Should I Stop Making My Mortgage Payments?
Today's question is, should I stop making my mortgage payments?
We'll be discussing when it might be appropriate to default on your mortgage.
Now as an attorney, I'm bound by certain ethical obligations under the rules of professional conduct. Therefore, I can't really tell you explicitly or advise you explicitly to simply default on your mortgage, breach your contract with your lender, and stop making payments on your mortgage debt.
However, we can have a very candid conversation about what it means to be in default versus what it means to remain current when you're trying to offload an upside down property. The bottom line is, it's extremely difficult to get a lender to issue approval on a short sale transaction when the borrower is current.
Think about it from the bank's perspective.
Let's say that I'm the borrower and you're the lender and I come to you with a short sale offer in my right hand that results in a haircut to you of $50,000. Here it is in my right hand and I present it to you.
However, with my left hand, let's say that I continue making my mortgage payments on time, every time, month in, month out, and I have given you absolutely zero indication that I'm ever going to stop making my mortgage payments before the maturity date of that loan. What do you think you're going to do with that offer that I presented with my right hand?
Chances are, you're not going to take it very seriously and you're probably not going to entertain the offer at all. If you're in default on your mortgage, if you've missed payments, effectively you have forced the lender's hand into doing what I call doing the math.
By being in default, you're giving the lender essentially one of two choices,
Either accept the short sale offer, accept the net proceeds of the short sale offer, or continue to foreclosure. So there is some inherent risk involved with defaulting on your mortgage debt. In the unlikely and unfortunate event that the lender declines your short sale for whatever reason, they can proceed with a foreclosure of your home.
Now remember, Washington state is a non-judicial foreclosure state. So if that lender were to non-judicially foreclose, they are precluded or prohibited from pursuing you for the deficiency balance, which is the good news.
If it's a two-lien situation, that second lender can still come after you.
So just keep in mind, if you make the decision to default on your mortgage, to stop making those mortgage payments, it does act as sort of a double-edged sword. On the one hand, you're increasing your odds. You're significantly increasing your odds of successfully obtaining lien holder consent, short sale approval. But on the other hand, if you don't get it, if the bank declines for whatever reason, then be prepared to deal with the foreclosure.
You're forcing the lender to determine the value as a short sale versus the value of the property as a foreclosure.
Now, 99 times out of 100, the bank stands to gain more by doing a short sale than they would if they simply let the property go to sale or foreclosure auction. That's because of the inherent nature of the auction. It's sort of a fire sale or a race to the bottom. Everyone's looking for a deal. No one is going to pay full fair market value at a trustee sale. The bank understands that.
The bank knows that, not to mention the fact that the bank is incurring all of these additional administrative fees and attorney fees by going through with the foreclosure, which cuts into their bottom line even more. So that being said, the bank stands to gain more from doing a short sale. The anticipated net proceeds from a short sale equals X, the foreclosure value of the house equals Y, X is greater than Y, and presumably, if the bank is behaving like a rational actor, they're going to go with the short sale option because of a higher net proceed that they'll realize.
Unless you're in default, you're not forcing the lender to do this calculation.
The lender is sitting back and collecting their monthly mortgage payment. There is no foreclosure as an alternative if the borrower is current. That being said, it may be appropriate under certain circumstances to default on your mortgage debt in order to force the lender's hand to issue approval on a short sale.