Real Estate and Beyond Blog: FANNIE MAE BRINGING DOWN THE HAMMER ON STRATEGIC DEFAULTS

Harry, I agree it is an ethics matter but it will be interesting to see how an orginization like Fannie Mae decides who is capable of paying and who is not. It seems like there will be a gray area in the middle.

Ted Is the color Gray our new color? The lawyers are having fun making money

Who will be watching Fannie Mae? Fred

IDK how they are going to decide what is strategic or not.  I would gather that most are here but I couldn't give you a %.  People go underwater and say screw it.  I am six figures upside down and am staying put.

Why is it ok for businesses to make this decision but not home owners? Any takers out there

There are consequences to every action whether it is a business or a homeowner.  Everyone has a breaking point on what is worth or not worth to hang on to.

Personal choice for people-move on with life great input

I won't be the one to judge but in working short sales I can tell you that people in distress don't think clearly about the future. Saying to yourself, I can't buy a home with a mortgage for seven years is a rational thought, and distress is not rational.

Joe good point-people are in survival

Will they approve the short sale, or sit on it for eons and force the owner into foreclosure?!?  Fannie Mae is a PRIVATELY held company. It's NOT the federal government -- but she sleeps with Uncle Sam all the time.

Carla anybody share your thoughts today?

Not sure what you mean Harry.  Nobody shares my thoughts. 

Harry, I agree with your question in #5.  There is still a different standard (morally, legally, and ethically) that Main Street and Wall Street are being held to.  Until that gap is narrowed, we will continue to have real problems in this country!

Do you have a link to more details?

Kent it looks like we will be crossing that bridge pretty soon since 11 million Americans are underwater. Where are the Wall Street Whiz kids now? foreclosure? Short sale?

Can you imagine the impact on a depressed housing industry if the government begins to lock more and more potential buyers out of the market place?  These strategic default owners are normally in fairly good financial condition and trying to stop the bloodletting. 

I don't think this is an issue of double standards at all.  This is a privately held company deciding who they will and will not lend money to.  I'm not judging anyone for better or worse who makes the decision to strategically default, however walking away from a mortgage because you choose not to pay it makes you a risky borrower and, in Fannie Mae's opinion, riskier than someone who made every effort to pay and wouldn't have defaulted without a hardship. 

Will they have it all figured out--American people feel uneasy about our current President

Lori-great point. Did the American people have a choice about their mortgages being sliced and diced to be put on Wall Street?

More evidence that big business and big government are in bed together. 

The government job is to level the playing field for all.  Clearing failing and killing the small business with their action direct impacting the home owner in this case.

Small business must be able to thrive or Government will continue to crush us. Stop Government Programs that are a complete waste.

Harry ... You are in the business of doing loan mods so will probably like this Fannie Mae new concept to disallow folks from new loans after strategically walking away from the first one.

We would probably agree on lots of things. However, I believe many fundamental mistakes were made by borrowers who bought more house than they could afford, or that they were too thin with little or no equity to start with.  So these folks should now be allowed to walk away from loans that they can afford to pay unless there are consequences.

You ask the question why shouldn't a homeowner be allowed to voluntarily walk away from his mortgage?

It's my old fashioned idea that when a man signs a note, he owes that amount of money to the bank or lender.  The note does not say that the money must be repaid unless the security loses value.  The note simply says that the debtor must pay the amount owed.  The debt is not dependent upon the value of the underlying security.  So that debt should be repaid as long as the debtor can afford to make payments.

However, if the debtor is no longer able to make payments, that's another story.  Then his default on the note would not be voluntary or strategic.

Harrison-I DO NOT DO LOAN MODS-Please read my profile. Your viewpoint is very well taken on this post. We have to have a solution to bring back hope for the American home owner.

When a business decides to  short sale its assets it heirs a team of experts to come up with a plan to successful shed it self of the liabilities.  Homeowners need to do the same thing before they default.

All of this while this morning the TBWS daily update say that ALL AMERICANS should own their own home, and HUD is going to make this happen.

See the link here: http://www.thinkbigworksmall.com/mypage/tbws/

 

Mixed feelings on this one.  I have little time for those who strategically default, yet I can understand being fed up with a corrupt and greedy enterprise that is the inevitable result of the worst system known to us, besides all the others ... Capitalism.  Sorry, I like to borrow from Churchill (I believe) now and again.

That written, I believe those who stragically default should be penalized.  Then again, it has been made so difficult in getting a loan these days with the proverbial pendulum swinging to the other extreme, it makes me wonder how many "qualified" buyers will there be down the road?  I can understand the mentality of implementing such a clause and this private enterprise (using that term loosely) that is Fannie Mae has that right.  But I say that the mark of foreclosure on their credit report will be the check and balances.  In theory and I'd hope in reality, that history will remain and they'll probably pay a higher than market interest rate down the road.  Folks got greedy across the board ... not just the big guys.  If your history (and time will eventually forgive) makes you a tad more of a risk than the next chap applying for a mortgage, you'll pay accordingly.  That's underwriting, folks. 

 

When you choose the "Scarlet Letter" of default ...it is a choice, not a freedom mandate. Contracts mean something even if you don't understand them. Who's responsible? The person who signed the note. When I buy a stock (and it loses value) is it my broker's fault? But if I gain value, who's fault is it then? The sword has two edges. This is where adults have a stake in how they spend money.

Good comment, Claude. 

I understand strategic default, in your mind it is a good idea but I would think that the person knows that they can be pursued. Fannie Mae has every right to pursue them, especially since my tax dollars are bailing them out. 

I can see both sides of the arguement but I do think Fannie Mae had to do something to stem the tide of defaults.

I don't think most of these home owners are even concerned about seven years down the road, just today.

Harry

Thanks for sharing the information.

Good luck and success.

Lou Ludwig

Interseting post.  It will be interesting to see how this is handled... there are varying points of view of these strategic defaults.... and it is an interestng debate.

Can't say as I blame them. They are forgiving, sometimes huge amounts of money. Is it too much to ask that the person who is basically asking to get out of their agreement with the bank not be able to get a mortgage again for several years? They may not like renting, but at least they are not on the street. I do feel sorry for those that were taken by less than competent or honest loan persons. But there are also those that had nice little mortgages before the boom, but decided to later refinance and pull money out of their homes for an SUV, RV or other item. In reality, getting their profit up front. Now they have the RV but are upside down.

Oh well, this is one that we can find villains and victims for everywhere and I sure have no answers. But it does seem somewhat reasonable for Fannie Mae to take a step like this.

This is why strategic short sales are the best answer in most cases for those who strategically default, just saying.... Katerina

Moral issues aside, my concern has been what an avalanche of strategic defaults would do to an already battered market. This is what Fannie Mae is reacting to. They see it as a big problem for them down the road if they don't put some brakes on the trend.

I have watched several television shows where home owner flat out say that they can afford their payment but they are going to walk away form their houses- Do they understand what they are doing to their neighbors, their eceonmy, and our eceomony as an entire country?  I think 7 years is getting off easy!

I am not sure any kind of punishment is going to sway the strategic defaulters. They have their minds made up and are going to do whatever they are going to do.

