SALISBURY – While it’s not quite time to start popping Champagne corks over the real estate market, it is good to know that cooler heads are starting to prevail, especially as the foreclosure market is apparently beginning to heat up again. 

While the record spate of foreclosures, and horror stories about accidental foreclosures are beginning to fade another group of borrowers is becoming prominent because of their increasing numbers of defaults – people who took out those now-infamous mortgages with balloon rate increases.

“A lot of those rates are about to increase,” said Brandon Brittingham a Realtor with Long and Foster. “And for a lot of different reasons these people aren’t ready to make the increased payments.”

Toward the precipitous end of the housing boom, people took out mortgages with the intention of turning over the house, refinancing or extricating themselves from the payments well before the payments ballooned into amounts they couldn’t hope to afford. 

With the housing market crash, this is no longer possible for many. Worse, a significant number of these and other homes are “upside down” meaning that the mortgages are for an amount in excess of what the house will fetch on the open market.

Although banks were, for a period, given incentive to renegotiate high rates and even in some cases principal amounts the disappearance of the incentives coupled with the continuing sluggish economy have made refinancing impossible in some cases and impractical in others. 

Brittingham said that the banks were primarily concerned in protecting their own interests and that, as the recovery continues, that didn’t always extend to helping people out from under their debts.

“For some reason some banks are still willing to take possession of a property even though it might not make the best financial sense,” he said.

Vacant bank-owned properties can deteriorate quickly, driving down surrounding property values. But what’s worse for the former owners is that in some cases not only will they have to pay the bank the difference if the house is sold at auction, they may also have to pay tax on whatever their “profit” on the house was.

As an example, Brittingham said, if a $200,000 house was sold at auction for $100,000 the mortgagees would still owe the bank the remainder of the debt and might get a IRS bill for the $100,000 the bank did sell it for.

One of the newest real estate alternatives to bankruptcy or foreclosure is something called short-selling. Shore selling involves a qualified real estate agent negotiation a sale price with the mortgage holder that is often somewhat less that the outstanding bill. If the bank agrees to a short sale not only is the homeowner off the hook for the difference but they are in some cases eligible to remain in the home until the sale is completed.

Brittingham said that he’s seen this work to the benefit of many families who are able to save and rebuild both their credit and their bank accounts rather than lose both in addition to their home.

Unlike foreclosures – which are part of your financial history even if they’re not always, strictly speaking, part of your credit history – and bankruptcies, short sales don’t by definition have a negative affect on a person’s credit.

Britingham said he’d seen a lot of cases of people who began dipping into their 401k and other savings in an effort to stave off foreclosure and end up losing their homes anyway.

Even when people do that and don’t lose their homes it’s not uncommon for people to spend their entire savings to stay in a home that isn’t worth what they’ve spent to keep it. Sometimes the smartest solution is just to get out with as little damage done as possible and start again fresh.