Foreclosure or not? I’ve been using the f-word a lot here in my Summerville, South Carolina law office. (That’s “foreclosure,” not the other f-word, by the way.) And I’ve noticed a transition in attitudes among clients. It’s gone from, “I don’t want foreclosure no matter what” to “let’s discuss what happens if my lender forecloses.” I call this the “foreclosure option.”
Deciding to keep your home is certainly not a foregone conclusion. Sometimes, it makes sense. But at other times, it’s nothing more than slow financial suicide. And sometimes it’s just not possible. Perhaps HAMP (“Home Affordable Modification Program”) won’t work for you, or maybe you have an investment property, like a lot in a subdivision, that isn’t eligible for HAMP.
Clients have been doing the math. And when they don’t, I’ve been doing it for them so they can make intelligent decisions about whether to stop making mortgage payments. Someone trying to save a house worth $250,000 when they owe $350,000 and can’t afford the payments needs a reality check. They need to understand that if they started renting tomorrow, they’d have more equity in the rental house than in the home they want to save. At least with the rental, they’re at zero equity, not negative $100,000!
Don’t get me wrong, I’m not saying everyone should just happily stop making mortgage payments. There are many factors which homeowners must carefully analyze to determine if surrendering their homes to foreclosure makes good financial sense to them. Sometimes, it’s complicated. At other times, it’s a no-brainer.
And What About the Morality of Allowing the Foreclosure?
The morality of the decision is a big issue for most people. Sometimes, it’s simply impossible for clients to continue making payments, but sometimes they can make the payments but decide to quit paying anyway. Recently, a client from Summerville, South Carolina came to see me about a mortgage on a lot. He now owes more than $100,000 than it’s worth. He’s paid over $50,000 in interest to the lender over the last five years. And he’s not doing it anymore even though he could. My job is to advise my clients of their legal rights, not kick them out of my office and tell them to keep paying no matter what. Homeowners need to decide what they think is right for their unique situation and act accordingly.
For some, the decision to let the property go is easy. They tried to work with their lender, but the lender wouldn’t help. They may also believe that the lender allowed them to borrow more than they were capable of repaying. Some also realize that allowing the foreclosure to occur isn’t a crime. It’s not illegal, and it’s in their best interests, so they tell the bank to foreclose away.
For most people, though, they view their contract as a promise which must honored, and they agonize over the foreclosure option. They only “give the house back to the bank” when there are really no other workable options. I’d say over 90% of homeowners fall in to this category.
There’s been a lot of discussion about the foreclosure option in the media lately. Recently, The New York Times published an article entitled, “Owners Stop Paying Mortgages, and Stop Fretting.” According to the article, some Florida homeowners used foreclosure to allow themselves to go to the steakhouse, “take their gas-guzzling airboat out for the weekend,” and “visit the Hard Rock Casino.” This has some people crying foul, and it has my friend and colleague Jay Fleischman, a New York City bankruptcy lawyer, a bit peeved at The Times.
As Jay states in his recent blog post:
The real shame of this piece is that it’s not reflective of what people do when they fall behind on the mortgage. Most people fight like hell to catch up, to get out from under the debt, and to do what is by all accounts the honorable thing. They want to hold up their end of the bargain, and fail only because most lenders don’t have the same objectives. There’s a disconnect in the real world – consumers want to make it right, and lenders just don’t give a crap. Because consumers are real people, and lenders are monolithic corporations with bureaucracies and levels between the font lines and the decision makers. That’s the reality, but the New York Times went for the sensational. Boo, hiss.
He’s got a point. Jay deals with lots of people every day as do I. And we both know in the vast majority of cases clients agonize over the foreclosure option and only decide to surrender their properties when (1) they just can’t pay, and (2) their lenders have refused to modify their loans.
And what Jay’s really troubled over is that Congress will get concerned that the American consumer will start behaving like Corporate America–just out for #1 and the “bottom line.” Oh, the irony!
We all know that Corporate America will avail itself of any legal means–and sometimes some illegal means–of propping up the bottom line. Corporations breach contracts, deny legitimate insurance claims, and don’t hesitate to avail themselves of bankruptcy protection if it will help their bottom line. But if the American consumer starts that stuff, well then, Congress will start hearings in short order. It’s a double standard.
Just remember the truth: Despite recent media attention, most people agonize over the foreclosure option and do their very best to keep their homes.