It should be interesting to see how all this settles out over the next few years.  I agree with Katerina, that a short sale makes sense if this is the decision the made.

Thanks for responding Harry!  Regardless of the secondary market, you are still asking someone to borrow a large amount of money and if you aren't a credible borrrower you shouldn't be able to borrow.  Giving loans to those who didn't qualify is part of the mess we are in currently.  If you loaned $100 bucks to your friend, and they chose not to pay you back, not because they couldn't but because they didn't think it was in their best interest anymore, would you lend them money again?  I'll keep checking back for more comments on this post.  It's a great topic!

I also would be interested in the criteria to determine who can pay back their mortgage. 

Is this the same Fannie Mae that ran crooked books for years, got caught, ran insane risk models for years more (80:1 leverage?), got caught again, the second time by the market and essentially forced the government to step in so they wouldn't default on over $3 trillion in paper sold to, mostly, the Chinese.  Who is policing Fannie?

So it looks like the American people got taken at the front, in the middle and on the back end. Sweet!

http://market-ticker.denninger.net/archives/2445-Fannie-Screws-The-Citizens-Twice.html

It seems we have mixed feelings about strategic defaults. We have some people for them and some people against them. What happens at tax time? Let's keep this discussion going. Love to see more comments from around America.

Harry, I also have mixed feelings about this, I really don't have much sympathy for those to "Strategically Default"  For me its not ethical.

Just my 2 cents

t

Harry, they need to bring down the hammer on Strategic Defaults, and they need to bring it down hard.

In a consumer driven economy, how is it that the consumer keeps getting beat up?  We allow big banks to get away with anything they want and provide no relief for the consumer at all.  The tune will change when the banks realize that they need consumers back in the market place again.  I hate everything about our financial sector.

Very interesting post with lots of comments. I personally don't believe strategic default is a solution, but also know that when people are in distress, all they want is relief. After all, we are a people of instant gratification.

What is strategic about defaulting if you don't have the money to pay? 

And to piggyback Donna #42- isn't doing bad business and then going in front of congress with your hat in your hand a strategic default? 

Who the hell are they to judge? 

Harry. I believe this only applies to the folks who strategically let their house be foreclosed on. If that's the case it has always been 7 years. These strategic sellers still have the option of going through the short sale process. If they are successful then the 7 years does not apply. At least this is my understanding.

Sellers need to seek legal advice.

Yes, short sales definitely provide a super option to folks.  Not sure why more sellers do not consult a professional first before walking away or giving up.

Harry, I have my own internal debates about strategic defaults.  First off, I very much agree with Claude's statement.  We don't give back our cars or our engagement rings because they lose value right after we buy them (does anything depreciate faster than a car or jewelry?).  What or who gives a guarantee about anyone else.

And, my passion and fervent belief is that our Country, families and economy is better when more people are in their own homes, in their own neighborhoods.

On the other hand, I think the Wall Street mess and the bailouts have further eroded personal integrity in our country.  Two years ago virtually no one would think of just walking away from their home.  But the bailouts of the banks, the bonuses paid to the scoundrels (sorry) who caused the mess in the first place and the absolute, complete and total ineffectiveness of the government's programs to "help" homeowner's has propagated a "what's good for the goose is good for the gander" attitude.

Personally, I make no judgments on people who are foreclosed, short sale or decide to strategically walk away.  My "job" is not to judge but to educate, counsel and assist.

IMHO, the REAL important part of your post is in the last paragraph.  "7 out of 10........"  Sorry, perhaps I feel a little helpless to stop or thwart Fannie or the Government from doing whatever they are going to....somewhat like me riding an emotional roller coaster about rates:  I am not in control.  I am, however, in control of how I can help current and future homeowners.

If people contact real estate and mortgage professionals BEFORE the train wreck we can help them develop a strategy that will get them back in the housing market faster.  I believe "7 out of 10" foreclosed, short sale or walk away clients could qualify much faster if the process is proactive instead of reactive.

Sorry for the long post.  Note to Bryant:  Never has been 7 years.  Nope.  2 for a BK, 3 for a Foreclosure.  Now, 4 or 5....but this is a GUIDELINE....there is a "story" behind every loan and the art is in the story telling. (BK and Foreclosures are on your credit report for 10 years, not 7).

FYI - your anchored text for your name isn't hyperlinked all the way - only partial. '-)

Harry: Thanks for the info. Could you please provide the link to where you obtained this info? Thanks

http://www.twincities.com/business/ci_15362826?nclick_check=1

Here is the source. I am sure there are more articles on this subject

Let me ask you this- if you owned a homes that has lost $200,000 or more in value and you have a mortgage of $400,000 and homes around are selling for much less than your purchase your home for and your lender will not do anything unless you are in a crisis mode, I must say it gives one pause.

A homeowner has a monthly payment of $2500 a month on there mortgage  and can rent for $1000, and save $1500 a month. I can see why "Strategic Default/foreclosure" is a  attractive option.

So often I hear the word honorable mention and doing the right thing. This is a personal decision for each homeowner. So Fannie Mae & Freddie Mac want to exclude these  individuals from obtaining a loan who is to say that in seven years Fannie Mae & Freddie Mac will be around, and who to say that these guidelines may change.

So many homeowners need to seek professional advice, not just from a real estate agent.

Hi Harry,

Wow, this is brand new information for me!  I wonder how they are going to police this?

Maya

We have many different opinions on the subject today. Did the American people create this mess?

'Don't wanna' has never been a good excuse for any inaction.....I clearly remember my Father saying,,,more than once "I didn't ask you if you wanted to...."

Where's Barney Frank now? He lit the fuse on this problem and is still not being held accountable.

Harry, good for Fanny Mae.  Something needs to be done.  A strategic foreclosure is much more damaging to someone's financial future than people realize.  They will always need to check the box yes when asked have you ever been foreclosed on? 

As to your question posed in 57.  A simple and emphatic yes.  There are a lot of factors that collided, but at the end of the day, no one made a homeowner sign for a mortgage.  Somehow we have lost accountability in America.

 

 

Q: How does Fannie Mae decide on what constitutes a strategic foreclosure? 

A: ACORN will decide that.

We simply cannot relent on pressuring Congress to shut down the GSE and privatize them.  I keep calling Sen Kay Hagen's office about this and they tell me that the regulating of the GSE will take place after the Financial Services Bill passes.  They can't tell me who will be the sponsor, the timing, or anything else.  I recommend that everyone call their Congressmen and Senators and ask about when the GSE will be shut down or re-regulated.  Thanks.

It's pretty sad, that Fannie Mae is coming after homeowners and investors that are simply victims of a bad market / recession.  Yet they don't go after giant Wall Street insitutions.  Instead they give the banks a bailout.

Fannie Mae should bring down the hammer and I proud of them for taking the action!!!

I truely understand why people are doing this, it howeveer does make it right.  Just becasue you made a bad investment does not mean that you should be able to walk away with out feeling some pain.  I know that I did not sign up to pay peoples mortagas just becasue they want to get out from a home that is currently under value.  I bet they would not have given back to the sysem if they sold their home for more than what they owed on it.langsat

This post really stirs the pot on the topic. Life is not black and white- it is gray. People have to make decisions based on their situation and their future. I have no problem with people doing their homework and if they decide to walk-Ok. I also have NO problem with Fannie or any other entity deciding to issue tougher guidelines to those people. Home-ownership in not a right but something you earn.

