BluefoxToday blog : Strategic Defaults Are A Contributor To Guideline Changes

Strategic Defaults Are A Contributor To Guideline Changes

I posted a blog yesterday "Strategic Defaults are a big part of the problem" giving my reasons why I feel that Strategic Defaults Are A Contributor To Guideline Changes, and that i would post another blog to point out some of the Guideline changes that have come about because of Foreclosures and Shortsales. I feel very strongly about this issue, because I see firsthand every day the impact that Foreclosures are have on the ability of others to purchase a home, that anything that voluntarily further contributes to that is inexcusable in my opinion.  Strategic Defaults are completely voluntary and a CHOICE to do so, and NOT out of NEED.  I started off yesterday's blog with my definition of what I understand a Strategic Default to be, so I will state it again:

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.

Some have tried to justify this behavior by putting the blame on those who received TRAP money, and wrongfully kept it.  I agree that what these institutions did was wrong, but even if they had used the money like I believe they were supposed to, it would not have been used for those doing Strategic Defaults.  The money as I understand it, was intended to help homeowners that are in trouble with their mortgages, and had no other choice but to be Foreclosed on or do a Short Sale.  It was not intended for those who are voluntarily walking away from their properties.

In my opinion because of needless Strategic Defaults we have seen an even greater tightening of the Lending Guidelines than we would have otherwise.  There is no dispute that Foreclosures and Short Sales have caused Lending Guidelines to tighten and change.  It was a given that as banks experienced loses they would make adjustments to the Guidelines by which they would lend by.

The first changes that we saw were, the almost complete elimination of Stated Income type loans.  I say almost because I have been told that they can still be obtained.  I can't do them, and I don't know who can, but I am told they still exist.  Stated Income filled the need for the Self-Employed who make enough to purchase and afford a mortgage, but because of the way they report their income they have difficulty document it.  So now Self-Employed people are having a very hard time purchasing or refinancing a home since Stated Income Loan Programs have been virtually eliminated.

This was quickly followed by a reduction in the Debt-To Ratio Limits.  At one time I could do a Conventional Loan with a Total-Debt-To-Income of 67%.  Yes you heard that right, 67% of total Gross (not net) Income.  This obviously needed to change, and as Foreclosures and Short Sales increase, the reduction in the Total-Debt-To-Income Limits for Conventional Loans slowly decreased down to 45%.  It does not take a mathematician to figure out that reduction has taken a huge number of people out of the market.

Downpayment requirements have also tightened as Foreclosures and Short Sales have risen.  Programs like My Community and Flex 100 as well as other 100 financing programs have disappeared.  Again it does not take a genius to figure out the impact that this has had, especially on First Time Homebuyers.

FHA will on October 4th change their Guidelines once again.  The Annual Premium (MI) will change from a .55 multiplier to a .85 multiplier for loans with LTV's of less than 95% and .90 for loans with LTV's of over 95%.  This is going to have a HUGE impact on Borrowers qualifying for a loan, because it will significantly raise their Debt-To-Income Ratio's.  There are many that have been qualified that will no longer qualify come October 4th.

There are many other changes that have contributed to the decreased number of qualified Buyers, due to Guideline changes that have taken place because of Foreclosures and Short Sales.  So I hope you can see why I am so passionate about anything that VOLUNTARILY further increases and contributes to more and more Foreclosures.  As Foreclosures and Short Sales increase the more Guidelines changes there will be, and the less qualified Borrowers we will have.  There is nothing profound about that, it is a proven fact.

So to encourage or even justify a VOLUNTARY behavior that contributes to this is mind boggling to me.  And what is even more mind boggling is that the justification is being mostly done by those that sold these depreciating value houses to those doing the Strategic Defaults.

I am in the business of doing loans, Realtors in the business of selling houses, Appraisers are in the business of appraising houses at their current value.  None of us are in the business of predicting the future.  If we could tell what the future will bring, we would all be very rich.  Yet the Lending industry is suppose to take the loss because they lent money to people who QUALIFIED at the time (many of the foreclosures and short sales were not a result of subprime loans and loans done by shifty lenders).  Lenders lent money and qualified Borrowers based on the Guidelines of the time.  To sit back now and say well they should not have done that is almost laughable.  Since when did that stop Realtors from selling those so called over priced houses, Appraisers from appraising those house, and Loan Officers from doing the loans?

Everyone in this Industry is presently being affected by what is happening.  This is our lively hood.  Our Borrowers and Buyers are being affected by what is happening.  So I can't understand how anyone can defend or try to justify someone VOLUNTARILY participating in a behavior that will further take Borrowers and Buyers out of the market.

This blog is already way to long, so I will stop here.  But if you have taken the time to read all of it, and I apologies for its length, I can't see how you can come to any other conclusion besides that Strategic Defaults Are A Contributor To Guideline Changes and have affected the ability of Buyers to purchase or refinance a properties.

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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 72 commentsGeorge Souto • August 28 2010 07:36PM

Comments

George,

It's my turn to agree 100%!!!!

