Lengthy article here in the NYT describing the problem. Of more interest to me is how Connecticut homeowners can use this mess to their advantage. In “non-recourse” states, where banks cannot go after borrowers for the loan balance remaining after a house is foreclosed on and sold, borrowers should probably sit tight and live rent free for the next couple of years while all this is sorted out, save what you would have paid for the mortgage and then move on, with a couple of hundred thousand bucks in your pocket.
In New England, founded by Puritans, there is no such forgiveness and banks can, and do, sue borrowers for “deficiency judgements”; until now, debtors were advised that they had to exhaust all their other assets before walking away from their home. Now those same debtors have great leverage – if the bank wants to salvage anything from bad loans without a lengthy wait, they will need the cooperation of the mortgagor. My advice to struggling homeowners is to consult a lawyer experienced in this field and see whether a work-out or a short sale can be accomplished. Forgiveness of debt can be a wonderful thing.
UPDATE: thinking about all this, I wonder whether it’s not a good idea for everyone to stop paying his mortgage. Bit of a gamble, but if it works out, you should be able to more than recover your own equity and still profit from the withheld mortgage payments. Check the math for your own situation, but a strategic default is looking smarter every day.