People who decide to tough it out (and their are millions doing it) should pay lower interest rates and should have access to better programs. People don't seem to realize that just a few years ago for the first time in post war America- basically ANYBODY could have got a loan- alot of people did. I believe there will be a NEW secondary market that emerges with opportunities for people with issues. I just hope these folks are documenting their situation NOW so they can prove their case when they go to apply in the future.

 

No surprise this is popping up now after that 60 Minutes piece about a month ago. I do agree that people shouldn't be able to freely walk just because they are upside down. They agreed to borrow the money. The home was collateral, but you are still personally obligated to pay the debt. You shouldn't be able to walk away and buy in just 2 years.

I understand but how will they regulate this.  There are different circumstances and I hope there will be a review process and not just blanket rules for every case.

#22 Harrison
The repayment of a note is not contingent on the value of the underlying purchase. EXACTLY
     Mortgage NOT EQUAL To Home Value
     Car Note NOT EQUAL To Car Value (remember the old 25% depreciation when you drive it home)
     Cheeseburger Bought on Credit NOT EQUAL to credit card interest payment

#37 Shanna
This country is in a whirlwind of apathy.  So, no one cares how their actions impact their neighbors or their country.  That attitude comes from the top down & the bottom up, it's everywhere.

#42 Donna
AMEN!  This is what happens when you've got the BEAR GUARDING THE HONEY POT!

#60 Aaron
Yes, we have lost all accountability.  We no longer hold our government accountable (we are one of the LEAST POLITICALLY ACTIVE countries in the free-world), we do not hold business accountable (how many people, realtors included, still have accounts with BoA, Citi, Chase, etc). and heaven knows that we do not hold ourselves or our children accountable.  Personal responsibility goes much further than just deciding whether or not you are going to pay your mortgage. 

Did the private citizen create the mess...they consented by inaction & they participated to satisfy their own selfish desires.

#61 Gerard
I recommend that in November we all vote out whoever is the incumbent.  It's time for term limits & if we cannot get a Constitutional Amendment, we have the power of enforcing them ourselves.

It had to happen at some point.

Fannie has a right and obligation to protect themselves. They have an obligation to taxpayers too, who are bearing the cost of the bailout. If people want to walk away from a contract, the they can rent for seven years and save up for a better loan next time around.

Maybe the government should get out of the lending business. In many ways I'm regretting the bailout for Bank of America more than ever as they seem to have actually gotten worse. A little off topic I know....

So in most states banks have options to file a deficiency judgment. Perhaps if the banks starting enforcing their options on the strategic defaults it would help reduce them. I just don't excessive punishment on the true hardship cases. Who decides? Why should it be the government? Why shouldn't it be the lien holder? For that matter, why shouldn't the banks be allowed who they opt to lend money to? I'm for less government involvement and more bank involvement. The only problem there is they have already proved they are completely inept at running a business.

So if houses go up, we take the money and spend it like there is no tomorrow. It is OUR GAIN.

But if the house goes down, we walk away and let the big bad banks take the fall. It is not OUR LOSS, because it is not our fault, banks are bad, the economy sucks etc, etc, etc.

There are very bad consequences that will come down the pipe if this situation continues to exist, no matter how you feel about the morality of it all.

Would anyone buy a house if the bank could take all of the appreciation, and yet you were on the hook if the house went underwater?

I'm just saying...banks will not continue to lend if they are in this unfavorable position

 

Another sign that "The American Dream" will be just that...a dream for all these new "Renters"

I think most homeowners realize there will be consequences to strategic default. That's why they are going to buy new cars before walking away.

I feel for the poor homeowner who purchases a home with a 30 year fixed rate Fannie Mae backed mortgage who does absolutely nothing wrong and then decides 3 years later that they would like to sell but can't because they are $200,000 in the hole. Why are they in the hole? Because the lending industry ignored the risks, made incredibly poor lending decisions all in a regulatory environment that says anything goes. Perhaps the lenders should be sued by homeowners who have experienced losses as a direct result of the lending industries business practices. The real problem with stretegic default is that the housing industry suffers more without some preventative measures but lets all remember that the lending industry and our governement are the causes of this disaster.

In my opinion, this is not a new thing. It's only the 1st time we've seen it in our lifespan. Home prices fell dramatically in the 1st half of last century... some areas not seeing appreciation for close to 50 years. What is different is the people. Now, we the people are more focused on money than life. Life is not all about getting ahead monetarily. Some lessons have to be learned the hard way. We just may be in another long trough of stagnation and those who walk away when capable of paying are just throwing more fuel into the furnace. They don't think they are hurting anyone when in fact they are hurting everyone.

How did Betty Davis' famous line go? Fasten your seat belts. it's going to be a bumpy night?

Call me old fashioned but I was brought up to be responsible for my actions.  I have had to face some very tough situations that were definitely not favorable for me but I made adjustments and moved forward.  Remember these are not people, in general, that can't make their payment for any particular reason they are just way underwater and CHOOSE not to pay their mortgage payment.  I understand that it may take people 10 years or more to get back above water but you have to live somewhere so why not look at it as renting a place?  I have never been accused of being politically correct so I will say it... A strategic default is unethical, immoral and anything but strategic.  Now, that being said, there are very limited cases where some very extenuating circumstances make this the right decision....I may be old fashioned but I do have a heart.

Bill Burnett
President
Virginia Assn. of Mortgage Brokers

Harry, you asked "Why is it ok for businesses to make this decision but not home owners? Any takers out there"

You are mixing apples and oranges.  Your blog was about a person that can afford the payments but walks away.

A company cannot  walk away from its debt if it can pay it.  It must declare bankruptcy, sell all company assets and distribute the proceeds to everyone it owes.  This is all done under court supervision.

If a company does not do this they will be sued and they will owe that judgement.

If a homeowner would like to do this they can.  But it will only get approved if they homeowner can't afford the payments.

Of course that was not what your blog was about.

 

 

 

 

#67 Jeff:  AMEN!  There is some legal theory (note:  I am not a lawyer) floating around that the note is still good as long as the term regardless if the collateral exists.  When I first heard that theory bounced around my jaw dropped.  How many people are going to be in shock 20 years after a foreclosure if these theories play out?

People are amazed that we can no longer lend money to a ham sandwich and that is because banks are basing their lending decisions on RISK.  Every time a foreclosure happens, there is a new risk profile.

I just spent an hour reading responses at Huffington Post.  People are outraged and are blaming the big banks and calling them fraudsters.

My question is if people really believe they were duped by the banks and are using that as a rationale for a strategic default why are they even outraged that they won't be able to borrow money from these "fraudsters" in 7 years?

I am seriously amused at the lack of rational thought.

I'm not sure I understand why the reason for defaulting makes a difference. If you default, you default. Does your credit report take into consideration your reasons for not paying a debt? Illness, loss of income, divorce, or just deciding it's no longer worth it to pay? I heard a story the other day about a homeowner in New Jersey who's property taxes just went from $12,000 to $24,000 a year. Now that's a reason to walk away. It's hard for people today to honor commitments when they see the corruption and lack of consequences for bad decisions in government agencies and large corporations.

