Is A Strategic Default...Immoral?

Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity or "underwater" as of the 2nd quarter of 2009, with an additional 2.3 million mortgages possibly approaching negative equity-or having less than five percent in equity. That adds up to nearly 28 percent of all residential properties with a mortgage nationwide.



The majority of "underwater" homeowners is largely concentrated in five states--namely Nevada, Arizona, Florida, Michigan and California. Among these five states the average negative equity share was 46 percent, compared to 13 percent for the remaining states.



The question increasingly being asked is what the likelihood is of homeowners underwater who are going to "leave the pool" or "strategically default". According to a study by Experian, more than a quarter of all existing defaults were found to be strategic and more than doubled from 2007-2008. The study also found that borrowers with higher credit scores were 50% more likely to strategically default than those with lower credit scores.



The most important variables in predicting strategic default are the moral and social considerations. There is some research that suggests that while borrowers with negative equity should be walking away in droves, most homeowners choose not to strategically default due to the desire to avoid the shame and guilt of foreclosure and exaggerated anxiety over the preceived consequences from foreclosure.



What's most alarming is the decreasing rate of delinquencies that are ending up in foreclosure. Data by LPS (Lender Processing Services) suggest the average number of delinquent days for loans in foreclosure has risen from 249 to 406 from January 2008 to December 2009--a 63 percent increase. The fear is this "shadow inventory" is only going to lead to more inventory and home price problems in the future.



The HAMP program (Home Affordable Modification) is difficult to measure because there are still 1,164,507 cumulative trial-period plan offers extended to borrowers. Available data indicates about 112,000 modifications have turned permanent. While HAMP has helped to slow down the foreclosure crisis, currents efforts have been insufficient as the total number of struggling homeowners not on track for any foreclosure prevention assistance continues to grow. Only four out of ten seriously delinquent borrowers are involved in loss mitigation efforts.


Taken from Real Estate Insights



NANCY'S PERSPECTIVE...

Today I read a Real Estate Blog asking what the "magic number" seems to be for a homeowner when considering walking away. According to First American Core Logic that number is $70,000 negative equity or 25% when the homeowner default behavior changes.



In no way am I advocating a homeowner walking away from their financial responsibility. We had an experienced Loan Officer express her own feelings on the responsiblity she has taken on with her mortgage. She stated "I signed this contract, nobody forced me to, it was my decision and I understood the financial obligation I was taking on when I signed it."



This should be the attitude of every homeowner unless for one reason or another they have come in to a place of financial hardship that makes it impossible for them to maintain their mortgage. We are talking with many homeowners in this position, wanting to know what their options are.



May I give this small word of advise? Be informed, be pro-active, talk to your lender about a possible loan modification or reduced principal balance. If after taking these steps you are still coming up against a brick wall, THEN consider a Short Sale. Don't pretend like the problem is not there and hope it will go away, resulting in foreclosure.



There is a "point of no return" in the foreclosure process where it's too late to consider a Short Sale. Don't let your situation get to that point. Protect your credit and your ability to buy another home in the near future. A Short Sale will have a negative impact on your credit, but not as much as a foreclosure. Talk to a Real Estate Attorney or your CPA about the Tax ramifications of a Short Sale.



Effective April 5, 2010 the Treasury Department will be implementing the HAFA (Home Affordable Foreclosure Alternative) program to streamline the Short Sale Process. This program will be offered specifically to homeowners who have tried the Loan Modification Trial Period and were declined the modification.



We're here to help in any way we can. If you have questions about the Short Sale process attend our informational workshops the 3rd Saturday of each month at 410 Century Park Dr. Yuba City from 10:30-11:30 a.m. Call to reserve your space (530)701-3132 or email us at cookteamonline@att.net