BluefoxToday blog : Strategic Defaults Big Part Of The Problem.

Strategic Defaults Big Part Of The Problem.

Lending guidelines have been tightening and will continue to tighten for the foreseeable future, and Strategic Defaults are a big part of the problem why this is happening.  Before I go any further I want to give my definition of what I understand a Strategic Default to be:

Strategic Default: A foreclosure that results NOT from the Homeowners inability to make his/her mortgage payment, but as a result of the Homeowners CHOICE to not make the mortgage payment, because the property has decreased in value and presently is no longer worth what they paid for it.

This blog is written based on that definition and that being MY understand is of a Strategic Default is.  If you understand a Strategic Default to mean something else, then this blog does not apply to you.  So if you are going to defend Strategic Defaults, do so based on the above definition, and not on some other definition of what you believe a Strategic Default to be.

Foreclosures and Short Sales, have become a huge problem for the Lending Industry, so when you further throw in self imposed foreclosures like a Strategic Default, you have an even bigger mess.  While in the short term this is a problem for the Lending Industry, in the long term it will be the problem of those who did not have a choice in the circumstances that resulted in them having to do a Foreclosure or Short Sale.  Unfair, YES, but outside of creating a "Moral Committee" to decide who really needed to do a Foreclosure or Short Sale, there is only one other alternative, and that is to treat Foreclosures, Short Sales, and Strategic Defaults all the same.  And there you have the problem that the HAVES (Strategic Defaults - those with money to pay the mortgage, but CHOOSE not to) and the HAVE NOTS (those that do not have money to pay the mortgage, (foreclosure), or have to sell for reasons out of their control and do not have enough value in their property, (short sale)).  The Lending Industry might take a short term lost, but it is the HAVE NOTS that pay for the lose in the long term.

I understand why someone might not want to continue to pay on a property that PRESENTLY does not have the value that they paid for it, but when they purchased the house, was it a place of shelter, and a place that they were choosing to make a home for their family, or was it a purchase to create cash-flow.  If it was for shelter, and a home for their family then what the present value is should not be an issue.  The market will change sooner or later, and they will then have increased equity in the property.  If it was to create cash-flow, then they made a very unwise investment and should be the ones to suffer the lost, and not everyone else.

When you make a commitment to purchase a house you are held to that commitment.  The bank agreed to lend you the money that YOU asked for to purchase a house, and in return you agreed to pay them them back the money that YOU asked for to purchase the house.  Now I have heard some say that it is their right to choose to not to pay the bank back the money that they agreed to pay back, and just let the bank have the house.  That is not completely true.  There is no where that I find in the Note or Mortgage that gives them that right.  But I do see where the Bank has the right to take the property if the homeowner does not make the mortgage payments.  If I am wrong please state the section of those documents that give them that right.

I sympathize with Homeowners that are losing their homes.  That they and their families are going through tough times in their life, and hope that the complications in their life can be limited as much as possible.  But I do not have any sympathy for those that fit the definition of a Strategic Default which I gave above.  These people are abusing the system, and making life even more complicated and stressful for those that do not have control of the situation that they find themselves in.

Strategic Defaults are a big part of the problem in today's Lending Industry mess.  And those that support what these people are doing really need to think through their position.  Regardless of what your position is on the greedy Banks and Lenders, it is not a justification for the HAVES to further complicate life for the HAVE NOTS.

I hope to follow up on this blog "Strategic Defaults Big Part Of The Problem" soon to give some examples of how Foreclosures and Short Sales have impacted Lending Guidelines, and have created changes that are eliminating many Buyers from the market.  There is still plenty of money to lend, it is qualifying for it that has become more difficult.

 

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Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308, gsouto@mccuemortgage.com, or visit my McCue Mortgage Homepage.

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 Info about the author:

George Souto NMLS# 65149 is a Loan Originator who can assist you with all your #FHA, #CHFA, and #Conventional #mortgage needs in Connecticut. George resides in Middlesex County which includes #Middletown, #Old Saybrook, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or souto@snet.net

Comment balloon 27 commentsGeorge Souto • August 27 2010 01:16PM

Comments

I have found banks will not go for this. They are pretty careful on what they accept as defaults. These issues do not go away as many people think.

Posted by Lori Bowers, The Lori Bowers Group almost 8 years ago

Good article George, I agree this is abusing the system, and further deteriorates property values for their neighbors.

Posted by Edward & Celia Maddox, EXPERIENCE & INTEGRITY - WE TAKE THE HIGH ROAD (The Celtic Connection Realty) almost 8 years ago

George:

Unfortunately, you have fallen into a  trap to what banks wants all homeowners to believe in.

 

There was a MORAL OBLIGATION CLAUSE on their mortgage note they've signed at closing!

yeah right!

