Many folks with Chinese Drywall (clients and non-clients) have contacted our offices with this inquiry. The logic makes sense: If the mortgage on a property is x, and the value of the property has since dropped below x because of Chinese Drywall, is there some room for “a break” from the mortgage company?

Legally? Not Really – At Least Not Yet

For the time being, the legal answer is “not really.”

Unfortunately, when you signed your mortgage agreement, you agreed to pay the amount of the note regardless of the property’s condition. Therefore, the fact that the property condition is worsening because of Chinese Drywall does not act to modify any obligations under the mortgage note itself.

Now, this is usually not a problem because mortgage companies require the property to be insured. In the case of Chinese Drywall, as we’ve previously discussed, the applicability of insurance to the loss is a bit complex.

There is some chatter on Capital Hill on this very issue, and a bill has recently passed the U.S. House of Representatives by a margin of 419-1 that would “encourage” banks and mortgage companies to provide homeowners with Chinese Drywall temporary forbearance on their mortgage payments.

What does this mean?

It means that the federal government would likely give the banking companies some incentive ($$$) to allow its mortgage holders with Chinese Drywall (you) to temporary not make mortgage payments. If the bill passes, homeowners with Chinese Drywall may have some legal recourse to request mortgage forebearance, and avoid foreclosure on their home while actions to recover for the Chinese Drywall losses progress.

Practically Speaking…There May Be Room For Negotiation

While homeowners may not have the legal right to receive “a break” from their mortgage company, the financial realities of Chinese Drywall may open the window for some practical remedies. Namely, to request a forbearance.

What is a forbearance? Wikipedia defines it as follows:

In the context of a mortgage process, forbearance is a special agreement between the lender and the borrower to delay a foreclosure. The literal meaning of forbearance is “holding back.”

Loan borrowers sometimes have problems making payments. This may cause the lender to start the foreclosure process. To avoid foreclosure, the lender and the borrower can make an agreement called “forbearance”. According to this agreement, the lender delays his right to exercise foreclosure if the borrower can catch up to his payment schedule in a certain time. This period and the payment plan depend on the details of the agreement that are accepted by both parties.

Forbearance is usually for temporary financial problems. If the borrower has more serious problems, for example if it is a variable-rate mortgage and the interest rate becomes unaffordable for the borrower, then forbearance is usually not a solution.

While you are not entitled to a forbearance without the U.S. legislation getting further along (and perhaps even being made stronger)…the realities you face as a homeowner are not lost upon mortgage companies. After all, if the property is worth less than the mortgage, they really don’t have much motivation to foreclose on the property.

Contact your mortgage company and request a forbearance. They will likely send you a forbearance application, and depending on the severity of your drywall problems, they may grant the forbearance. Remember, however, that forbearance agreements are temporary, and interest usually continues to accrue during forbearance periods.