain what is called a "deficiency judgment". This means that the lender sues the borrower in court for the amount of their loss. Most states allow all expenses incurred during the foreclosure process to be added to the debt. These costs typically include attorney fees, court costs, property taxes, insurance, maintenance costs, repair costs, Realtor commissions, and closing costs. The other major consequence is the damage a foreclosure will do to a persons' credit report. Foreclosures and bankruptcies generally are the most damaging events to the credit scores. When a short-sale or Deed-in-Lieu are done, the foreclosure is averted and the damage is lessened. The credit report usually will report the account as "settled" or something similar.

Is it unethical to walk away? That depends on the circumstances in my opinion. If someone finds themselves in a legitimate financial hardship that was unintended, I don't think so. Many good and honest people have been trapped in a situation through no fault of their own. When that happens, I think that they need to make every reasonable attempt to minimize their loss and the lenders' loss too. Lenders made a lot of money by making risky mortgages and they knew there could be consequences to pay. Every mortgage and note contains language that spells out the lenders' remedies in the case of a default. If the borrower defaults on the contract due to unforseen and unintended events such as the housing crash and/or the crumbling economy, then the lender can exercise those rights. This usually means that they can foreclose and take possession of the property. It often comes down to a "business decision" by the homeowner to do what is best for their family. Not sure what to do? Call for answers to your questions.

This article was written by David Smith (734-756-6050) of U-Move-On, a company who helps people find the best solution to their foreclosure problem. They provide the resources and services for help with the entire foreclosure process, credit restoration, finding another nice home, moving expenses, legal help and more. Dave enjoys using the many skills he has learned during his career to help people in foreclosure ?Move On? with their lives in the best possible way.