Homeowners who tried refinancing, but were rejected because they owed more than their homes were worth, may be ready to walk away and abandon their mortgages altogether. Desperate times call for desperate measures, and that has given rise to some novel and offbeat strategies.
With plummeting housing prices and rising mortgage obligations, many homeowners see no point in continuing to pay lenders for loans that are worth more than the underlying real estate that they own. A 14 percent drop in home sales, the largest decline in 20 years, was recently recorded-even as the number of unsold listings swelled, and household budgets experienced the added strain of consumer inflation. So far this year, 25 percent of all home sales have been foreclosures and, while that's a shocking statistic, it may be just the tip of the iceberg. Many borrowers are crunching the numbers and discovering that it doesn't make sense to keep fighting economic gravity in a losing battle to refinance, sell, or negotiate away from troubled loans. Instead, they see foreclosure as an exit strategy of choice. Sometimes that leads to interesting and somewhat surreal mortgage-related tactics.
Just walk away
During the foreclosure crisis of the late 1980s, homeowners began to practice a form of walk-away that real estate appraisers dubbed "creative refinancing." Being "upside down" in a loan became an impetus for this kind of convoluted refinancing strategy. Borrowers would simply stop making mortgage payments that they couldn't justify because their homes were worth so much less than what they owned. Then, the foreclosed homeowners went back to their lenders, applied for new loans, and bought back their own original homes at deeply discounted foreclosure bargain prices. In order to get the bad loans off their books and move on to more profitable business, many desperate lenders agreed to cooperate with this radical method.
The current crisis has inspired another plan that may not help homeowners in any significant way-but the entrepreneurs behind the concept might make some quick cash. For about $1,000-which is a large chunk if you're already facing the loss of your home-a company named "You Walk Away, LLC" offers to assist homeowners in expediting the foreclosure process. For their hefty fee, you get some counseling to repair the damage to your credit, as well as some basic legal information, and a brief consultation with a real estate foreclosure attorney.
Better than foreclosure
A more practical plan might be to talk to the lender and negotiate what's called a "deed in lieu of foreclosure." The lender takes ownership of the property and, in exchange for your cooperation, agrees to waive any outstanding balance. In other words, you hand over your home at the current appraised value in exchange for having your mortgage debt erased.
But beware-some lenders can still sue you for the difference, depending upon the laws of your state. What's more, the IRS may tax you later for the debt that the mortgage company forgave, and call it earned income.