I often wonder if I should simply change the title of this blog to “FHA mortgage news” since it seems like an overwhelming portion of recent coverage has been directed towards the agency’s activities. Its newest initiative – and the subject of this post – is to alter its role in condominium mortgage lending.

In October, it was announced that FHA mortgages would be more difficult to come by for condo owners. Namely, lender spot approvals would be eliminated, a maximum on the number of units in a condo complex that could obtain FHA loans imposed, and requirements on owner occupancy and sales were to be implemented. The rule changes were scheduled to take effect on November 2, and everyone predicted the worst for the condo market, which was already in the doldrums.

Only a couple weeks later and after incurring the wrath of condo lobbyists, the FHA suddenly did an about-face, and announced that on the contrary, it would actually move to make it easier for condo owners to obtain FHA mortgages. The first order of business was to double the maximum allowable mortgage size (actually the doubling had taken been implemented in 2008, but the FHA extended it to 2010). While this measure technically applies to all borrowers and all mortgages, it is expected to disproportionately favor condo mortgagers, whose properties tend to be significantly more expensive than average.

In addition, the FHA raised the maximum number of condo owners in a given unit eligible for its loans to 50%, while lowering the required ratio of units that must be sold at the time of mortgage origination to only 30%. The FHA is also making it easier for condominium complexes to have their FHA eligibility confirmed, while also giving lenders more discretion/authority to approve individual cases. Still, given that lenders are ultimately held responsible by the FHA for faulty approvals, it’s unlikely that many will make full use of this power.

In their entirety, these rule changes could energize the condo market, which is still one of weakest corners of the overall housing market due to the outsized role that speculation had played in bidding up prices prior to the bursting of the bubble. On the other hand, FHA mortgages are inherently more expensive than most because of the required insurance, with the main benefit of a lower down payment.

For that reason, condo owners aren’t exactly banking on the FHA to single-handedly buoy their sales. In fact, many have stopped selling units altogether, and have turned to leasing instead, with the goal of waiting for the glut in the market to first clear itself. Still, given that condos account for only a small portion of overall housing sales, even a small boost in nominal terms could be quite large in relative terms. FHA to the rescue!

A pair of articles published last week in the NYTimes (”With F.H.A. Help, Easy Loans in Expensive Areas” and “Wall St. Finds Profits by Reducing Mortgages“) highlighted the growing role that the FHA is playing in the mortgage market.

The former explained how the FHA is now underwriting more expensive mortgages and requiring less money down. The article states that the FHA historically stayed away from the regions characterized by expensive real estate, such as San Francisco, New York City, and many other coastal areas with thriving housing markets. In an about-face, however, the FHA has massively ramped up its lending activities (”underwriting loans at quadruple the rate of three years ago”) in these markets – and in all markets, for that matter.

In fact, the FHA doesn’t actually issue these loans; rather, it insures them against default. Argue its supporters, therefore, the program should theoretically cover its costs, perhaps even turn a profit. After all, it charges a hefty 1.75% premium on all of the loans it ensures, which should more than offset the risk it assumes. Its detractors argue that since the FHA is unfamiliar with these higher-end markets, it is not only betraying but also risks underpricing the insurance it sells. Given that 1 in 6 of the mortgages it insures is currently delinquent, they may have a point. Additionally, the fact that these mortgages tend to be for greater amounts (Congress doubled the maximum allowable loan size as part of the Economic Stimulus Act of 2008) means that each default ends up being more costly.

The second article explored how the FHA is insuring delinquent loans that have recently been refinanced. Under this “scheme” (a fair characterization, in my opinion), hedge funds and other speculative investors are purchasing blocks of securitized mortgage portfolios at deep discounts from the big banks that currently own them and are eager to offload them. Then, the mortgages are refinanced with participating lenders (often resulting in a reduction in principal), insured by the FHA, and resold to other investors. The program is beneficial to both the borrowers and the investors, although perhaps less so for the FHA.

Of course, it’s impossible to say whether this insurance is excessively risky for the FHA. At the very least, it will be years before default rates on these loans can be forecast. However, given the FHA’s recently announced financial troubles, combined with the precariousness of the housing market and the fact that more borrowers are defaulting even sooner on their loans, one would expect the FHA’s strategy would be guided by prudence. [Chart courtesy of the WSJ].

