Can Mortgage Borrowers Facing Hardship Stop Paying?

September 21, 1998, revisited July 26, 2008

Rereading this article 10 years after it was first written reminded me that many parts of California experienced a protracted decline in housing prices beginning in the early 90s that was similar in many ways to the more-or-less nationwide declines in 2007-2008. The plight of borrowers who found that their houses were worth far less than they owed, was identical, and that is what this article is about. My own reaction in 1998 was a little less sympathetic and perhaps less helpful than my reactions in 2007-2008. See Mortgage Loan Modifications.

"My partner and I bought a condo for $170,000 in 1991 when the California real estate market was at its peak, borrowing $153,000 at 9.75% for 30 years… The house is now worth about $85,000. When my partner was unfairly fired early this year, we felt we had a compelling hardship, and stopped making the payments. Our plan was to force our lender into a loan modification, perhaps even with an outright principal reduction. But the loan is now owned by Freddie Mac, which says I am contributing too much to my 401K plan, and refuses to reduce the rate or to forgive past interest due…Is there any escape from this nightmare?"

I doubt that anyone can help you, except you, but you badly need an attitude check. You are not the only one to lose a job for reasons not their fault, or have their property decline in value. There is no "compelling hardship" clause in your contract with the lender that gives you the right to forgo the payment of interest and have the principal reduced. If you were the lender, how would you feel if the borrower pleaded inability to pay but had enough money for a substantial contribution to his retirement account?

I have no way of knowing, but it is possible that Freddie Mac's hard nosed response may reflect your cavalier attitude toward your obligations. At this point, you can either default with all its consequences, or you can go back to the lender for another try. For it to succeed, you have to bring two things to the table. The first is a different attitude that reflects the reality that the lender didn't cause your problems and has no obligation to share them with you. The second thing you need to bring to the table is a detailed budget showing the maximum amount you can afford, and are prepared to pay, including money shifted out of 401K contributions. You then just might have a chance to avoid default.

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