Equity will always return if the buyers are honorable!

Bill

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

Everyone in this Industry is presently being affected by what is happening.  This is our lively hood.  Our Borrowers and Buyers are being affected by what is happening.  So I can't understand how anyone can defend or try to justify someone VOLUNTARILY participating in a behavior that will further take Borrowers and Buyers out of the market.

 

That said it for me...

 

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) about 8 years ago

William I agree and thank you.

Judi, see that if I had just asked you I could have saved myself a whole bunch of words .......... LOL

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

George, I will not try to justify people walking away from their mortgage obligations...you borrow the money you find a way to pay it back...period end of story. 30 year fixed rates in the 4's allow most, some option to refi, if you can't I'm truly sorry for your situation but I never forced a home owner to buy more than their comfort level.

Posted by Steve Loynd, 800-926-5653, White Mountains NH ( Alpine Lakes Real Estate Inc., ) about 8 years ago

George, you said it all, 110% worth. I was raised to understand that if you couldn't afford to buy something you waited until you could, If you made a commitment to do something you did it to the best of your abilites and completed it. As noted already, if you made the request for the money, and make the commitment in writing, you respect that commitment, and not just say to hell with it, I am special and I don't have to abide by my word

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

Steve, likewise I go over and over the monthly payment with a Borrower to make sure that they understand what they are committing to, and in the end it is their choice as to what they are comfortable with it.

Ed well said, but then again you and I grew up in the same culture, and that is what we were taught.

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

George - I wouldn't disagree with you that strategic defaults are contributors to guideline changes.  My only point of disagreement is that people do not just buy homes to live in them.  They buy them as their largest investment and are willing to ride out dips in the market as they did in the 80's and 90's, but when 70-80% of the home value disappears and is not expected to return for ten more years, for those who bought at the peak in 2005-2006, it's unreasonable to expect that people will continue paying a mortgage when their home is underwater for 15 years.  It's not a good business decision.  We are seeing commercial investors walking away from underwater properties and no one places moral blame on them.  I don't understand why a homeowner is treated any differently, especially when they could rent for 15 years and put the difference into a retirement account.  It just doesn't make good business sense to pay on a property that far under water for so many years.

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

Gail if rents stayed the same every year then someone might be able to achieve that, but rents go up unlike fixed mortgages that aways stay the same, so that savings will not be their.  Actually the opposite will happen they will keep falling deeper and deeper in the whole.

As far as a morel judgment goes, how would people react if it was not a faceless bank that people were defaulting on but a friend or family member?  Would the reaction be the same? Probably not, there would probably be outrage.  But in the end it is the same thing, whether fail to pay back the faceless bank or the friend, the end result is the same.

I am not in commercial lending, but I think that it is a safe assumption that if someone defaults on a commercial loan for whatever reason, they will not be able to get another one for several year. 

I fail to see how not fullfilling your obligations, is all the sudden become an honorable thing.  I believe that the term use to be sticking it to the man, but in this case those that do Strategic Defaults are really sticking it to their fellowman.

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

George, I can not for the life of me understand someone who has the ability to pay and opting to walk away avoiding responsibility.  You gave a great what if example: "...how would people react if it was not a faceless bank that people were defaulting on but a friend or family member..."

That puts it in the right light...right is right and wrong is wrong.  I understand that it's not only strategic defaults that have caused many problems and guideline changes, but it's an issue that should not be tolerated and why should it??  Because it's a bad business decision??  Because as Ed said; "I'm special"?  Too many people think they are "special" and that's exactly the way I see many kids being raised...hope this isn't a glimpse of things to come.   

Anyway it shouldn't be tolerated because it's wrong, it's unethical, it's not honest and it's so incredibly unfair to everyone.

Back to edit:  Had to let you know that I suggested this and your other strategic default post.

   

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) about 8 years ago

George, I read the other post too, and I have to agree with you. There is a huge difference between people who can no longer pay and those who just don't want to because now it is a bad investment.

There is one more tiny little point I would like to throw into the mix. A little observation... 

How many times were many of these homes refinanced? I am talking about all in the mix. Strategic defaults, short sales, foreclosures.

The foreclosure my daughter purchased had numerous refi's. Original purchase price was around 150,000. A few years later it was foreclosed, owing 350,000. Never in a million years was the house worth that money, but aside from that. Where is the money? I can tell you it is not in the house, no updates were done during the previous home owners tenure.

What is happening to people who are losing their homes due to job loss, illness, those things are horrible. They are still struggling to pay, or they can no longer pay and are waiting for the ax to drop. But just walking because it is no longer a sound financial decision to pay, that is criminal.

Posted by Andrea Swiedler, Realtor, Southern Litchfield County CT (Berkshire Hathaway HomeServices New England Properties) about 8 years ago

George I am glad that Fannie Mae has decided to pull the plug on those that just want to walk away...Fannie Mae strikes against strategic defaults!

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

George another great follow up.  Whatever happen to honoring your commitments?  when time gets tough that does not mean you get a free pass; if you can pay you should do the right thing even if the impact is negative on your portfolio. 