 

Banks MADE A MISTAKE loaning money during the FREE FOR ALL period and when they saw they were in trouble, because of their responsibility to their shareholders  they asked the Government to bail them out!

Homeowners MADE A MISTAKE buying a house at the highest point of the market and when they saw they were in trouble, because of their responsibility to their children (shareholders) they choose an strategic default

 

What is the difference???

Because of your self imposed moral constraint. . you want others to suffer?

 

George, you have the right to pay for your mortgage and no one is disputing that. .

. .but you don't have the right to impose a guilt factor on individuals  whose homes have lost so much value that even a foreclosure w/ bankruptcy is a much better option than being morally obligated to pay.

Have you checked the prices in Las Vegas, Arizona or Florida? 

Posted by Fernando Herboso - Broker for Maxus Realty Group, 301-246-0001 Serving Maryland, DC and Northern VA (Maxus Realty Group - Broker 301-246-0001) almost 8 years ago

George,
I have a friend of mine that was trying to do a loan modification on his home, his home is not worth  more than $ 160,000,  he owes around $183K, and wells fargo wanted to give him a loan modification of $ 160 less for his current monthly mortgage payment, when he really needed a lot more help and also this is not all, wells fargo is charging him many fees that increases his loan amount around $ 203,000, is that fair? are they really helping with this? I know that the lender does not have any obligation to modify a mortgage, but if they are trying to do something, please do it on the right way. 

I'm so upset to see these kind of negotations, if he does not accept he gets into foreclosure and believe me, they don't care, wells fargo personnel is very irresponsabile and not helping, it does not matter who he speaks with.

Helpless personnel ! ! ! Bahhh!!! 

Posted by Ray Saenz, Homes for Sale in Laredo, TX - Texas, Realtor (Exit Realty Laredo) almost 8 years ago

George,

Great blog, Stratigic Default, we have heard of them and we have seen them, people buying homes in '06 when lenders were giving money away and there were bidding wars over homes.  Inventory was flying off the self, price sky rocketed and anyone that wanted a home could get one even if they couldn't afford that hugh home and nothing to fill it.  Then there were people that were taking money out of their homes to play or invest with and those investments went bust so now they are in default.  Sooooooo many mistakes.  I wanted to make another very profound point but I am having a brain freeze..or maybe just old and tired!  :)

Loan mods haven't worked for everyone either, if there is no money coming in or a job is lost it doesn't work either.   Those that walk, however, even if they can pay is just dumb.  Nobody held a gun to smeones head to make them buy.

Oh well what do we do? 

Thanks for the article, hope all is well.  :)

Posted by Debbie Aldrich, Salt Lake City Realtor - Salt Lake County, Cottonwood Heights (The Watts Group Real Estate ) almost 8 years ago

Lori, you are right, and the more this becomes a problem, the more the waiting period will be before they can by a house.

Edward & Celia, that is another impact that this is having.

Fernando, I talk to people who want to be qualified to purchase a home every day, and there are people that I could qualify for a mortgage two months ago that I can not qualify today because the Guidelines have been tighten due to foreclosure.  I have not fallen into any trap, I see it everyday with my own eyes.  That is not speculation that is fact.   You need to go back and read the blog.  I am not address those that do not have a choice in this matter, I am address those that do, and are further making it worse for those that don't have the choice, like those that Ray is talking about in the comment after you.  A moral issue hardly.  The right to walk away from a financial obligation and think that there will not be a consequences from it, unrealistic.  Let me re-state unrealistic for those that deal in reality, but not so for those who have the since of entitlement that many seem to have in our country today.  It is everyone else's responsibility except their own.  In the mean time those who want to hang on to their home, are the ones who are suffering the consequences.

Ray, unfortunately your friends are one of the victims of what is going on.  I am trying to help someone right now that Bank of America was offering to do a Loan Modification on the was going to reduce his mortgage payment by a whopping $10 per month.  If I can refi him into a State Program that we have, I will be able to save him $1000 per month.  Loan Modifications are not the answer, but they are part of the foreclosure problem.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 8 years ago

Debbie, you have a great handle on this, and I could not agree more with one of your comments "Nobody held a gun to someones head to make them buy".  The problem is that they are acting like someone did hold a gun to their head.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 8 years ago

George, loan mods don't make it easier, it just becomes a matter of paying more, longer. I just met with a client whose house is worth $35,000 less than they paid for it. Job hours have dropped back and travel costs to work have gotten worse. Now they have to make a decision as to whether they try to ride out a short sale, or just walk away. Their problem gets worse as they have either made less than full amount on mortgage payment or misseda payment, which puts them into default.  As the market is so tight, and they need t get a pretty high value on the home through a short sale, their best option may be to just ride out the foreclosure process then walk away. That is a lot different than someone that owes $450,000 on a house they paid $550,000 for and just want to cut their losses.

