Leveraging the Unemployed Payment Moratorium

The latest move from Washington – giving the unemployed a one-year pass on making their FHA-backed mortgage payments – presents an opportunity for them to take some clear actions to help themselves without worry of an immediate foreclosure.

Leave aside the fact that – compassion for people in a tough spot notwithstanding – this represents yet another distortion in the market’s attempt to work itself out. It may only prolong that arduous process, but then again, if anyone deserves a break, it’s the disturbingly large percentage of people who have lost jobs and livelihoods over the past few years.

As a short sale specialist, my first piece of advice to these people is this: If you were ever thinking about selling your house and getting out from under the burdens of a large mortgage and a house that has lost value and is upside down, now is the time to do it.

I can’t even tell you how many short sales we have lost due to a lender’s abrupt decision to foreclose, even when we thought the lender was fully on board with the sale. There have been times when we were literally hours away from making a sale and the bank stepped in and nixed it in favor of a foreclosure.

So with a year’s breathing room, that helps to eliminate the chance that a short sale will be torpedoed at the last minute. It relieves some of the urgency and uncertainty for homeowners, and can allow them to let the sale run its course.

We haven’t addressed this with any particular lenders yet, since this development is so fresh, but it’s hard to imagine a lender not going along with a short sale in this scenario. One choice for the lender is to get no payback on that loan for 12 months, with a lot of uncertainty about what happens after that. The other choice is to approve a sale that can get the loan off their books even if the payment does come up a bit short of the full amount.

The homeowner’s individual situation will dictate how they react to this. They may feel confident they’ll have a job by mid-2012, or that they can scrimp and save enough money during this moratorium to resume payments a year from now and make it all work out. One thing they shouldn’t do is coast for nine or 10 months and then decide to try a short sale just as the deadline is approaching for restarting their payments. That’s a risky strategy, but one I expect we’ll see a lot of.

But maybe they have thought about selling the house and want to get out of the deal with their credit history only lightly bruised. If so, a short sale, starting the process now, may be their best bet.

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