Having interviewed over a thousand clients for complaints against their lenders, servicers, and the securitized trusts that bought their subprime loans, I have heard this line from clients over five hundred times: “They told me to stop paying my mortgage.”
The advice to stop paying your mortgage might come as a whispered aside from the “friendly” agent of the servicer that answers the phone when you call – whether it’s Nationstar, Ocwen, BSI, SPS, SLS, Wells Fargo, Caliber, CHASE or any of the others. It may be from the representative at the loan modification company that you hired to help you get a modification. It may be from a well-meaning friend. No matter who says it to you, stop and imagine a highwire with molten lava below it. That’s what you are getting yourself into.
If you’re underwater and the payments are too high for you, you may actually choose to allow a foreclosure, because the house isn’t worth what you owe. You can take a gamble on a modification, because, after all, you wouldn’t be able to refinance without kicking in some cash. Foreclosure is a way to walk away from the debt. A strategic default means you have decided to live for free in the house for as long as possible, while also postponing the actual foreclosure sale for as long as possible. It makes financial sense in some situations.
If you have equity, think seriously before you default. Your credit will be affected and you won’t be able to refinance. After you default, your mortgage payments will be added to your principal balance. That means that if your mortgage payment is $4000 per month, your balance will increase by $4000 each month. Your equity will move, like an intravenous drip, from you to them. $4000 a month. Drip, drip, drip…
In some of the more stable California neighborhoods, prices are coming back so fast that the increase in principal balance is being outpaced by an increase in equity. Those borrowers are the lucky ones. Not everyone is in that situation.
If you have equity and you don’t default, you can either sell or refinance. If you default, you will only be able to sell — and you’ll have to do it fast, before the servicer forecloses. Once you get a notice of default, the clock will be ticking: in three months you’ll receive a notice of trustee’s sale, and the sale will take place in just three weeks. You may be able to delay the servicer with a loan modification review, but if they dual-track you and sell, you will have no control over the price. The servicer will sell your property at a price low enough for them to get their fees and penalties, and for some in-the-know investor to get a sweet deal.
The difference between the fire sale price and the amount of the debt is the called the “surplus.” You are entitled to it, but you’ll have to fight for it. And sometimes it is hundreds of thousands of dollars less than what you could have gotten if you sold the property yourself.
It is hard for most clients to understand that, above all else, the servicer wants to foreclose on you. It is hard for clients to understand that servicers have a million tricks to get you into foreclosure. If you’re naïve enough to stop paying your mortgage just because someone advises you to, all that you’ve done is make it easy for your lender to take your home.
This is a big decision — maybe the biggest decision you’ll ever make regarding your finances. Don’t make it based on a faceless, nameless voice on the phone. Don’t make it without talking to a reputable attorney.
I offer free consultations every Saturday at Advocate Legal. Call us at (323) 692-7499.