Underwater & Sinking Fast...The Myth Behind The Reality of Strategic Defaults!

The year was 2005.  The call was from a struggling homeowner who needed to sell their home.  However, there was one significant barrier.  They had mortgaged their property for more than they could sell it for.  Hard luck had resulted in a job loss and they were faced with the stark prospect of making a difficult decision.  

The term 'short sale' was not a term that most people were aware of in our area at the time. The negotiation with two banks took several months, but the process finally concluded with a resolution that enabled the home to be conveyed to another party and one which stopped the financial bloodletting which had depleted my clients.  While, not a perfect outcome...it was likely the best given the circumstances.

Five years later, short sales are a part of the nation's popular lexicon.  Last nights' segment on the 60 Minutes news broadcast chronicles a rapidly spreading viral movement known as strategic defaulting. Strategic default refers to the decision to walk away from a home which you CAN afford because the home is now worth far less than the mortgage note. It's considered by some, to be an ECONOMIC decision or an investment alternative of sorts.

However, what was most troubling to me in watching the segment is one myth which underlies much of the reporting on this issue at the present time.  Strategic Defaults are NOT always the decision of a homeowner. As a real estate broker who has negotiated short sales for nearly half of the past decade, I have witnessed a remarkable SHIFT in the process of negotiation with some banking entities recently. Sometimes, the instruction to miss payments can come from an unlikely source!

Most notably, within the past 3 months, we have witnessed some banks giving EXPLICIT written directions to some mortgage holders to DEFAULT on their payments in order to be considered a 'qualified applicant' for a short sale.  The home owner is faced with the threat that the file will be closed or denied UNLESS the borrower strategically defaults on their mortgage payment. We have witnessed this even in cases the homeowner has suffered a JOB LOSS and/or JOB TRANSFERS.

Which raises the question...Is it possible that while many struggling homeowners are trying to do what is right and negotiate with the banks, there is a bizarre movement to FORCE them to damage their credit and walk away from their homes by a Strategic Default?  This approach is peculiar on a number of fronts, as statistics indicate that there is significantly LESS damage economically from the negotiation of a short sale for the community AND the mortgage investor.

The 60 minute segment indicated that 7 MILLION homes have payments which are in arrears.  I wonder how many of these homes are behind on their payments because they have been INSTRUCTED to do so by the mortgage servicer holding the note?

At some point we will awaken from this nightmare.  I am concerned that we will discover that much of the chaos has been our own horrific creation...borne of a myopic view of society which forced short term gains at the expense of the reality of long term consequences.  

underwater shot courtesy of Stig Nygaard on flickr

 

Lola Audu, is the Designated Broker & Owner of Audu Real Estate.  Our company specializes in helping people buy and sell homes in the greater Grand Rapids, West Michigan area.  We've had the privilege of helping hundreds of clients succeed in their goals of purchasing and selling property including demonstrated success in the negotiation of Short Sale Transactions. You can contact us via e-mail @ info@auduhomes.com or by phone at 616-791-0511.