Underwater homeowners, beware walking away (Chicago Journal)

By Don DeBat

March 9, 2011

The Chicago-area housing market is fighting an uphill battle toward that level playing field every home builder, condo developer, Realtor and home buyer hopes to see again in the next few years.

The good news is the downtown Chicago rental apartment market appears to be enjoying a boom in the Chicago area with high occupancy levels and rent increases of up to 8 percent forecast for 2011.

However, experts say there are some mountains to climb before the Chicago area’s for-sale home and condo market returns to normal, based on the following chilly facts:

Some 38.6 percent of the existing homes in the Chicago area were underwater at the end of 2010 with the amount of mortgage debt exceeding the owner’s equity.

More than 40-percent of the homes marketed in the area in December sold for a loss, reports Zillow.com.

Some 69.1 billion in home-equity evaporated last year, up from $67 billion in 2009, but an improvement of the $90 billion lost in 2008, according to Zillow.com.

Condos accounted for 42.5 percent of all foreclosure activity in the six-county Chicago area in 2010, reported the Woodstock Institute, a Chicago think tank.

Faced with reality and fed up with wrestling with cold-hearted bankers, it’s no wonder that many homeowners who are under water are considering the concept of a strategic default.

“A mortgage isn’t a life sentence, it’s a contract,” noted Dylan Ratigan, host on MSNBC, who blogs for the Huffington Post. “Your house is the collateral for that contract, and if you stop paying, the bank gets the house. That’s in the contract.”

Ratigan believes there is nothing immoral about not paying your mortgage, giving up your down payment and just walking away. “You need to see your relationship with your bank as purely contractual,” he said. “The bank certainly sees you as a number.”

There are several ways to do a strategic default. You can mail your house keys to the bank, do a short sale, or a deed-in-lieu of foreclosure.

If possible, the best course of action is to meet with the bank and get it to a loan rate modification and stay or agree to a short sale and let you leave.

“If you can’t pay the mortgage, let your lender know you are in trouble,” advised Chicago real estate lawyer Leon Wexler. “The lender would be better off getting possession of the property or approving a short sale than incurring the expense and delay of a foreclosure with no pot of gold at the end.”

In a short sale, the homeowner also is liable for federal taxes on the difference between the mortgage amount and the sale price because the government considers this money as taxable income.

However, it is essential to hire a good real estate lawyer to negotiate a strategic default and avoid legal traps, experts say.

In Illinois, Indiana, Wisconsin and 35 other states, if you stop paying your mortgage or home-equity line of credit your lender can have recourse against you for the amount you owe.

So, after the bank forecloses on your house, it could and sue you for other assets to pay for the difference between the mortgage amount you owe and the price the house brings at auction.

“The market is different now,” Wexler noted. “Lenders do not have to hide their bad loans from regulators. Courts in Chicago and Cook County generally were not entering deficiency judgments against delinquent home-loan borrowers because there are tens of thousands of bankruptcies. If the owner had the money the loan would not be in default.”

However, your credit score will take a hit if you walk away from your mortgage obligations. But it is not the end of the world, especially if you do not have other major assets that the bank can chase. Some former homeowners report being solicited for new credit cards within months of a strategic default.

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