Posted by Ed Silva, Central CT Real Estate Broker Serving all equally (RE/MAX Professionals, CT 203-206-0754 ) almost 8 years ago

"Strategic Default: A foreclosure that results NOT from the Homeowners inability to make his/her mortgage payment, but as a result of the Homeowners CHOICE to not make the mortgage payment, because the property has decreased in value and presently is no longer worth what they paid for it."

George,

I'd have shortened the definition to: "Strategic Default: A foreclosure that results NOT from the Homeowners inability to make his/her mortgage payment"  Beyond that it doesn't matter what you say. There can be many reasons for a strategic default.

The most common reason reasons for a strategic default use to be the time it took to sell a home. Now it's PC to be a victim of "the bank" It's acceptable to steal the bank's money, after all they're a big evil corporation! It's not like it's Grandma and Grandpa's retirement stock. Or is it? It's not like any one cares about stealing from the stock holders! (The depositors are not at risk because of the FDIC.)

There is nothing new in strategic default it's an old and nasty real estate tool. I've seen anchor tenants use it to force their landlords to capitulate to their demands. It's never been honorable. No matter what the entitlement crowd say it's still not.

It's no wonder the public the public doesn't see their personal disgrace, look at the comments.

Worst of all is the ignorance! Most people have to lower their standard of living after a strategic default! They don't understand the magic of amortization! Witch insures that no matter what equity always returns!

The only acceptable reason for a strategic default is that you've lost your income and default while you still have some cash rather than waiting until you're out of money and can't make the payment! Foreclose is bad enough with out having to steal grocery carts to move with.

Bill

Posted by William J. Archambault, Jr. (The Real Estate Investment Institute ) almost 8 years ago

Ed, there could be hope for this family the major problem might be the loan size might be to high for the program that I am thinking of.

Master William, Amen to that.  I can always count on you to say it like it is.  Even when I disagree, which is not very often, I can respect your conviction in what you say.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 8 years ago

This is a bad state of affairs for sure George......from what we have been reading about the new tax implications coming in January 2011, we think the worse may yet to come! 

Posted by Al & Peggy Cunningham, Brokers, Our Family Wants To Help Your Family! (RE/MAX West Realty Inc., Brokerage) almost 8 years ago

Al and Peggy, there will be FHA changes on October 4th to cover some of their losses, and I am sure that Fannie and Freddie are not done either as more foreclosures continue to happen.  That is why I feel that these Strategic Defaults are so bad, they are creating a bad situation into an even worst one.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 8 years ago

George,

I think people who do this should be fined.  So many are unable to pay but to stop paying just because they feel like it, is wrong.

Ann Hayden in Wildwood, MO

Posted by Ann Hayden, SelectAnn.com (Berkshire Hathaway HomeServices Select Properties-St. Louis Missouri) almost 8 years ago

George - The mortgage companies and investment bankers created this mess, then our taxpayer dollars bailed these businesses out so they could survive.  We know that they held onto this money rather than passing it on to consumers resulting in tighter credit.  No one foresaw that home values would decline 70-80% in markets like Florida, Arizona, or Las Vegas.  I can't blame anyone in these markets for a strategic default if they bought at the peak of the market.  The market isn't going to recover in five years to the level they bought at.  It's unreasonable to think that people will pay mortgages on homes that are that deeply under water.  These loans should be restructured so that strategic defaults don't have to occur.  If a consumer was warned that their home value could drop 80% in five years and it might take another ten years before the value recovers and they still took the mortgage, then I agree, the borrower has a moral obligation to pay. 

Posted by Gail Robinson, CRS, GRI, e-PRO Fairfield County, CT (William Raveis Real Estate) almost 8 years ago

Ann, they will be a paying a fine in a way.  The length of time before they can purchase a home again is being increased, and is predicted to increase even further.  The problem is that it is increase for those that did legitimate Foreclosures as well, because of the Strategic Defaults.

Gail I guess I would have to respectfully disagree.  Yes those large banks wrongfully hung on to that money instead of doing what they were suppose to do with it.  But all that money, as large much as it was would not have helped everyone to the extent that I keep hearing.

I have done a lot of loans and I have never had a Borrower ask me if their values were expected to rise or decline.  But all of them, except for those that were buying investment properties, were buying the house because it was the place they wanted to live in, and make a home for themselves and their family.  Even those that were purchasing the property as an investment property, were buying it for the rental income that they could receive and not for the increased value.  It wasn't the Banks responsibility to advising them of increasing or decreasing property values, nor was it the Realtors responsibility to do that, it was up to each buyer to come to that realization on their own.  We need to take personal responsibility for our actions, and not constantly push it off on others.  

