America is Like a Sinking Ship. Half Underwater and Upside Down

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A short story on what to do if you are underwater or upside-down on your mortgage!

If you are one of the millions of Americans that have negative equity in your home (Ex: Market price of home $200,000, you owe $300,000, Negative equity = $100,000), DON’T PANIC!

At the end of this housing mess in late 2011, some analysts put the number of underwater (aka upside-down, negative equity) mortgages in this country at almost %50.  It’s a good thing our money isn’t real or backed by gold anymore because writing the debts down and off would be a lot harder.   

The scary part is that a lot of the real estate in this country is now owed by foreign banks.  And the even scarier part is that there is a shadow inventory of properties that the banks have stashed away.  These properties are not even for sale or on the MLS system.  If these properties were thrust onto the open real estate market, it would add tons of inventory and would cause an even sharper drop in home prices.  In some cities, the shadow inventory makes up over 20% of all properties in the city.

But Believe it or not, some American’s with Negative equity are choosing the worst option in the universe when it comes to being underwater on their mortgage.  It’s sad to say but some people are committing suicide as a way to escape the debt.    

I mean, let’s face it, who wouldn’t be scared!  Hell, if I didn’t know the laws and had a $2.2 Million dollar mortgage on a Santa Barbra, CA shanty shack now worth only $500,000, I would be losing my mind too. 

But the point is that the people committing suicide here are definitely choosing the wrong option! Unfortunately, for some of these people a quick legal consultation may have saved the day.   

The Options

And what are the options?

1.      Loan Modification

2.      Short Sale

3.      Bankruptcy

4.      Walk Away

Of course Suicide is not one of the options!  The uninformed commit suicide! 

Throughout the course of my career as an attorney, I’ve had some interesting characters come into my office.  I’ve had the major drug dealer killer types, admitted murderers, gangsters (and I’m not even a criminal attorney!) and I’ve even had a clients wanting to know if I could help them Trademark and Incorporate their line of Marijuana foods and cakes so that they could sell them to all the states in the U.S. that have legalized medical marijuana.  Oh the times they are-a-changing. 

But God forbid if a client ever came into my office, stood in front of me and told me they were going to commit suicide because they were upside-down on their mortgage, I really don’t know what I would do but the following is what I would say and how it would go down if I had the chance to save a life, prevent a suicide and possibly be the first lawyer in recorded history to receive a ‘Get into Heaven Free Card’, just kidding, I’m sure there are lawyers in heaven (I hope!). 

The Short Sale Option

I might quickly yell, “Wait!  Don’t kill yourself yet, we can try a SHORT SALE!”

Praying that the client would sit down, I would then tell him, “Listen, I didn’t mean to yell but let’s try to do a Short Sale.”

I would offer him some red wine to depress the central nervous system and explain,

“A Short Sale is somewhat of a miracle because it will completely wipe away your negative equity, poof!  GONE!  You won’t have to pay a cent!”

He might think I’m lying and shoot us both so in order to avoid a double tragedy I would quickly follow up,

“Listen, only hustlers guarantee things but I would be willing to bet that you would get approved for the Short Sale, most people do, just look at the stats!”  

“And it gets better!”  I would quickly continue,

“You wouldn’t have a ‘Foreclosure’ stamped on your credit report!  And you would probably be able to purchase another home again probably within a year!  In about a year, you should be able to get a great deal on a new home.   And you were going to kill yourself!?”

The Bankruptcy Option

Then I would tell him, “In the unlikely event that your Lender does not approve your Short Sale, NO WORRIES!  We can probably file a Bankruptcy for you!  A Bankruptcy would wipe away the negative equity and possibly give you a fresh start!” 

I would quickly chime in, “And don’t worry to much about your credit report, Bankruptcy will indeed stay on your credit report for many years to come but the truth is, two years out of Bankruptcy, your credit score will probably be comparable to someone else with your same debt/income who hasn’t filed a Bankruptcy! Amazing!”

Hopefully by now the central nervous system is depressed from the red wine and he’s able to absorb the following, “The reason why your credit rebounds is because you are not allowed to file for Bankruptcy again for a number of years per the new Bankruptcy laws.  The big banks lobbied for the new Bankruptcy laws because some people figured out that you could file bankruptcy, get credit, go on spending sprees and file bankruptcy again, over and over again, every other year.” 

The Loan Modification Option

If he asked about Loan Modification, I would calmly but excitedly explain,  

“Loan modification is also an option Sr.!  Loan Modification is just like Refinancing except $10,000 plus in fees is not tacked onto the back of your mortgage!”

“Listen, if you want to ‘wait and see’ whether the property values go back up, we might be able to get you a lower interest rate by applying for a loan modification.  A Loan Modification will lower your interest rate and monthly mortgage payment but we have to see if you are a candidate.” 

Hopefully my lawyer skills are enough to save the day in a situation like that but in reality, it's not the lawyer skills, it's the imparting of information.  I think Gorden Gekko (played by Michael Douglas) from the movie ‘Wall Street’ says it best.  He said, ““The most valuable commodity in the world is information.” 

In the end, let’s hope that the information contained in this article prevents, at the very least, a small to mid range panic attack.  Of course I would like to save a life with this article but if it prevents one or two people from buldozering their houses as a false way to escape the debt, I will be happy!

From the author: Drew Alia, Pennsylvania Attorney
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