I feel for those who are in a financial bind because of health or lost of job, but to just walk away because you can is just so wrong.

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) about 8 years ago

The guideline changes were something that needed to be changed anyway.  100% stated income with a 580 credit score will default almost every time.

Posted by David Krushinsky, AZ MB-0949619 MLO NMLS #202115 (Dk Home Loans, LLC) about 8 years ago

What the Public sees from the News Media and the Internet, factual or otherwise:

1 out of 5 Federal Employees makes $100K or more

Average Government Employee (State, Local, Federal) make twice what Private Sector makes

Wall Street makes huge Profits from taxpayer's TARP and Bailout Money

Franklin Raines make $130 Million Dollars for running Fannie Mae into the ground.

Michelle Obama blows a zillion tax dollars taking her daughter to Spain.

National Debt will Equal GDP in a few short years.

Barack Obama is on another vacation or playing another round of golf.

Nancy Pelosi spends $380,000 on liquor for the taxpayer jet that she flies around in.

Bankers still pay their CEO's staggering salaries in the  tens of millions of dollars.

The War in Afghanistan is now longer than WWI and WWII combined, costing hundreds of billions of dollars.

Etc. etc. etc.

So John Q. Public, realizing that he owes $200K more than his property is worth, says, "Why should I be buried under this debt created by these evil financiers and this worthless government?  To heck with it!"

 

No Easy Answers in Today's America...

Posted by Fred Griffin, Licensed Florida Real Estate Broker (Fred Griffin Real Estate) about 8 years ago

George, good luck but better polish your armor. After several posts on this I realize I;m talking to the wrong people. My clients mostly agree with me, I'm not a short sale shop, and I don't debate this with friends. But I can't hold back on a comment.

If you don't understandthe implications of strategic defaults on fiscal and monetary policy, or don't care about the moral implications, can I appeal to your personal pocketbook? How will you feel about your neighbor who makes a "business decision" to walk away from his house? What if five neighbors do this? What if this sucks 20% or 30% out of the equity of your home that you considered an investment? Walk out yourfront door and look left, look right, and imagine a few foreclosure signs stuck here and there. Of even if they were done as DILs or short sales, they will sell 20-30% under market value. Now imagine wanting to sell your own home under normal circumstances: job transfer, downsizing, a divorce, or to pay medical bills. What if you want to do the right thing and pay off your debts (they're commitments!!!) but your neighbor had a clever lawyer and a clever Realtor who manipulated the system. Somehow, I can't see that the proponents of strategic default will continue to be quite so enthusiastic when they see the REO sign on their own street.

Posted by Leslie Ebersole, I help brokers build businesses they love. (Swanepoel T3 Group) about 8 years ago

i don't know what it's like in ct, but down here in good olde southwest florida we got crushed. for a few years i felt as you do, but now i'm not so sure. many honest well intentioned people made mistakes. how long must they pay for these mistakes? i mean these properties in some cases aren't just a little underwater their $2-3-400,000 under. they won't move at their current prices. i believe shorts are a better alternative, but i'd have to say that strategic defaults are certainly not the sole cause of the problem but just a small part.  

Posted by Jay Beckingham, Seniors ROCK! (Fairway Independent Mortgage Company) about 8 years ago

Nick, thank you.  This is not a popular issue, because there seems to be more and more a sense of entitlement out there.  It is like there should be a guaranteed equity out there and no risk of loss.  that is not life, there is a risk in everything, and a house is no different.  Everyone that has commented so far has do a great job sticking to the issue.  I really appreciate all the comments, they all have added value to the blog, even my friend Gail who sees this issue in a different light then I do.

Andrea you bring up a great point.  The continuous refinancing has definatly added to the lack of equity in a property, and the need for Short Sales when they have to sell the property.  I wish I had thought of that when I wrote the blog, so I am glad you did it for me.

Bill I agree, and by the way you did a great job on that blog.  Unfortunate there are going to be many that did not have a choice in the Foreclosure that are going to get pulled into the new change if Fannie Mae follows through with that.  The new rule if it happens will require a judgment call, and any time you have that some that the rule was not created for will be pulled in.  And that is one of the big reasons why I am so against these Strategic Defaults, in the long run they hurt those that did not have a choice.

Jennifer you are so right.  You took the words out of my mouth.

David your right things were to lose and needed to be tightened, and the low credit scores was one of them.  But that ended up having to be done by the Lenders, because FHA still does not have a minimum credit score.  A number of changes made since and needed to be done,  But there have been others that don't make any sense, like Fannie Mae hitting Borrowers with Credit Scores in the 700's but lower than 740 with points.

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

Great discussion. Fred, yours is funny. I am working a strategic default now (well, it's all in the eyes of the beholder: divorce, but both have the ability to pay, neither want the house, it's upside down value-wise, they hired me to sell it, I can only sell it far below what's owed... that is that...) and I feel a little greasy even doing it. But that said, we are in the market to sell houses at FMV regardless of the seller's reason. And regardless of the reason the FMV is so low in the first place. Or whether the chicken or the egg came first.

