Legally, the borrower is obligated to pay their mortgage unless an abatement or forbearance is negotiated and granted by the bank.
The following issues should be addressed when negotiating with the bank: the devaluation of the property and the borrower's financial hardship associated with expenses related to moving to a temporary location in the case of remediation.
The borrower's options depend on the following factors: (1) whether the builder is willing to remediate, (2) whether the borrower is willing to incur the remediation expense, or (3) remediation not being an option and the decision to walk away from the uninhabitable home.
Furthermore, in order to determine what potential solution best fits the borrower's needs, it is important to understand what options may be available and what effect they may have on the borrower's financial future.
•Abatement - Bank agrees to suspend mortgage payments for a specific period of time (typically 3 months).
During abatement, the bank agrees not to report any negative information to the three major credit bureaus.
Prior to the abatement period expiration, if additional time is needed, the borrower should contact the bank and ask for an additional abatement.
•Forbearance - Bank agrees to forbear any mortgage payment due and postpones any foreclosure proceedings, while interest continues to accrue.
•Mortgage Modification - Restructuring of the existing loan by reducing the interest rate, monthly payment and term of the loan, without the expense of closing costs.
•Deed in Lieu of Foreclosure - Borrower asks the bank, instead of foreclosing, the borrower relinquishes the deed to the bank, requests that the mortgage balance is forgiven and the borrower avoids defending a foreclosure proceeding.
•Short Sale - Bank allows the borrower to list the house for sale at a price lower than the amount of the mortgage balance.
Any deficiency (the difference between the amount owed pursuant to the note and the mortgage and the amount the bank accepts in a short sale) should be addressed up front with the bank; otherwise, the borrower faces the prospect of the bank pursuing a deficiency judgment against the borrower.
The promissory note is the borrower's promise to pay the bank the amount owed and the mortgage secures the home as collateral to pay that amount.
That promise to pay the balance due on the note and the mortgage does not change because it is later discovered that the house has tainted Chinese drywall.
Accordingly, where the borrower does not have the option to remediate, the house is uninhabitable and is now worth a fraction of the amount owed, it makes sense for the borrower to request a deed in lieu of foreclosure or a short sale.
In the scenario where the house is being re mediated, the borrower should request abatement, forbearance and/or a mortgage modification.