If I buy a car on credit I have an obligation to pay.  If I purchase a TV set on credit I have, I have an obligation to pay.   If I fail to pay for those things and others, their are consequences.  So I fail to see how the obligation to pay for a house that is purchase on credit is different.

People need to come to the realization that these people that are doing Strategic Defaults are not the victims, but they are making victims of those who had no other choice.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 8 years ago

WOW!!!!!!!!!!!!!!!!!!!!!!!

"People need to come to the realization that these people that are doing Strategic Defaults are not the victims, but they are making victims of those who had no other choice."

I wish I'd said that!

I know I'll repeat that!

Bill

Posted by William J. Archambault, Jr. (The Real Estate Investment Institute ) almost 8 years ago

Bill sorry I missed you call yesterday, hopefully we will tough base again.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 8 years ago

George, I've never agreed with the notion or action of strategic default.  I'm sure you were raised the same way that I was; and that is, that you are responsible for your actions.  It's that sense of "entitlement" some have that really drives me up the wall. 

Posted by Nick T Pappas, Madison & Huntsville Alabama Real Estate Resource (Assoc. Broker/Broker ABR, CRS, SFR, e-Pro, @Homes Realty Group, @HomesBirmingham & Providence Property Mgmnt, LLC Huntsville AL) almost 8 years ago

George,

I thoroughly enjoyed reading this blog and the comments that follow.  It definitely seems to be a divided camp in thought on whether strategic defaults should be defended or attacked. 

Personally I believe that when anyone borrows the money to buy a property and they sign a "promissory"  note... they should repay that mortgage unless their personal circumstances change and they CANNOT do so.

Posted by 1 ~Judi & Don Barrett & Chassy Eastep - Integrity, BS Ed, Integrity Real Estate Services -IDABEL OK (Integrity Real Estate Services 118 SE AVE N, Idabel, OK 74745) almost 8 years ago

Nick, my Mom & Dad had very little, but they would work night and day if need be to make sure that all their bills were paid, especially the mortgage.  My Dad use to work 12 hours a day seven days a week in a factory making minimum wage to afford the one and only house he ever bought.  He did that because he wanted a place that he could call his own, and raise his family in.  It wasn't about equity, it was about providing for your family and a house they could call their own.  You did not look for anyone to give you anything and you worked for everything you had.  Those values are drilled deep in me to this very day, and I hope I have passed the same along to my two boys.

Judi, I agree.  People find themselves in circumstances through no fault of their own.  Loss of job, and health reasons can send a family into a tail spin that they just can't seem to get out of.  But to CHOOSE to default on a mortgage,  live free in a property for a year to a year and half and stiff the Lender that cannot be justified in my book.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 8 years ago

An Interesting conversation and I think there are lots of reasons for this mess...  However, I have to agree with the point of view you express here.  

Posted by Joan Whitebook, Consumer Focused Real Estate Services (BHG The Masiello Group) almost 8 years ago

George nice job with your article. I have written about strategic defaults from the standpoint of why do one when you can potentially short sale instead. I am glad Fannie Mae is penalizing those borrowers who do it! Strategic default vs short sale

Posted by Bill Gassett, Metrowest Massachusetts Real Estate (RE/MAX Executive Realty) almost 8 years ago

George very informative post.  According the the reports I have seen this is strategic decision being made by those who are more well off and usually involve a second or third home.   I suppose this is shedding the none performing part of a portfolio.

Posted by Jennifer Fivelsdal, Mid Hudson Valley real estate connection ( JFIVE Home Realty LLC | 845-758-6842|162 Deer Run Rd Red Hook NY 12571) almost 8 years ago

Joan, thank you

Bill I agree, and I think the penalty for Short Sales should be lessen, because at least that Homeowner is making an effort to work with the Lender to reduce the potential lose.

Jennifer, those that are defaulting on second and third homes will be in for a shock if they need to do a refinance down the road.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 8 years ago

George,

You make some good points. Strategic mortgage defaults certainly are a large problem today, and also expected in our free market system. Homeowners, like businesses, are just seeking their own financial survival.

Posted by Esko Kiuru almost 8 years ago

Esko I know that you guys have had your fair share of them.  I guess I don't see anything positive out of walking away from a property and paying rent for several years.  The market will not stay like this for ever and when it changes those property values will jump up again.  To me Strategic Defaults don't make any sense at all, and in my opinion they are bad for everyone.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 8 years ago

One lurking gorilla is that when the clock strikes 12 on Dec 31, 2012 anyone who does a Short Sale AFTER that stands to fork over a chunk of change to Uncle Sam for the privilege.

Posted by Suzanne Marriott, Associate Broker, CLHMS, e-PRO (Keller Williams Arizona Realty) almost 8 years ago

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