Mortgage strike devised to leverage mortgage relief from lenders for underwater homeowners

by Broderick Perkins

(10/3/2012) A unique mortgage strike by underwater homeowners in Ohio is one of the latest strategies designed to pressure lenders into providing mortgage relief for homeowners often overlooked by mortgage assistance programs.

It's uncertain if the plan will work and the strike comes with the potential for struggling homeowners to suffer additional financial stress.

Modeled after Ohio law that allows rent strikes under certain court-supervised conditions, the mortgage strike is the brainchild of Empowering and Strengthening Ohio's People (ESOP) a housing and neighborhood advocate with offices throughout the Buckeye State.

Here's how the mortgage strike works:

• Instead of paying the mortgage servicer, participating homeowners send mortgage payments (principal and interest) to a local attorney to hold in escrow until the homeowner orders the money released.

• The attorney, only providing an escrow service, for a fee, verifies the monthly escrow payments to the mortgage servicer.

• The homeowner continues normal property tax and insurance payment.

• The homeowner releases the monthly principal and interest payments when the mortgage servicer agrees to restructure the home loan, preferably with a principal reduction, to put the mortgage balance in line with the home's value.

The strike is designed for homeowners who are "underwater" - they owe more on the mortgage than the home is worth.

Ohio has been hit hard by the housing crisis, especially in the Cleveland, Cuyahoga County area where tens of thousands of homeowners are underwater. The housing crisis has wiped out 30 percent of the area's real estate property tax base, according to ESOP.

Zillow reports 39 percent of Cuyahoga County homes are underwater. Other Zillow data reveals 24 percent to 40 percent of homes in major Ohio counties are underwater.

ESOP concedes mortgage strikers could face some undesirable consequences including impaired credit, credit score reduction, foreclosure or litigation.

Lenders could bite back. Mortgage terms typically give the lender the right to foreclose if the borrower defaults on payments. Lenders can also send monthly reports of missed payments to credit bureaus.

ESOP says the spin on a strategic defaults - the homeowner simply stops making mortgage payments and walks away, either in defeat or to extract relief - is necessary because underwater homeowners have few, if any, options.

For many homeowners, the mortgage payment has virtually become a rent payment due to lost equity - underwater homeowners have lost their equity stake and are unable to move and fully pay off the bank.

Banks won't allow traditional refinancing without sufficient equity and many federal refinancing programs disqualify many homeowners.

For example, Home Affordable Refinance Program (HARP) refinances are only available to those with Freddie Mac and Fannie Mae loans. Special Federal Housing Administration (FHA) refinancing is available only for FHA mortgages.

ESOP says a mortgage strike is a form of civil disobedience, designed to produce change in a flawed mortgage system and shift the balance of power to homeowners.

Stay tuned.