First of all, it’s important to understand that there is little a lawyer can do to help you save your home. None of the laws governing home mortgages, even the ones passed recently like the Making Home Affordable program, force lenders to offer lower interest rates or make other concessions to troubled homeowners. Not even a bankruptcy judge can modify or ‘cram down’ the interest rate on a mortgage loan without the agreement of the mortgage lender. Only a very few give their agreement though. While the laws offer incentives, fewer than expected mortgage lenders are offering modification programs or they’re making the process difficult. Plus, the current programs were designed to assist people with sub-prime mortgages. Due to high unemployment or underemployment, more and more conventional mortgages are falling into default and there are no programs for these loans and lenders are less willing to negotiate these loans.

What you will primarily want from a loan modification lawyer is their ability to negotiate and navigate the often tricky world of mortgage loans and real estate law. Often the troubled homeowner is overwhelmed by the amount of paperwork involved as well as the emotionally draining threat of losing their home. A good attorney can assist the homeowner in the process. This will be based on the particular situation of the homeowner. In some cases, bankruptcy, either Chapter 7 or Chapter 13, will be the best option. Others may require some negotiation and speaking with the right people. Often an attorney calling can get more attention than the homeowner calling.

But, how do you find a good and reliable loan modification attorney that can really assist you and not rip you off?

Unfortunately, the current economic situation has created a number of fraudsters billing themselves as “foreclosure rescue specialists.” These organizations, which may or may not be tied to a law firm, seek out desperate homeowners. They will often tell the homeowner that they can save their home but they want a large upfront fee to do so. Others use other legal trickery to scam troubled homeowners. You need to be very wary of any loan modification attorney or foreclosure rescue organization that makes vague promises of saving your home while demanding a substantial upfront fee.

However, there are a few good loan modification lawyers that have been successful in challenging foreclosures based on the lack of a good paper trail due to the way mortgages were repackaged as financial instruments. Others have challenged the mortgage based on evidence of predatory lending. These legal maneuvers don’t work in every case and take specialized legal skill so it is important to find a lawyer who is well acquainted with these methods.

In order to locate a good attorney you will need to find one that specializes in bad mortgages and consumer law. One of the best ways to find such an attorney is to consult your local HUD-approved housing counseling agency. They can give you a referral. Always ask for multiple references. Check out the references and make an appointment to discuss your case. This meeting should be free of charge and should clearly describe the legal process they will use and what the fees for their services will be. If they ask for a big upfront fee, be prepared to walk away. Also be wary of high pressure sales tactics as well.

Sadly, there are many more troubled mortgage loan cases than the number of available loan modification attorneys can handle. Plus, most families that are having trouble paying their mortgage are very short on money and will find it difficult to pay for a lawyer. Sometimes though, local legal aid organizations can help put troubled homeowners in touch with an attorney that will take their case for low or no cost.

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Just mailing the keys to the mortgage holder, aka “jingle mail”, and walking away is a bad idea. After all, you signed a contract to make payments on the home loan as agreed. If you find yourself unable to meet these obligations there a number of remedies you can pursue to discharge the home loan debt properly.

Naturally, you may feel frustrated with your situation. Many inexperienced borrowers found them tricked into taking on loans that they were obviously going not be able to pay back. Even experienced borrowers have been hurt by the boom and bust of housing prices. However, the excesses and mistakes of the past don’t discharge the debt. Even if you were a victim of predatory lending practices or out and out fraud, you still need to go through proper legal procedures. In short, you have to follow the rules in order to properly deal with your problem. Walking away from your home loan obligations isn’t following the rules. Remember, it is in both your best interest and the interest of the mortgage holder for you to stay in your home and paying a mortgage.

In some cases, you might be able to qualify for a loan modification that would allow you to stay in your home with a mortgage that’s been modified to better fit your financial situation. The government has recently created a $75 billion program to help people with out of control home loans. You should contact your mortgage company to discover if you qualify for this home loan modification program.

However, if you can’t qualify for a home loan modification then you will need to try for a short sale. This is where, with the agreement of the financial institution that holds the mortgage, you sell your home for less than what you owe, typically at the current market value, and the bank agrees to forgive the difference. These days it can be difficult to find a qualified buyer who can get a home loan even at the reduced prices.

