June 1st, 2009 4:34 PM

Foreclosure ethics

Some of the nation's most prominent mortgage lenders and bankers have been exposed as predatory culprits or exorbitantly overcompensated greedy executives who couldn't care less about their customers. For many homeowners, this behavior undermines the traditional American sense of moral responsibility that they might otherwise feel regarding their financial promises. The ethical motivation for repaying mortgage debt by a responsible person who signed a contract in good faith is offset by a justified lack of faith in the ethical standards of lenders, bankers, and Wall Street investors, who capitalized on the housing bubble and made the economy go bust.

Many homeowners were pressured into bad loans unknowingly, and others were given shoddy treatment as they attempted to negotiate a refinanced mortgage or loan modification solution that would be mutually beneficial to both them and their lenders. They're now fed up with trying to play nice, and are ready to leave the banker holding the bag-and house. So they bite the foreclosure bullet and walk.

Foreclosure and credit scores

Long after the shock of losing one's home is overcome, many of the financial repercussions of foreclosure may linger and cause more problems over time. In some cases, lenders are seeking judgments against homeowners whose properties are foreclosed and fail to sell for high enough prices at the foreclosure auction. Unless the lender provides a written release regarding what is owed and what has been permanently forgiven, the borrower may still be on the hook for the lender's losses. The homeowner will also take a severe credit hit because of the foreclosure, and that will be amplified if there's a claim by the lender for an outstanding debt balance.

Once your credit score goes down, rates for everything from car and health insurance to credit cards will go up.  Landlords may also charge more because of the perceived credit risk of renting to someone who failed to make a monthly housing payment. Then again, the landlord may refuse to lease to anyone with a foreclosure in their recent history, preferring to rent to those who have a better track record. Employers also do credit checks before hiring, so a homeowner who walks away from a mortgage might find himself jobless, homeless, and paying extraordinary rates for loans.

Meanwhile, a foreclosure generally stays on credit reports for seven to 10 years.  Before you walk away from your mortgage, investigate every means possible to avoid it, including a loan modification or a refinance mortgage. Otherwise,  it could be a long, hard road ahead.

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