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.

Related posts:

1. Avoiding Foreclosure Is Becoming More Difficult It seems that avoiding foreclosure is now becoming more difficult...
2. Walking Away From a Mortgage If you are far behind on your mortgage with no...
3. Alternatives to Foreclosure In today’s recessionary economic climate many people are looking at ...

Begin by going over all of your home loan documents so that you are prepared for any upcoming resets or other changes to the conditions of your loan. When will your payments increase? By how much? Can you refinance? What kind of penalty would you face for refinancing, if there is any?

You may need to make significant changes in your spending and lifestyle in order to keep your home and maintain your credit in good standing. You may need to consider taking on a second job to help make your payments. Avoid making any major purchases at this time when you are facing financial hardship and the economy is uncertain. Think about selling other assets if you can, such as cars or boats, so that you can use this cash to assist you in meeting your payments.

You should always take the initiative with your home loan lender. It is important that you contact them before the problem becomes overwhelming to you. Should you receive calls or letters from your lender it is imperative that you  respond to them as soon as possible. Do not wait to get too far behind. Lenders are less likely to move quickly into foreclosure if you have been proactive and show that you’re working to make your payments. You will want to speak to the right people. This can be tricky because of the way home loans are resold but be persistent. Ask for the loss mitigation or collections department. It is key for you to be completely honest with them about your situation. Also, don’t make promises to them that you can’t keep even if they pressure you in to accepting unfavorable terms.

You should beware of foreclosure rescue scams and other related rackets. There are a number of scam artists who target people in neighborhoods where foreclosure rates have been high. Their typical approach with troubled homeowners is to promise to help them keep their houses. The trick is that these mortgage loan rescues often come with payments which are out of reach of the average homeowner. This results in the homeowner being defrauded of their home and often still owing the original mortgage amount. Should any company approach you with such an offer make sure that you check them out through the Better Business Bureau as well as your state real estate commission and Attorney General. Do not sign anything without reading it all and get all promises in writing. Ask your attorney or other real estate financial professional to review any paperwork before you sign it. And remember that if it sounds too good to be true it probably is.

Another approach is to contact a nonprofit group that offers free housing advice specific to your area. This is a good way to get more information and financial counseling. They may be able to help you with your options. If you took out a loan between Jan. 1 2005 and July 30, 2007, are current on your loan payments and your mortgage has not yet reset to a higher rate, you may be eligible for a five year rate freeze.

If all else fails, you can always try to negotiate a short sale. If you have missed more than two payments but your home has not yet gone into foreclosure this is the right time for you to find out if you can sell your home for a price that falls short of what you owe the lender on your original home loan. Should your mortgage holder agree to accept the sales price and forgive the rest of your debt, they forgo the pricey foreclosure process and save money. As for you,  you will walk away with only minimal damage to your credit score in most cases.

I hope this article has provided you with some important information on how to avoid home loan foreclosure.

Related posts:

1. How To Avoid Foreclosure Rescue Scams One question that is on many people’s minds today is...
2. Home Loan Foreclosure Advice Perhaps you’re a homeowner who is facing foreclosure. Maybe your...
3. Mortgage Loan Modification Problems Have you had problems trying to get a mortgage loan...

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.

Related posts:

1. Home Loan Foreclosure Advice Perhaps you’re a homeowner who is facing foreclosure. Maybe your...
2. Mortgage Loan Modification Problems Have you had problems trying to get a mortgage loan...
3. How To Avoid Foreclosure Rescue Scams One question that is on many people’s minds today is...