Leaving No Choice But to Fall Behind on a Mortgage

A new study by Northwestern’s Kellogg School of Management and the University of Chicago’s Booth School of Business revealed that 26% of borrowers who defaulted on their mortgage payments did so strategically. The study pointed out that one in six borrowers would choose to walk away if their shortfall was over 50% of their home’s equity.  This finding is especially intriguing due to the falling housing prices in areas like California and South Florida, where many borrowers have found themselves incredibly upside down on their mortgages.  These borrowers generally do not qualify for reverse mortgages even if they are old enough to be eligible, since they do not have enough equity in their homes.

However, it is logical that borrowers would not want to remain in a situation where the amount they owe on their mortgage is becoming increasingly more than their house is worth.  And especially given the current state of the economy, some of these borrowers have found their situations change such that they can no longer afford the payments in the first place. With so many homes available at bargain basement prices, it is unsurprising that borrowers might choose to try to walk away to a better situation, regardless of the negative effect it may have on their credit.

Yet this is exactly the situation the government should be remedying. Many programs to help borrowers during the recession have left out those homeowners who are dramatically underwater on their mortgages, but these borrowers (who appear to often come in larger groups as neighborhoods fall dramatically in value) are some of the ones who need the help the most and whose mortgages, through no fault of their own, no longer make financial sense.  Rather than simply becoming content to let homeowners walk away and take the hits to their credit or entrap them in their home, the government should work with lenders to establish a solution that helps bail out and reevaluate those whose mortgages are worth far more than their homes.  Both sides should be able to win from the situation, rather than the current reality in which the banks, the borrowers, and the communities lose.

 

HUD Announces $58 Million For Housing Counseling

HUD announced this week that they would be offering $58 million in grants for housing counseling in 2009.  This is an increase of $11 million from a year ago. The money is especially significant in a time when many agencies and nonprofits are finding their budgets cut, and as pressure rises, both in Congress and in the legislatures, to increase protections for consumers in mortgages and reverse mortgages. As the number of foreclosures and delinquencies are at record highs, there is even more potential for housing counseling to help homeowners avoid getting into difficult predicaments and find the right solutions to get out of them while keeping their homes. Government programs are sometimes notoriously difficult to manuver, and counseling can often help consumers make their way through the forms and red tape–or avoid getting in those situations in the first place.

It is good to see the government recognize the importance of counseling and take steps to help fund this much needed avenue.