While it pains me to write this (since as taxpayers, we are all indirectly responsible for any losses born by the FHA), these programs are incredibly friendly to borrowers, and I would be remiss if I didn’t encourage you to take advantage of them as borrowers. Especially given the FHA’s dire financial condition, it’s difficult to say how long it will be possible to borrow at such lenient terms.

Based on feedback from our readers, it seems the only thing most borrowers understand about Private Mortgage Insurance (PMI) is that without it, many of them would be denied mortgages. While for many borrowers, this is indeed the case, it’s important to be aware of the other options that exist.

First, let’s start with the basics: what is PMI? As implied by the name, PMI is literally an insurance policy on your mortgage, which protects the lender in case of default. Typically, PMI is required on mortgages with a loan-to-value of greater than 80% (i.e. when the down-payment is less than 20% of the value of the mortgage). The insurance is calculated as a percentage of the the total mortgage value, and is rolled into the monthly mortgage payment.

PMI is not cheap, and will average about $1,000 per year on a $200,000 mortgage. Generally speaking, insurance premiums for fixed-rate mortgages are lower than for variable-rate mortgages. In addition, long mortgage durations (30 years, as opposed to 15 years), and high loan-to-value mortgages are associated with higher PMI premiums. This is to be expected, since mortgages with these characteristics typically have higher default rates.

One alternative to making monthly PMI payments is to roll a one-time premium into the mortgage. Thanks to current tax rules (mortgage interest is tax-deductible, while PMI premiums are not), it will be cost-effective for the average borrower to do so. Unfortunately, most borrowers are not aware of this possibility, because lenders require special authorization to process it and hence avoid mentioning it to prospective borrowers. Finally, while such a strategy will technically raise the size of your mortgage, some (or even most) of this premium will be rebated to you when it is determined that you no longer need it.

Speaking of which, mortgage insurance is only a temporary outlay. After your loan-to-value ratio exceeds 80%, you will no longer be required to pay for it. This is natural, since if your loan-to-value ratio had been this high when you first obtained the mortgage, you wouldn’t have been required to purchase PMI.  In fact, thanks to a law passed in 1999, lenders must take the initiative to cancel the mortgage insurance agreement when the LTV falls below 78%, based on the initial appraised value of the home. Borrowers are also entitled to early cancellation (though, you must request it), if your equity exceeds 25%, based on a current appraisal of the home.

As I mentioned, private mortgage insurance is quite expensive, and hence not-at-all desirable. This is because the mortgage insurer is selected by the lender – not by the borrower – which doesn’t have as much of an incentive to cut costs. Accordingly, it might be economical to pay a higher interest rate in lieu of PMI, if your lender offers you such an option. The best approach is to simply (save up until you can afford to) make a higher down-payment, such that PMI is no longer necessary.

In a bold, unforeseen move….oh who am I trying to kid? In a move that everyone saw coming, Congress voted (and President Obama approved) to extend the popular tax credit for homebuyers for an extra six months. [Given the growing sense of discontent with heretofore government efforts to restore balance to the market, perhaps they didn't have any other choice.] The program was originally slated to expire in November, but thanks to popular demand (and prodding from lobbyists in the real estate industry), it will now run until April. “To qualify for the credit, buyers have to have a binding contract on a property in place by April 30, and need to close on the sale by June 30.”

The program has also been modified slightly from its original form, in which only first-time buyers with a maximum combined income of $150,000, were eligible for the $8,000 tax credit. In its latest iteration, the tax credit will be available to an even wider demographic. First-time homebuyers will still receive a tax credit worth $8,000, but the income restrcitions have been raised to $250,000, which means that all but the wealthiest 2% of Americans are now eligible. In addition, those wishing to make a new home purchase (but are not first-time buyers) are eligible to receive $6,500 for so-called “Trading Up” purposes.

For many homebuyers rushing to close on a home purchase, the extension was no less than a windfall. It appears that many had orignally underestimated the amount of time it can take to close (sometimes several months); now that they have until May 1 to close, there is less of a need to rush. In addition, the tax credit credit can still be claimed in advane, in the form of a loan from the government. In this way, homebuyers looking to make a purchase now, won’t have to wait until filing their taxes to receive a reinbursement. Given that April 15 is right around the corner, however, this is probably less of an issue for those that take advantage of the program in the coming months. As an aside, it’s important to check with an accountant/tax-preparer to confirm your eligibility for receiving the credit, as the IRS has already identifief 20,000 caes of fraudulent/accidental claims by those who were ineligible.

