Archive for January 25th, 2012

Should I Default on my Mortgage?

I get all sorts of comments on this blog, not to mention inquiries from prospective clients via email.  This one, which I’ll paraphrase, really caught my attention, as it presents a situation I suspect a lot of Florida homeowners are facing.  Here’s the question, and my response:

Question:  My wife and I have always paid our mortgage, but with the economy as it is we’ve struggled to do so recently.  Our house is about $150,000 underwater, and for the past year or so, we’ve borrowed money from my parents to make the mortgage payments.  Unfortunately, my parents can no longer afford to lend us any more money, so we’re trying to decide what to do. 

I’ve been asking the bank for a loan modification for many months.  They keep telling me “we’ll get back to you,” but then I never hear anything.  Most recently, the bank began insisting that my wife disclose her financial information as well.  I argued with them about this, since my wife wasn’t a borrower and did not sign the Note, but they insisted that the only way I would be considered for a loan modification was if my wife submitted her financial information as well. 

What should I do?  My wife doesn’t want to disclose anything, but if she doesn’t, and we don’t get a modification, then we can’t continue to keep making our mortgage payments for much longer. 

Answer:  First off, this might sound backwards to you, but I’m glad your parents are no longer giving/lending you money for your monthly mortgage payments.  I can understand the logic behind their doing so, don’t get me wrong, and I’m certainly not trying to criticize you or them.  However, as I’ve explained on many occasions, including here and here, depleting a 401(k), IRA, or savings account to make monthly mortgage payments on a house you just can’t afford is almost never a good idea. 

Please read this post, which I wrote in July, 2010.  As I explained there in detail, it’s almost never a good idea to deplete your savings to make monthly mortgage payments, as all that will happen is you’ll run out of savings and then still be facing foreclosure anyway.  If you realize you can’t afford to continue making monthly mortgage payments indefinitely into the future, isn’t it better to stop making those payments now, keep whatever money you have in your own pocket, and brace yourself for the impending foreclosure lawsuit, rather than spend all of your savings, then face foreclosure with no money left in your pocket? 

The fact that your parents were lending to you, as opposed to you depleting your own savings, doesn’t change my view.  In fact, it might make it worse.  Your parents are obviously older than you, so they’ll have fewer years in the work force (if any) to recover, and I suspect from your email that you’ve depleted your own savings, too.  Nonetheless, you’re still in the same situation you would have been in had you and your parents kept those monies in your own pockets – facing foreclosure. 

It’s critical for you, your parents, and all homeowners to realize that any money in your 401(k) or IRA can never be taken by the bank (i.e. to collect on a deficiency judgment) – the only way you’ll ever lose that money is if you take it out voluntarily.  Even if you get foreclosed, you’ll still get to keep your 401(k) and IRA monies.  Even if you have to file bankruptcy, you’ll still get to keep your 401(k) and IRA monies.  Hence, I can hardly imagine a circumstance where it makes sense to dip into these accounts to make mortgage payments.  I suppose a temporary reduction in income could justify doing so for a short period of time, but that’s the catch – lots of people think/hope their reduction in income is temporary, but before they know it, they’ve made a year of mortgage payments from their IRA or 401(k) with no end in sight. 

Obviously you can’t go back in time, and my point isn’t to beat you over the head with things you can’t change.  Rather, my point is to help you realize, going forward, that it’s probably best that you and your parents stop depleting your savings to make monthly payments on a mortgage you cannot afford. 

I can understand you thinking “let’s keep making the payments and try to get a modification … if we get a loan modification, and our monthly payment is reduced, then maybe we can afford to stay here.”  Candidly, LOTS of homeowners have that mindset, especially in Florida.  Unfortunately, as I’ve explained many times, including here, here, and here, loan modifications are rare, particularly those with principal reductions, and banks/servicers have all sorts of perverse financial incentives not to provide modifications to well-intentioned homeowners.  Hence, what you view as “temporarily borrowing until we get a modification” or “temporarily using savings until we get a modification” is more like “depleting savings waiting for a modification that’s probably never going to come.” 

As for the issue of whether you should disclose your wife’s finances, let’s put it this way.  I agree with you – it’s hard to see how the bank needs your wife’s finances to evaluate you for a modification, since she wasn’t on the loan in the first place.  In that sense, it seems logical to withhold this information.  However, if you’re adamant about getting a modification, and that’s what the bank is saying they need, it won’t help to withhold it.  Frankly, it doesn’t seem like you’re going to get the modification you want either way you proceed.  Hence, whether to disclose her finances is probably a matter of how you’ll feel if you get rejected again and didn’t disclose them.  Will it eat at you to feel like you didn’t do everything you could?  Will you feel better knowing you disclosed them, even if you get rejected, as you’ll at least know you did everything you could? 

I hate to see you in this situation.  However, nothing breaks my heart more than the conversations I’ve had with clients, particularly older clients, who tell me they’ve depleted all of their savings and are now being sued for foreclosure.  Please don’t make this mistake.  It’s bad enough to face foreclosure – it’s even worse to do so after you’ve spent all of your money.

Mark Stopa

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