Declining property values could save your house.

In the last decade or so, standards for granting mortgages have become much looser. People who could not qualify for mortgages before have been able to get so-called “sub-prime” mortgages at higher rates. In addition, lenders have created all kinds of new mortgages that allow people to buy houses with little or no down payment.

Some people call this trend “predatory lending” because people with high interest rates and variable interest rates, are much more likely to be unable to make the payments and to lose their homes. Others argues that these loans allow many people who could never afford a house of their own to have one, and if it leads to a higher rate of defaults, it’s worth it.

Both sides have a case, but we do nopt want to enter this debate here. Our purpose is to tell you how the declining property values we have been experiencing lately can help you keep a house you might otherwise lose.

It works like this: When you do not meet your mortgage obligations, for whatever reason, the lender has the right to foreclose on your house and force a sale. In Massachusetts (and many other states) that sale is done by auction, and the usual winner of the auction is the lender, because they bid exactly what they are owed and if no one bids more, they get the house.

Once they own the house, the lender then puts it on the market. If it sells for more than the loan amount, the extra money (after expenses) goes to the former owner of the house. But if it the mortage exceeds the valueof the house — as it often does when house prices are going down and litte or no downpayment was used to purchase the house — the sale will not cover the full amount of the mortgage. The former owner is technically liable for the difference, but the lender usually ends up taking the loss.

So, the lender goes to a lot of trouble and ends up losing money. That creates an opportunity for the borrower.

If you are falling behind because your interest payments went up, or because your economic circumstances have changed for the worse, you have a very good argument that the lender would be better off cutting your interest rate to something you could afford. As long as they think you are telling the truth — and that you will have to let the house go to foreclosure unless they make deal — they should be willing to negotiate.

A mortgage brought current at any interest rate is usually better for the borrower than foreclosure on a house whose mortgage balance exceeds its value. The lender also knows that if you are willing to find a good bankruptcy lawyer, you could use a Chapter 13 bankruptcy to force a deal on them.

Chapter 13 stops all foreclosure proceedings until the judge decides what is reasonable. If possible he will set up a payment plan for the mortgage that you can live with. Chapter 13 can have the added advantage of significantly reducing your outstanding credit card debt allowing you to afford more for the mortgage.

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