In the short-term, there’s no question tha this tax credit will continue to provide support for the housing market. Many analysts have attributed the apparent stabilization of the housing market solely to this program. Given its expansion to include all but the wealthiest home-buyers and the removal of the requirement that it can only be claimed in association with a first-time home purchase, it will provide have an even greater impact in the months ahead. In fact, “The industry group is forecasting 5.69 million existing home sales in 2010, up from an anticipated 5.01 million this year. About 549,000 new-home sales are projected for next year, up from an estimated 397,000 this year,” a rise of nearly 15% from 2009 levels.

As for the long-term, that’s another story, altogether. ““Housing activity is likely to fall back once the tax credit finally expires, as some sales will have been brought forward from future months,” explains one analyst. Ideally, the economy will pick up during the interim, and cushion the fall after the program ends. In this way, the tax credit can be seen as nothing more than a giant bridge loan for the housing market.

As the housing crisis enters its twighlight hour, the government is still fighting tooth-and-nail to ensure its relative stability. Towards that end, it just announced a new initiative aimed at low-income borrowers. Under the new program, capital will be provided to state and local agencies (FHAs) so that they can make loans to this strata of borrowers; ultimately, the loans will be repackaged by Fannie Mae and Freddie Mac, and sold to the US Treasury Department.

Low-income borrowers have always been at a disadvantage when it comes to obtaining mortgage financing. State and local agencies have thus played a valuable, and even necessary role, in funneling cash to this under-served group of borrowers. As a result of the credit crisis, however, such agencies have had an extraordinarily difficult time obtaining capital, and many are operating at only 20% of normal lending capacity. Historically, they have been able to count on Fannie and Freddie to purchase their mortgages and satisfy their capital needs; since being nationalized in 2008, however, Fannie and Freddie have also had a difficult time meeting their capital needs, with 2009 bond issuance projected to be only 25% of 2007 levels.

30 states have already signed up for the program, and it is expected that more will follow. In order to participate, every agency will have to pay a fee for each mortgage that they originate, which should be offset by the lower interest rates and cheap access to capital. From the government’s standpoint, it is expect that these fees will defray all of the costs associated with the program. While there is no fixed budget, government officials anticipate healthy demand, and hence, healthy costs, perhaps as high as $35 Billion. Plus, the federal government will ultimately be on the hook for any mortgage defaults. As advocates of the program note, however, these state and local agencies have a strong track record. Despite targeting risky borrowers, they typically only issue 30-year fixed-rate loans, and require rigorous documentation of assets and income.

It is unclear how long the program will last, since it is being justified retroactively on the basis of a law passed in 2008. Government officials have been clear in their insistence that this initiative is intended to serve as a stopgap measures, and that these agencies should effect the government to fulfill their capital needs in the future.

From the standpoint of borrowers, this should provide a minor windfall, as loans can be used either for home purchases or for fixing up rental properties. Even before the inception of the credit crisis, such borrowers have largely been locked out of the conventional financing system. Now, they will have a chance to obtain mortgages, at reasonable cost. For more information, and to find an agency in your area, consult the National Low Income Housing Coalition.

It looks as if George Bush’s ownership society – during which a record 69.2% of American households owned their homes – is gradually coming to an end. To be sure, the Obama administration is many ways continuing the Bush policy of encouraging home ownership, via housing tax credits, loan modification incentives, and purchases (via the Fed) of mortgage-backed securities. At the same time, however, there is a growing recognition that universal home ownership is neither practical nor desirable; the alternative, of course, is renting.

By most measures, there has never been a better time to rent. While housing prices and interest rates remain favorable, rental costs are even more attractive, with ratios in many regional housing markets continuing to favor renting. Even in New York City, long perceived to be the nation’s most robust rental markets, is experiencing falling rents. Fundamentals (i.e. oversupply) are combining with rude economics (increasing unemployment, falling wages) to create one of the most attractive environments for renters in recent memory.

Many advocates argue that the government should ride this wave by formally ending at least some of its home ownership subsidies, such as the mortgage interest tax credit, FHA insurance, and guarantees for mortgage securities. Unfortunately, the vested interests which benefit from this system are enormous, and will not sit by idly as home ownership gives way to renting. From lenders to brokers, realtors to investment banks, there are literally trillions of Dollars at stake which are preventing a change in the status quo.

