50 Ways to Leave Your Underwater Mortgage in the Tri-Valley
Many residents in Dublin, CA and the rest of the Tri-Valley bought their homes at the peak of the residential real estate market in the halcyon days of 2004-2007. Once lenders stopped handing out money recklessly to people who should have never qualified for a home loan, the real estate bubble popped. Those who put down less than 30% of the home prices are now underwater on their home mortgages.
Struggling Tri-Valley homeowners have discovered that they are not necessarily tethered to the home mortgage anchor that is pulling them further underwater. To borrow the hook from Paul Simon’s classic song, many homeowners are finding there are nearly 50 ways to leave their underwater mortgages. Perhaps one of the most popular lifelines struggling homeowners reach for first is home mortgage loan modification. In theory, the banks are supposed to work with the homeowner, so the homeowners can reduce their monthly payments and keep their homes; however, many homeowners do not qualify for this program, and those who do have reportedly been defrauded by their lenders and ended up losing their homes anyway.
Many homeowners who do not wish to be victimized by the loan modification process have opted to default strategically or to short sale their homes. Corporations have long elected to default strategically rather than paying mortgage on the properties they own, when continued payment no longer makes good business sense. To initiate the strategic default process, the homeowners would stop paying the mortgage on purpose and, in essence, give the banks the keys to their homes. The decision to default strategically is commonly known as “jingle mail,” which is a reference to the sound of the keys inside the envelope addressed to the bank. The “jingle mail” approach has many downsides including a huge hit to homeowner credit scores for at least four years.
Another approach to leaving behind an underwater home mortgage is with a short sale. In a short sale, the homeowner strikes up an agreement with the bank to sell the home for less than the balance of the mortgage. Banks will often expect homeowners to chip in some of their personal funds to help reduce the difference between the sale price and the remaining loan balance. A short sale will hurt the seller’s credit score for at least two years, since banks typically require homeowners to miss at least a few mortgage payments before they agree to let the homeowners sell the homes for less than the balance of the mortgage.
Many homeowners electing to default strategically or to short sale in and around Dublin have found that the banks will typically let them live in their homes rent-free for nearly a year. Stories are circulating in San Ramon about some homeowners living in their Windemere McMansions for over two years without making a single mortgage payment.
Of course, the rent-free living comes at a high cost to the homeowners. The defaulting homeowners’ credit scores will take a devastating hit. The lower credit scores will usually increase the cost of borrowing and result in credit limit reductions. Additionally, rent in and around Dublin is rising while the average home prices have stagnated or decreased, because the supply of rental properties have remained the same for the past couple of years. At the same time, the number of distressed homes has increased, as home builders continue to build new homes. Finally, the social stigma attached to a strategic default or a short sale remains very much a part of the American culture and can weigh heavily on the conscience of the homeowners, because distressed homes tend to affect the prices of comparable properties in their neighborhoods negatively.
The Around Dublin Team is not endorsing the use of the home loan modification, strategic default, or short sale in any way with the publication of this article. Real estate professionals such as Eric Haggin, Tyler Moxley, Vickie Nagy, and Ron Mazur will be able to provide more information about the short sale process and the options available to homeowners that want to pursue this approach.
7:07 AM on May 16th, 2011
Two years?? Sheesh, would love to know how they pulled that off.
8:58 AM on May 16th, 2011
Those who profited and caused this unprecedented real estate bubble have a moral obligation to bear the primary burden of its collapse.
10:59 AM on May 16th, 2011
I can’t say it would help Dublin house values much but there are many families underwater. There are refinance products that allow UW home owners refi at todays rates in hopes to stabilize house values as an option to missing payments and Short Selling a home. Visit my financial blog at http://www.LoanSquawk.com; I will be putting together a Q&A on the underwater home refinance program that is available to some homeowners. Its not a fix for all unfortunately but for some.
11:43 AM on May 16th, 2011
To say that “The defaulting homeowners’ credit scores will take a devastating hit. The lower credit scores will usually increase the cost of borrowing and result in credit limit reductions. ” simply isn’t true. People with high credit scores going in – high 700′s / low 800′s – can recover their credit scores very quickly – easily within a year or two. The flip-side of this is that banks won’t allow them to get another home loan from between 3 to 7 years, but it has very little impact on buying a car or getting a credit card.
1:54 PM on May 16th, 2011
Is this blog encouraging people to do strategic default. This does not seem like solving the problem rather than being part of it. One of the factor affecting the house value is people can get out of it easily, being irresponsible of the financial decision they had made. I am not targeting those home owners who are can’t barely pay the bill. The true is, lot of short sale and Reo are created by those affluent groups that dumping the property, since it does not make economical sense. May be we should learn England’s housing market, anyone who default on his loan will also lose their professional license, like lawyer, Doctor, and Broker.
That’s why their housing price fair much better than we do. Even in the suburban neighborhood, like Peterburgh where new construction were abundant, in England, the price only dropped 15 percent from the peak. The price in Dublin can drop as much as 50% from the peak. Thanks for all those irresponsible investors, when you look back few years from now, hope you will not regret you are part of the problem of this housing downturn that kills the american dreams of many people.
7:57 AM on May 17th, 2011
I don’t understand the point of this post? You are not endorsing any of these actions but you write about them in detail.
Also, I understand why someone living in a house whose value is underwater wouldn’t be happy with the situation, but if you do not need to relocate to a new area, why would you try to get out of the house? That seems to place the responsibility on the banks and/or taxpayers, depending on how you look at it. Keep making your payments. Home values will rise again, its just going to take some time. If you can still afford the payment, what is the problem?
8:49 AM on May 17th, 2011
Here is a link to a article I put together as an option VS a default. My job is to help preserve and endorse home ownership. I’m sure this article on Around Dublin Blog was to detail out whats going on in todays market. It is true there are MANY strategic defaults. Currently banks have a buy and bail rule of you have to income qualify on the departing residence (not counting future rents) as well as future residence as well as 6mo of reserves on both properties. I know the article is just talking about the bail side but there are quite a few individuals buying and then short selling the underwater home driving down property values/ A good solution all the way around would be to consider the HARP loan on the primary and then just rent it out and buy a new property if that meets their needs. This would help stabilize inventory on the buy and sell side. Here is my article on the HARP program, I hope it helps. I have over a decade of lending in the Tri Valley and I would be happy to help any of the Around Dublin readers.
http://www.loansquawk.com/blog/californias-underwater-home-refinance-hope-for-homeowners/