BluefoxToday blog : Strategic Default in Reverse

Strategic Default in Reverse

 

An article in the Chicago Tribune describes how some mortgage servicers are exercising strategic default in reverse and are abandoning properties after determining that the costs of foreclosure are greater than the underlying value of the property.  Often in distressed neighborhoods, such properties only add to the decline of communities, as vacant houses become eyesores and havens for criminal activity.  Chicago area foreclosures increased by 20% in 2010, only adding to lower home values and further blight.   

 

Home in ForeclosureThe Tribune article describes the “stewardship relationship” that exists between borrower and lender and how certain loan servicers are failing to live up to their responsibilities as “stewards” following default.  (I find it interesting that lenders would ever be considered stewards, for in reviewing the behavior of many during the housing crisis, it appeared it was always about the money.)  Good stewards take their responsibilities seriously, when it’s about the money, stewardship isn’t involved. 

 

For two years now, we’ve read of the moral responsibility of borrowers to honor their mortgage obligations; and many have been critical when borrowers made the “choice” to walk away.  It seems ironic that some of the very banks that have criticized homeowners for walking away are now choosing the same option, and solely for financial reasons.  Regardless of who is walking away, it is always about the money.  

 

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Comment balloon 19 commentsJohn Mulkey • January 13 2011 06:53PM

Comments

I wonder if municipalities couldn't take ownership of these homes, and get people in them who can take care of them. Of course, what probably would happen is it would be freinds and relatives of the decision makers who got the homes. 

Posted by Joetta Fort, Independent Broker, Homes Denver to Boulder (The DiGiorgio Group) over 7 years ago

HA!  When it was home owner walking away from a burdonsome mortgage, they were branded as immoral. 

Now that it's banks, it will be called what it is, strategic. 

Posted by Lenn Harley, Real Estate Broker - Virginia & Maryland (Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate) over 7 years ago

Interesting how the banks now are using the same terminology. This has been going on in many large cities thruout the country.  Cities are upset at the lack of maintenance & lack of tax incomes.

Posted by Lyn Sims, Schaumburg IL Real Estate (RE/MAX Suburban) over 7 years ago

John...it is tiring to read the 'semantics' involved with this situation. It should be so simple;
...if I present myself as capable of fulfilling a contract
...I had better be honest with all involved in what I present as Truth [have a job, can produce records, & am in
    my right mind to understand what it is that I am doing & signing;
...now, it appears that I must also make certain that the lending institution is able, capable, & truthful about
   their presence & process in this contract.

Too bad. if I welsh on the contract, my credit is ruined or badly wounded;
What happens to these institutions who decide that they can not afford their end of the contract.
Something is very skewed here. 
Some local municipalities are considering purchasing houses in their area & selling them under the proviso that the new owner repair them & contract that they will remain the owner for XX number of years.    

There are those who never intend to follow the contracts they sign, but somehow I cannot believe that is the higher % of folks out there.
Congress caused some of this with their 'don't ask about credit, don't demand job proof nor length at the job', the institutions [mortgage] went along with it for whatever reason & now don't like the bad taste in their collective mouths.  You gamble--you could win, but you also might lose.
Great interesting post.
Barb

Posted by Barb & Sal Dragotta, Macomb County Michigan over 7 years ago

The Banks take a "Charge Off" on their Income, reporting this as a Loss.  So the U.S. Taxpayers get hit for the money.

The Banks default on the Property Taxes; Local Government loses revenue.

Cities / Counties will incur Law Enforcement Expenses as these become havens for Crime (prostitution, crack houses, etc.)

Cities / Counties will incur the Maintenance and Tear Down Costs for these properties.

The majority of these defaults, according to the Tribune, are in African-American neighborhoods.  Fair Housing and Equal Opportunity obviously mean nothing to Banks.

 

 

Posted by Fred Griffin, Licensed Florida Real Estate Broker (Fred Griffin Real Estate) over 7 years ago

Joetta - The cities have been given billions from the govt just for this purpose.  Unfortunately, by the time action is taken, many are in such bad shape they're worthless.

Lenn - Interesting how things change.

Lyn - Yes, it's been happening in Detroit for several years.

Barb - It's a mess!!

Fred - It's always the money..

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 7 years ago

Banks.....a.k.a. legalized mafia.

Supported by us, the taxpayer. Really, there are so many things wrong with that picture I truly would not know where to begin.

How about a glass of wine instead?

MyMidtownMojo.com

Posted by Thom Abbott, Midtown Atlanta GA Condos For Sale (MyMidtownMojo.com |770.713.1505 | Intown Atlanta GA Condo Living) over 7 years ago

Thom - Or a stiff drink! (Hope your new year is getting ready to blossom)

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 7 years ago

John: Seems like if the home owners weren't paying taxes someone would come in and foreclose on the tax lines and if they were in an association and not paying the dues then the assocaition could foreclose as well. I bet there is nothing in the law that would force the lender to foreclose.

Posted by Matt Grohe, Serving the metro since 2003 (RE/MAX Concepts) over 7 years ago

Excellent post, John. As Lenn points out, home owners are considered immoral for strategically choosing to not fulfill their obligation to lenders, even though it’s in their best financial interest to do so. But the banks get to play by a different set of rules, getting to walk away from problem properties. It’s an infuriating double-standard.

Posted by Bill Burchard, Broker, Realtor, Representing Buyers and Sellers (3B Realty: 951-347-3818, CA) over 7 years ago

Matt - That's right. And most would not be in any community with an association.

Bill - Double-standard indeed!

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 7 years ago

Amazing. I didn't know and appreciate the update.  I'm sure their credit isn't ruined with that decision either.  And it wasn't a good business move to approve a loan mod or short sale?!?  So this is the unintended consequnce of that, I guess.

Posted by Carla Muss-Jacobs, RETIRED (RETIRED / State License is Inactive) over 7 years ago

Lenn said it right.  I remember reading the book 1984 in which it says that to get something accepted you just change the word used for it.  So, now defaulting, even on the bank's part, is strategic.  Interesting.  Fifty years ago I wonder what the percentage of mortgages were simply walked away from, on either side?

Posted by Jay Markanich, Home Inspector - servicing all Northern Virginia (Jay Markanich Real Estate Inspections, LLC) over 7 years ago

John,

 

This is a sad state of affairs. But, I don't really think that mortgagees have this obligation to stay on and realize on their security. Certainly, they don't in Ontario.

 

Brian

Posted by Brian Madigan, LL.B., Broker (RE/MAX West Realty Inc., Brokerage (Toronto)) over 7 years ago

In every arena, we must educate ourselves and well-placed mistrust seems in order. It is a sad state of affairs.

Posted by Janice Roosevelt, OICP ABR, ePRO,Ecobroker ( Keller Williams Brandywine Valley ) over 7 years ago

Carla - While we sometimes view banks as heartless, in some instances--failure to approve short sales or modifications--they just seem stupid.

Jay - Changing the terminology is something government has been doing for years.

Brian - Yes, it's sad--sad to allow homes to deteriorate beyond use.

Janice - I agree.

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 7 years ago

Incredible. I've heard that a lot of the houses in the city limits of Detroit are being "thrown in" with block of other bank properties, because no one will buy them otherwise.

Posted by Eric Michael, Metro Detroit Real Estate Professional 734.564.1519 (Remerica Integrity, Realtors®, Northville, MI) over 7 years ago

John,

You make a good point. Just as the banks first think about the money, why can't homeowners do the same, without being labeled morally irresponsible.

Posted by Esko Kiuru over 7 years ago

Eric - Detroit is a "worst case scenario."

Esko - Seems "fair" to me.

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 7 years ago

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