Smart About Money: Everyone’s defaulting on mortgages, right?By Nick Maffeo
A woman from Canton came in looking for advice. She’d bought a condo in 2008 and was living there happily, but seeing the deals that her friends were getting on nicer properties, she wanted to trade up.
She could easily afford the mortgage on the properties she liked. All she had to do was sell her condo before the real estate market improved and priced her out of her new “dream home.”
Unfortunately, she owed $275,000 on the condo, but according to several realtors, she could only hope to get $235,000 in today’s market. She didn’t have $40,000 in cash to make up the difference. She was stuck.
The woman had spoken to many people about this predicament, including a friend who advised her to just “walk away” from the condo mortgage and let the lender — a regional bank — deal with it. According to her friend, it was the “smart move,” “easy to do,” and people did it “all the time.”
That’s not exactly right.
A mortgage is a serious financial commitment that’s hard to walk away from … for good reasons.
Media reports make it seem like everyone, from major corporations to the folks next door, are defaulting on obligations with no repercussions — which isn’t the case. Corporations’ restructuring plans have to be approved by the courts, and it’s always a black mark on their reputation.
Walking away from a mortgage has lots of repercussions, including possible tax liabilities and significant long-term credit score damage.
Also, Massachusetts allows a lender to seek to recover the amount owed on a mortgage, known as the deficiency balance. So a borrower who walks away from a mortgage may still owe it!
Some people were tricked into predatory loans. This woman wasn’t and she has no financial hardship — nothing to justify a forbearance from her lender. A default in her situation will be a serious red flag to a future lender.
Under the circumstances, I advised her to consider staying in her affordable and comfortable condo — an idea which, she admitted, had many advantages (including allowing her to beef up her savings, which were fairly low). Or she could rent the condo and use that income to cover her expenses until she could either sell at a better price or save enough to cover the difference between what she could sell for and the balance on the mortgage.
The bottom line: This woman has two viable options for having what seems to be a “bad” situation work out very well for her … without the long-term and not-insignificant burden of a default on her credit record. I wouldn’t be surprised to hear at some point that this particular cloud had a real silver lining. They often do.
Nick Maffeo is the senior vice president, chief financial officer and treasurer at the Canton Co-operative Bank in Canton. Have a question? Email to firstname.lastname@example.org.
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