By Kitty J. Lin, Attorney at Law
In this economy, many homeowners are hurting from the downturn of the housing market and subsequent reduction in the value of their home. Many homeowners have bought their homes when the real estate market was at an all-time high, believing they have made a good investment. Instead of realizing the American Dream, they find themselves making payments for a property that is worth significantly less than what they now owe the lenders. It may be a hard pill to swallow for some because they could be living next door to a neighbor that purchased a foreclosed home for several hundred thousand dollars less than their current home, even though the houses are almost identical in size and amenities.
Unfortunately some of these homeowners have been unable to keep up the monthly mortgage payments on their properties, and have had their dream home foreclosed on. Other homeowners find they are still able to afford their mortgage payments, even though their houses are not worth what they owe. Is this good or bad for the economy though?
Most of the stay and pay homeowners are stuck between a rock and a hard place. These homeowners cannot get a loan modification because they are still able to afford their mortgage payments. They cannot sell their home, unless it is a short-sale (short-sale is when a home is sold for less than what is owed on the mortgage(s)), there is no equity and the homeowners would end up owing the mortgage holder if they sell their homes. Finally, although the current housing rates are at an all-time low, they cannot refinance their homes for a lower interest rate because there is no equity, or the credit scores are not high enough to take advantage of any offers. Whichever the cause, homeowners are left with the choices of either walking away from their home or continue to make their mortgage payments and hope the value of their house increases $100k plus in the next ten years.
Some experts and bankruptcy attorneys believe the stay and pay homeowners that are actually paying their mortgage payments on time even though their houses are worth hundreds of thousands of dollars less than what they paid actually is hurting the economy. How can this be true?
The stay and pay homeowner may be worse off than those that walk away from their homes to start fresh. The homeowners that continue to pay the high mortgages are arguably spending a higher percentage of their pay on their mortgage than on other consumer goods. They are most likely paying a higher percentage of interest on their loans, and may be paying a higher amount on their property taxes. These higher costs mean that they have less money to spend on other items, like fixing up their property, or buying consumer items for themselves or their children.
While this theory makes a lot of assumptions, it may hold some water. If these homeowners were paying less for their mortgages or renting somewhere, they would theoretically have more money to spend on other goods or services. Is that not always true though? If the government did not tax us so much, then people would have more money to spend on other items and services and the economy would be better. Over time we all spend a certain amount on a home or a vehicle. Depending upon the timing, it may be a good deal or it may not be. At the end of the day, it all should balance out in our supply and demand economy. Unfortunately it appears more and more people will seek the counsel of bankruptcy lawyers due to increases in tax debt due to increased taxes.
Unfortunately, with the economy stagnant at best, it will be a long time for real estate prices to rise, which means the stay and pay homeowners have a longer period of time to reach before their house has equity. However, homeowners may stay because their homes have special memories that cannot be replaced. For those that wish to stay in their homes that are underwater, it may be possible in a Chapter 13 Bankruptcy to at least get rid of the second and third mortgages or line of credit. See our lien stripping article here.