Owners should consider consequences of walking away

Q: I have a question and statement. I keep reading and hearing about the government bailout for homeowners who are at risk for foreclosure. We, in Las Vegas, were the hardest hit.

My problem: I do not have a hardship. Even though my husband lost his job, I went to work full-time and we can afford our mortgage. But, our home is worth $150,000 less than we owe due to the drop in appraisal value. I put 25 percent down on a $500,000 home to avoid a jumbo loan and now all of that equity is gone. We can't relocate for my husband to work so we will stay here, but why isn't anyone in the government or in our local government trying to have all underwater homes readjusted to current market value to help people who might think their only option is to walk away?

I personally know a doctor, real estate agent and two physical therapists who are just not paying their mortgage. One pays his homeowners association fees and taxes and hasn't made a mortgage payment in 12 months. No one is coming after him and he is banking all of that money. He knows his credit score is shot, but doesn't care. The banks seem to prefer people not pay and stay in the home so it's not vacant. I will not walk away and not pay, but I am afraid more and more homeowners will as they think the value of the homes will not ever go back up. We need someone to speak for those who can pay their mortgage but are underwater due to the housing market fiasco.

I am a responsible, hard-working and honest citizen and this is ruining my life. My husband wants to stop paying like the others I mentioned, and I am having a hard time giving a reason why we shouldn't. If we can't pay, then I can get help, but because I can pay, and didn't buy beyond my means, I am suffering.

Please help me get the word out that if there isn't something done to readjust home values and mortgages, I have a feeling there will be plenty more people walking away. -- Christine G., Las Vegas

A: I sympathize with your situation, both personally and professionally. With an estimated 75 percent of all local homeowners owing more on their mortgage than the current market value of their home, thousands of local homeowners are facing a similar dilemma.

When a homeowner walks away even though they can afford to pay their monthly mortgage payment, it's called a strategic default.

I'm glad you said you don't plan on doing that.

The Greater Las Vegas Association of Realtor's position on this issue is that people should honor the contracts they signed and avoid the temptation to walk away from their home mortgage. This is especially true for those who can afford to pay their mortgage.

Of course, we all know many people are choosing to ignore that advice and the law.

Those who choose to walk away from their mortgage should understand the consequences. They include legal and credit ramifications. You should also know that government and mortgage industry leaders are working harder to discourage and crack down on strategic defaults.

For example, Fannie Mae, which has a federal charter to expand affordable housing and help lenders loan to homebuyers, recently revamped its policies to encourage borrowers to work with their loan servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk away and had the capacity to pay, or did not complete a workout alternative in good faith, will now be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure.

Terence Edwards, Fannie Mae's executive vice president for credit portfolio management, said these steps are intended to get borrowers and loan servicers to work together.

"Walking away from a mortgage is bad for borrowers and bad for communities, and our approach is meant to deter the disturbing trend toward strategic defaulting," he said. "On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time."

Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments.

It is also instructing its loan servicers to monitor delinquent loans facing foreclosure and recommend cases that may warrant deficiency judgments.

Personally, I don't think federal or local governments can or should do as you suggest and have all underwater homes readjusted to current market value.

It may take several years, but home prices will eventually rebound.

As Fannie Mae points out, troubled borrowers who work with their servicers and provide information to help the servicer assess their situation can be considered for foreclosure alternatives, such as a loan modification, a short sale, or a deed-in-lieu of foreclosure. A borrower with extenuating circumstances who works out one of these options with their servicer could be eligible for a new mortgage loan in three years, or in as little as two years depending on the circumstances. For more information, visit efanniemae.com.

For more information on similar topics, consult a qualified local Realtor, visit foreclosurehelpfornevadans.org or visit lasvegasrealtor.com.

Rick Shelton is the president of the Greater Las Vegas Association of Realtors and has worked in the real estate industry for 20 years. GLVAR has 12,500 members. To ask him a question, e-mail him at ask@glvar.org. For more information, visit lasvegasrealtor.com. Questions may be edited for space and clarity.