A few days ago ABC national news asked the infamous Suze Orman, if a home owner who owes more than 20 percent over what their home is currently worth should they just pack their stuff and walk away (basically telling the bank to shove it). What do you guess Madam Orman answered? Suze said take a hike. Walk away from your underwater mortgage.
Suze doesn’t hold any insurance licenses nor is she a licensed investment advisor; but you do and possibly you are. Is it appropriate advice to tell your clients to walk on their debt, and is that ethical or morally correct advice?
At a time when the world and especially Europe are seemingly coming apart at the seams is this a new era and philosophy in personal budgeting and financial advice? Apparently (and according to an ABC News study), almost 12 million Americans are upside-down or underwater on their mortgages. And while billions of dollars were earmarked for assistance for mortgage modifications and mortgage renegotiations, only a small fraction of those funds have been allocated or lent out by the banks.
The process of home mortgage refinancing or loan modification is daunting, cumbersome, confusing, and overall broken. The number of homeowners who barely hanging on but are still paying their mortgage payments along with those home owners that have not made payments but the bank hasn’t yet posted for foreclosure are the “shadow inventory” that is becoming a huge concern for law makers and bankers alike. When there is an oversupply of anything, common sense dictates that the price will decline to get rid of excess inventory.
What will happen when homeowners begin learning that some of their neighbors aren’t paying and in many cases, haven’t paid their mortgage payments for months and in some places, years? The banking, real estate and mortgage industry’s house of cards may just come crashing down. You can’t fault Peter for not paying on his upside-down underwater home mortgage if his neighbor Paul isn’t paying.
Over the past five years, home prices have fallen between 25 percent to 50 percent all across the country, and one in four homes is worth less than the mortgage on them. Plus, getting a loan or mortgage to buy a home is reportedly tricky and difficult for all except the Kardashians these days. So what does taking a hike from their mortgage mean to your client and their credit rating? Certainly it’s not a good thing for them credit-wise, but it gets frustrating for them to watch the big fish get federally funded financial “do over’s” while the tiny minnow consumer home owner personally suffers the humiliation and the financial Armageddon like set back.
Fact is that it’s much cheaper to rent than own a home these days than to own your home and pay a mortgage. Property taxes and cost of repairs and replacement materials are at all time highs. If some of your clients in the “undecided but need to figure it out” group, maybe you should tell them to at least go through the motions of working out a deal with their mortgage bank. And if your client still can’t see how they can make ends meet without a “bail out” or loan modification, here are the first steps of advice to offer:
1. Call your bank or mortgage company, tell them your plight and ask for their loan modification package. Also, tell them that you will not be able to make any more payments on your loan until something can be worked out with them. (Note: unfortunately lenders seldom, if ever, begin to negotiate until you are way past due on your payments. So, prepare your clients to not make payments to their mortgage company, but, as a safety net, to make payments instead to an escrow type account to indicate “good faith” on their part later, in case the bank plays hardball)
2. Send a certified letter to your bank stating what was said in item No. 1, and reference the time and date of your phone call made to them previously. (Keep those saved payments in your quasi escrow account as your cash reserve to use for rent deposit and/or for several months rent up front if you do vacate your home)
3. Contact a realtor in your area and ask them if they would list your home pending a short sale scenario. There are lots of realtors that actually specialize in this process and will work directly with your bank. (This is important, too, even if the current market value is thousands below what you owe on your mortgage, it shows good faith on your part to work out of this bad situation.)
4. Contact a professional debt advice source or consumer credit counseling service. (This is where your clients may get free help to assist in getting their personal financial ducks in a row; once you default on your mortgage, it is likely that your credit cards will be severely limited or cancelled)
Forewarned, this will crater your client’s credit score and rating by hundreds of points, and they’ll likely not be able to get reasonably affordable credit for up to 5 years. But with savvy personal financial planning and use of protected assets such as IRAs, life insurance, retirement plans such as 401(k)s and annuities you may be able to guide them to come out ahead in the long run.
And this is where YOU come in to quarterback and protect your client’s interest and your relationship. Take the leadership role in helping your senior clients and their Boomer children. Even if you aren’t able to provide much assistance, your clients will love that you are concerned and care about them.