When Borrowers Stop Playing Ball
powered by Content that WorksPosted on: August 2010
Common sense says that when a ship is sinking, it's time to jump overboard with a life raft. But when that scuttling vessel is a home with a mortgage the borrower can no longer afford, refusing to pay the lender may help that borrower survive today but leave him with a bleak future, say the experts.
According to a May report by the Mortgage Bankers Association, the combined percentage of loans in foreclosure or with at least one past due payment was more than 14 percent. Many of these borrowers have chosen the "strategic default" option - the decision to stop making mortgage payments, in many cases despite having the financial ability to do so. But taking this path can have severe financial and legal consequences beyond the bank repossessing the residence.
For starters, after a foreclosure, short sale or deed-in-lieu-of foreclosure, a borrower's credit score can be reduced by anywhere from 200 to 400 points, and any type of foreclosure mark will stay on your credit report for up to 10 years, says Bob Patrick, CEO of Movin-On, a North Granby, Conn., real estate consultancy. Additionally, the period he'll have to wait to purchase another home can be between two and seven years.
"When you refuse to pay your mortgage, you've made the decision to breach the contract with the mortgage lender," says Frank Uzzi, a real estate attorney based in New York.
Aside from losing the home, Uzzi says borrowers may be liable for interest, late fees, court fees, and legal fees that the lender incurs. "In many cases, the bank will pursue borrowers for a deficiency judgment, which means the bank will file another lawsuit against to recoup any money the bank is short if the house did not generate enough money to satisfy the amount owed on the mortgage," he says.
What's more, if the borrower defaults on the loan, his name will be posted in local newspapers under foreclosure notices, which can be "personally humiliating and may have business consequences," says Dennis Torres, supporting faculty of business law and director of real estate at Pepperdine University's Graziadio School of Business and Management in Los Angeles.
Indeed, borrowers foreclosed upon may have trouble getting a job if they carry a poor credit rating and history, says Norm Miller, professor and director of academic programs for the Burnham-Moores Center for Real Estate at the University of San Diego. "You won't go to jail, but you will need to rent for a long time and rebuild your credit rating. And you may need to pay cash for everything for a while."
Uzzi says significant emotional stress also can accompany foreclosure and litigation proceedings, which can be detrimental to physical and mental health, and relationships with others.
Also, most future loan applications will ask the dreaded question, "Have you ever been foreclosed on?" says Patrick. "This stays with you for life," he says, "even though it may not show up on your credit report after 10 years."
A better option than withholding loan payments is to contact the bank and request a loan modification, "which will allow the bank to restructure your loan and lower your payments," says Uzzi. Know that not all modifications requests are granted, however.
In addition, borrowers should consider renting out the home (if they can nearly break even on payments), moving to a cheaper apartment or in with relatives, as a ways to live within their means, Miller advises.