Despite conditions that should have been apparent to most of us for years, the collapse of the housing industry took most of us by surprise.  Even when there were obvious signs that the housing ship was sinking, entities like the NAR and the President remained in denial, insisting that the industry was strong.  Even as the downward spiral continued, the talk was that a soft landing was imminent. The three most striking elements of the observations of government, professional organizations, and a fair number of "experts" were, Blah, Blah, Blah.  They denied the issue until it buried us.

Now we have the threat of strategic default, often thought of as a way rich folks dispose of property that has lost value.  Actually, it is more often considered out of necessity.  Many of us have negative equity in our homes and just keep moving forward, making our monthly payments with no particular worry about the home's loss of value.  It's still a nice, comfortable place to live, and we're happy to be here indefinitely.

What happens though, is that indefinitely sometimes evolves out of necessity.  We lose our source of income, either through job loss or disability.  We are faced with a compelling reason to relocate across country.  Family situations change, such as a birth, death, divorce, etc.  Real estate professionals all know the primary purpose people decide to change homes, and it's seldom a whim.

When you can't afford to sell your house, and you have enough funds to continue making payments, there are decisions to make.  Sometimes that decision is to walk away.  In the old days when I was a bill collector for a department store, I knew that nobody I contacted me was going to send me money they needed for food or rent.  They had priorities that I could not reasonable fault.  Same goes for people who have financial responsibilities and a home that is under water.  They are going to make decisions, and many of those decisions will be in the direction of voluntary default that's really not all voluntary.

Home prices in many areas, probably most areas, are dropping faster than the thirty year amortization table is lowering mortgagors' debt.  If the present trend continues, and it seems that it will, more and more people will cross tha line into the world of negative equity.  Banks and government have a compelling reason to recognize the problem and take action now.

As of today, the crickets are still chirping, and voluntary default is absent when banks and government write out a list of their concerns.  The current strategy is to pretend like there is no problem.  As prices continue to drop, and the numbers of potential defaults grow, there is no plan to address the problem, and it will eventually become the Next Big Surprise.

E.J. "Mike" Carlier  Lakeville, MN

Keller Williams Preferred Realty 

612-916-3033

http://www.prettygoodhomes.com

 
Star Posted by E.J. "Mike" Carlier Lakeville MN on 06/10/2011 10:11 AM   Comments (46)   Strategic Default Is the Next Big Surprise in the Real Estate Market Channel   strategic default  
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46 Comments on Strategic Default Is the Next Big Surprise

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JUN
11
2011
486,374 Points 3 Featured Posts Localism Sponsor Attended Rain Camp Called Shot Master

Investors are very savvy when it comes to what benefits them, and they employ the scenario that best suits them.
1:47am • #27
1,418,309 Points 41 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

It all business. . 

Somehow, I find it amusing in all the short sales I performed. .

the ones under $125K value were incredible hard for the homeowners to get to a decision. ..

The ones with homes in the $500K or above. . was..get it done and call me when I need to sign something.. 

 

 
7:47am • #28
175,528 Points 5 Featured Posts Outside Blog

I am currently working to compile a short list of items that I intend to take as far up the food chain as possible.  These items will be real, actionable things that can be done TODAY to break the downward spiral we're seeing in the housing market.  So many have made great points above regarding this situation, and at the core, this is a great post that brings up necessary matters.

I don't care which side of the moral fence anyone is on any longer.  There are cases to be made for both paying your mortgage and casting it aside.  The reality is that if we, as an industry, don't DO SOMETHING soon, things only get worse for a long time before they get better.  The time for the moral argument was 2008.  That train has sailed.  We are dealing with realities that transcend philosophies at this point.

I am looking for thought (and action) leaders to help me compile the aforementioned list.  If you're in, drop me an e-mail at rspinosa@rpm-mtg.com, or check out my blog for more info.  Thanks again --- great post.  Can't be said enough.
7:54am • #29
139,830 Points

Great blog. I run into alot of people that cannot make their payments and are doing loan modifications. The issue with loan modifications they are usually upside down in their home worse than before.

