I received a copy of this article from my friend Lisa Capes at Chicago Title. It is written by two Phoenix area attorneys who practice real estate and bankruptcy law. I thought the information was both topical and thoughtful. I called Stuart and we had a nice chat about the issues homeowners face today. Below, and with permission, we are posting their article. If you have questions, please contact Stuart or Robert. Their contact info is at the bottom of this post.

 House Underwater? Possible Courses of Action
by Stuart Pack and Robert Nagle

Many homeowners today are faced with the situation where their homes are worth less than what they owe on their mortgages. In fact, the issue has reached the national media, with the New York Times and National Public Radio both presenting articles on this issue this week alone.

This article briefly explores some options a broker can discuss with a homeowner who is considering the sale of their home.

There are 4 viable alternatives for homeowners to consider: the first is to continue to make the monthly mortgage payments. This is what most homeowners do. For numerous reasons and regardless of whether the payment can be afforded, homeowners feel obligated to repay their loans, even though it may not be in their financial interest to do so.

The second alternative is loan renegotiation. Many homeowners who have requested their lender to renegotiate their loan have discovered that their lending institution is reluctant to modify the terms of the loan and when their lender is even willing discuss a renegotiation, numerous hurdles must be overcome before the loan can be renegotiated. It is generally rare for a lender to agree to actually forgive any of the principal of the loan.

The third option is to find a buyer for the home and negotiate a "short sale". As with asking a lender to renegotiate a loan, many homeowners find the short sale process to be extremely frustrating, time consuming and ultimately an unsuccessful endeavor. This is not to say that a successful short sale is impossible, but it is frequently a difficult process.

Last and newest is the "Strategic Default." More and more homeowners are electing to walk away (i.e., intentionally default) from their mortgages and let their lender foreclose. These homeowners have reached the conclusion that the financial reasons to walk away outweigh the reasons to continue to make the monthly payments to the lender. There are several viable reasons to consider a Strategic Default.

Arizona has long established "anti-deficiency" laws with respect to home loans. What is a deficiency? A deficiency is the difference between the principal balance due on a home loan and the amount that the lender receives at a foreclosure sale. Thus, if the loan balance is $500,000 and the lender receives $200,000 at the foreclosure sale, there is a deficiency of $300,000. "Anti-deficiency" laws are generally intended to protect homeowners from the lender collecting the difference. In fact, lenders making loans in Arizona are aware of the inherent risk to them of the anti-deficiency laws, and typically price their loans accordingly.

There are many criteria used to qualify under Arizona's anti-deficiency statutes. Each situation is unique and upon review, an attorney who specializes in real estate transactions can determine whether the property would qualify. 

Finally, a Strategic Default may not have as great an impact on your credit score as the lending community would have you believe. Many commentators think that a borrower's credit scores will take the same hit (e.g., 200 to 300 points, depending on overall credit conditions) through a short sale or foreclosure, and both remain on a person's credit report for seven years (bankruptcies remain for 10 years).

Being informed about the options available to a homeowner will help establish your credibility as not only the right person to assist with a potential home sale but also as an advocate for the best interests of the homeowner.

These are complicated issues that should be discussed with competent counsel familiar with real estate law and bankruptcy law. For more information, please contact Stuart Pack or Robert Nagle at (602) 595-6951 or email them at stuart.pack@naglelaw.com or robert.nagle@naglelaw.com.