A Deal Too Good To Be True

People often write to me seeking advice. These generally aren’t “Dear Abby” types of requests. Rather, they have questions about the mortgage industry – the status of the housing market and home prices, job openings, advice about their home loans, you name it. For many months, the question I received most was: “How can I avoid foreclosure?” But lately, I have witnessed a rather disconcerting trend, with more readers asking about strategic defaults. These are home owners who can afford their mortgage payments but are under water, meaning they owe more on their mortgage than their home is currently worth, and looking to get out of their mortgages.

A reader recently asked: “My house is under water. How can I avoid being the one who takes the hit?" The writer is current on his payments, has a job and holds an interest-only loan. He is recently divorced, has depleted savings and owns a home whose value has plummeted 25 percent. He doesn’t qualify for a government loan modification. He wants to sell but doesn’t want to take the loss. This reader writes that he heard about private hedge funds willing to reduce the principal balance of loans to keep them from defaulting. He wants to know if I could tell him how to find one of those hedge funds to reduce his principal balance.

Although there are some private modification programs – including some that offer principal reductions – they are so limited in their availability that they aren’t a realistic solution for more than a small number of homeowners. The government has some programs designed to keep people who can make reduced payments from losing their homes. Those programs will help a lot of people. But plenty of other people, like this borrower, don’t want to stay in their homes. He’s divorced. He’s moved on, figuratively, and now he’s ready to move on, literally. And he wants someone to come along and get him out of his loan.

My advice for this home owner, and others like him, is to keep making payments for as long as he can. First, I think the housing market will come back. American homeownership hasn’t gone away, and people will continue buying and selling homes for a long time to come. Second, there are options that could keep him current on his loan or get him out of it without taking the entire loss himself. Renting the house and seeking a short sale are two such options. Third, he should protect his credit. He may be discouraged about the house he has now, but something tells me he’ll want another house, with another loan, soon enough.

In the meantime, more programs are emerging that can help homeowners get out from under negative equity. Those are worth researching and waiting for. What is unlikely to materialize is a private hedge fund seeking to reduce the principal balance of his loan. Our borrower is hoping for a deal that is too good to be true.