Selling is usually the better option.
8:20am • #30
383,922 Points 8 Featured Posts Called Shot Master

Thanks to all of you for your thoughtful comments.  The moral side of defaults is an argument that certainly deserves attention, and we all have opinions on that issue.  The underlying issue that affects the industry is how to minimize the number of defaults, and minimizing voluntary defaults can have a substantial effect on the overall health of housing.

Just as the merchant can try to convince everyone that it's immoral to steal cigarettes, he and we would be fools if we thought appealing to people's morals will substantially affect the losses.  The merchant keeps cigarettes out of reach from shoplifters, and banks need to do what they can to encourage fewer defaults.  So far, banks have done nothing of substance.  A change in their tactics would probably improve their bottom lines, and it would help to stabilize our industry.
8:59am • #31
1,047,838 Points 396 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

Mike. We are already seeing a lot of this in my market. Some are primary residences and some are 2nd homes and rentals. When values have dropped close to 80% in my area of Florida it's very difficult to justify continuing to pay. Especially if the payment has gone up and the rental income has gone down.

I believe if folks have decided to walk they should attempt a short sale first. Give the bank the option of settling the debt before they have to foreclose. It's usually better for the bank and the borrower to reach an agreement if possible.

Working towards a settlement instead of walking away also helps to keep property values higher. There's nothing worse for an area than abandoned properties.

Hard for me to believe folks still consider this a moral issues. It's not.
9:09am • #32
383,922 Points 8 Featured Posts Called Shot Master

Bryant, thanks for your thoughts.  We know what people should do, but we also know what too many will do.  This is an industry and national economic problem that deserves some pre-emptive action.  Because lenders are waiting until the homeowner reaches the point of decision or later before even dealing with them, they are hurting themselves and our economy.  There are a number of steps I feel can be taken, not including unilateral principal reduction, and that's the subject of today's post.
10:00am • #33
238,686 Points 10 Featured Posts Attended Rain Camp

I'm in the camp with Fernando and Broker Bryant.  It's business.  Nothing to do with morals.  It's evaluating the financial statements, getting the advise of the financial planner, and making the decision to sell a rapidly depreciating asset.  If the homeowner and the bank reach an agreement, it's still a win-win. 
12:24pm • #34
106,189 Points 3 Featured Posts Localism Sponsor Attended Rain Camp

E.J.  My view, We need to stop pointing fingers.  You stated that NAR and the president remain in denial....  There's enough bad press which causes a lot of the problems, an example - look at companies 401's they are diminishing more and more.... every day it's a negative review on all the TV stations.  Until we start being thankful for what we have, and start being positive, we will continue in a downard spiral.  I appreciate your honesty and professionalism.  But I think we start needing to turn those fingers into a "thumbs-up"..... we are all in this together... and need all of us to make things turn around!
12:30pm • #35
187,408 Points 1 Featured Post

Strategic Defualt I don't think will be the next surprise.  It is there and has been, lurking around.  The shame of having  a foreclosure has washed away and people are looking at it as a financial decision. 
12:32pm • #36
145,246 Points

An interesting and thought provoking post! Thanks for sharing!
2:05pm • #37
1,123,552 Points 90 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

A house is a place to LIVE, not an investment. Too many people don't seem to get that.
4:04pm • #38
383,922 Points 8 Featured Posts Called Shot Master

Tamara, do you think that those realities make it even more vital that some actions be taken before the mortgagor reaches the decision point?

Susan G, my statement about NAR, government, etc., being in denial is hard to dispute.  I stated that they were consistently in denial until there was no way to ignore the fact that there was a housing crash and a huge foreclosure problem.  I'm sure that you agree that the crash did occur.  Now that there are so many hundreds of thousands of homes underwater, it would be difficult to suggest that all we need is to act positive.  The reality is that, just as a merchant would hope that there will be no shrinkage from theft, we have to face the reality that, as long as there is negative equity there is a serious potential problem.  I'm not finding fault; I'm finding fact.

Susan J, there is certainly strategic default today.  As more homes migrate to underwater status, there will be more and more people finding reason to consider walking away.  Of course, that will lead to lower home values, and even more underwater owners who will be faced with decisions to make.

