banktime.com

A law professor from the University of Arizona recently published a highly controversial study on troubled home mortgages. Brent White went so far as to say that sinking homeowners should give serious thought to just walking away from their obligation, a view that has had him under fire for the better part of the last holiday week. It’s not that homeowners should blindly turn their back on their legal responsibilities, White disputes. It’s just that he believes that consumers should be given the same legal options as business owners, since there is an indisputable double standard in that regard.

White points that business owners are given several legal options for abandoning contracts that are not working out. Banks and the legal community understand this, and thereby have more incentive to work with struggling business owners. White believes that banks need to be compelled to modify mortgages that are not working out. In an academic release, White ventured his opinion that so many of the estimated fifteen million homeowners upside down on their mortgages are still paying their monthly obligation. He points out on numerous occasions that he certainly is not in favor of people backing out of their commitments. It’s just that homeowners need to take a hard look at what’s in their best interests, he states. Not surprisingly, the real estate industry has not emerged as fan of Professor White’s work.

A spokesperson for the National Association of Realtors, Walter Maloney, responded adamantly against White’s statement. Raging that not paying a mortgage is “not a responsible thing to do,” Maloney also cast doubt on whether White’s beliefs about home values are correct. White asserts that home values are unlikely to raise any time in the near future, leaving struggling homeowners paying for mortgages worth much more than the house in question, and leaving banks no incentive to help these people out. Maloney argues that home values have historically leveled out after several years of low vcalues. Furthermore, he counters, it is downright unethical to advise people to walk out on their mortgage payments.

Interestingly enough, White doesn’t dispute Maloney on that point. In truth, White doesn’t seem all that concerned with ethics inasmuch as the best interests of home owners are concerned. It may be truly shameful and “wrong” by emotional standards to let go of the contract you signed, he admits. But really, once you get beyond those emotional feelings, there are often “powerful financial reasons” to let go of the sinking ship that is an upside-down and troubled mortgage commitment. It’s the banks’ fault that so many people are trapped in toxic mortgages, he attacks. And honestly, people should consider cutting out emotions and taking a hard, rational look at the situation.

One of homeowners’ primary excuses for hanging on desperately to a hopeless mortgage, White states, is the fear that the penalties will take a lifetime to counteract. But this simply is not true, he reasons. He says that the consequences of defaulting on a mortgage may take a few short years to overcome, if the consumer has otherwise untarnished credit and steadfastly maintains a good history with their other creditors. Plus, he says, many individuals and families “should be able to plan in advance for a few years of limited credit.”

It’s abhorrent to consumer credit counselors to willingly advise even a few years of bad credit. Financial experts cling consistently to the tenet that good credit is one of the most important assets that an adult can boast. An article about White’s explosive thesis quoted one Diane Saatchi, cited as being the VP for Corcoran Realty, in East Hampton, New York as saying that “It’s foolish to deliberately make credit rating worse. If you can’t or won’t make the payments, get in touch with lender, and work it out.”

But White advises a much different tactic. He advises homeowners to take a hard and realistic look at their situation before it becomes dire, and to make plans in a calm and cool manner. Buy a car if you’ll need a new one, and even buy a cheaper house if you foresee needing one. Do this right before you plan on stopping your payments, and well in advance of when you will be forced out of your home. Take control of the situation, and surrender the albatross around your neck on your own terms, he says.

There is some legal precedent for what White is suggesting. It’s also a much-less legally sever alternative, albeit with more financial responsibilities for the consumer. Under a legal procedure called “deed and lieu,” homeowners may return to the bank holding their mortgages and hand back the deed in a situation where they owe more on a house than it is worth. If the bank agrees – and most will, given that they don’t have many options with a homeowner threatening to bail on their obligation – then the bank takes over the house. However, the former homeowner will have to claim the difference between the valuation of their home and the mortgage amount on their next year’s income taxes as income. That’s tough, but the plus side of such a maneuver is that the consumer will avoid the credit score devastation of a foreclosure. Lenders also avoid the tremendous cost and time involved in an involuntary repossession of the property, plus the risk of a vengeful evictee trashing the property.

All I can say about all this is that homeowners should always think long and hard about the consequences of any major decision affecting their future homeownership before they jump into something like what White recommends. Obtaining legal advice from a lawyer is the very best option, but doing some intensive research is absolutely necessary to protect your financial and legal wellbeing. Keep in mind that you will never get ahead by not paying your mortgage. There is no way that you will gain money or get yourself to a more advantageous place in life by dishonoring your contract with the bank holding your home mortgage. The best you can hope for is to stop losing money, and to avoid really dire consequences. In my opinion, your situation had better be pretty darn bad before you stoop to those depths – and homeowners have many options before you get to that point. Just be careful and weigh your options – that’s this blogger’s advice!