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To Pay or Not to Pay

I have been coming across more and more homeowners who are in a quandary. They are not behind in their mortgage nor in any stage of foreclosure, yet they want to sell their home which has dropped in value and would end up being a short sale. Although more and more banks are accepting short sales that are not in default, it is hit or miss. An impending foreclosure really motivates the bank. The thought of yet another non-performing asset does not bode well with the balance sheet so the bank really doesn't want to become a homeowner.

So as a homeowner in this situation what are your options? Well for one keep paying as agreed and wait for the market to turn around. If that isn't an option because of an upcoming ARM reset, forced relocation, or other outside circumstance out of your control, then you have some tough choices to make. You have to look at your monthly expenses and arrange them according to priority and see if paying your mortgage makes logical and economical sense. For example if your refrigerator is empty and you have 1/4 tank of gas and your choice is pay your mortgage or eat and be able to get to work then the answer should be obvious.

I would never advise anyone to miss mortgage payments for the sole purpose of gaining leverage for negotiating a short sale. This is the same type of thinking that got us in this mess to begin with. There is nothing wrong with not paying your bills if you can't, it's using it as a strategy for some other reason is what I have a problem with.

Owners of investment property may have a tougher time but it really depends on the individuals financials. If he has a portfolio of investment properties and wants to short sell one because it is under performing, good luck. On the other hand, the small time investor with one or two properties may have a fighting chance if you present a good case.

Of course there are people in our business advising this type of behavior my only response to those who are thinking of it to speak with a competent attorney and/or accountant.

Your thoughts and comments are always appreciated.

Noel Padilla

Kendall Short Sale Foreclosure Specialist

Posted by Noel Padilla, CDPE on 07/08/2008 07:57 AM

Comments (10)

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10 Comments on To Pay or Not to Pay

JUL

2008

I really do not like the bank's attitude

I have a client who will not be able to make his loan payment in the very near future, and the bank just won't talk to him unless he is behind.

He had the motivation to pay as long as possible and maybe in the meantime find a solution with the bank, but now that he knows that the bank is not interested in a solution, it is very hard for him to be motivated to pay yet another month.

Anne

Short sales have been way too common. I don't understand how so many people were allowed to buy homes they can't afford and why these people bought these homes obviously knowing they couldn't afford it and now they get to take basically no responsibility for it. I understand there are SOME cases where people COULD afford the homes and maybe lost jobs or whatever happened to put them in this position, but in too many of these cases it was people getting approved for loans outside their budgets with either fale information or without thinking of all of their other expenses. Now they all get upset about how bad the market is when they helped contribute to this cycle.

Sincerely,

Kathleen

Some people are just keeping their heads above water. How long is your credit effected from a short sale?

When a homeowner signs a deed of trust (promise to pay), there are no clauses that say that this document is only valid if you want to stay here AND the market cooperates, are there? Hmmm... Seems to me that a promise IS a promise. If a homeowner has a devastating financial or medical crisis, that is one thing, but just deciding that I want to move and the bank will have to take my loss so I can sell is not an ethical choice in my mind. Sorry to be an old "fuddy duddy"! And to those offering advice such as this to sellers, SHAME ON THEM!

It is amazing tome how many people are just walking away from homes. I guess just like they didn't realize the bubble would burst they don't realize that the bottom will come and prices will eventually rebound. If you throw in the towel because the property has dropped in value eventhough you can afford to keep it, it is like cashing out your stock portfolio when it is down. Those who hold don't loose in the end.

You know, this is the first "time" in real estate where I actually advised a client in a way that I would NEVER have before! I was and am an Investor and became a Realtor later, after 5 or so years in the business. I would NEVER have suggested a foreclosure, but this week I DID!!!

My client lives in Florida and he is late on payments. His home appraised for much more than it was "worth" and he pulled out a line of credit. Now the prices have adjusted back to normal and appraisals are coming in 30% lower than the paid for the 1st mortgage. He was a mortgage broker too...and had to move away!

I told him that maybe it was time to consider foreclosure or bankruptcy!

I felt EVIL suggesting it!!

Tracey

Linda

About 2 years sometimes faster if you can restablish a good payment history. Which isnt hard becasue most of the short sale clients only credit blemish is the short sale so their other credit lines remain intact so long as the creditors don't run credit checks which most don't.

Anne,

Agreed!

Katheleen,

Greed, on the banks part mostly. I go to you to buy a home, you introduce me to a mortgage guy who says I can afford x payment for 2 or 3 years then refinance which most did. Then the bottom fell out and all those empty promises weren't fulfilled. Remember the subprime market was full of people who were not educated on mortgages thus relied on "professionals" for guidance.

Steve,

Your right a promise use to mean a whole lot. This new generation doesn't value a "(wo)mans word" any more. A handshake use to be enough, if you didn't hold up your end well,you just got shot that's all. Maybe we need more of that and people will start doing what they say they would. This is why this country is the way it is.

Jennifer,

Good point, that's why homeownership is called an investment-something that will gain value over time, not over night!

Noel: If making the payment can be done through renting the home, then that's also an option. Buy the next home, now, while interest rates are low and prices are too. Rent out the prior home and cover that mortgage. Sell it when the market comes back.

Once upon a time, lenders would not consider a short sale, DIL or loan modification unless the borrower was behind in payments - some even required the borrower to be 90 days past due!

That is not the case any more albeit there are a few lenders that hold onto that obsolete policy.

It is the laste payments that wreck a person's credit score - the short sale or DIL is just a hiccup. The late payments will tumble a score by more than 100 points!

Please don't advise your clients to stop making payments! That's sooo old school and not necessarily good advice.

AUG

2008

Noel, this is a great post. Many times the banks don't seem to have any common sense. If a borrower has a cloud looming from a distance that he/she will no longer be able to make the payment, then why not work it out with him/her now? Why wait until they are behind to do something. Yes, it is understanble that they have other files that are in dire need of getting the deal finalized. However, prevention is better than waiting for the problem to occur.

Tracey, I don't see anything wrong for advising a client to let the home go into foreclosure. There is nothing evil about suggesting that. Sometimes, the lenders forced the borrower into this route and so let it be.

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