John, thanks for reading my post. If you get a chance, I would appreciate hearing your opinion on today's episode, The Big Solution
4:15pm • #39
383,922 Points 8 Featured Posts Called Shot Master

Erica, that is a point I try to make as often as possible.  There still remains the problem of folks who no longer are either interested or able to continue living in their current homes.  When there seems to be no end in sight to their lack of mobility, some of them will make decisions that affect everyone elses property values.
4:17pm • #40
1 Featured Post Outside Blog Attended Rain Camp

Mike thanks for post....it has turned to an interesting conversation.

I think that since less than 1/3 of foreclosures are listed for sale before the bank takes them indicates that most foreclosures are stategic default....but I guess you could argue that there is not much stragety involved in walking away from your home overwhelmed and broke.

The Luxury Market is experiencing more and more strategic default and it is creating a rippling effect across the country. Unless home values start to go up and/or confidence in the housing market goes up this ripple effect will continue.....and the only real winners are the investors that will buy them cheap with cash and rent them for ten years.

 
4:17pm • #41
699,772 Points 39 Featured Posts Outside Blog Called Shot Master

Everyone's trying to slip in their moral compass here. If you were a business & this was happening what would you do? Why look at it any different? I think that maybe 'the rich' have better advisors & aren't afraid to jump ship when they see they are on the deck of the Titanic.

I like the well chosen phrase 'mobility action'. When people feel trapped/stuck/burdened they will choose the best relief whatever form that is.
4:38pm • #42
383,922 Points 8 Featured Posts Called Shot Master

Brian, you would never make it as a bankster.  You have too good perceptive power for that role.

Lyn, a lot of folks are trying to explain why homeowners should or should not default.  The fact is that they will default, and the deeper under water, the more likely they will be to do it.  My point is that there are some actions that could be taken to get at least some of the potential defaulters to go another direction.  The need for mobility must be satisfied, or the trend toward going deeper underwater must be turned around.  There are ways to do both, starting with people who are not yet in trouble financially.  We can fix much of the problem with just a little effort and -- here's the big one, cooperation between banks and their arch enemies in Washington.
5:13pm • #43
JUN
12
2011
291,825 Points 20 Featured Posts Outside Blog Called Shot Master

Hello Mike,

Interesting discussion here.  Hopefully you're wrong about the next Big Surprise.  In Santa Clara County/Silicon Valley I think we're past the worst and have already started a slow recovery.

However, if strategic defaults become prevalent, I'm confident three things will result:

(1) Mortgage interest rates will increase for everyone in the future to cover the risks and costs associated with strategic defaults.

(2) More states will pass legislation allowing deficiency judgments.  At this time CA does not allow deficiency judgments for Purchase Money mortgages for owner-occupied 1-4 units.  That will change in CA and other states if strategic defaults become prevalent.

(3) Loans with less than 20% cash down payment (and maybe more) will disappear, or become very, very expensive to compensate mortgage investors for increased risks.

 
1:07am • #44
383,922 Points 8 Featured Posts Called Shot Master

Lloyd, I think that the market will determine the terms of future loans.  If banks see potential profit, the rate and terms of the loans will accomodate the borrowers.  That may mean higher rates and 20% or more down, but the number of loans would diminish to a level that would take a significant revenue stream away. 

Deficiency judgments are not a cure-all for collecting debt.  There are many tactics a slippery eel can use to avoid having a judgment collected.  My guess is that banks will do nothing as more people cross the line or drop further underwater every time an REO gets sold and erodes values.
9:59am • #45
106,189 Points 3 Featured Posts Localism Sponsor Attended Rain Camp

E.J.  Thanks for your honesty.  I certainly wasn't suggesting all of us should sing kum-by-ya..... I agree we are in a sad situation.  It's not just in Real Estate that people are in denial - i totally agree. I was suggesting that it takes all of us professionals to bring us up by our bootstraps..... and turn negative press to positive.  I for one realize that this business is cyclical.....  I'm just tired of hearing bad things in the press.... is all. 
12:53pm • #46

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