In this case, the home loan lender may be willing to accept a deed in lieu of foreclosure. When this happens, you sign the house back over to the mortgage company and they forgive some or all of the debt you owe. You will need to work out the deals of this agreement with the mortgage holder. If at all possible you will want to have some qualified legal representation to help you through this process. Some former homeowners who’ve done a deed in lieu of foreclosure have found themselves still on the hook for thousands of dollars due to a bad agreement.

Another thing to understand about a short sale or a deed in lieu of foreclosure is that it will place a serious bad mark on your credit for several years. It will typically be 2-3 years before you can easily borrow money again for even small things like a credit card or vehicle and most likely 5-7 years before you can qualify for another home loan. Also, there are tax implications when a debt is forgiven. You may end up owning a big tax bill as well so make sure that you examine this aspect too.

If you can’t work out a deed in lieu of foreclosure agreement this only leaves foreclosure itself and bankruptcy. This isn’t a great option for either you or the mortgage holder. This is the result of a failed negotiation, either on your part, the bank’s part, or of both parties. My recommendation is that if you find your home loan in trouble that you begin seeking alternatives to foreclosure with your mortgage holder as soon as possible.

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When it comes down to it,  banks made it far too easy during the past few years for homeowners to take money out of their homes with home equity loans and subprime mortgage refinancing.  This was OK as long as the economy was OK and property values kept rising. Unfortunately this was an economic bubble and resulted in the fall we’re seeing now. Now home values are plunging and many homeowners now have inflated mortgages and home equity loans paired with an under valued home. The truly unfortunate part of this situation is that many homeowners can no longer afford their mortgage payment.  These people are facing the very real possibility of forclosure. For them, losing their family home is a very real threat.

Fortunately, the good news is that many banks that made these questionable loans have begun to  realize the economic realities of the current economic recession and are now giving homeowners several options to solve their mutual problem with bad home loans.

Obviously, the best solution would be to catch up your mortgage and then to make your home loan payments on the agreed upon schedule.  Sometimes banks will allow deferrals, make-up payments and other programs to allow you to get caught up and these are on a case-by-case basis. There are also possible state and federal programs that may allow you and your bank to ease into a home loan solution that fits your particular needs. You will need to check with your bank to discover what these options may be in your individual situation. Just remember that the mortgage company is not the enemy, they want a win-win situation if at all possible. They are willing to help you out in most cases although you may have to talk to several people until you find someone in the right department to work with you on your situation.

In some cases, banks will renegotiate a home loan. Some banks are more inclined to do this than others so you will need to check with the past due loan or the loss prevention department at the bank. Always stay in communication with the bank so that you will be in a good position to take advantage of home loan modifications that may be available to you. On the flip side, some banks won’t negotiate for various reasons so be prepared for other options if this won’t work for you.

One option that is being offered by home loan banks is called a short sale. In this scenario the bank permits you to sell your home at or below the current market value. This allows the home to sell quickly, regardless of what is owed on the home loan.  For example, let’s say that your mortgage is $480,000, but currently comparable  homes in your area are selling for $390,000. If the bank permits you to do so, you can accept an offer for $390,000. It is possible that you could take even lower bids. In turn, the bank will take a loss on the sale of the home because the sale will not cover the full mortgage loan amount, but the bank will not be stuck with a home they don’t want in their inventory.  So far as the homeowner goes, in most cases they will be able to simply walk away after the sale and be free and clear of the original home loan.

To effect the short sale of your home, I suggest that you engage the services of a professional real estate agent who is knowledgeable about short sales and has had some experience and success with these kinds of sales. It is in your best interest to bring in a professional to help you with this because they will know proper way to handle the paperwork involved and other details. Also, since they won’t be emotionally involved in the sale they can offer a practical view of the situation to all parties involved.  Remember that in most cases that the bank that holds the home loan will end up paying the realtor fees.