Lets give these poor upside-down homeowners another option. Lets first free up the debt and then sell their home. That way they can still make some money and move on with their lives.

If you let your crying kids get away with stealing, they will expect to get away with robbery when they grow up. Strategic defaults should be perused with full force, otherwise why should anyone follow the laws?

Lorraine or Loretta Kratz-Certified Negotiation Experts, (#55) have it right. Trading a $2500 mortgage payment for a comparable home that rents for $1000 should be a no-brainer for parents who want to provide for their children's college, or for their own parents' care and comfort in retirement, or for their own retirement, or for paying for the necessities of day-to-day living. Who else is going to step up and undertake such responsibilities?

 

Want to call it strategic? Maybe it is "strategy", but life is full of economic choices, and no one is infallible. The so-called "downside" -- that someone refusing to repay a bank's underwater mortgage at the expense of their family's financial well-being and security -- will "cost" these families the ability to do business with these same banks in the future, is clearly the product of someone's delusion! Lenders will lend, or not lend, based on their perception of potential profit, not upon what someone else lost in the past. The recent bubble, fueled by the very loans now in default, stands as irrefutable proof of this reality. Last time I looked, $700 billion of the lenders' "mistakes" were covered by the U.S. taxpayers. Yet no such breaks to those taxpayers whose books, likewise, don't balance?

 

Or maybe it's well-placed, professionally crafted propoganda. The fact that this issue is even being debated speaks to the success of the financial lobby to get right-thinking people to do wrong-headed things. Personal responsibility? What if this propoganda translates to "screw your family -- pay us banks instead!" Would there be so many proponents of "personal responsibility" if that is the real message?

 

See my blog for the latest academic studies on this important issue -- walking away.

http://ab149.blogspot.com/

I work for several Big Banks lending department. They are not working with good ethics as well. Working with REO properties, many have been damaged by owners losing there homes, while others by theft. The FHA started making sure that the homes met HQS/UPCS standards. They would send inspectors to these properties and appraiser that would not mention HVAC system stolen, the damage to these homes. Electrical, structral issue from improper building mistakes the muncicipality inspectors did not catch. The consumer in the buying market now really needs to have these home inspected. REO propertys are excluded fron disclosure laws and many are buying into serious issues.

 

 

Prepare to see a massive spike in bankruptcy filings.

I think you should not be able to get a new mortgage until you pay back your first one.  Pretty simple concept.

Just wondering, I thought AZ did not allow the deficiency judgment on foreclosures??

For many out here in Vegas, a short sale is a form of strategic default.  I will be very interested in seeing the 2,000 page document that defines "strategic default". 

I have a buddy with three kids to put through college and an underwater home to the tune of $400,000.  He's lost everything in real estate.  Used to be a multi-millionaire and now just has his job - a good job with strong six figure income.  Now he has negative net worth. 

So banks won't work with him.  His only choice (if he wants to be able to send his kids to school) is to default and try to get the loan re-structured (good luck) or move out and send the keys back in the mail because the banks refuse to work with him. 

This is exactly the kind of person you want in the home market sooner than later.  These are people doing what they have to do for economic survival and doing drastic things to do important things for their family. 

Another example of the government cutting off their nose to spite your face.  

I can't wait to see the "Strategic Default" police at FNMA and the lawsuits that will create in the future.   Especially if they make the law "retro-active".  Does anybody really blame people for giving up and mailing the keys back to the bank in this economy?  

Maybe in other parts of the country that haven't seen a 60% depreciation in their homes and a 90% depreciation in their land holdings aren't at this stage yet.  For many in Vegas, the towel has been thrown in and you are just going to prevent the housing market from recovering sooner with these kinds of retribution-oriented policies. 

Harry... The pendulum will swing the other way, people need to stay put and realize that if they keep paying the mortgage and once the market comes back they will NOT be upside down any more.

If you blame Congress for the mess and then ask for Congress to fix the mess, you are delusional.

If you want to stabilize housing, you'd want more--not less--penalty to those who do default.  Whether strategic or unfortunate, what you want is a system of penalties that disincent default.

The goal in fixing an economic crisis is to prevent the next incremental "strategic" default from making that choice.  In turn, you support housing which helps the unfortunate families that are always the anecdotes given immediately before a really crappy idea.

Please don't tell Congress to "fix this."  They can't. 

I have a feeling these "smart" homeowners are willing to meet them in court. By that time,  these borrowers should have enough saved up money to pay for an attorney and plenty more to pay for another home, possibly cash.

How can you turn down a borrower in the future with more than 20% down, stable job?

Thanks for keeping me up to date Harry. Good Post!

I love how some of you state that these buyers have no ethics and morals, yet big banks have been doing this for many years. They got into the mortgage business out of greed, they knew there was money to be made on sub-prime loans and even relaxed the lending with special financing such as the  "No Doc" loan. Yet when they got caught in the firestorm of the mortgage meltdown, they cried foul and got bailed out. So for the greed that was invloved, it is ok for the banks to bailed out? Yet when a homeowner is faced with a $2500 mortgage on a $400,000 loan when the property is valued at $200,000, the buyer has no ethics or morals for walking away from this?

Excellent Post. It sounds like it could be somewhat subjective as to which are strategic and which are not.

 I just met with customers this morning, they're trying to do the right thing.  Up side down by $50,000-70,000 depending on sales price.  They don't want to bring this much to the table.  Still paying their mortgage.  No hardship except they want to reduce their commute.   Asked about rent but with a mortgage payment of $1500 and possible rent income of $1200-1300, again in the hole.  Any suggestions.  It's a VA backed loan not Fannie Mae.  Thanks Margaret C.  

Sorry if this appears twice I wasn't sure if it submitted the first time

Wow, what a diversity of opinions! Confirms that we are all different even though we may all be Realtor's. Keep up the debate. My take is that many people bought for the wrong reasons in the first place! Neither Greed ( I am going to get or live rich!) nor Fear (If I do not buy now I may never be able to in the future) is a sound reason for buying a home! My 37 years experience have allowed me to go through many market sways... up and down and even dead. Some properties I sold 20-30 years ago are now worth about what they paid back then. Sad!

It should be a life time ban. If you walked away from a mortgage you could pay and I was the party taking the hit, I would respect your decision but go after your heirs for the deficiency.

People can make any decision they want, they just have to pay for it. And quite frankly I think seven years is way to short of time before the party taking the hit will guarantee another loan for them, with my money....absolutely ridiculous.

Welcome to the new American, land of no-accountability and entitlement.

 

Everyone needs to stand for something, pretty sad some people stand for leaving others with the bill and playing victim.

 

Harry, let's be careful.

