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Last week I received a very interesting comment on one of my articles on loan modifications. The comment claimed that for most underwater borrowers (homeowners that owe more on their property than it is worth) a “strategic default” is smartest way to go.
I had some months ago written an article claiming along similar lines that in many cases foreclosure is the only logical conclusion when homeowners had overspent on their homes and could no longer afford the overpriced luxury homes they had unwisely bought at the crest of the housing boom.
Readers response ranged from claims that greedy buyers had it coming and deserved to lose homes they should never had bought to angry comments from people that felt my cold perspective was detached from the real plight of homeowners.
Opinions on the issue of loan modifications typically polarize to these two opposite views. 1) That loan modifications are an unwelcome intervention to the “natural” forces of free market and 2) that “saving” troubled homeowners is the responsibility of Government and the god given right of homeowners.
The comment I mentioned above intertwined these two views in an arguably “immoral” but very pragmatic perspective that you will hate or love.
The proposition is that if done smartly a foreclosure can provide a clean slate for troubled homeowners that can’t realistically save their homes. Banks won’t like this option but homeowners need to care for themselves, banks certainly do so. These are the steps our anonymous commentator suggests, with some gentle editing:
1) Let the lender foreclose. During this time you will of course not have to pay your mortgage payments. 2) Just before your property is to be sold declare bankruptcy. This will wipe out all liability for the mortgage debt, if this is an issue in your state, eliminate all other unsecured debt and in the process buy you a few more months to move and during which you can save your mortgage payments towards your move. 3) Start rebuilding your life. The market is a mess now anyway and most likely will continue like this for several years. Your credit will be destroyed by the bankruptcy and will appear on credit reports for 7 to 10 years but during this time you can rent while your credit scores improve. In two to three years you could have a decent credit score if you don’t get into more trouble. After only 2 years of a bankruptcy you can qualify for loans that allow for persons who have had a foreclosure/bankruptcy, like FHA for example.Editors note: Bankruptcy laws have tightened up a bit so this “advice” might be underestimating how many years you will be unable to take a loan and the annoying detail that the government will be pretty much running your financial life for you for years after declaring bankruptcy.
This option is not a great one for loan modification agents, as they don’t get any money out of it but might be a good option for some troubled homeowners.I must say that I don’t feel this option is a responsible or moral way of dealing with debt but it is another option. Unfortunately the credit culture we live in moves people to spend money they don’t have on things they don’t need. The idea that all that waste can be made to disappear with a convenient bankruptcy does not seem fair. However there are many homeowners that have fallen into dire straits without being irresponsible because of unemployment and the drop in house prices.
Last 3 posts by Andrew
- Loan Modification Alternatives: Short Sale Your Home - November 23rd, 2009
- Loan Modification Alternative: Is Renting Your Home a Good Option - November 21st, 2009
- Loan Modification Alternatives: Is Renting Your Home A Viable Option - November 21st, 2009
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