There are disadvantages to a short sale. Yes, your credit score will suffer although it will not be as bad as it would be with a foreclosure of bankruptcy.  It has been estimated that your FICO score can drop 100 points with a short sale.  But compare this to drop of over 200 points with a foreclosure or bankruptcy. Also, with a short sale, you will not be able to buy a new home for at least 2 years. For a foreclosure or bankruptcy this can be at least 3 years if not much longer.

Bankruptcy is the final solution that might allow you to stay in your home. You will still need to catch up payments and stay current on your payments if you do a Chapter 13 bankruptcy. This will damage your credit but you won’t lose your home if you are able to make your payments.

Lastly, there is foreclosure. Sometimes this will happen in spite of your best efforts to avoid it. Should this happen to you be prepared for some struggles but stay strong and avoid taking on any new debt for several years. Save your money and, with any luck and the passage of a few years of time, you will be able to find a new home to purchase. Just don’t make the same mistakes again.

I hope this article has helped you with your questions about foreclosure prevention.

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Quit claim deeds are a type of deed which is used in the transfer or sale of property when the grantor, the person who owns an interest in the property, is essentially allowing the transfer of that property to another person or legal entity. The grantors do not actually own the property but rather simply have legal and financial responsibility for it. Grantors therefore have the legal right to sell the property, however, there is a catch.

A quit claim deed offers little protection for the buyer down the road. Although the property will be transferred to the grantee from the grantor, the quit claim deed does not legally protect the grantee from future claims to the property, including any mortgage or home equity loan on the property. Since the grantor does not legally own the property this leaves a door open for potential problems regarding the property in the future.

Quit claim deeds are typically used in situations that call for a relative level of simplicity as  compared to many of the other forms of property transfers or sales. One common use of  the quit claim deed is to clear up a title to a piece of property. Another common use of a quit claim deed are for those who want to use a simple way to give up their interest in a certain piece of property.

When quit claim deeds are used in the sale of a property this can result in a significant level of risk to the buyer of the property. However, quit claim deeds do still have other uses which are very beneficial in some types of transactions. For example, in the case where there are multiple people who have a valid claim to a home, such as when a relative passes away, a quit claim deed is an effective way of one of these people to legally transfer their interests in the home to another person. A divorce can create a similar situation, making the quit claim deed very useful.

It is important to note that a quitclaim deed cannot be used to relieve you of obligations related to a mortgage loan or a home equity loan. Real estate loans include both a promissory note, stating your promise to repay the loan in the way stated in the loan documents, as well as a security interest, which is a deed to the property securing the loan which gives the mortgage or equity loan holder the right to foreclose if the conditions of the loan are not met as promised. Another complication that can arise when quit claim deed and a mortgage loan meet is that most home loans have specific clauses that deal with a transfer of ownership. It isn’t usual for loans with these clauses to have serious restrictions on the transfer of property. These conditions may cause you serious financial repercussions if not followed to the letter of the home loan contract.

In general, if you want to do a quit claim deed on a property that has a mortgage or equity home loan securing it you will want to go through the steps of refinancing these loans in the new owner’s name so that all legal obligations for both the property and the home loan are no longer in your name and thus no longer your responsibility.

In the case of a divorce, sometimes a mortgage company will be willing to relieve you of the obligation for the home loan, sometimes at a price for processing fees plus the loan typically must be current. Sometimes they require that the home loan be refinanced by the party who received the home in the divorce settlement. Do not assume that because you were not awarded the home in the divorce that your obligation ends there. Make sure all of the details of the loan are properly attended to so that you no longer have a financial obligation for the home loans against the property.

It also also important in the case of a quit claim deed for you to consult with a tax adviser to insure that you will not be liable for any income or gift taxes from the transfer of the property. You do not want the IRS or state tax agencies coming back to you a year or two later demanding payment of taxes unexpectedly.  This applies for by grantors and grantees of the quit claim deed.

It is important to be smart about quit claim deeds when you use them and to make sure that you have completely taken care of any obligations related to the home loans and taxes during this process.

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Remember that mortgage lenders are generally willing to work with homeowners to find a solution to avoid foreclosure if a feasible repayment plan can be worked out. In a forbearance, the lender agrees to temporarily cut or suspend mortgage payments until the homeowner can start paying a full mortgage payment again plus making up the missed payments.