Posted by Kristen Correa, Broker, I love coffee & real estate. I am out of coffee! (Kristen Correa Real Estate & Reedy Creek Realty Services) about 8 years ago

Fred there is one little problem with that.  Just because all the other things are wrong does not make Strategic Defaults right, and they become one more thing and the long list of wrongs that we are paying for.

Leslie, excellent add-on to this blog.  Those were excellent points that you made.  Thank you.

Jay, Strategic Defaults are not the sole cause, but they have contributed to an already bad situation.  We all need to be responsible for our own mistakes, and not push them off on others who did not have any say in our decisions.

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

Kristen, at least they are not just walking away, and making an attempt to at least do a Short Sale.  Divorces create messy situations.  And even though what they are doing is not good, in my mind it is a different situation than a Strategic Default.

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

George, I've never thought that strategic defaults were right, even though, to a degree, I understand the logic behind them. And the domino effect that they are having on all of us should make someone stop and think, hey, maybe I should just keep on making my payments.

Posted by William James Walton Sr., Greater Waterbury Real Estate (WEICHERT, REALTORS® - Briotti Group) about 8 years ago

Absolutely.  It is a question of ethics vs "business decision"

Posted by Anne-marie Boyer | Del Mar Carmel Valley San Diego | GRI, ABR, REOMAC, 5-Star (San Diego's Finest Real Estate) about 8 years ago

I do not belive it is an ethical question. I do think it is a moral dilemma. Big business makes these types of decisions every day.

 

Posted by Aaron Vaughn | Builder | Investor, If the deal makes sense, the cash will follow. (Conifer Homes) about 8 years ago

Fred put John Q public's feelings fairly well I think.  Those who are strategically defaulting are making a business decision in most cases based on the facts of the situation versus so-called moral or ethical obligation.  I am not advocating the practice or willing to discourage it either.  Many people put 20% down with a 30 year fixed and have gotten HAMMERED by doing it "right".  Now they find they are hundreds of thousands of dollars upside down.  When they try to understand when or if prices will ever come back they get the shoulder shrug from everyone in the business and government.  So, on a $500k purchase that this 20% down buyer can afford but chooses to default on he is out $100k plus expenses plus any improvements made to the home plus interest he is still paying...  Hmmm...  How many years will he have to work just to make up the personal loss of that $100k initial investment?  How long to make up the remaining $150k loss on the property?  How long should this person pay for something that was indeed cause by others?  How much pain SHOULD John Q public take while others in the mix take ADVANTAGE?  Yeah, I am a real estate agent that got into this business AFTER the big time hit in 2003-06.  I am a real estate agent working harder for less than ever.  I am a real estate agent that looks at trends and tries to take a very high level view.  When I do, I see a ship that has already sailed. 

As much as I understand what you are saying George and it would have been great if things had happened differently, but I for one cannot place fault on someone for accessing thier situation and making a tough choice.  Regardless of what the media promotes, it is indeed a tough decision for people when they take the step to stop making payments.  Were I to judge others, I would likely start with those responsible for the oversight of corporate giants in the building and mortgage business that seemed to look the other way for a very long time while they themselves enjoyed some of the ill gotten fruit.

It will get better though!  This is The United States of America!  remember to VOTE in November! 

Posted by Ken Patterson, Roseville Real Estate, TOP Rocklin Realtor (TPR Properties) about 8 years ago

George, I'm not convinced that the choices made by others (as a real estate agent viewing the situation) are mine to judge...or, yours. Look at it this way, if you're concerned about buyers: the addition of strategic defaults will bring pricing down- MORE buyers will qualify as prices continue their decline. Not pretty, but a likelihood.

It would seem wise to stick our necks out for issues that we can control- not those which exceed our grasp due to the personal choice of others being exactly that: their choice.

Posted by Laurie Mindnich about 8 years ago

George. I would NEVER suggest someone do a strategic default and let their property go into foreclosure. However I have no issue with folks that want to do a strategic short sale. These are very difficult times that we are in. I talk to folks that are upside down by as much as 80%!!! 80%. That number is staggering. They can stay and pay (continuing to throw money down a black hole) or they can sell now and secure a better future for their families. To me it's a no brainer.

But I agree completely they should not just walk away and get foreclosed on.

Posted by Bryant Tutas, Selling Florida one home at a time (Tutas Towne Realty, Inc and Garden Views Realty, LLC) about 8 years ago

George. I want to add that most of the folks that I deal with who are doiong startegic short sales have already tried to work out a loan modification with their lender. After months and months of going through the process the lender ALWAYS comes back with "Sorry your request for a loan modification is denied. Why don't you do a short sale?"

They also tell them to miss a payment while going through the modification proicess. So before they deny them they ask them to ruin their credit.

Posted by Bryant Tutas, Selling Florida one home at a time (Tutas Towne Realty, Inc and Garden Views Realty, LLC) about 8 years ago

OK George. One more and I'll leave you alone :) This is from Wells Fargo. we submitted a short sale request with a contract back in March. In May they forced the seller to go through a loan mod and told them they needed to be delinquent. They had never missed a payment up to that point.

