There was an article on the Los Angeles Times website a few months ago that discussed the increasing problem of Strategic Defaults in the United States. I want to tell you why the study cited in the article is right and why this is a growing problem that is gradually reaching crisis proportions in America. Then on my next blog post (Part 2 of this series), I will show you why Strategic Short Sale is the solution.

This LA Times article cited a study conducted by Experian, one of the three national credit bureaus.  They studied the credit files of 24 million Americans and discovered that “homeowners who have high credit scores when applying for a home loan are about 50 percent more likely than low-scoring borrowers to go into strategic default.” In other words, they intentionally and abruptly abandon their mortgages. (SEE ARTICLE http://www.latimes.com/classified/realestate/news/la-fi-harney20-2009sep20,0,2560658.story)

Findings from the study:

• Roughly two-thirds of strategic defaulters have just a single mortgage from which they’re walking away.
• The number of homeowners who strategically defaulted in 2008 was 588,000; double the number from 2007. This strongly hints that the homeowners did this as a response to the “Great Recession”, which hit hardest in 2008.
• Strategic defaulters were 18 percent of all serious delinquencies which extended for longer than 60 days into the fourth quarter of 2009.
• The homeowner with a larger mortgage balance is more likely to walk away from the mortgage than the person with a lower balance. Also, someone with credit scores in the two highest categories are more likely to opt for a strategic default than those in the lower score categories.
• None of this appears to be done by ignorance on the part of the homeowner who defaults. The study suggests that someone who defaults strategically and as a result, loses the house, is completely aware that this would be the outcome. They further understood all of the future negative ramifications of their action. The TIMES quotes one person who worked on the study who said that the strategic defaulters are “clearly sophisticated.” Her reasoning was that they seemed to make intelligent decisions as to where to make payments and when. They didn’t default on equity credit lines until after bailing out on the primary mortgage, for instance, presumably to receive more cash on the equity line.

My opinion of the study:

Although 588,000 strategic defaulters is an incredibly high number already, I believe the number will unfortunately continue to rise. I say this because many option ARM and interest-only products will be hitting recast dates from now through 2012. This will seriously impact the borrower’s monthly payment. A great many of these loans are far below loan modification program caps of being underwater. It’s possible for someone to have a $600,000 on a property worth just $300,000.

Frankly, before the Great Recession of 2008 struck, most homeowners would have said that they would not consider a strategic default, because it seemed somehow wrong.  It was as if they were walking away from their responsibilities.  But desperate times call for desperate measures, and the housing crisis caused thousands to reconsider this position—and to conclude that caring for their families required that they default.

Put yourself in the other guy’s shoes. Suppose you bought a home for $500,000 during a housing bubble. You figured that a worst-case scenario would be selling the home for $600,000 or $700,000 in three or four years when your loan recast.  Now, however, your home is worth only $300,000. And it may never reach $500,000 again, let alone $700,000. Your payment might jump up to $3,000, from its previous amount of $1,500 monthly. You think about the fact that you could rent a similar home for less than that. This is the position that thousands of home-owners are in. In their eyes, a strategic default is the only smart move, and some would say that they might be right.

In my view there’s a better solution for many of them; this solution is the Strategic Short Sale. This solves most of the same issues as the strategic default, and yet quickly creates a brighter future for the sellers. We’ll talk about this solution in detail on my next blog post, and why it’s usually preferable to the strategic default.

Questions for you:

• How do you foresee the housing market playing out over the next several years?
• Tell me what you predict will happen regarding the economic recovery and how you think this will impact homeowners.

Visitors who read this post also read:

• Strategic Default Vs. Strategic Short Sale; which one do you think is the best choice? – Part 2
• Should I Strategically Default on my mortgage and “punish” Fannie Mae?
• Townhouse For Sale Bowie Maryland Short Sale 11201 Westport Dr Home

An Obama housing initiative that I can totally agree with

On November 30th 2009, the Treasury department came out with a new set of guidelines called “Home Affordable Foreclosure Alternatives – Short Sale and Deed-in-Lieu of Foreclosure” or HAFA for short. It is the new addition to the Home Affordable Modification Program (HAMP) (HAMP is meant to help homeowners get their loans modified but in my view the HAMP plan has not been successful because most lenders were unwilling to reduce the principal amount owed by the borrowers especially when home values have dropped significantly – now enough of my opinion on HAMP and back to HAFA the reason you are reading my blog post).