A forbearance is typically only a viable option if you can show certain types of hardships that your lender approves of and that your income is expected to return to normal in less than 6 months, on average. Remember, a forbearance won’t help you if you’re have purchased a home that you can’t afford. In my experience, managing a forbearance is only possible if your regular payment amount is less than 30% of your monthly take home pay. Since loans are often made for more than this it may not be possible for a forbearance plan to work for you. In that case, you should pursue different options.

In order to grant a mortgage forbearance, mortgage lenders want to see that the delinquency was caused by an unexpected financial circumstance such as illness or injury. Some will accept a job loss as long as it’s a temporary situation. Surprisingly, few lenders will accept natural disasters such as a fire, flood or storm damage as a reason for a forbearance. The reason for this is that the property isn’t inhabitable and this increases the chance that the homeowner won’t continue to make payments. Beyond just the reason, the mortgage lender has to be assured that the borrower has a sound and reasonable plan to return to fiscal stability and can be relied upon to stay current on their mortgage payments afterward.

To begin a mortgage forbearance you should get in contact with the lender’s loss mitigation department. A customer service flunky or a collections agent won’t be able to help you with this. It is important that you take complete and careful notes about your interaction with this department. Stay polite and calm while you speak to them and in any written communication with them. It’s best to begin by asking for a homeowner’s assistance package or a forbearance agreement application. Sometimes the lender’s representative will ask you for details on your situation in writing although some will take a statement over the phone.

In general, most lenders will be willing to enter into a forbearance agreement if there are 3 or fewer delinquent payments on the the account. If  there are more, it is quite rare for them to negotiate an agreement. If you aren’t behind on your mortgage, then it is unlikely that they will be willing to negotiate an agreement with you until you are actually behind on payments.

A forbearance agreement generally calls for the borrower to pay back the loan delinquency within 3 to 12 months, usually by making an extra 1/2 payment each month including interest and late payment fees. Sometimes lenders will remove late payment fees but sometimes not, however, it doesn’t hurt to ask about this. Occasionally, they will tack on an inspection or appraisal fee. They will do this to insure that you’re still occupying the home and that the property hasn’t been abandoned. Lenders generally prefer a gradual repayment plan instead of a lump sum payment although some may accept this if the source of the funds can be verified. It is almost unheard of for a lender to extend the pay back time for more than 12 months so make sure any proposed repayment plan fits well within this timeframe.

Make sure that you carefully read any forbearance agreement you receive from the lender. If you’re unsure about any part of it, consult with the lender and with an attorney. Some lenders will try to sneak in additional terms and conditions that may cause you difficulty.

It is important not to abandon the property while you’re working under a forbearance agreement. Not only does this indicate to the lender that you’re likely to default on the loan, it may also disqualify you from tax advantages as well as government programs intended to help distressed homeowners.

Of course, a forbearance agreement will only work if you’re on solid financial ground where you will be able to overcome a temporary financial setback. If this isn’t true in your case you should examine other options that are more drastic than a forebearance.

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The traditional advice given by financial experts is for a troubled homeowner to contact their lender as soon as they begin to fall behind on their mortgage. After all, it’s assumed that the lender wants to do everything they can to avoid an expensive foreclosure. Does this assumption still hold true in today’s real estate market? The experiences of many troubled homeowners seems to indicate that this is no longer the case. They’ve found the path to obtaining a lower interest rate or more manageable payment to be very frustrating.

The cause for this is really rather simple, there’s no financial incentive for a lender to offer a loan modification to most homeowners. As it turns out, many lenders aren’t really lenders at all. What they actually are is a loan servicer. This means that they essentially take the mortgage payments and distribute these payments to the actual investors.

Most home loans over the past 10 years have been bundled and sold as an investment instrument. This has created a market for loan servicers, companies or divisions at banks, which simply manage the accounts and are paid a commission for doing so. They don’t have the legal authority to modify conditions of the loan. All they can negotiate are repayment in full plans or forbearance plans.

The actual owners of the home loan are the hundreds or even thousands of investors who own a part of many loans. They would all have to agree to change the terms of a mortgage contract and this is unlikely to happen. Thus, the loan servicer has a strong incentive to stall or delay any kind of loan modification. Why? Because they get paid a commission to do it. They get paid by the investors for their collection efforts up until the actual sale or foreclosure. However, they will not profit if a loan is modified.

