The recovery from the housing crash four years ago makes home insurance all the more important if you are a homeowner struggling to keep up with the mortgage payments.  Federal housing agencies such as Freddie Mac and Fannie Mae are offering relief packages for homeowners who now owe more on their homes than the properties are actually worth due to the collapse of the housing market.

When the housing bubble burst near the end of 2008, people were unprepared for the fallout from the credit crisis.  The value of homes plummeted along with the sharp rise in unemployment, but the mortgage balances remained the same.  However, without significant income, people struggled to make the mortgage payments.  The terms of the agreed upon home loans remained the same even though the market was worth significantly less than the years prior to the collapse, which left millions of Americans with few options other than foreclosure or bankruptcy.

As a result of the increasing number of foreclosures and mortgage defaults, the government recognized that the privatized mortgage insurance market was falling short of protecting Americans from the bulk of the financial collapse.  Home and mortgage insurance was for a long time used as a bailout condition after homeowners were forced into bankruptcy, and used the liquidation as the only way to leave a depreciated home behind to start over.  But the government at last listened to calls from across the country to reform the home mortgage insurance industry, and help out the most underwater homeowners.  The system reform in all likelihood will increase low home insurance rates from their current levels as regulators take on extra properties.  But the changes will ultimately help the people most in need over the long term.

If you kept up to date with your mortgage payments but struggled once the housing market went bust, you can apply for what is called a deed-in-lieu transaction.  This option means that Freddie Mac or Fannie Mae will take on the remaining balance of your mortgage, which allows you to walk away from the remaining financial obligations.  However, in doing so, you will also have to vacate your home, and allow the banks to resell the property.

Although the situation isn’t ideal, if your home is no longer worth what you paid but the mortgage is still valued at the pre-collapse home assessment, the deed-in-lieu may be your best option.  In one way, allowing the banks to take your home is likely something you never wanted to see happen.  On the other hand, if the property losses were more straining, both mentally and financially than the home was worth, then change could be a good thing.

Jesse Michelsen

Jesse Michelsen