Many homeowners today are faced with the situation where
their homes are worth less than what they owe on their mortgages. In fact, the issue has reached the national media, with the New York Times and National Public Radio both presenting articles on this issue this week alone.
This article
briefly explores some options a broker can discuss with a homeowner who is considering
the sale of their home.
There are 4
viable alternatives for homeowners to consider: the first is to continue to
make the monthly mortgage payments. This is what most homeowners do. For numerous
reasons and regardless of whether the payment can be afforded, homeowners feel
obligated to repay their loans, even though it may not be in their financial
interest to do so.
The second
alternative is loan renegotiation. Many homeowners who have requested their
lender to renegotiate their loan have discovered that their lending institution
is reluctant to modify the terms of the loan and when their lender is even
willing discuss a renegotiation, numerous hurdles must be overcome before the
loan can be renegotiated. It is generally rare for a lender to agree to
actually forgive any of the principal of the loan.
The third
option is to find a buyer for the home and negotiate a "short sale". As with
asking a lender to renegotiate a loan, many homeowners find the short sale
process to be extremely frustrating, time consuming and ultimately an
unsuccessful endeavor. This is not to say that a successful short sale is
impossible, but it is frequently a difficult process.
Last and
newest is the "Strategic Default." More and more homeowners are electing to
walk away (i.e., intentionally default) from their mortgages and let their
lender foreclose. These homeowners have reached the conclusion that the financial
reasons to walk away outweigh the reasons to continue to make the monthly
payments to the lender. There are several viable reasons to consider a
Strategic Default.
Arizona has long established "anti-deficiency"
laws with respect to home loans. What is a deficiency? A deficiency is the
difference between the principal balance due on a home loan and the amount that
the lender receives at a foreclosure sale. Thus, if the loan balance is
$500,000 and the lender receives $200,000 at the foreclosure sale, there is a
deficiency of $300,000. "Anti-deficiency" laws are generally intended
to protect homeowners from the lender collecting the difference. In fact,
lenders making loans in Arizona
are aware of the inherent risk to them of the anti-deficiency laws, and
typically price their loans accordingly.
There are many criteria
used to qualify under Arizona's
anti-deficiency statutes. Each situation is unique and upon review, an attorney
who specializes in real estate transactions can determine whether the property
would qualify.
Finally, a Strategic
Default may not have as great an impact on your credit score as the lending
community would have you believe. Many commentators think that a borrower's
credit scores will take the same hit (e.g., 200 to 300 points, depending on
overall credit conditions) through a short sale or foreclosure, and both remain
on a person's credit report for seven years (bankruptcies remain for 10 years).
Being informed about the
options available to a homeowner will help establish your credibility as not
only the right person to assist with a potential home sale but also as an
advocate for the best interests of the homeowner.
These are
complicated issues that should be discussed with competent counsel familiar
with real estate law and bankruptcy law.
For more information, please contact Stuart Pack or Robert Nagle at (602) 595-6951 or email them at stuart.pack@naglelaw.com or robert.nagle@naglelaw.com.