The first step to avoiding frustration in the loan modification process is to determine who your mortgage holder really is. If your mortgage has been sold as part of a security, the chances of you being able to get a loan modification is rather low. In this case, you should prepare yourself for other options, such as a short sale, deed in lieu of foreclosure or a foreclosure, or find a way to bring your mortgage current and continue to keep it current.

There could be changes in the law that would remove the financial incentive for mortgage loan servicers. Several have been proposed in Congress, the Obama administration and the SEC. However, until the law is changed troubled homeowners, their communities and the actual mortgage investors will continue to have a no-win situation on their hands when it comes to mortgage loan modifications.

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If the foreclosure process has been handled properly many of the typical problems with buying a foreclosure at the courthouse steps are taken of prior to the home going into a REO inventory. Major banks generally hire a foreclosure property management company to insure that the house is officially vacated by the prior owner and not vandalized by them. This also should prevent you from being caught up in lawsuits brought by delinquent borrowers and having to evict them. One of the first things to check is if the mortgage lender who’s listing the REO property has taken care of these important details. If the home in question is still occupied or in obviously poor condition it’s best to pass on it in most cases. However, it is important to note, that foreclosure property management services do not include a proper home inspection or guarantee against other potential problems.

As with any primary home purchase it is essential that you have the property inspected. Even if you’re buying for investment purposes an inspection may save you thousands of dollars. Many people get caught up in the competition and quite often the novice REO buyer ends up purchasing a money pit. Sometimes REOs are sold at auction where you can’t get a full inspection report ahead of time. In this case, leave the buying to the pros with a lot of cash on hand who can take a loss if the property turns out to be a dud. Don’t bet the farm on an uninspected REO home unless you’re willing and financially able to take the risk.

One thing that you have to consider is that a REO home might have structural issues that led the prior owner to the tough decision of letting it go into foreclosure. For example, some homes in foreclosure in Florida right now have defective Chinese made drywall that will cost thousands of dollars to correct. Other homes might have serious termite damage. Others may have dangerous mold issues. There have been reports of expensive homes built during the housing boom that were so poorly constructed that they’re essentially worthless because they’re falling apart.

Beyond the serious problems, you can expect the REO home to have some damage simply from someone living there and general wear and tear. You should budget for at least new carpet and new paint in any REO home you buy. You will probably also need to make drywall, hardware and other general minor repairs. Also, it is quite likely that the HVAC system will need maintenance and, if the home is more than a few years old, a new roof.

The bottom line is that you should have cash reserves equal to about 10-15% of the purchase price for repairs. Do not count on credit for these repairs since today it is quite common for banks to refuse equity loans on previously foreclosed properties. Using credit cards or lines of credit for these repairs is also risky in today’s financial climate. In today’s real estate market cash is king.

It is also quite important to make sure that any outstanding liens and back taxes have been resolved. Depending on the state laws, you may be responsible for these items as the buyer of the foreclosed property. You do not want this to come as a surprise to you after the fact. If you don’t know what you’re getting into this could significantly increase the cost of the home, making a great deal into a nightmare. For your own protection you should always consult with a local real estate attorney before buying a foreclosed REO property so that you understand your potential legal liability.

Most banks make a list of REO properties for sale available online or go through a real estate broker or management firm who handles this for them. My recommendation for the novice buyer is to go through a real estate agent who specializes in selling foreclosures and REOs or a REO specialist. While the savvy real estate investor can save money with a do-it-yourself approach the risk to the beginner is quite significant. That’s why it’s best to work with seasoned real estate professionals when buying a REO property.

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First of all, you will want to gather up your financial documents. This should include your mortgage statements, both your primary mortgage and secondary mortgage if you have one. You will also need information that documents your income such as your current pay stubs and most recent income tax return. Additionally, you will want your recent bank statements and investment statements. Lastly, you will need to have other financial information such as amount owed on car loans, credit cards and any other consumer debt.

