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Divorce: Upside Down Real Estate – Walk Away – Breathe the Fair Air!

 From the Mediation desk of Melanie Nathan:     Recently in my mediation practice I have had a spate of divorce cases where the spouses (partners)  have been at odds about how to deal with underwater real estate.  When dividing community property real estate, the purpose of the mediator is to assist the parties in  dividing the asset, either through a sale of the property, a buyout by one spouse of fifty percent of the community property equity interest;  and possibly a continuing partnership in the property.  This may also apply where there is no community property and the parties jointly own the property.

 Since the recession and housing bust, there has been an increasing amount of homes either about to be foreclosed or upside down. Often both or one party may still be feeding community or post separation income into  an unviable  property.    These situations may be remedied by short sales, loan modification, divorce settlements providing inter spousal transfers and indemnifications for debt assumed, or simply by walking away.

This difficult situation adds to the stress of divorce, especially if the parties are not in tandem as to the fate of the property.   Some may want to hold on to the property in the hope of a future upside,  and whomever remains on must be prepared to take responsibility for their share of the holding costs, such as mortgage payments, property tax, maintenance costs and insurance.  If one party decides to hold on, there is no likelihood of the other receiving any cash settlement  for an upside down property, regardless of what went into the property or the dream of a future upside.   

 I have had cases where one spouse holds the property, like the sword of Damocles, over the head of the other, asserting they will be stuck with poor credit, unable to find rental accommodation, in legal trouble, creating fear resulting in the threatened party holding on for longer than necessary.   

 This is where a neutral mediator and/or advice of a consulting attorney is imperative.  The neutral can help the party step out of the dream into reality.  The neutral provides a safe and peaceful environment for joint exploration of the remedies and can facilitate a productive discussion, helping the parties crunch numbers,  call in other  professionals such as CPA or Mortgage expert to assist with the analysis.  

Fear, misunderstanding  and false senses of security ought not stand in the way of moving forward. It is important to pursue the evolving legal remedies.   These cases need to be mediated rather than litigated. Positioning and pos toward resolving all the issues. Using separate attorneys can be counter- productive and may result in wasted precious time, while throwing good after bad. A party can always have a separate consulting attorney on the side.  

 With all this in mind I was delighted to come across an article by Kenneth R. Harney, November 29, 2009, in the LA times: “Professor advises underwater homeowners to walk away from mortgages; Brent T. White, a University of Arizona law school professor, says that it’s in the homeowners’ best financial interest to stiff their lenders and that it’s not immoral to do so.” … read on…   ( A MUST READ!)

“Go ahead. Break the chains. Stop paying on your mortgage if you owe more than the house is worth. And most important: Don’t feel guilty about it. Don’t think you’re doing something morally wrong.

That’s the incendiary core message of a new academic paper by Brent T. White, a University of Arizona law school professor, titled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.”

White contends that far more of the estimated 15 million U.S. homeowners who are underwater on their mortgages should stiff their lenders and take a hike.”  

 This Article, a breathe of fair air, served to endorse my sentiment which I have not hesitated to express in mediation. These are unusual times.  Although the facts of each case may seem similar, they all have a distinctive circumstance and the facts must be explored in detail before a strategy is employed. The one piece of generic advice that I can impart is that one spouse should not be held hostage by the other to a hope or dream about the  future of the property, or to any obligation.  Divorce provides a unique opportunity to walk away from the property and leave it in the hands of the Party who does not want to give it up.  The mediator can help draft documents to reflect such an undertaking by one, documenting the discussion that led to the decision.      The change in spousal relationship can have an impact on negotiations with mortgage lenders and indemnities can be established between spouses for an element of protection if the lender pursues the non-owner spouse in the future.  Also of course a plan can be made for both to walk away. 

 Save your money,  and muster up six months of rent instead of paying it into the property. If you have bad credit and need to rent a property you can offer a few months of advance rental.  However BUYER BEWARE – when you pay rental ahead- be sure that the home you are renting is not about to be foreclosed upon as you may find yourself the victim of the Landlord’s inability to pay his/her mortgage.  

 I believe that walking away from an expensive dream opens the door for an inexpensive reality and good nights of sleep. 

MELANIE NATHAN 
nathan@privatecourts.com
www.privatecourts.com
www.divorcemediators.us