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Lessons Learned from Comparing the U.S. Mortgage System to Spain’s

You know the story: real estate prices rose through the 2000s, businesses prospered, and home ownership grew with the houses. Houses that the owners financed with low-interest mortgages that they thought they could easily pay off.

Then the bubble burst. Unemployment soared, and the homeowners who could not afford to pay down their mortgages also saw their houses’ values collapse so significantly that they now owe more on the house than it is worth. All the equity is gone, and now the bank will foreclose on them, evict them, and then require them to pay off the mortgage on the house they no longer live in.

This isn’t New York but Spain.  (Read article here.)  The European Union also suffered a housing bubble and bust at the same time the United States did. Here in New York, though, homeowners have options that Spaniards do not.

First, U.S. homeowners can short sell their houses. How does a short sale work? The bank agrees to sell the home to a third party at a loss. This allows the homeowner to walk away from the underwater home and move on while the bank does not have to manage a property until a new owner comes along, if one ever does.

Second, New Yorkers can modify their mortgages thanks to the Home Affordable Modification Program (HAMP). It’s not a cram-down, which means the bank agrees to a reduction of principal, so in a modification, only the interest rate is reduced, though this may greatly help homeowners in the long run. Recently, however, the New York Times reported that two banks, Bank of America and JPMorgan Chase, have begun offering homeowners mortgage modifications that include principal reductions. The banks target people who have option adjustable rate mortgages (ARMs), the most dubious kinds offered at the height of the housing bubble. According to the article, one Miami woman agreed to a 50% cut in her $300,000 mortgage.

Third, U.S. homeowners have an unofficial option that Spain’s homeowners do not.  “Strategic default” on their homes.  Also sometimes referred to as “jingle mail” (a reference to putting the house keys in an envelope and mailing them to the bank), this simply means walking away from their homes and the mortgage.  More often in non-recourse states where banks cannot pursue defaulters for the remaining value of their mortgages, Americans can escape the fate of the Spanish homeowners.

The differences presented may not necessarily make New Yorkers feel better, but hopefully do illustrate the options available to New York homeowners facing the prospect of foreclosure.

For more questions about mortgage modifications, short sales, foreclosure and effective strategies for dealing with foreclosure, please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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