Today a client said something that resonated with me: “This foreclosure is more difficult and stressful than my divorce.” It’s true. Foreclosure is an ordeal – even if you have decided strategically that giving up your bad investment is the right business decision.
For one thing, foreclosure lasts longer than a divorce. In Michigan, while a couple can divorce in as few as 2 months, a mortgage foreclosure will take between 6 months to several years. Moreover, although you can remarry while the the ink on your judgment of divorce is still drying, you will be hard-pressed to finance another home purchase after foreclosure. The mortgage default and foreclosure will remain on your credit report for 7 years. The sheriff’s deed will be in your county land records permanently. And regardless of how quickly you rebuild financially, many institutions (such as FHA lenders) may refuse to finance you for over 5 years post-foreclosure.
So why do it? Why foreclose? Well, for most people it is not a voluntary decision. If you have a reduction in income, an increase in expenses, or both, making your mortgage payment can become challenging. Savings drain. Available credit gets used up. And in the meantime, for most of us the reality is that your home has been plummeting in value. This means a voluntary exit strategy, such as a home sale, is impossible.
What about short sales? I hear people asking about this all the time. I hear the radio ads by “aggressive” realtors too. It seems fair. Find a buyer who offers you a price on par with recent sales in your neighborhood. It may be less than your mortgage balance, but the mortgage company should be reasonable and accept it, right? Wrong. First, your mortgage company doesn’t have to be fair. I tell people every day. I’m a lawyer. I advise people on what the law says, not on what is fair. The two concepts do not always overlap. Your bank can reject any sale of your house for less than what you owe them. Second, short sales require a willing buyer. Mortgage company delays approving an offer? Why should the prospective buyer be patient and wait around? There’s no shortage of other houses out there for sale for cheap. Many walk away when a closing deadline can’t be met. And third, in Michigan a short sale is not the end of your mortgage woes. Your mortgage company still holds your contract, your promissory note. Even if the short sale agreement allows for discharge of the mortgage that is recorded in the land records, it does not necessarily forgive the underlying debt. Your mortgage company has 6 years to sue you after a short sale. More and more frequently, it will too. That “financial hardship packet” your mortgage company asks you and your realtor to fill out to approve a short sale? I call it a treasure map. Your mortgage company can send it to a collection attorney to recoup its losses by way of garnishing your wages and your savings, and even seizing vehicles and other valuable assets. Helped your mortgage company cut its losses and avoid foreclosure? This is the thanks you’ll get.
And foreclosure? It’s slow, it’s stressful, and you will occasionally have moments of hope where it seems like you’ll be able to work out a great deal with your mortgage company. Unfortunately, for most foreclosing homes, that deal never comes. Your mortgage company and its attorneys are not on your side! No matter what, do not forget this. Amortize your loan over 30 years and see how much you will your bank in excess of the original amount you borrowed. It’s probably hundreds of thousands. Now look at home sales in your area (try http://www.zillow.com). How far upside down are you? 10%? 50%? 75%? In 2012, I have seen single family homes that are structurally sound sell for hundreds of dollars in urban areas like Detroit, Pontiac and Flint. Hundreds of dollars, not hundreds of thousands. The market won’t pay you what you owe for your home. It certainly won’t pay hundreds of thousands more for it. Why are you paying that much to your bank? You remember your bank, right? The place that wants to sue you and take everything you have after it has kicked you out of house and home? Yeah, those guys.
If you are in this situation, I believe the answer is strategic foreclosure. Tell the bank: You can have it! Your house is a liability for you. You wouldn’t sit at a slot machine for 30 years putting in money and getting nothing back, would you? So why gamble hundreds of thousands on a house that has a value in free fall? Strategic foreclosure is tough, it’s emotional. It’s slow, it’s painful and yes, it will damage your credit. But there is life after foreclosure! I will say it again. There is life after foreclosure! Life with savings. Life with mobility. Quality of life.
What next, then? This is an important, life changing decision. Do not take advice from friends and family or rumors and myths. Seek the informed guidance of an attorney. Be honest with them. Your conversation is confidential. Don’t hide anything. Let them do their job. It’s embarrassing, but so is a doctor’s examination. You want to be physically healthy, why not be financially healthy? An experienced lawyer can help. You will survive, and if you do it right, you will thrive. Instead of staying up all night worrying what you’ll have to juggle next to pay that enormous mortgage payment, you will be building savings and paying down other debt. It is possible. You are not alone.