At the beginning of August this is what they received. Now the property is back on the market at a lower price than the contract we submitted back in March.

www.CentralFloridaShortSales.com

Posted by Bryant Tutas, Selling Florida one home at a time (Tutas Towne Realty, Inc and Garden Views Realty, LLC) about 8 years ago

I have a client that recently did this. They were in a bit of a different situation as there was serious (Felony) loan fraud in the neighborhood for about 3 years that overly inflated the home prices in a very small gated upper middle class neighborhood. They were hit hard by this so they justified the strategic foreclosure in that way. In some ways I could understand but the bottom line is that it was wrong. The fraud guys were sentenced to 15 years so I guess they got their due. 

Posted by Steven Beam, Parker Colorado Real Estate (RE/MAX Alliance - Parker Colorado Real Estate.) about 8 years ago

I can understand the mindset of a strategic default but I don't condone it and the prevalance of the mindset has ruined our local economy.

One thing being said - I am still greatful that we have lending period.  Every profile type has defaulted, everyone is at risk for a "strategic default."  HUD homes have increased dramatically in my area in the last year so I am really not surprised that FHA needs to find a way to pad the fund!

Posted by Renée Donohue, Las Vegas Real Estate Broker - www.urLVhome.com (Savvy Home Strategies Realty, LLC-REALTOR®-Estate-Probate) about 8 years ago

Totally 100% agree.  Strategic Default completely goes against the way I was taught to approach life.  Except in rare instances, it's just wrong in my book.  I've had friends come to me with the bright idea that this will "get them out of the fix" the (fill in the blank... mortgage lender, realtor, homebuilder, etc) got them into... of course it's someone else!  Everytime, I have to bite my tongue and graciously urge them to see the error of their ways!

Posted by Chris Jenkins-Sarasota Realtor, "Expect Success" (PalmerHouse Properties) about 8 years ago

William like you I also understand the concept, and like you I don't like it.  Walking away from a property that you took money for to purchase and then not pay it back is just plain wrong.

Anne-Marie the way I see it, it is wrong on both counts.

Ken, no matter how one may try to justify it I personally cannot see the Justification for voluntarily walking way and stiffing others for your mistake.

Laurie, I could not disagree more.  Nothing good will come out of Strategic Defaults and we are already experiencing what they are producing.  That is not judging that is fact.  They have taken Buyers out of the market and not created Buyers.  And how is bring prices down and driving more people underwater a good thing?

Bryant come back and comment as many times as you like, it was good seeing you stopping by again my friend. Bryant the people that you are talking about are the victims that I am referring to and they are caught between a rock and a hard place and Loan Modifications are not the answer, they do very little for them.  Strategic Defaults are all together different.

Steven, it is a shame that the con artists took advantage of people, and some found themselves in bad situations.  But most of these Strategic Defaults seem to be people that were not taken advantage of, they new exactly what they were doing.  They made a commitment and they need to stand by it, and they deserve whatever comes their way if they don't.

Renee you guys out there in Vegas have been hard hit with every type of default there is.  If anyone knows what the ramifications are you certainly do.

Chris, I hope that you are able to convince some of them that this is not the answer, it will only bring them more problems in their future.

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

Bottom line...it is what it is and the way the criteria for lending is right now...well, to tell you the truth it's nice to have qualified buyers (WELL qualified) and these are the ones that are going to be in those home for hopefully a lifetime.

Posted by Celeste "SALLY" Cheeseman, (RA) AHWD CRS ePRO OAHU HAWAII REAL ESTATE (Liberty Homes) about 8 years ago

I guess the problem I have with strategic defaults is that I am a huge believer in paying off and owning your home.  If you have a home with no mortgage you can live in it mortgage free, rent it out for cash flow, or give it to an heir.  Over the life of a 30 year loan it seems unlikely that most would be worth less at the end than they are in these hard times.  So, if I were in a position to pay off a loan and own a house over time I would not choose to let go of it if I did not have to. To me strategic defualts are not that stratigic.  Just my opinion.

Posted by Marcy Moyer, Probate, Trust, and Investment Specialist (eXp Realty of California Silicon Valley Probate, Trust, and Investment Sales) about 8 years ago

George, this is such a sensitive issue. I think it has all been said by others. Looks like FNMA is going to take care of a large portion of these strategic defaults by pulling the plug on those who walk away.

Posted by Sharon Alters, Realtor - Homes for Sale Fleming Island FL (Coldwell Banker Vanguard Realty - 904-673-2308) about 8 years ago

there is no doubt that Strategic Defaults Are A Contributor To Guideline Changes but I will continue to say that a strategic default is a viable and reasonable option for upside down borrowers to consider.