Now that you have all of your financial information together, go to the Making Home Affordable website and click on the “Find Out If You Are Eligible” link. Next, select the program type that best fits your situation, either loan modification or refinancing. You may want to review both your options to see which you’re most qualified for. If you don’t qualify for either program based on their web application and still feel that you need assistance with your home loan, don’t get discouraged. You may still qualify for other programs or for lender based loan modifications.

After you’ve determined your qualifications for the Making Home Affordable you will want to get in contact with a HUD-certified housing counselor. You can find one by calling the HUD information line at 1-888-995-4673 or going to the Department of Housing and Urban Development Foreclosure Avoidence Web site. You should be prepared to take notes when you speak with a housing counselor on the phone. Jot down the names of the people you talk to, the date and time as well as the basics of the conversation such as promises that were made or if your were denied. You should also receive a case number. I recommend keeping a notepad handy for this purpose because staying organized is quite important in this effort.

If your current lender gives you a hard time in your refinancing efforts, a new rule change may help you. This new rule allows homeowners who have a mortgage that is guaranteed by Freddie Mac to refinance with any Freddie Mac affiliated lender. You will also be able to roll a larger percentage of you closing costs into the refinancing as well. This additional flexibility in the program should help those who’ve had frustration in obtaining a home loan modification under the current rules from certain lenders.

It is important to remember that you must be current on your mortgage loan to qualify for a government-sponsored refinancing plan. Should you be behind on your home loan you may still qualify for a loan modification under the Making Home Affordable program.

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This new program, Making Home Affordable, that was pushed by the Obama administration should help millions of people  attain lower monthly payments and also avoid foreclosure. But, are there any strings are attached to the program? What are the credit score implications? Are there any tax implications? How could it affect your monthly payments? Are there any scams associated with this program? Let’s take a look.

One of the first questions people ask about the federal loan modification plan if their credit score will be affected. In general, a refinancing plan doesn’t affect your score since it’s just a rewriting of the terms of an existing mortgage loan. What negatively affects your credit score is missing payments. Under the new federal housing relief plan, one of the terms is that qualifying homeowners can’t have missed a payment during the past year. So, if you’ve missed a payment, the new program won’t help you.

It’s still too early to tell how much impact the this federally sponsored mortgage loan adjustment program. There are no credit reporting guidelines in place for these home loan modifications. It’s not even clear if they will be reported at all. However, most people who’re applying for this program will have had some financial problems and missed credit card or car payments will have a negative impact on their credit report. But, in the long run, if a loan modification puts you on the right track financially your credit score will begin to improve. Just make sure that you have a sound financial plan for your own recovery, such as using the savings on your mortgage loan to pay down other debts..

One potential problem in the federal housing relief plan is that your payments might be more. For example, if your home loan is still at a low introductory rate it isn’t out of the question that you may have an increased home payment after the adjustment. However, the up side is that you will avoid any interest rate spikes that are common with subprime adjustable-rate mortgages

Mortgage lenders who’re participating in the Making Home Affordable program are required to provide you with a “good faith estimate” which will include your new interest rate, monthly mortgage payment amount and the total cost of the loan. You should compare the numbers of the refinancing offer with your current loan to insure that it will be and improvement for you.

Another question is when should you apply for this mortgage loan adjustment. Mortgage rates right now are at historic lows and aren’t likely to go much lower but are more likely to rise later in 2009 and into 2010. It wouldn’t be a good idea to wait. Also the Making Home Affordable program expires on June 10, 2010 so you should bear that in mind as well.

As for the tax impact, any charges associated with refinancing a mortgage are currently tax deductible. However, some fees, such as an appraisal or home inspection, are not. Neither are certain attorney’s fees. Also, a lower interest rate will reduce your mortgage interest deduction so you may need to adjust your withholding to account for this change as well.

Should you not qualify for the federal loan modification program you can attempt to negotiate your own refinance or modification of your loan. Many lenders are willing to work with you to help avoid a costly foreclosure. I have mentioned in other articles on this site how to handle these negotiations.

Beware of third party home loan adjustment companies. While some are legitimate there are plenty of scammers out there. Some even operate using the federal loan modification as a cover by using official sounding names or invoking President Obama’s name. Don’t pay any upfront fees or fall for other scams like this. Remember that home loan assistance is always available for free from government approved housing counselors.

