Foreclosures Bring Relief to Some Homeowners
When Lindsay Zortman and her husband put up their newly renovated house on the market in September 2008, the family moved into a rental home so that it would be easier to close on the sale. But the real estate market collapse went into full force, and the Zortmans decided to tough out the winter and then move back into their luxurious five-bedroom country home in the spring since no one was buying it. Tragedy overtook them, however, and the couple learned that their youngest son had brain cancer.
Lots of money and effort went into treating their 3-year-old son and the family stopped focusing on selling their house. "In December 2008, we made the hard decision to stop paying our mortgage and let our home go into foreclosure," says Zortman. "Our only thought was that money didn't matter as much as being together. Our credit was ruined and we knew [the situation] was just going to get worse with both of us off of work," she adds.
The Zortmans joined the flock of 588,000 borrowers last year who chose to walk away from their homes and ceased paying their mortgages. This year, the number of people strategically defaulting on their mortgages is expected to drastically rise as people look forward to foreclosure as a means to alleviate their financial burden. It doesn't hurt, too, that borrowers who owe more than their homes are worth are getting a motivational push from Brent T. White, a University of Arizona law school professor, who insists in his 52-page academic paper titled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis," that homeowners who are underwater "should be walking away in droves" with no fear of long-term repercussions.Richard Runion, a father of six faced with enormous debt, is considering doing just that since he is already 17 months behind in mortgage payments. "My wife had a heart attack over a year ago and left us without her income, causing us to fall behind on our mortgage," Runion says. He attempted to negotiate a loan modification with his lender, Bank of America; however, Runion claims BofA would not work with him on a reasonable loan modification, increasing his monthly payment of $1,287 a month to $2,500."They offered me a modification that would have raised my payment to $2,500 and there was no way I could have agreed to that, so [BofA] said I needed to pay $17,000 up front to get the loan caught up. I wish I had that kind of money," Runion says.
Alex Charfen, distressed property market expert and CEO of the Distressed Property Institute, advises against a strategic default, noting that worried homeowners have plenty of other options such as a deed-in-lieu of foreclosure, refinancing, renting the property or negotiating a short sale.
According to Charfen, 23 percent of homes in the U.S. are currently underwater. "If banks don't pursue [borrowers who stop paying their mortgages], you can potentially have one out of four homeowners walking away from their mortgages and the effects this would have on the economy would be massive," he says.
But Charfen believes lenders won't sit back and let defaulting borrowers off the hook. "If strategic defaults gain more momentum and popularity, banks will become much more aggressive on deficiency judgments and post-collection efforts, just due to the fact that they have to defend their portfolios," he says.
Runion, however, isn't worried about the bank coming after him. His greatest concern is that he doesn't know anyone who can host a family of eight so that his children won't have to change schools and leave their friends, and finding a house big enough for his family in the same school district is "close to impossible," he says.