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Saturday, October 30, 2010

Black, white or some shade of grey?

I’m not normally a shades-of-grey type of person. Generally if there is a clear right and wrong, a stop or go, or a black or white decision to be made I tend towards not seeing shades of grey in the situation that will allow the “little white lie” excuse. There normally aren’t any little white lies... just lies.

Having said that, the current housing situation, coupled with the horrendous economy in our area has had me thinking in shades of grey, in terms of advising clients with distressed houses. This is especially the case if they have already tried one or more of the failed federal programs to help distressed homeowners. Those programs, while well-intentioned, were ill-conceived, poorly executed and never bought into by the lenders involved.

So is it wrong to tell someone to just go ahead and ride out the foreclosure process and let the bank have the house? What about if they and you have tried everything already – a loan mod, a short-sale and appeals to the bank? Is there any rationale to advising them to strip themselves of any and all savings, retirement funds or college funds in a vain attempt to avoid the stigma of a foreclosure? I think not.

The market has already dealt with the most egregious offenders – those who vastly over-reached or lied on mortgage apps. They were the first victims of the downturn and perhaps rightfully so. Now we are seeing the people being displaced who were OK before the bottom dropped out of everything. These are people who had good jobs and got reasonable mortgages on homes that might have been inflated in value, but which represented the market at the time. These are our neighbors and friends and relatives, not a bunch of deadbeats.

Now we are seeing the results of the economy not only destroying the value of our homes but causing an unprecedented level of unemployment, with no end in sight. More and more I talk with or read about the ex-automotive engineers or factory workers in our area who have been out of work for 1-2 years, sometimes longer. They are the type of people who did burn through their 401K money or college funds trying to stay afloat and trying to keep their homes. They also are the ones that initially trusted that the federal programs to assist them would work – until they tried to use them. Now they go to Tea Party rallies and shout slogans about government being too big and taxes being too high.

So, what are we to do when a client with almost no chance of selling (even with a short-sale), asks us what they should do? Obviously we have an obligation to advise them to seek legal advice and financial counseling; but, should we also render an opinion on their options? Most of us have some level of experience with the bigger banks and how they deal with distressed home situations. A few are OK; but, most are so understaffed and overwhelmed that the whole process is broken right now. I find it hard not to empathize with the poor, tapped-out homeowner who has tried and failed to get any real relief from his/her lender.

I know that the consequences of a foreclosure are bad and I usually point them to several articles that outline what the impact, both short and long term, will be. Even a short sale has credit consequences and there are still many stories, rumors or urban legends of lenders going after short sellers for the deficiencies. So, it’s hard to find a happy ending to talk about with these people. In the end it can come down to this – do what you have to do to take care of your family and yourself in these hard times. If that means riding out a foreclosure on a house that will otherwise take you under, then so be it.

I’ll tell them about the foreclosure process, so that they understand what is coming, how much time they have left in the house, what to expect the lender to try to do and maybe point them to some advice on what you can do to start rebuilding your credit. I can help them find a place to rent for their family. I’m not going to look at them and go “tsk, tsk, what a deadbeat”; instead I’ll take a moment to reflect – “there, but by the grace of God, go I.”

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