There will be serious consequences but if, after careful consideration, the good, outweighs the bad...do it...walk away

I dont recommend it, and I wont provide justification for anyone (they have to do that for themselves) but I understand it and I always suggest it as one alternative to be considered (along with a short sale, deed in lieu, loan modification, conversion to rental property etc as a way for folks to move on with their lives

Borrowing money and Loaning money is  risky business Both parties to these loans entered into their transactions betting that values would continue to rise. They didnt, now both parties have to suffer the consequences.

The way things work now is that the borrowers get all the benefit if property values increase and are expected to suffer all the loss if they go down. This dosent seem fair to me.   Why not consider a new type of loan, call it an equity participation loan where the lender earns a part of the appreciation if home values go up and shares in the loss if values go down.

Posted by Ron Parise (LocateHomes.com) about 8 years ago

I blame greed on this whole mess, the buyer for buying beyond what they could afford, the lenders for a turning a blind eye by enabling them to do so (negative AM loans) by crafting loans programs that made it feasible for those buyers who should never bought to buy thus driving up the Values on those of us who could afford our loans and are now suffering with deprecated values.   I have no pity for the banks most of them if not all are posting profits and will recover quite fine How many people can you say are doing the same?  I don't Advocate defaults but I don't mind Strategic Short sales since that's as close of a "Bail Out" Main Street is ever going to see. Just my .02

 

Below you will find an ethics professors take on the subject.

http://www.sacbee.com/static/weblogs/real_estate/SSRN-id1494467.pdf

 

 

Posted by Victor T. Gurrola, Diamond Bar Real Estate Professional (Remax Realty 100) about 8 years ago

George,
I have written before that these changes from lenders are because all the problems that they had with past borrowers, they did a scrutinized research in the defaults and they found the most important factors for these kind of defefault and they are taking more regulations to combat this problem. thanks for sharing another great blog !

 

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

George: That's a good point. It certainly makes sense. Thanks for the post!

Posted by Paul McFadden, Pest Control, Seattle, WA. (Paratex) about 8 years ago

George, while I respect your right to your own thinking, I have an acquaintance who, in 2006, paid 1.2 million for a Hamptons house (your area had its ridiculous fake bubble, as well, I'm guessing). Now that the value has been established at $600k, what is a person in this situation supposed to do? If they choose to live with their $600k error, they have my respect for their integrity; if they choose to make choices that extricate that $600k bubble of nothing from their lives, they have my respect for their common sense. I just don't think that  one size fits all is a safe presumption for "strategic defaulters". I don't like that policies are changing due to the whole problem, but I would have a very hard time with a $600,000 bit of air myself.

Posted by Laurie Mindnich about 8 years ago

Hey George,

I am not justifying any decisions made by those choosing to Strategically Short Sale.  Simply showing there is always multiple sides and views to any subject including this one.  One can definitely understand the "Why" of the choice.  Many generalizations get put out thier as what should be stopped or what caused this or is causing that.  Placing judgment on all without an understanding of an individual situation.  The reality of the situation regarding property values is tha short sales are going to happen.  Many feel that the simple fact of being hundreds of thousands of dollars upside down with no real timeline for a possible recovery is in itself a hardship. 

I for one find it hard to justify putting honest people in a position where they will not be able to recover for decades if ever.  Because they can pay is not a rational argument that they should...  That is like the argument that the "rich" should pay more taxes because they can afford it...  In some ways it sounds convenient, but in many ways that makes no sense at all.

 

Posted by Ken Patterson, Roseville Real Estate, TOP Rocklin Realtor (TPR Properties) about 8 years ago

George,

I gave you a "like it" check for this one!  I don't like the situation, but, I do like having everyone see what is happening out there.  I don't think that the government is looking out for the public's best interest.  We have had down markets before, and I don't ever remember such resistance from the government.  All the new regulations, penalties, appraisal rules, etc., have really gone overboard and are now, hurting people.  Yes, we needed some restructure, but, will it ever stop?  More new rules, more paperwork, more problems with loans. Homeowners are frustrated, beyond their core.  Many of them have lost their jobs, their healthcare, and divorces rise when times are bad like these.  Pray that people go out and vote in, responsible - not former policticians in November.  We need new , fresh ideas, not the same old rhetoric.

Okay, that felt good:)  Thanks for the opportunity to rant!

Are you coming to the Success Seminar on Wednesday? I certainly cannot wait to hear positive information!

Posted by Frances C. Rokicki, Broker-Mentor,CRS (Fran Rokicki Realty, LLC) about 8 years ago

I fully agree with Bryant (#26-28 above). It's not for me to determine if it's right, wrong or indifferent. It's for me to help someone who needs to liquidate a property. I'll never suggest they do a strategic default, or a regular short sale for that matter, but if they decide that's best and want my help in doing it, I'll give them 100%.

Posted by Eric Michael, Metro Detroit Real Estate Professional 734.564.1519 (Remerica Integrity, Realtors®, Northville, MI) about 8 years ago

Sally and those are the type of Borrowers that you are going to have to have, because the border line buyers are slowly being taken out of the market.

Marcy I like the way you ended your comment, and I agree.

Frank and Sharon, they are going to find that the consequences are going to be more than they bargained for.