Renters did manage to score a token victory when it was announced last week that Fannie Fae had already initiated a pilot program that would enable to homeowners to remain in their homes for up to a year after foreclosure. This mirrors a similar move by Freddie Mac last March, and is in the same vein as an existing Fannie program which honors existing lease arrangement in rental properties facing foreclosure. Under the new program, the deed reverts back to Fannie after foreclosure, but the homeowner is given the option to rent the former home at market rate, which is typically well below the payment required under the preexisting mortgage. By most accounts, the program has proved to be a success, with a conversion rate of approximately 66% (i.e. 2/3 of homeowners opt for the deed-leaseback instead of eviction).

Of course, this initiative is not really grounded in any kind of altruistic desire to minimize foreclosure, nor does it aim to shift the balance back towards renting. Rather, it’s a simple business decision. Fannie realized that by delaying foreclosure in the practical sense, it could avoid dumping these properties on a market that is already saturated with foreclosed properties and taking a massive write-down from a short-sale. Instead, it can sit on the properties for a year while the housing market (hopefully?) recovers, while collecting a modicum of income from the homeowners-turned-renters.

Cynicism aside, renters should be happy for any break that they can get. With special interests and government incentives continuing to favor home ownership, renters are still fighting an uphill battle.

In the wake of the credit crisis, a wave of consolidation in the mortgage lending industry has left only a handful of large firms standing. As a result, Wells Fargo, Bank of America and J.P. Morgan Chase collectively dominate mortgage lending, accounting for half of all new loans. Wary of both the structural risks and obstacle to competition that this represents, Fannie Mae is moving to provide a leg up to small, community-based lenders.

Towards that end, Fannie will effectively guarantee all-short term debt issued by such lending institutions, provided that funds received from such debt issuance is used to originate new mortgages that meet Fannie’s lending standards. It should be noted that in most cases, Fannie Mae (and/or its counterpart, Freddie Mac) already guarantee the majority of the mortgages issued by such lenders. While this protects the mortgages that the lenders originate, it doesn’t protect the lenders themselves. Thus, this program, will make it easier for small lenders to raise capital to fund mortgage-origination activities by guaranteeing their solvency.

The upshot is that this should not only increase overall mortgage lending activity, but also enable smaller lenders to compete more effectively more with the big boys. Previously, small lenders were hoarding existing capital and having trouble raising new capital, since investors were rightfully worried about the viability of the loans that they were making. For better or worse, this initiative means that they should be able to offer new mortgages at lower rates and less rigid lending standards.

Certainly, this program is not without its critics. The WSJ has suggested tongue-in-cheek that the government should just go ahead and nationalize the entire mortgage lending industry given that it is now directly responsible for ensuring its functioning. “Fannie and Freddie’s guarantees and subsidies helped to create the housing disaster, which has led the Fed directly to purchase mortgage-backed securities and mess up the market for small mortgage lenders, which in turn is leading Fan and Fred to guarantee the debt of those small lenders,” summarized its editorial board.

For those of you contemplating a mortgage, this means that you can obtain one from a small lender, without worrying about whether it will still be in business tomorrow. There’s no longer a substantial advantage associated with taking out a mortgage from a “Big-Box” lender, since smaller lenders can now compete on terms and pricing. In fact, given the bureaucracy of large lenders, it might be smoother to simply work with a regional/community lender, with which it will be easier to work with in the event of a problem.

Most mortgage watchers are keenly aware that 30-year mortgage rates are once again sinking, and are now hovering around around 5%. However, few are aware that 15-year rates have been falling even faster. According to the most recent Freddie Mac Primary Mortgage Market Survey, the average 15-year mortgage rate is only 4.46%, just above the record low 4.33% recorded in early October. Only 6 months ago, the spread between 15-year and 30-year rates was .3%. Now it’s .6%. Over that time period, 30-year rates have risen, while 15-year rates have fallen. Unsurprisingly,demand for 15-year mortgages is now outpacing demand for the 30-year alternative.

While it’s impossible to offer a comprehensive explanation for this divergence, most analysts attribute it to the fact that the different mortgages are being utilized by different types of borrowers. “The main users of 15-year loans…are established homeowners refinancing mortgages — people secure enough that they often take on larger monthly payments in order to pay off their loans before they retire…People who take out 30-year loans, by contrast, are generally less well established, with smaller down payments, and require a bigger slice of their incomes to make their payments.” Given the current economic climate, then, it makes sense that lenders are willing to offer a discount to those with an established credit history (i.e. 15-year borrowers), compared to those entering the market for the first time (i.e. 30-year borrowers).

