What a difference ten short years makes! Back in the ’90s, basically everybody in America believed they had the right to own a home. Regardless of whether or not they could afford it, the marketing hype of the big banks made them believe that there was a loan for them. Homebuyers went for zero-down loans, subprime loans, and stated income with no verification loans.

In those days, it almost didn’t matter what you would put on an application for a mortgage; chances were it would be approved. In fact, in the early 90s, I listened in as a colleague applied over the phone for a mortgage on a property in California (I was living in D.C. at the time). When the underwriter asked him how much money he made, he countered by saying “How much do I need to make?” The banker just laughed and said he’d fill in the right amount and get the loan processed immediately. My buddy was lucky; he could pay for his new home.

But not everyone who bought in those days of free mortgage money was prepared for the inevitable fluctuations in real estate dealings. When the real estate bubble burst, the simple equation of supply and demand that usually drives the market was made highly complicated by the state of the economy and unemployment.

I’ve listened to all of the experts argue that certain loans never should have been made, and certain individuals should never have secured mortgages–but I don’t know what good that kind of hindsight does anyone today. Today, homeowners in trouble need to know what to do going forward.

There is a steep learning curve right now for both lenders and homeowners, with homeowners realizing they’ve gotten the short end of a deal built on a treacherous foundation of misrepresentations and outright lies.

Lenders, too, are learning the hard way what happens when homeowners are forced to acknowledge that the home they own is worth far less than they still owe the bank.

More than 25% of all homeowners are “underwater” with their mortgage—owing the bank more than the fair market value of their home.

The most basic thing such a homeowner needs to understand is this: When you entered into the mortgage contract, you agreed that in exchange for the money you needed to buy the house, you would put that same house up as collateral to the bank. In other words, if you failed to repay the bank the money you owed them, you would be penalized by having to surrender your property to them.

It’s very important to banks that homeowners feel they have a moral obligation to repay a mortgage loan in full. They count on the desire that people have to stay in their homes as a powerful motivating force.

Yet as time goes on and banks persist in offering solutions that do not grant any real relief to distressed homeowners, more and more people are making peace with the notion of just giving the house back to the bank and defaulting on their mortgage payments.

According to a recent survey, compared to a year ago, nearly twice as many homeowners believe it is okay to simply walk away from their property and their mortgage. In fact, when the black and white choice becomes “pay” or “walk away,” over 27% of all homeowners admit they would consider abandoning their homes.

If you are one of the over 11 million homeowners living in a house that is worth less than you owe on your mortgage, what options do you have? In the next three parts of this series, you will learn why loan modifications don’t work, how a short sale can leave you vulnerable, and why foreclosure—or strategic default—may be your best option once your dreams of home ownership are shattered.

Originally published on FoxNews.com

 

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