Ron, if I was purchasing a house I would not go for the loan program that you are proposing.  Banks do really care if the values go up or not, they don't want to own the house, they just want you to pay back your loan.  That is how they make their money, not on owning properties.  But you are right in that it is risky business, however, Bank will keep minimizing the risk and these people that are just walking away from properties will have a very hard time purchasing a house again in the future.

Victor, "Strategic Short Sale"?  What is that?  A Short Sale is a Short Sale, both side agree to it.  But in the case of a Strategic Default only one side is involved in the decision to walk away and stiff the other.  Banks are not asking for anyone's pity, they just expect you to fulfill what you agreed to do when they lent you the money.

Ray you are right Banks are asscessing the risk, and will change the Guidelines to address the situation.  Unfortunately the inocent always seem to get caught in the crossfire.

Paul thank you.

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

Laurie you ask what a person in their situation is supposed to do?  They are supposed to fulfill their commitment, it is that simple.  The Bank did not force them to buy the house, and they are the one's that came asking for the money.  If they made a bad decision they are the one's that should bare the loss.  It is still the same house that they wanted to buy and where they wanted to live, that has not changed regardless of the value.  And I fail to see where there is any integrity in not paying your bills. 

Ken, I don't understand what a "Strategic Short Sale" is.  A Short Sale is a Short Sale and both sides agree to it.  I definitely do not understand the justification behind a Strategic Default, which is just simply walking away from the house and not fulfilling what you freely agreed to do.  I don't see any judging in that at all.  Either you walked away from a property that you were still able to make the payments or you didn't, that is as black and white as it gets.  If they fit the definition they are a Strategic Default, it they don't then they are not.  I am not judging who fits it and who does not, but if you refer to them as a Strategic Default then you have made the judgment not me.  Ken I also don't understand how you can refer to someone as honest if they do not do what they promised to do.  They signed a Note and Mortgage promising to pay back the money they borrowed, how is one honest by walking away from their obligation and not fulfill their commitment?

Francis, all those people are becoming victims in the whole mess that is why I can not find any justification in what these people that are doing Strategic Defaults.  They are making things even more difficult for those that are already in bad situations, and it is those people that are the true victims.

Eric, my problem is not with the Short Sales, at least they are trying to minimize the damage, and both sides come to an agreement.  But Strategic Defaults, just walking away from a property that you can still afford, for no other reason that you don't like the fact that it is not worth the money that you paid for it, that I have a big problem with.

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

Hey George, this post is getting a lot of attention as well it should...I only came back to congratulate you on the feature.

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) about 8 years ago

George ~  I must admit I had not given this topic a lot of consideration...  I find the debate very interesting... I think this is a complex problem and I am learning so much from reading the points of view expressed in this post!  I am so glad you posted this issu for discussion.

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

I think Fred indicated part of the problem that is leading the public to consider strategic default.  We hear about corporations choosing to default as a business decision, which is apparently more acceptable. 

Posted by Christine Donovan, Broker/Attorney 714-319-9751 DRE01267479 - Costa M (Donovan Blatt Realty) about 8 years ago

Both sides took an investment risk when the transaction started. The lender took a risk that the borrower would pay the money back and the borrower took a risk that property values would remain stable or increase. Sometimes investment risks just don't pay off. (Part of the problem may actually be the whole idea of looking at a home as an investment instead of a durable good - to use the economic terms.)

That being said, homeowners took advantage of incredibly low lending costs that they only receive because being a homeowner is not the same as being a business making an investment. Businesses have always paid higher interest rates exactly because there is a higher chance of a default due to a "business decision". With more strategic defaults, higher interest rates will soon become the norm.

By the way, I think you forgot one of the first casualties of the strategic defaults - FHA allowing borrowers to count rental income from the home they were moving out of.

Posted by Carl Pruitt, http://FHALoanAdvice.com (FHA Loan Advice) about 8 years ago

Nick thank you and I know that you were one of those that suggested it for a feature.  See the pull that you have around here :) :) :)

Joan, I am learning for it as well.  What I find amazing in some of the comments is people actually feeling that there is nothing wrong with not abiding by what you contractually agreed to.  If that is the case why have a contract in the first place if it is worthless.

Christine, I don't find corporate defaults any more acceptable than Strategic Defaults.  Those defaults are actually even more harmful, in that they not only fail to pay back the money they borrowed, they also stiff their vendors, and put people out of work.  I don't see where anyone is claiming that they are acceptable.

Carl thank you for the add-on.  The blog was not ment to point out all the changes, but enough to bring some awareness to what is going on.  The blog was already longer than I like to make them, so I am glad that others, like you, have further identified other changes that Strategic Defaults have contributed to.

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

George, Just to clarify, the basic definitions that I use are... Short sale- not being able to afford your mortgage payment, trying to get the bank to take less than is owed. Foreclosure- walking away from your home for any reason, regardless of being able to make the payment or not. Strategic Default- able to make payments, getting the bank to Short Sale the home.

