Posted by Larry Doyle on December 23, 2008 7:15 AM |
At “Central Station” the other day, a loyal reader thought it may be useful to write about the implications of defaulting on a mortgage. Certainly nobody wants to default on a mortgage, but given the dynamics of our current housing market and economy, delinquencies and defaults are simple realities.
In thinking through this topic, it struck me that it may be just as beneficial to address what to do before defaulting as it is to know what happens after defaulting.
First and foremost, given the economic environment there should be no sense of shame or embarrassment in a deteriorating financial condition. That said, as one of my earliest mentors taught me “people in finance typically do not have problems with losses but they have big problems with surprises.” How does that piece of wisdom apply to today’s deteriorating housing market and rising foreclosures?
In my opinion, I would strongly encourage any individual who is feeling a degree of financial stress with their mortgage payments in the context of their overall financial budget to visit the bank/broker who gave you the mortgage. In doing so, I would bring an overview of your monthly budget, including taxes, food, utilities, insurance, etc. The more comprehensive you can be the better.
Perhaps you may think that you do not need to do that or want to do that and you can struggle through another month. Perhaps you are also digging yourself into a deeper hole. I am all for people meeting their obligations and I detest those who knowingly abuse the system. In the middle of those extremes, however, are a great number of people who are doing everything possible to keep their home and manage their finances.
You may think that in visiting the bank who wrote your mortgage that you are strictly dealing with an enormous entity bogged down with piles of red tape. I would offer that in this market and this economy, “everything’s negotiable.” Rest assured the last thing the bank wants is for another mortgage to default.
Additionally, the likely first piece of government assistance to come from the Obama administration is capital to help homeowners in foreclosure or approaching foreclosure. I expect that assistance will incorporate some degree of mortgage principal reduction.
I would definitely broach the topic of principal reduction after laying out your budget. The worst the bank can do is say no. If that is their response, you will have been on record as having been proactive in the process and that can’t hurt you if, in fact, you end up actually defaulting.
On that note, I do caution that there seems to be a cottage industry developing to handle mortgage defaults and foreclosures. While it would be irresponsible of me to impugn an entire industry, I was struck by a number of sites that advertised how they could seemingly perform miracles. My initial line of thinking was that these may very well be the same people who put people into exceedingly costly mortgages in the first place. Please be very careful in whom you engage at this juncture.
Additionally, if in fact you default on a mortgage you need to fully understand that your credit score will take a serious hit and that the cost of future credit/loans will likely be significantly higher if in fact you can get a loan at all. Aside from the impact on your credit score, there will likely be tax implications as well. I would encourage you to talk to an accountant or tax preparation service well in advance to learn about these implications.
Again, please understand that I am not a professional financial planner and that the opinions here are strictly my own. These topics are challenging as is the economy. I do like the concept that “everything’s negotiable.” I hope that if in fact you find yourself in this position that you find that my approach outlined here is ultimately the equivalent of “an ounce of prevention is worth a pound of cure.”