As for those of you trying to decide which duration is most appropriate for you, well, that’s not an easy question to answer. In a nutshell, a 15-year mortgage will save you a tremendous amount of interest (more than half) over the life of the mortgage, but this is offset by a much higher monthly payment. There is also a psychological benefit of being able to pay off the mortgage sooner and not have to worry about spending the rest of one’s life making payments. Summarizes a Freddie Mac rep: “The thinking is that many baby boom mortgagors are taking advantage of the low rates to refi into a mortgage that will enable them to live a relatively care-free retirement life — i.e. free and clear of mortgage debt.”

But with any dilemma, the reality is much more nuanced. For one thing, the monthly payment associated with a 15-year mortgage is significantly higher. Accordingly, one might opt for a 30-year mortgage and simply repay it in accordance with a 15-year amortization schedule. In this way, one retains the flexibility to make the lower (30-year) payment if financial hardship strikes. This “insurance” is inexpensive relative to the overall mortgage, adding $50 a month for a $200,000 mortgage. Skeptics counter that few borrowers are disciplined enough to make the 15-year payment voluntarily and that for those facing financial hardship, making a 30-year mortgage payment will probably be just as problematic as a 15-year payment.

Other proponents of 30-year mortgages point to the extra interest as an advantage, since it is tax-deductible. One clever analyst thought he had figured out a way to save money overall with a 30-year mortgage by exploiting this loophole, but it turns out that the spread between 15-year and 30-year rates has widened to such an extent that “the math no longer works.” Once again, the skeptics rightfully point out that even if you can deduct 30% (assuming a relatively high tax bracket) of your mortgage interest, that still leaves 70% that you are paying to the lender.

Finally, there is also the possibility that interest rates will skyrocket, creating a possible arbitrage opportunity with a 30-year mortgage that wouldn’t exist with a 15-year mortgage. Basically, if you invest the funds that would otherwise have been paid to the lender in a high-yield savings account, you would end up with more money than you would otherwise have had if you simply opted for the 15-year mortgage. But these opportunities are pretty rare, and anyone who argues to the contrary is probably trying to cover up the risk associated with such a strategy.

In short, it’s reasonable to assume that a 15-year mortgage will save you money, compared to a 30-year mortgage. However, the higher monthly payment is an important consideration, and should not be accepted by those with uncertain financial situations. If, on the other hand, your income stream is relatively stable, and you’re eager to escape from under the burden of debt as quickly as possible, the 15-year mortgage is a reasonable choice.

By all accounts and measures, the foreclosure crisis continues to rage. “Foreclosure filings were reported on 937,840 homes in the three-month period, a 23 percent jump from a year earlier, according to a report real estate firm RealtyTrac.” For many industry analysts, this has come as a complete surprise, as it was expected that the government’s loan modification program would have contributed to an (temporary) abatement. That’s not to say that the efforts of the Obama administration have been in vein; rather, it speaks to a change in the underlying dynamics of foreclosure.

In short, the crisis has entered a new phase. Initially, the majority of foreclosures were driven largely by sub-prime and other risky types of loans. As interest rates rose and housing values plummeted, many of these borrowers suddenly found themselves unable to afford the higher payments and defaulted on their loans. At this stage, foreclosures were largely concentrated in bubble regions of the country, where house prices had appreciated faster than justified by fundamentals. This type of foreclosure has been easy to address, although not as easy to prevent. With the support of lenders, the federal government has sought to modify the mortgages for those struggling with higher debt burden. The underlying principle was pretty straightforward: lower payments should translate into lower default rates.

In the still-emerging second stage, foreclosures have begun to crop up among prime borrowers in relative stable housing markets. This trend is unrelated to risky lending practices, but instead, is a product of the economic downturn and rising unemployment. Job losses have exposed the precariousness of many borrowers’ finances, causing them to begin missing payments almost immediately thereafter. As a result, “About 30% of foreclosures in June involved homes in the top third of local housing values, up from 16% when the foreclosure crisis began three years ago…The bottom one-third of housing markets, by home value, now account for 35% of foreclosures, down from 55% in 2006.”

This brand of foreclosure, while easy to identify, is nearly impossible to treat directly. In many cases, unemployed borrowers can’t afford to make any mortgage payment, which means a loan modification wouldn’t do much to ease the possibility of default. The government is facilitating refinancings for mortgages with negative equity, but for most borrowers, this will only forestall the inevitable. Only when the economy recovers and employers begin hiring again will the crisis subside. While the Mortgage Bankers Association (MBA) is projecting that unemployment will peak at 10% in 2010, many analysts expect that the total number of foreclosures will be roughly the same as in 2009.