Answering on your comment back to me, I think a Short Sale AND Strategic Default are to "minimize the damage, and both sides come to an agreement." Walking away, able to make payments or not, isn't a Strategic Default, it's a Foreclosure.

Posted by Eric Michael, Metro Detroit Real Estate Professional 734.564.1519 (Remerica Integrity, Realtors®, Northville, MI) about 8 years ago

Eric, you are certainly entitled to your own definition of a Strategic Default, but as you can see by the comments whether the commenter agrees or disagrees with me, the understanding of what a Strategic Default is seems to be the same.  There is no "Sale" in Strategic Default.  It is a strictly walknig away from a property with no effort to negotiate any terms with the bank. 

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

Hi George --- I'm back.. I was wondering how many of the foreclosures are due to a strategic default  -- is anyone tracking this?

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

Joan, I have not seen a figure seperating Stretegic Defaults from the other Foreclosure figures.  But it would be an interesting figure to see.

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

George, if a Strategic Default is just walking away, letting it go to foreclosure, while being able to pay but choosing not to, then I agree with you. I guess my thinking was a little different, but now that I'm using the same meanings as you (and the rest of the world), I'm on board with what you're saying. I still think that if this is what they've decided to do, they should Short Sale, and not just walk away, and I'll still help them with that.

Posted by Eric Michael, Metro Detroit Real Estate Professional 734.564.1519 (Remerica Integrity, Realtors®, Northville, MI) about 8 years ago

Where is the hall monitor when you need one.  They are no different than scammers and should be held fully accountable and prosecuted to the full extent of the law.  They slip through the cracks and then we all have to pick up the tab.

Posted by Don Spera, Serving York and Adams County, PA (CR Property Group, LLC) about 8 years ago

Eric, I agree, a Short Sale is a better option, and they will be in a better position to purchase latter. Fannie Mae has proposed not to let those that do Short Sales not be able to to by for seven years, This has not happened yet, but it most likely will, and if Fannie Mae does it the others will follow along.  Short Sales I believe is 3 years for FHA and 4 years for Fannie Mae.

 

 

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

Don, and I thought that my position was tough :)

Strategic Defaults have to be discouraged, and it is mostly going to take tough penalties to do that.

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

George, Just came back by to see what you've been up to.  Tis is a great post.

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) about 8 years ago

Judi thank you!

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

George, Congratulations on the Feature!  This is an excellent topic for discussion because everyone has an opinion and very different perspectives.  You've done a great job moderating a high octane topic.

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

George, Congratulations on the Feature!  This is an excellent topic for discussion because everyone has an opinion and very different perspectives.  You've done a great job moderating a high octane topic.

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

Gail, I like the way you phrased that "high octane" ......... LOL

I have to remember that.  Thank you :)

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

All I can say is WOW and AMEN!....I spent 10 months underwriting forecloses loans....and aside from it being THE most DEPRESSING underwriting job I have ever had, it was an eye opener on why the guidelines change every 15 minutes!!!!!  I can't say any more than that, but you are right on the MONEY!

Posted by D. Bass, Blog: Ask The Underwriter (Ask The Underwriter) about 8 years ago

George,

These defaults are just wrong....

Ann Hayden in Wildwood, MO

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

D. Bass it is good to have your input on this, because I know that you as an Underwriter have a different knowledge of what has brought us to this point, than the rest of us.

Ann, I totally agree.

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

Hi George....Congratulations on your feature post and your 600,000 points for Blogging here in the Rain..that takes a lot of time and effort.

Cheers

Posted by Fred Carver Personal Real Estate Corporation, Accredited Real Estate Consultant (RE/MAX Camosun Victoria BC Real Estate) about 8 years ago

Fred, thank you.  I have been around since September of 2006 so it has taken a while to get to this point.

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

Hi George,

Bottom Line is no matter how you choose to define the transaction or determine the honesty of those involved, all parties have come to a settlement whether a short sale, strategic short sale or foreclosure.  All parties agreed and assumed risk in the begining.  All parties agreed and assumed loss in the end.  Certainly investors and lending institutions see value in whatever resolution they come to just as those having signed a note see value in their direction.  You and I see things quite differently, but ultimately the free market gets to decide the answer.  Good luck to you!

Posted by Ken Patterson, Roseville Real Estate, TOP Rocklin Realtor (TPR Properties) about 8 years ago

Ken, you are right about there being a bottom line, but that bottom line is that there is nothing honest about signing a Note stating that you promise to pay a debt and then just walk away from that obligation.  The end result of Strategic Defaults is that innocent people end up getting hurt, if you don't think so, that a look at my latest blog and see the Guideline changes that they have lead to.  And by the way there is no such thing as a Strategic Short Sale, but there are Strategic Defaults which are just simply another word for dishonesty.

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

George,

Strategic defaults certainly are affecting mortgage lenders' guidelines, no question. However, they also are part of the free market working its way out of this prolonged mess.

Posted by Esko Kiuru about 8 years ago

Esko, I hope your right, but I don't see that as part of what is know as the free market.  If it is, it is a strange new component.

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

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