You say, "People on Wall Street continue to receive big bonuses at Christmas time and the American home owner is losing their home. Where is the balance? Who is monitoring Wall Street?"   Wall Street bonuses are not the reason for the market failure.  Private industry bonuses are not the problem here. Are you suggesting the government take over Wall Street and give the bonuses as they see fit to whomever they see fit?  Fannie and Freddie are gov't owned by the taxpayer.  Having Fannie decide who is doing a strategic default or not is a terrible idea that will bring forth lawsuits.  So yes, attorneys will continue to make big bucks. However, this is no solution to an already terrible loan modification and short sale process.  We have processed over 1,000 short sales and about 800 loan modifications.  This will only create more divide between the homeowner and the banks.  This is not a good thing.  As bad as it is for homeowners to orchestrate a strategic default. it is far worse for Fannie Governemtn Mae to decide who, in fact, is actually doing this.  This will not be pretty.

Harry, I think the key to the Fannie Mae announcement is the guidelines for "extenuating circumstances". According to the latest government figures 60.3% of the families that applied for the government loan modification program, the hardship was due to loss of income. Their decision won't be based on ethics but finances.

Proving your "hardship" was due to circumstances beyond your control has ALWAYS been a part of underwriting guidelines. In the past a well written letter of explanation would do the trick. Don't think that will "float the boat" going forward.

Lenders will require documentation that in fact "extenuating circumstances" did exist, so I would recommend advising your clients to keep all the documentation that applies to their hardship. Without it, lenders will be forced to treat it as "strategic".

In the current environment, lenders are always going to err on the side of caution when determining hardship and does anyone believe it's going to get easier?

 

Please our Government and system pretty much makes us foot the bills for Financial Meltdowns that happen because there is no-accountability and entitlement.

@ Greg Cook

Thank you for the clarifications!! Much appreciated...

Awesome post #97, I agree 100%.  Nice try #94 but blaming the banks is ridiculous.  Neither the banks or the homeowners should be bailed out.  That leads back to the core of this debate, everyone including the banks need to be responsible for their decisions and actions.  Banks should be allowed to fail and suffer the consequences just like these homeowners who will have to wait at least 7 years to get back into the market.

Bill Burnett
President
Virginia Assn. of Mortgage Brokers

What an impressive post.   The only way Fannie Mae can regulate this is if they can get the borrowers Income and Tax returns with a pulled credit and look at the ratio's at the time they walked away.  Similar to when they qualified for the loan.  If you have a loan that is $400,000 and the home is worth $200,000.  Some consideration needs to be made for waiting out the low period.  The house will go back up so why are you moving?  If you have too, and you don't have that difference than how can Fannie Mae call it a strategic move?  In most cases when you walk away and take a short sale, Fannie Mae, or any bank for that matter, with a little due dillagence only needs to see the final HUD on the sale of the previous home, they can than see if the amount on the previous loan was paid in full.  This is already happening today.  So the new lender will see the previous home was a short sale and it will be treated the same as a foreclosure.  So in many cases already the borrower trying to walk away from their current home will find it difficult to get a new one.  For those that are walking away and renting, again the lender at the time of accepting a short sale would require that the sellers provide "letter of hardship" which would include income documentation.  Using the same concept for qualifying for the loan, can the sellers afford to stay?

 

comments posted here do not necessarily reflect those of WR Starkey Mtg.

According to Brian Buffini we will be in a housing shortage in 18 months. If he is correct and he based this on some statistics about the lack of building going on the number of Echo boomers  etc.. If the  homeowners could hang on for about 2 years I think the values will return. The competition will be strong and we will see a rise in values again. Statistically the value of homes and glut on the market of houses has been at the beginning of every decade throughout the last three decades that I have been in the business. A friend of mine actually did a spread sheet on it and kept track of it. He sais it goes way back in the history of Real estate. By the middle of the decade we have a balanced market and at the end the sellers have the control. Review your history its very cyclical.

It is what it is. Purchasing a home is not only about the American dream; it is an investment move. And when an investment fails, one has to make a decision, painful as it may be. Pointing fingers does not help. You just do it, and feel relieved that you did. Who would want to continue making payments on what is now a failed investment. If Fannie Mae chooses to penalize the seller, again, you face the penalty in 7 years. You cross the bridge when you get there.

Jane Pacheco

I personally wouldn't consider the strategic default option. I think some people are looking at it in a very short sighted way...as in a quick way to get out of a bad situation now, but what about the future? I like to plan ahead. And will that upside homeowner stay upside forever? Not likely. Seven years is a long time to wait to buy home...and that is if the rules stay the same. I know the laws and contracts in Colorado are changing all the time.

Fannie Mae is also only one lender option that is being taken off the plate for these strategic defaulters, and who knows if they will even be around in 7 years. Nothing is static.

Now that we are creating a whole new class of people that can't buy a house for 2 to 7 years, will the banks respond with new programs just to get these people in homes sooner??? Who knows what's going to happen. There is no answer, because we can't predict what's going to happen in the future.

I do think it's a shame that strategic default is an option, because it's making a bad situation even worse. With all the foreclosures and short sales we are experiencing in my area...we have really seen property values fall. Not to mention the obvious like displaced families that don't have and now can't afford a place to live. In one city we have families living in their cars. It breaks my heart. I"m sure these people would love to be a position where they could have voluntarily walked away from their homes.

I don't know how big a deal this is to the homeowner, because a foreclosure is generally matched by credit problems and with the qualifications the way they are, I think many people will just rent and wait out the 7 years anyway.

Bill of post #103 in perfect world responsible parties would not be bailed out, but who got bailed out? While I agree that all should be responsible, that wasn't the case when the mortgage meltdown happened. Banks asked for a bailout after they "made a mistake" with their investments. While the post #94 may seem ridiculous to you, it is not without merit that the banks received preferential treatment.

I find it kind of interesting that this has gone from a well written post to a bash the government, bash the banks, blame it on Obama (because I know everyone had so much confidence in Bush), bash who ever we can forum.

I think there is one important issue that is never brought to light when we talk about residential foreclosures.  Compare the impending doom forecast by many in the commercial real estate world, there is a general consensus that things might not be as bad as people thought and there is not going to be any explosion of the commercial markets. 

The biggest difference is the most banks actively sought to work out a solution with the borrower.  The banks have been able to minimize, legal and general expenses as well as keep losses smaller then they would have been.  Hmm, lets see how it works for folks in IL, miss three payments, your heading into foreclosure, try to call the bank and work with them, GOOD LUCK!.  The banks I have dealt with basically said we will keep the process going regardless of any attempt you are doing to work with us.  Have a short sale offer, we don't care, we're selling the house.  If the banks had actively tried to work with customers in trouble and figured out solutions with them this whole mess could have been a lot less. 

Until next time

remeber this time,

 

John Ziemba

 

 

As so many have noted here, it really comes down to the definition of "hardship" in determining whether a homeowner's action are acceptable or not according to Fannie Mae.  I agree that it's a legal can of worms that will be difficult to enforce, particularly in light of banking and Wall Street shenanigans.

But what does constitute an acceptable "hardship?" Illness?  Loss of a job?  Reduced income due to the recession?  An ARM resetting?  Not wanting to forego a child's college tuition?  Baby Boomers whose 401K's have been decimated?  There doesn't seem to be a standard criteria, so it probably depends on who within Fannie Mae you are talking to, or how good your lawyer is.

Is it just me or does this seem like a vindictive action by Fannie Mae that has not been thought out?  But why would that surprise anyone...

