Divorcing couples struggle with negative equity in homes

Life used to be much simpler for Kim Surratt, a family-law attorney in Reno.

Back when home prices were rising steadily, the divorcing couples with whom Surratt works would agree to sell their house, split the profit and get on with their lives.

But now that thousands of home-owning couples owe more on their mortgages than their homes are worth, Surratt and other professionals face the baffling task: How to equitably divide negative equity.

No one is tracking how many divorcing couples struggle to find an answer to an underwater mortgage.

But 60 percent of Nevada homeowners who have mortgages owe more than their homes are worth, says the Santa Ana, Calif., analysis firm CoreLogic.

And professionals - both in the real estate business as well as those who work with divorcing couples - say the problem is arising consistently these days in northern Nevada.

In fact, the problem may be so difficult to solve that some couples delay divorce in hopes that the real estate market will improve.

"It's possible that people are staying together because they can't afford to get out," says Helen Graham, co-owner Real Estate by Graham in Reno and president-elect of the Reno-Sparks Association of Realtors.

For couples who head into divorce court, however, there are no easy answers.

Some who have enough equity and enough financial strength to quality are able to complete a loan modification that brings them toward a resolution, says Joel Sarmiento, a senior vice president with Wells Fargo Home Mortgage.

He says Wells Fargo, like many other lenders, agrees that divorce is a hardship that often is cause to modify the terms of a mortgage.

But loan modifications don't work for everyone who's caught up in a divorce. Short sales or a decision to deed the house back to the lender help some couples wrap up their financial relationships, Sarmiento says. Others decide to cross their fingers and hope.

Some couples, says Surratt, decide that they will continue to own the home jointly even after the divorce - hoping the market will improve enough that they can either sell or refinance.

That, in turn, raises dozens of questions - Who will pay for a new roof? Who will decide when the time is right to refinance?

"Divorce agreements have turned into pages and pages and pages about the co-ownership of the home," says Surratt.

In fact, the real estate questions often are so complex that couples who otherwise would split up through use of a simple self-help divorce are required to pay for the help of an attorney.

And that, in turns, brings further hardship for cash-strapped couples who can't tap a home-equity line of credit to pay the divorce lawyer.

Realtors, Graham says, generally see the divorce-with-negative-equity situations as so complex that their first words with potential sellers point them toward getting the assistance of an accountant and legal specialist.

Short sales, for instance, can result in messy tax implications - and they can get all the messier for a divorcing couple.

The use of a quitclaim deed, meanwhile, can get the name of one spouse off the ownership of the house - but doesn't remove responsibility for repayment of the mortgage unless the quit-claim deed is accompanied by a refinancing.

A good starting point for conversations, Graham says, is the free service of a HUD-approved credit counselor.

But Surratt notes that even the best financial counsel won't completely defuse the emotions of a divorce and a residential investment gone sour can prove to be just one more reason for angry recriminations in a breakup.