How Do I Stop The Bleeding?

The big question is what are the alternatives when you realize you are seriously "upside-down" and can no longer afford to pay the mortgage? Is there an exit strategy other than walking away and allowing the bank to foreclose? What about my credit? Will the bank attach my other property?

If you are "losing your shirt" and the kids are near starving, you have to make a common-sense decision. What is your 800 credit score worth? I will never suggest that you do not pay your bills but, let's face it, does it really make sense to go bankrupt "supporting" a lot of dirt? It is hard to believe that people will blindly use up their retirement money or the kid's college tuition fund to actually further compound an already bad decision. It's much more than just not "throwing good money after bad," it's a question of waking up and taking control of your life. You've already lost money. I find it painful to sit by and watch people ruin their lives on top of it.

As a realtor and investor, I see that many owners are willing to take the credit hit, but they just don't want any other personal exposure. They just want to return the deed to the lender but do not want the lender chasing them with a deficiency judgment for which the borrower is personally liable. There are two alternatives that are always discussed: a short sale and deed in lieu of foreclosure.

I discussed short sales in my post of October 5 below. Other than the problems of getting a viable offer and then selling the bank on accepting it, and not asking for the deficiency, and before the buyer backs out ..... it's easy. And if you ask the bank to accept a deed in lieu, they can't say "NO" loud enough. Realtors will tell you that the bank doesn't want the property back (that's why the short sale makes sense, other than their commission), but the lender inexplicably seems to make the short sale way too difficult.

This dilemma is easily explained once you realize that all this knowledge (indeed 99% of all the articles on loss mitigation from so-called experts) is coming from clerks at the bank and realtors. And the realtors are receiving their information from the bank. Is there any surprise that this is all just one-sided information, spread as the gospel, from the party you owe the money to?

The real alternative: have an attorney fight the foreclosure and give the property in exchange for no personal liability. This means using a litigation attorney that specializes in mortgage law and foreclosure defense. Tip: If your attorney asks the bank what they will accept, it's the wrong guy.

Why would the bank just settle for the deed? Simple. When the lender forecloses, all it is doing is seeking to get title to your property. We are offering it to them up front - without a fight - which nowadays costs the lender over $50,000 on average per foreclosure and could take well over a year. In exchange, the bank is giving up the potential of getting a deficiency judgment (which they are not getting so quickly anyway). Given the time and expense, any lender actually lending his own money would rather just take back the property and get it over with, in a heartbeat! (This is where we can insert the discussion about the reasons for the mortgage meltdown.)

Stop asking the clerk at the bank what they will accept and, instead, have a proficient attorney handle it with the bank's attorney. Once the bank no longer has its "stick" of threatening to hurt your credit, you can put yourself in the driver's seat.