Even if new foreclosure filings subside, however, there is still an enormous “shadow inventory” of foreclosed properties that hasn’t yet been brought to market. According to a recent report by Amherst Securities Group, “As many as 7 million pending foreclosures could flood the market in the near future, driving housing prices down. That number represents homes that have already been repossessed by lenders or are in serious danger of defaulting….The 7 million units represent 135 percent worth of an entire year of existing home sales, which are pegged at 5.2 million.” Lenders realize that the housing market is still tenuous to try offload more than a small portion of these properties.
“But some economists expect that a wave of foreclosed properties could hit the market in 2010, dampening home prices again,” as self-imposed moratoriums are canceled.

Many homebuyers smell opportunity, and have waded cautiously into the market. The same goes for speculators, some of which are buying foreclosed properties en masse. Others are buying mortgage notes at deep discounts, as part of a gamble that borrowers will be able to repay them after the crisis eases. “The process works like this: A company or its investors purchase a note, then the homeowners get a knock on their door and are given the news about the change of their loan servicer and offered a modification.” As always, these first-movers could potentially reap large windfalls, Still, given that foreclosures have yet to peak, it might be wise to remain on the sidelines, until all of the dust settles.

According to the most recent data, more than 25% of mortgages are underwater- that is, the balance owed on the mortgage exceeds the value of the home. In the most troubled areas – such as Florida, Nevada, California, and Arizona – this figure can exceed 75%. In addition, negative equity positions can be sizable; one survey showed that the average Miami resident with an underwater mortgage owes about $75,000 more than the value of his mortgage.

In light of these statistics, it’s not surprising that more and more borrowers are simply walking away from their mortgages, despite the fact that many have the financial wherewithal to continue making payments. According to Experian, a credit rating agency, 582,000 such borrowers executed a “strategic foreclosure” in 2008 alone, which is more than twice as high as the 2007 total.

In other words, a growing contingent of borrowers has determined that it’s simply not economical to continue paying their mortgages. (As an aside, this is an excellent indication that homeowners, themselves, don’t have much confidence in the apparent housing recovery that many analysts believe is taking shape). Before, it was assumed that the impact of foreclosure on one’s credit would be enough to discourage strategic default, but the uptick in this trend demonstrates otherwise. Some borrowers evidently think it will be too many years before housing prices will return to the bubble levels. For those that bought properties for speculative purposes, there is a sense that it makes little sense to continue making payments on an investment that has little value.

Despite the clearly negative impact of this phenomenon for lenders, they appear to be doing little to avert it. Some are finally helping borrowers with loan modifications, but this rarely involves a truncation of the principal amount. Thus, borrowers who were underwater before receiving a modification will likely remain underwater after a modification, despite the lower monthly payment.

The government, for its part, hasn’t done much either. Its program aimed at helping underwater borrowers reduce their debt burdens through refinancing has been a miserable failure, reaching only 3% of eligible borrowers, despite the recent elimination of an initial 5% cap on underwater equity. It seems that despite the possibility of a lower interest rates, most borrowers are smart enough to realize that paying money (i.e. closing costs associated with the refinancing) to retain an underwater mortgage doesn’t make financial sense. Ironically, the Mortgage Forgiveness Debt Relief Act of 2007 is facilitating strategic default by allowing borrowers to discharge of debt tax-free. [If not for the law's passage, foreclosure could have potential tax consequences].

Still, there are negative consequences of ignoring government help and deliberately defaulting on a mortgage. For the majority of Americans, foreclosure is still stigmatized. From a financial standpoint, foreclosure (as well as short sales and deeds in lieu of foreclosure) will immediately result in a lower credit rating, diminished ability to borrow, and higher interest rates. Thanks to the Mortgage Forgiveness Debt Relief Act, strategic default no longer carries any tax implications. Of course, they may be costs associated with finding a new residence.

From a legal perspective, one’s liability post-foreclosure depends one’s state of residence. 10 states forbid banks from making claims against personal assets when foreclosing on a mortgage with negative equity. The other states, however, generally allow lenders to sue for the difference. Legal experts have indicated, however, that this is only used in 15% of cases, which means the majority of defaulters get off with hardly a slap on the wrist. Still, if you’re considering this as an option, it would be beneficial to consult a lawyer and/or accountant just to confirm.