I'm glad to see that they are doing something to address the issue.  However, I don't think it is near enough.  "Can but won't" is a totally different situation than "Can't but wants to".

 

I personally think it is the disconnect between Wall Street and Main Street that is causing the strategic defaults.  Businesses bail out of bad real estate investments all the time and continue to be able to borrow money.  Homeowners were told by the media, financial advisors, and government that homeownership is the foundation of building wealth.  You start with owning your own home then you build up an investment portfolio and save for retirement.  Home values and stock values plummeted at the same time wiping out assets that people depended upon for retirement. 

If a homeowner decides to act like a business, then they have to weigh the likelihood of recouping the equity lost in their home through price appreciation over the life of the loan vs. renting.  They may also have lost a good part of their nest egg and emergency funds during the Great Recession and feel that the $1,000 a month apartment makes more financial sense than the $3,000 a month cost of homeownership, so they can build up a nest egg again and save for retirement.

Thank you for the link to the article, I hope you report the details as you learn more about Fannie Mae's guidelines for a "good faith effort" or "extenuating circumstances."

Homeowners need to make financial decisions based on factual data just like businesses.  Why does Wall Street get to play by different rules than Main Street?  A lot of people are questioning that logic.  it just doesn't add up.

Makes sense...

I am still of the opinion that the "strategy" in strategic default is dependent on the property, the borrower/investor, and circumstances none of us are aware of. As for Fannie, their bureaucracy is too large to solve any of this!

A lot of these folks are older and are not concerned about their future credit situation. They don't have enough time to start over so they just want to cut their losses and stop the bleeding. They are more concerned with keeping what they do have ( other than their houses) and surviving the best they can and really aren't thinking of buying another house someday. It's unpleasant but it's true.

Very conflicted on this. Yes, there are some homeowners who could pay,
but most cannot. The prior ruins it for the latter. The banks and some other
unscrupulous characters are responsible for getting many of these people in this situation
(it amazaes me how many people actually did not notice that they were making
more than they really were in loan docs-they just trusted someone), so in retrospect
I understand the screw the banks sentiment, but on the other hand, it is a business,
and businesses have been known to go under-especially when we aren't there to
assist!

Amen, Bob and Bonnie; it is going (to continue) to be a bumpy ride!

Great Post, I saw this coming a long ways back when the topic first arose.  I also smell another dip in the market due to this action coming down the line.  I just hope people make wiser choices in the future, and learn from all of this mess.  I've met so many broken people over the last year, and it would be good to see more smiles, and grins once again.

 

Good luck to all of you, see you at the closing table!

Brent Laugesen, Realtor 727-735-1510

Clearwater Beach FL.  http://www.Clearwaterbeachwaterfronthomes.com

 

This debate goes round and round. As we somtimes say when we haven't a clue "time will tell."

One comparison that we hear often is as written by Claude (#27 above)    "When I buy a stock (and it loses value) is it my broker's fault? But if I gains value, who's fault is it then?"

I believe that this is a very weak analogy. Note that when you own stock you normally own it outright -- that is with no loan against it. So you take the hit 100% when it goes down, or you keep the gain when it goes up.  This is the exact same thing that happens with your house IF YOU HAVE NO LOAN AGAINST IT.

But if you have a loan against it, the stock broker has the right to sell it without consulting you or filing any papers. You might get a margin call but you either contribute more money immediately or the stock gets sold for whatever price the floor specialist is willing to buy it for.

Can you imagine the uproar that would be generated if the banks were allowed to do this to homeowners?

I will not judge those who make the decision for a strategic default, but I don't think I could do it myself.  I hated renting when I first moved out of my parent's home.  I couldn't wait to buy my own place.  Fortunately, almost every time I moved, the value went up.  I just sold my home and took a loss, but I got a great deal on a foreclosure that will be like new when we move in.

If I could afford my mortgage and knew the consequences of walking away, I think I would ride it out.  My grandparents lived in the same house for around 50 years.  My parents moved once during my childhood and once again when retiring. 

But today we are a transient society.  If we decide we now don't want to commute anymore and our house isn't worth what we paid, we can walk away.  House is too small (or too big) and not worth what we paid, we can just walk away.

Some of today's home owners are like teenagers that are living only in the present (and I'm talking only about strategic defaults where they can make their payments).  They're not happy - they walk away.

Not only would I hate to have to rent for any length of time, I would never be able to sleep wondering if and when they'd come after me for the default.  If I'm not suffering financially with the exception that it was a bad investment, then I'd expect to suffer for my decision to just walk away from my mortgage.  I hope these people truly understand what might be waiting for them in the future.

 

Thomas #119 - The banks, in a round about fashion do this forced liquidation - it's called foreclosure.  Your "margin" call is when you stop making the payments, and then the Notice of Default is filed with the monetary requirements to bring your loan current. If you bring it current, no problem.  If you don't, you're relieved of your asset.

What will be interesting is how FNMA handles all their bad debt - whether it's strategic debt or not.  Will they sell the debt to the highest bidder collection company?  Will the defaulted debt haunt borrowers the rest of their life?  Depending on what happens, this can impact purchasing power for far longer than 2 or 5 or 7 years.

 

The blame game will never go away when justifying one's actions!  Chances are;  The way things are going, Fannie and Freddie won't even be around in 7 years to worry about it!!!  More Smoke and mirrors, bubbles and band aids for years to come.  Instead of worrying about a few Strategic Defaults, they should be more concerned about all the Buyer Fraud cases on the books, that are starting to grow exponentially.

 

hehe Kewl, more people who can't buy homes!

After Financial Reform Passes, with the new FHA Rules:

Maybe the People who are left - who can qualify to buy, could start a club or their own Fan Page or something!

I have many clients who are thinking about letting go, but they are having me do all I can to save it before that happens. I see others just moving in the middle of the night and not caring less. It is sad for sure.

Took them two plus years to figure this out???? By the time they get going there'll be another news story in the horizon.

I am for either side.  On one hand I can see the logic of strategically walking away from your mortgage loan due to being upside down and with no equity in sight.  Who really wants to pay for something that is losing value than gaining value? 

There were many buyers who were sold on a game plan prior to purchasing their home.  Buy it now because the interest rates are good, the home price is favorable, the lender is offering you ZERO DOWN, STATED INCOME and STATED ASSETS and all you need is a good credit score and a pulse and you can get that $500,000 home and only pay interest for 5-years and then you can refinance after that for maybe a lower interest rate and get the fixed rate mortgage plan or sell your house for a nice profit and then buy something bigger and better?  Sure my hired real estate agent...I'll get prequalified and buy that house from you.  Thank you for referring me to that lender with the magic loan program.  For without thier help there would be no way I could have got this house.  They worked miracles with the numbers and made it look like I made MORE money then I actually did.  I didn't have enough cash for the closing costs because all of my assets are tied up in IRA's and CD's but they said I could finance that into the mortgage and didn't need to touch any of my retirement money as they only needed the amounts to get me this loan so I wouldn't have to worry about it and because it's part of the mortgage payments I can possibly get a tax break on that but I'll need to check with my tax guy to be sure.  You're such a wonderful agent and I am so happy you're looking out for me.  I'll definitely refer all of my family and friends to you when they're ready to buy or sell their home. 