I hope this article has helped answer questions you might have about the new federal home loan modification plans.

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The main reason people are choosing to take this drastic step, in spite of having a good job with sufficient income to pay their mortgage, is that housing prices have fallen so far in some areas and may have little hope for recovery any time soon. People just can see continuing to invest money in an asset that no longer has the value they expected, even given the considerable negative effect strategic defaults have on a person’s credit score.

In the past, strategic defaults were rare. Generally, mortgage defaults were caused by a serious financial problem the borrower encountered, such as long term job loss or a medical crisis. Occasionally, there would be strategic defaults by people who had purchased a dangerously faulty home or who had another non-financial crisis but this was quite rare. In most cases, people were willing to tough out bad situations in order to save their home and credit. But, today, this may be changing.

Financial experts have long assumed that 99% of the time a homeowner would not chose to face the serious consequences of defaulting on a mortgage. They believed that borrowers would rather deal with problems associated with a home rather than having their credit ruined and never owning a home again. But, this attitude seems to be changing. Why?

In areas that have been hard hit by the housing crisis, such as California, home values have fallen an average of 45% from peak prices of 2005-2006. This would make a house that was worth $500,000 in 2006 worth about $275,000 in 2010. What’s worse, economists are predicting that home prices may not rise significantly for 10 to 12 years in certain hard hit areas. This economic climate makes strategic defaulting an attractive choice for many homeowners.

On paper, it makes sense to do a strategic default for people living in certain areas. Since home values are expected to remain low for so long, a homeowner could potentially lose thousands of dollars should the sell their home or simply lose the opportunity cost for thousands in mortgage payments. The classic argument against renting is that you’re thowing money away, but, when there’s not equity to be gained from owning real estate it makes this argument less compelling. With rents depressed as well, a strategic default could put $1000 or more a month in the former homeowner’s wallet, freeing them up to purchase things, pay off other debts or even save money.

Also, in the era of big bank bailouts and long distance commuter subdivisions there is less civic pride to serve as a psychological barrier to strategic defaults. People today tend to see mortgage lenders more as “Mr. Potter” than “George Bailey” and thus don’t feel bad about defaulting on a mortgage loan that they believe was taking advantage of them. Also, with people less connected to their neighbors, they’re less likely to feel badly about the consequences their strategic default might have on their neighbor’s home prices and the quality of their community in general.

The only barrier that remains is the tough financial punishment that defaulting on a home loan brings. The result is that the defaulting borrower won’t be able to borrow money for quite some time except at very high interest rates. With the consumer credit markets remaining tight, one who does a strategic default on a mortgage may find it impossible to get a loan at any reasonable interest rate.

What does it mean financially if you do strategically default?

Basically, it means that if you carry out a strategic default you’ll be living on a cash basis for many years to come. Any consumer products you want, you’ll pay cash for them. If you buy a car, you’ll have to pay cash for it. And you probably won’t be able to qualify for a home loan for at least 10 years, maybe longer depending on what happens in the credit markets.

The bottom line is that you’ll have to maintain a strict financial life after you default. This kind of frugal, disciplined, lifestyle may be difficult for someone who’s been on a credit binge for years. Operating your household on a strict cash basis doesn’t come naturally for many people but it is possible if you commit yourself to it. In fact, I recommend it even if you don’t plan to do a strategic default. You’ll find yourself in much better financial shape if you do.

Should you do a strategic default on your mortgage?

A lot of people are asking themselves this question since around 15 million homes have mortgages that are upside down and nearly 5 million mortgages are facing foreclosure or are behind 2 or more months. Some estimates calculate that about 1/4 of these troubled mortgages are held by someone who may be in or considering a strategic default.

Such a default isn’t easy. It requires some tough choices and tough lifestyle changes. It requires balancing your civic responsibility to your community against your own financial well-being. It means determining if your personal integrity means that you should keep your promise to the mortgage lender. It means preparing yourself and your family to shun credit and live on cash only. These are questions that you’ll need to consider before committing to a strategic default on a mortgage.

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