What To Do If You Owe More Than The House Is Worth

Every day in the news we see more examples of house devaluations as well as increasing numbers of homes in foreclosure. If you are one of the many people trying to figure out what to do about keeping your home as its value continues to slide downhill, you may have considered what some see as the only solution: stop paying the mortgage.

This 'cut-your-losses' approach recently gained traction primarily in response to the failure of lenders in instituting mortage relief programs. For some months now, Washington and the President have been pushing for the banks and other mortgage holders to step up and make good on their promise to extend mortgage relief to the thousands of people on the brink of losing their homes. Most of these homeowners are suffering because they cannot afford the payments. The current crop of mortgage delinquencies have to do with homeowners being laid off from their jobs or suffering other financial setbacks brought upon by the worst financial downturn experienced by the United States and its economic allies in over 70 years.

Brent T. White, a University of Arizona law school professor supports this approach in his academic paper titled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis". White argues that stopping the payments, as extreme as it is, could save the homeowner hundreds of thousands of dollars they have no reasonable prospect of recouping in the years ahead.

In California, mortgage lenders have no legal right to pursue defaulting homeowners assets beyond the house itself. Because of the inherent imbalance in the borrower-lender relationship, White professes that feeling shame and guilt over not making those payments is wasted energy. Understood. People do not like defaulting on their legal obligations and consequently shame is easily attached to conduct equivalent to breaking a promise even when the promise was made to a bank that may no longer even own your loan!

White claims that peoples emotions get in the way about clear financial thinking about mortgages. White seems to be downplaying the obvious collateral credit damage a borrower will suffer if they default on their loan: a plummeting credit score and the unliklihood of being able to buy a home or large ticket item for years to come.

My advice is in this wild and unpredictable real estate climate, weigh your options. If you just can't handle the house anymore, try to work with your lender on setting up a short sale, that is negotiating a deal that allows you to sell the house for less than what you owe but for the current fair market value. Sure, it can take many months to complete these deals but the impact on your credit and future financial life is far less than a foreclosure. If you lost your job and have no immediate hope on changing your situation, you may wish to consult with a Bankruptcy attorney skilled in giving you the best advice on how you might seek Bankruptcy protection. I know all these choices are hard, but the best choice is the one you make rather than made by someone else for you.