Now my fellow AR family.  Doesn't this sound familiar?  Do you recall one of your clients undergoing this very scenario many years back when the market was great and we all were doing very well both business-wise and financially?  Life was good.  We were selling homes, our lenders kept pushing their NO DOWN, STATED INCOME/STATED ASSETS loan program and we all were selling houses so fast that developers had a hard time keeping up with us.  Homes were being sold months before they were ever close to being built.  It was crazy.  But now, things have changed.  The market, home values and homeowner's feelings about their homes.  They were sold on the American Dream but this dream was also marketed to people who really couldn't afford their dream home.  But led to believe they could.  Comment #60, Aaron said that "No one made a homeowner sign for a mortgage" which is true.  No One MADE them do that.  But the lenders and their aggressive loan programs sure made it easy for people to qualify for a loan and in doing so, sold it as if it was a no brainer to NOT do it.  In essence, the lender didn't physically force them to sign the note but if you think about it, they went as far as to hand them one of their pens at loan closing and watched them sign off on a mortgage loan. 

We shouldn't feel those who are strategically walking away are bad people regardless of their financial health.  It's their home and are free to do whatever they want with it.  We can judge, critique and comment about this but remember, some of these defaulters were sold their homes by one of us, a Realtor.  How many of us turned away buyers because our referred lender told us that their qualifying was tight?  How many Realtors used to call the appraiser and tell them that we needed a certain value to make the deal work?  How many of us gave up some of our commissions to help our buyer client come up with the money they needed to make the deal happen?  There were numerous changes within our own world and how we do business now so we are just as much to blame than the homeowner and the lenders.  Sad to say that there are Realtors who did not play fairly or were just out to get paid and didn't care if their cilents could or could not afford their purchase.  It was close the deal and move on to the next.  The more you sold, the more you got recognized, the more awards you won and the more money you made.  And now, when the market is bad, homeowner's are struggling and those who aren't are being held to the muddy waters. 

As much as we may despise those who seem to be able to pay their mortgages but walk away from it without a care or worry about everyone else, we also need to remember they may be our clients one day in the not so near future.  They're still a source of referrals for future business.  Just because they've got issues doesn't mean those in their circle are in the same situation.  So, at a time in our careers where we NEED TO FILL UP OUR REFERRAL PIPELINE so that we can continue our profession we should be empathetic and unbiased regardless of how we feel. 

Good post, good thoughts, but when the high paid people who walk can't buy what will happen to the Realtors who cater to that group for the next 7 years?

If I'm living in my home paying my bills, including a $300,000 mortgage, and the value drops to $1 I guess that would make me underwater.  Why do I need to leave?

Good controversal post. I feel each to his own and move on!....There is a multitude of people in pain emotionally, financially, etc. etc. etc. etc.

There is no reason to do a strategic default! When these folks bought their homes they agreed to make payments based on the purchase price of the home and the market conditions at the time. Where is responsibility and ethics.

How does doing this teach our children the right thing to do? If I change my mind about something I just walk away... NO!!@!! Live up to your responsibilities!!!!! They made their bed and now they don't want to lay in it!

In "CrisiS", Rational & Irrational, theres never one.....far behind the other!

signed: N. SANE....(lol)!!

I'm sure someone mentioned this in this thread somewhere, "Fannie Mae" is not a privately held company.  It is 80% owned the the federal government, which last time I checked was all of us.  As with AIG, GM, Chrysler, Fannie, Freddie and Citi Corp. just off the top of my head, all are failing or already BK and all are majority owned by the federal government. 

Are you tired of the socialist experiment yet?  Europe is!

It seems this has become a popular topic in ActiveRain. We have many different opinions when it comes to strategic bailouts. Looking for more solutions

Wow, what a response to this issue.  I love this country, but  greedy Wall Street has raped the middle class.  I mean how much money did a few execs put away a few years ago and keep getting bonus after bonus.  This country needs to restore the middle class, it's the engine that drives our economy.  Maybe I'm off subject a bit, but to me Wall Street and our government put the average Joe Blow in this situation.  Yes, they have a contract(commitment) to pay thier loan, but these people are looking out for their own well being.  The government bailed out banks, car companies, big business, etc., how about the average Joe? 

Average Joe Blow used the equity in his house for a spending spree.  That's why average Joe Blow is in his situation today.

Harry,

As strategic default seems to be gaining momentum, lenders are taking action trying to combat its further spread. It's hard to determine right now what will work and what won't.

I know the lawyers are gearing up to go after people in three or more years. Be ready for them. Bankruptcies will be at their highest.

This is an extremely troubling development.  I just had a counseling session with a client who applied for a loan modification and was turned down.  She makes $35k a year and her house payment, left to her by her ex-husband, is $60k a year.  The lender said she made too much money for a loan modification.

Now this.  We're screwed.

The minute the banks received a slap on the wrist, I saw this coming. A lot of people are not going to stand by and take this while the banks got away with billions, asked for more, and actually received it.

I do not agree with walking away from a mortgage you promised to pay when there wasn't a clause that allowed you to walk when the value drops. If it there is proof you can pay; you should. And yes, under those circumstances, I agree with Fannie Mae. Two wrongs don't make a right. Your promise to pay is separate from the fault of the banks.

Dennis:  Are you sure that was the case and did you confirm that with bank?  They DENY loan mods because people make too little.  It's like re-qualifying for a loan.

WOW--So many great posts here. I personally know of a few people who are doing the strategic default thing and they know exactly what they are doing. They not only can afford the payments they could pay off the whole mortgage and not skip a beat--these a investment homes and it just interferes with their lifestyle and they don't want to do it anymore. I have no sympathy for these folks. Another one is trying to do a short sale on a rental, same good finances. Something missing here??--How can they do a short sale when there is no hardship, that's easy, just create one by hiding assets, not including income on the income statements, etc., They are working harder trying to commit fraud against the lender than they ever did in their working careers. As you can tell, I'm totally infuriated with people like this--OH--I forgot, it's all the bank's fault not theirs. It's about time for Fannie Mae--I say go after them.  I get so tired of interviewing prospective short sale sellers and them asking me how they can hide the money from the bank

If the banks had step and did the right thing people would not be in the situation that they are in now. If they had begin to refinance the loan and lowered the interest rate at the beginning When things started getting out of hand. They could have stop the bleeding. The CEO's of these banks need to be ashame of themselves when so many people are suffering because of their greed. Need to pray because it may get even worst before it's better. Unfortunately know one knows how long it will be before this housing market will really turn around and the prices of these home will start getting back where homeowners will see that it is profitable to keep their homes.

I am a Real Estate Agent AND a Property Manager for a large national company. Lately we've seen quite a few applicants coming to us that are going through foreclosure. I think many people who are in the midst of a foreclosure, whether strategic or otherwise, know that they can rent for as long as needed to "get back on their feet". Even though home ownership has always been looked at as "the American Dream", renting really isn't all that bad!  And, in our market, there are some great rental rates out there -- far less than a mortgage (and someone else will take care of the maintenance and repairs, saving them even more money!)

378 Bill,  I couldn't agree more.  I guess having moral integrity these days is considered "old fashioned values".  How sad.

