We saw this coming a mile away....socially acceptable "strategic defaults." For purposes of my blog I am suggesting that "strategic default" means a homeowner that can make his or her payments but chooses not to for one reason or another. (Note: this excludes legitimate hardships like job loss or health issues for example)
Many owners think, "I'll walk away, my credit will get dinged up a bit, I will keep my credit clean and be able to buy again in a few years". But we should look at the real long term affects of default.
First, how long will it be before the borrower can buy again? The numbers change depending on who you ask and when, but a common response is 5 to 7 years from date of default to get any kind of respectable mortgage loan. Unfortunately (or fortunately depending on your view of things) it could be much longer for some opting for strategic default.
Why might some buyers have to wait 10 years or more to reenter the market? One reason is many borrowers are forgetting about the ticking time bomb that maybe awaiting them...the "deficiency" collection. The deficiency is the difference between what is owed on the note and what the house sells for at the foreclosure sale (different from state to state but I am referring to Michigan).
In Michigan, lenders have up to 6 years to purse a deficiency judgment against the borrower. Keeping this in mind, do think lenders are going to purse borrowers now, while the economy is in the crapper? Or do you think they will wait a few years until the borrower gets back on his feet, when he is making and saving some money for a home down payment. The last lender I spoke with about deficiencies said "we don't even have time to go after people now...we're too busy foreclosing, but we're not concerned about it because we have six years to go after them." Six years! Ones financial outlook can change a lot in six years. And it's not the bank that will be going after these borrowers; it'll be Collection Agencies that bought the loan deficiency rights at 10 cents on the dollar. My guess is they will be ruthless and efficient...nothing like today's loss mitigation departments.
So just when the defaulting borrower thinks he is re-establishing himself and the wife starts to dream about a new home...BAM! The collection calls and wage garnishments will start. Now what? My guess is the borrower will either have to file bankruptcy, thus starting the credit rebuilding process all over again...prolonging the rekindled dream of homeownership another 5-7 years. Or, option B, he will reluctantly make payments to settle the old and forgotten debt he walked away from. Either option likely will be a major financial setback.
I guess the moral of the story is if you're planning a strategic default...you might need to sleep with one eye open. Before walking away, consult your lender, an ethical attorney and trusted real estate professional. There may be a more suitable option. The loan may be modified, or a short sale may be in order. We can in many cases address the deficiency during a short sale so there is closure at the end of transaction.
For more information on deficiencies and short sales, email or call Marc Reno at email@example.com or 810-966-1200 or 810-650-2856.
Marc Reno, Associate Broker, CDPE
**This blog for informational and entertainment purposes, I am not an attorney and am not qualified to give legal advice.