The scheduled effective date for HAFA is April 5, 2010 but smart servicers and lenders will be wise to implement the program before that time (with enough pressure from homeowners, I am sure the wise lenders will not wait till then, so learn as much as you can about HAFA and start calling your lender to task). Once HAFA is in full effect, homeowners will be accepted into the program as long as all the requirements are met and the paperwork is received on or before December 31, 2012 (Hence I have more than enough time to start working on providing you a solution as your Real Estate Agent especially if you reside in Maryland).

So what is HAFA proposing as the foreclosure alternatives for Homeowners?

Simply put, Treasury has proposed that lenders (and/or servicers) offer Short Sales or Deed-in-Lieu (DIL) as the alternatives to foreclosure for homeowners who are unable to be approved for a HAMP modification request, a HAMP modification was offered and not accepted by the homeowner, the homeowner falls out of a HAMP modification or the homeowner requests for a short sale or DIL. The HAFA program is meant to streamline the use of short sales and DIL by lenders and make the entire process a lot simpler and quicker!

So what are the benefits of HAFA for Maryland Homeowners in financial distress?

• It provides additional alternatives for homeowners besides HAMP

• Allows for pre-approved short sale terms even prior to listing the property with me.

• Allows lenders to use the same paperwork they previously collected from homeowners who must have tried to qualify for HAMP

• Stops lenders from reducing my commission as your listing agent (I guess this point is truly to my own benefit)

• Requires that lenders fully release homeowners from future liability of the debt or pursuing any deficiency judgments as a result of the short sale or DIL

• It standardizes the entire short sale and DIL process, the documents to be used and the timeframes. The paperwork will include making using of a Short Sale Agreement (SSA), the Request for Approval of a Short Sale (RASS) or the Alternative Request for Approval of a Short Sale (Alternative RASS – which is used in cases whereby the homeowner gets the home listed and has a buyer’s contract even before the lender sends out their own pre-approved short sale notice). (lets just hope that lenders can now be more efficient and effective)

• Once determined that a short sale is possible lenders are required to give at least 120 days to the homeowner to sell the property using a real estate agent (hint – me)

• Even though the foreclosure process can continue, lenders cannot move forward with the final foreclosure sale until the marketing period has expired (hint – you wont have to worry about this when I am your agent, I will sell it quickly)

• Lenders have only 10 days to approve or disapprove a short sale or DIL

• The program offers $1500 to homeowners as a moving incentive for them to consider a short sale or DIL

• It stipulates that all junior liens be offered up to $3000 maximum for a full release of their dept, hence no time wasting negotiating back and forth with junior lien holders (no more money out of pocket demand from junior lien holders whatsoever)

What are the requirements need to be qualified for the HAFA program?

• The property must be your principal residence

• The mortgage loan is the 1st lien and must have been originated before January 1, 2009

• The mortgage is delinquent or future default can be foreseen

• The current unpaid principal balance (UPB) is equal or less than $729,750 (for 1 unit properties)

• Your total monthly mortgage payment must exceed 31% of your monthly gross income

• You may be required by your lender to keep making payments during the short sale marketing period. If there is a payment, it cannot exceed 31% of your monthly gross income (now is it only me that thinks most folks considering a short sale already exceeds 31% of their gross income – LOL)

• The property if sold as a short sale cannot be sold to a relative; it must be an Arms Length Transaction. Also the buyer may not receive funds from the transaction and cannot sell the property for at least 90 days after closing

Well there you have it, this is my summary of the new Short Sale and DIL guidelines set by the Treasury Department in their HAFA program. Feel free completely educate yourself on this program and read the complete guidelines and rules by going to this link http://budurl.com/EntireHAFAGuideLines. Until all the lenders wise up and start moving towards making use of this new program, I will still have to get short sale negotiated and approved the usual way. So if you are a Maryland Homeowner in financial distress and you can no longer afford your mortgage payments call 866-205-6352 so I can help you get mortgage relief ASAP!

(P.S I know this was a long post but please leave your comments on my blog; it lets me know you find my post useful, thanks)

Visitors who read this post also read:

• Maryland Short Sale Specialist | MD Expert Realtor Help
• Free Short Sale Seminar for Maryland Homeowners on How to Stop Foreclosure by Owen McGab Enaohwo; a Realtor and Certified Short Sale Specialist
• Is a Short Sale Right for You? Read and then Decide!