It seems we have some people against it and some people for it. We will see what happens over time.

Businesses are there to make a profit! Banks have to make a profit! YOU have to make a profit! If the Broker you work for does not make a profit from your split, then he's out of business and you'll find yourself looking for another broker! In other words, if your expenses are greater than your income, you're BROKE!

Profit is what drives this world, even the Communist Chinese discovered this decades ago. Without profit, any economy will collapse. Look at the socialist countries in Europe. They are all broke because they were driven by the whacko leftist socialists who thought they had a right to everything without working for it! Pretty soon when everyone takes and nobody gives, something has to break.

If you bought a car 5 years ago and borrowed $40k to purchase it, and today you got into an accident and totalled the car, and you didn't have collision insurance, would you quit making payments to the bank? The loan you got for the car has nothing to do with the value of the car! It was used as collateral in case you defaulted, they repossesed the car. Just because it's now worth less doesn't mean you stop making payments for the car loan.

The loan you made to buy the house has nothing to do with the value of the house and the contract you signed with the lender! The house is used as collateral, and if the house burns down and you have no insurance, you still owe the money you borrowed from the bank!

Everyone assumes the house and the loan are married. The loan is to you not to the house. You owe the money to the bank! It's your tough luck that it's now worth less than the balance of the loan!

Suppose you bought a house in 2003 for $250k and in 2006 the value increased to $500k. What would you do if the bank said now that the house is worth more than when you got the loan, we want you to increase the loan amount to maintain 80% equity. In other words, they want you to now owe the bank $400k. I think this is only fair, since when the value goes down, you want to pay less (loan mod).

If you buy stocks on margin and the value goes down, I've had margin calls often and if I couldn't come up with the extra cash, they automatically sold the stock. Maybe this would work also for real estate! If the value of the house goes down $50k, maybe the owner should be forced to come up with $50k cash to offset the value of the collateral. If the owner can't, the bank would sell the house to get their cash. At least the way it's structured now, they are letting you stay in the house.

Also everyone fogets that over time, most all real estate appreciates. If the borrower waits 5, 10, 15 years, the equity will return and they are still homeowners.

Also most everyone forgets why we are in this situation. Our fair minded government under both Clinton and Bush decided that everyone should have a house, whether they can afford it or not! They forced the banks to lend to people who obviously could not afford the payments. They created the "SISA" model: Stated Income, Stated Assets subprime loan. I sold many homes to contractors and people who had no jobs! The lender placed a finger on their wrist, and said you've got a pulse, you are now qualified for a $500k loan!

So don't blame the banks for this mess! They were forced (yes forced) to loan money to unqualified borrowers, or they would not get fed funds.

I think everyone knows how I feel about this situation. This is what happens when your government said: "Trust me, we're here to help you".

 

Hi Harry - I have written an article about strategic mortgage defaults over at my wordpress blog. I would love to have you drop by and post a comment:)

One cannot blame another for making important business decisions about an INVESTMENT that they made. The bank took a risk to lend and they said that should this risk not pay off, we will take back our collateral. This is not about ethics, as the banks would want you to believe people. It's not! They are just trying to scare you into not exercising your legal rights. Come on now! You're on big corporates side here?! Seriously??? Someday if you're faced with a decision to be made that will affect your income and assets for YEARS, trust me this, Tull walk away so fast your head will spin. Don't believe me? We will see.... Investments are business decisions, not emotional ones. If an investment isn't paying off, staying in them isn't just stupid, it's just plain ignorant. Good luck with that...

Is it ethical to walk away and give back the asset to the bank?

Kurtis (#149) - I agree that it's not an ethical decision - it is a personal business/financial decision to walk away even if you can afford payments.  I've received different answers to and don't know the truth about if you do this is in deficiency states, will they come back after you?  Is there a statute of limitations?  How long will strategic defaulters have to be looking over their shoulders?

Thanks for another informative post this week. Have a great day.

Harry, I started to read all the way through the comments but will have to come back later and finish. This is such a great post, very thought provoking!  The views expressed in this comment are mine and in no way reflect on anyone else, I take full responsibility for what I am about to type. 

I am bothered to my core by the term Strategic default, I think it is disgusting when people think that it is ok to have others cover for their decisions, if they can afford to pay then do it. They signed a contract, freely and without coercion, They made a deal, period, if it had worked out the other way would these same people be willing to give up all of their proceeds to others? NO, then they should not expect others to bail them out either. I am beyond repulsed at this kind of thinking and behavior, none of us is owed anything just because we are here. Work for it, and if you fail, then take the lesson and do not repeat it. Read a page from Hershey, yes the chocolate man, who failed several times and learned each time he did, and look at what he created through those lessons. 

What happens when this becomes socially acceptable? Should it be ok for me to go buy a new car, drive it for a year, then turn it in because it is not worth what I am now paying, NO!!! Morally wrong, ethically wrong, and it needs to remain socially WRONG! Do not make this ok, ever, it is not! Where is the pride of doing what is right? Where is the personal responsibility? Who raised these people? And why should I be forcibly put in a position of having to cover their failings of convenience?

 

For a minute Elizabeth I thought you were talking about the banks, but I guess it has become socially acceptable for the banks to be bailed out for mistakes in the "investments" or "contracts" they made? At least the CEO's got they package deals they deserved

Hi Francisco, I was addressing the topic at hand on this thread. I could go on for days about the garbage with the banks, but I will be brief: I was calling my rep BEFORE  they even started to discuss the possibility of doing any of the "stimulus" packages telling her to say "NO!!!", (I knew it was coming down the line, and I do not believe that there should be bailouts of any kind, tear the band-aid off and be done.) I was writing, calling, emailing and getting others to do the same, my rep did vote no on all of these packages. Also I follow the Ludwig Von Mises Institute blog for economics, and if you want to really understand what went down I strongly suggest to anyone interested to read "Meltdown" By Thomas Woods :)

Harry,

How hard is it for a homeowner, hardship or not, to make a simple phone call to their lender and request a loan mod, if not qualified, a short sale, if not qualified for that either, a DIL request, if not qualified for that either, at least a good faith effort was initiated by the homeowner...isn't that what Fannie Mae wants?  A good faith effort to avoid a default? 

Now what will Fannie Mae do?  Insist the homeowner stay?  Wow...this is getting crazy. 

People continue to comment on this post. It seems many people are disturbed about strategic bailouts. Keep adding your comments

Why does this have to be a moral/ethical question?

That's certainly not how the underwriting engines are looking at it.  It's either a foreclosure event or a preforeclosure event and there is, increasingly, no distinction between the two.

The "hammer" for shorts/preforcelosure sales/deed in lieu, etc. is a matrix time vs. down payment. 

Short sales are 2, 4, or 7 years with 20%, 10% and less than 10% down payment, respectively.  And, realistically, those are going to tighten before any of today's defaulters are eligible again. 

I don't know the matrix for strategic defaulters yet, but there's no way that it will be less punitive than the short sale or preforeclosure matrix.   Seems like it takes the "strategic" right out of the default if it is a 30% down payment 7 years later and you get a rate that is 1.5% over market.

I loved reading your post today when it comes to this issue. Have a great weeekend