Strategic default is a hot topic in the press, on the blogs and in the real estate industry. Homeowners are starting to weigh all their options and make "business" decisions about whether to stay or walk away from their home. In many cases, the homeowner/borrower is truly unable to continue to make the payments due to a variety of hardships, job loss or major changes in their income. There are a variety of alternatives to foreclosure including a short sale. The best advice for homeowners in this situation is to consult with qualified legal, tax and real estate professionals to gather the best advice and information in order to make the best decision for themselves.
Have you noticed a lot of recent press criticizing the HAMP program as short-sighted and delaying the inevitable onslaught of more foreclosures? The underlying theme is pointing to "negative equity" as a primary factor for homeowners "strategically defaulting" - ultimately deciding to let their home go to foreclosure or short sale.
In case you missed some of those recent articles and resources:
Amherst Securities testified before the House Financial Services Committee (12-8-09) - Download Amherst Securities Group - HAMP Testimony
Two main points from this report:
1. Single largest problem with housing market is negative equity.
2. Current modification program does not address negative equity and is destined to fail.
WSJ Development Blog (1-4-10) NY Fed: Most Successful Mortgage Modifications Reduce Borrowers’ Principal
An excerpt from that article...
Borrowers who receive loan modifications that reduce loan balances and not simply interest rates are far less likely to re-default on their loans, according to a new study from the Federal Reserve Bank of New York. Modifications that write down loan balances “can double the reduction in re-default rates achieved by payment reductions alone,” the study says.
Negative Equity Report for Q3 (Calculated Risk Blog 11-24-09)
Data Highlights
- Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity. Together negative equity and near negative equity mortgages account for nearly 28 percent of all residential properties with a mortgage nationwide.
- The distribution of negative equity is heavily concentrated in five states: Nevada (65 percent), which had the highest percentage negative equity, followed by Arizona (48 percent), Florida (45 percent), Michigan (37 percent) and California (35 percent).
Other articles/reports/studies:
- White Paper Sees Strategic Defaults Rise with Negative Equity (12-08-09)
- Strategic Default White Paper - Strategic_Default_White_Paper.pdf
- Negative and Equity and Foreclosure - Negative Equity and Foreclosure.pdf
- Moral and Social Constraints to Strategic Default - MoralandSocialConstraintsto_StrategicDefault.pdf
- Subprime Mortgage Modification and Re-Default - Subprime Mortgage Modification and Re-Default.pdf
Lenders Pursue Mortgage Payoffs Long After Homeowners Default This article from Bloomberg.com points out what we believe is just the tip of the iceberg - mortgage companies pursuing the deficiency or shortage from a foreclosure or short sale. The laws that allow a mortgage company to pursue a deficiency judgment varies from state to state. There are several reasons why we haven't seen a lot of reporting on this - but this could change soon:
- Banks/lenders have been seriously bogged down just handling the high volume of defaulting loans, short sale requests, loan mods
- Not really politically-correct or good PR at the moment given our current economic and housing crisis
"The FDIC tracks the amount banks collect after defaulted loans were written off. These mortgage recoveries rose 48 percent to a record $1.01 billion in the first nine months of last year compared with the year-earlier period, according to the Washington-based regulator. Recoveries on defaulted home-equity loans almost doubled to $392 million, the FDIC data shows. The figures dont include money retrieved by trusts overseeing mortgage-backed securities, such as the one that holds the loan on Kings former home, or efforts by distressed- asset funds and companies that buy bad loans to profit from collection rights"
Good News / Bad News
- Bad news for Las Vegas and Nevada is that it appears we have a long way to go before we fully recover from the housing crisis.
- Good News is there are great opportunties for investors, home buyers looking to purchase in the local market.
Become a Certified Short-Sale Professional - get the latest information regarding alternatives to foreclosures and processing short sales from A to Z. Live, classroom training in Las Vegas - Check this Training Schedule for details.
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