Should You Walk From an Upside Down Foreclosure?

By: Dave Dinkel

An "upside down" property is when the money owed (mortgage) is greater than the fair market value (FMV) of the home. For example, if the FMV of the home is $250,000 and the amount owed is $275,000, the property is upside down.

This situation generally happens when there is a real estate market decline, the homeowner refinances more than 100% of FMV, or an equity line is added that is close to or above the FMV. In some areas of the country where there have been substantial market decreases, these same markets are retracting and leaving the latest home buyers, or buyers who refinanced, with upside down mortgages. Refinancing and allowing the property to go into foreclosure is getting to be a very common practice within the past few years.

When the homeowner is late on his mortgage for 30 days, he gets a Notice of Default ("NOD") and continues to receive these NOD's every thirty days until the loan is closed out by reinstatement or foreclosure. A little known fact is that lists of NOD's are sold to mortgage brokers and anyone who will pay a few cents per name. These list buyers know that if the homeowner becomes a NOD, he is likely to become a foreclosure candidate shortly.

Whether the lenders and the credit bureaus both get paid for these names is uncertain, but list brokers re-sell these lists many times over. If you have ever been late by 30 days on a credit card or mortgage payment, you may have noticed that you start getting "refinance" or "you are pre-qualified" loan offers. This is because the lenders of high risk loans are buying the NOD list and sending you financing offers. Investors use the NOD lists knowing that once a homeowner is 60 - 90 days late on his mortgage, he is usually headed to foreclosure and 80% of the time, the loss of his home. If you are an investor reading this and buying these leads, unless your list vendor can sort the 30 and 60 days leads out, get another list vendor who is one of the original buyers of this information. It will cost you a little more per name, but the difference is not significant.

The real question is what options does the homeowner have for his upside down property?

1.)The homeowner can continue paying his mortgage with his only benefit being the tax deduction for his interest and his credit remaining in tact. Each payment is lost equity and can only be justified as a rent payment in his mind.

2.)The homeowner can stop making his mortgage payment, go into foreclosure and lose his home and tarnish his credit for years to come. However, he always has the option of moving on to another home using a "no credit" purchase program to buy his new home.

3.)He can ask his lender to do a loan modification to reduce his mortgage payments by extending them out 10 years, find a buyer for a short sale, request a deed in lieu of foreclosure or simply walk away from his home and let the lender repossess it by foreclosure, essentially the same result as "2.) above.

So as you can see, the homeowner has few choices to "stop his bleeding"
as it is known in the industry. This is the hidden foreclosure market that is just beginning to become obvious. Many homeowners with second homes or investment properties are making the choice to walk away and take their chance with credit repair later. However, the most objectionable consequence is the potential for a deficiency judgment by the lender for the deficit that wasn't paid on the mortgage. The lender has the option to pursue a deficiency judgment or issue and IRS Form 1099 which gives the homeowner "phantom income" in the amount of the mortgage deficiency, which is a far better option that carrying a deficiency judgment on his credit report. Take these consequences into consideration if you have to make the judgment of whether to stay or leave your home behind.

About Author:
Dave Dinkel is the author of "32 Ways to Quickly Stop Foreclosure" and has helped thousands of foreclosure victims for nearly 33 years. If you are facing foreclosure, visit StopMyForeclosureMess.com for guaranteed solutions.

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