You may have heard or read recently about strategic defaults as this topic is all over the news. A strategic default is when a home owner walks away from their mortgage when they are still able to make the payments.
The reason why a home owner would consider a strategic default and just walk away is because the value of their home has dropped substantially below what they owe on their mortgage.
The general feeling amongst those that are using a strategic default is that it will take years for their homes market value to recover. They basically walk away from the property and start fresh.
Fannie Mae the government backed lending giant is putting into place simple measures that will discourage home owners from considering a strategic default. What does Fannie Mae plan to do?
They will begin “locking out” borrowers from getting new mortgages for seven years! They will also go after strategic defaulters for the money they owe in states where they are allowed to do so.
Those home owners who walk-away and had the ability to pay the mortgage or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure.
Fannie Mae stressed that borrowers who make a good faith effort to work with their lender in order to resolve their situation will be eligible for Fannie Mae loans much quicker than those who just walk away.
Obviously the more homes in neighborhoods around the country that become abandoned due to strategic defaults puts further pressure on depressing Real Estate prices. Foreclosures and bank owned homes tend to bring down values of surrounding properties. Traditional home owners end up competing with these bank owned homes when selling their properties.
Some people that are using strategic defaults are doing so because they have become so exasperated at their lenders for not doing more to help them such as a loan modification. Anyone who has ever tried to get a loan modification would probably be the 1st to admit that lenders do not make it easy for a borrower to get one. Often times borrowers can’t get responses from banks to their questions and are repeatedly told to send in the same documents over and over again.
As a Realtor who has been selling Real Estate for the past twenty four years in Massachusetts, I have come across a number of properties where the owner just picked up and left. Often times I wonder why they did not take the necessary steps to try to avoid foreclosure.
It seems there are lots of folks that do not realize there are better alternatives that just bailing on their loan.
Short Sale vs Strategic Default
One alternative that I have been very successful with is helping Massachusetts home owners to short sale their property. In a short sale the lender allows a home owner who owes more than their home is worth to take less than the amount owed at closing.
The owner of the property benefits in this situation because they get out of a financially difficult situation without going to foreclosure which can seriously damage your credit.
Most of the time when your home is foreclosed on you will not be able to get a loan to buy another home for five to six years. With a short sale in most cases you will be able to buy another property in two to three years. In either event your credit scores are going to take a hit but a short sale is generally the lesser of two evils.
Some of the statistics that have been bandied about are pretty scary and unfortunately are an indicator that Real Estate values are more than likely not going to be headed up for quite a while.
By the end of 2011, approximately 48 percent of the 50 million mortgage loans nationwide are predicted to be underwater or valued less than the money owed on them. There are also published estimates that more than 11 million American homeowners are underwater and predictions are that the number could more than double in the next 18 months!
It begs the question on whether or not holding a buyer out of obtaining a Real Estate loan for seven years would help the housing markets around the country?
One of the driving forces for a Real Estate recovery is going to boil down to simple economics of supply and demand. Home ownership needs to be more affordable to more people. We will not see a full fledged recovery without the buyers to support it.
Given the fact that Fannie Mae is going to seriously crack down on strategic foreclosures, looking at short selling your home could be a more logical solution.
The only conundrum when looking at a strategic default vs a short sale is whether or not the lender will let you complete one. In many situations lenders will not let you short sale your home unless you have a financial hardship. In my experience, I have seen quite a few lenders that are not enforcing the hardship qualifications aspect of a short sale as you would expect. Is it harder to get a short sale done without a hardship? It certainly is but not impossible.
There is certainly lots of things to think about when deciding if a short sale is the right move or not. Over the last three years I have helped numerous home owners in the Metrowest Massachusetts area complete a short sale. Along the way I have written quite a few articles that detail some of the most important considerations when completing one.
If you are considering a Massachusetts short sale I would encourage you to read some of the articles I have put together below.
Short Sale Real Estate articles:
Acceptable short sale hardships
Questions to ask a short sale listing agent
Picking a top Massachusetts short sale Realtor
If you are needing to complete a short sale of your home or condo in Ashland, Bellingham, Framingham, Franklin, Grafton, Holliston, Hopedale, Hopkinton, Medway, Mendon, Milford, Southboro, Westboro, Natick, Northboro, Northbridge, Whitinsville, Upton, Uxbridge, Shrewsbury, Worcester, or Douglas Get in touch! I would love to interview for the chance to represent your best interests.
I am successfully completing short sales through out the Metrowest Massachusetts area. So far, knock on wood, I have a 100% success rate for short sale approval!
If you are outside of the Metrowest Massachusetts area and need to do a short sale please feel free to contact me and I would be happy to refer you to a Realtor in your location that handles short sales and knows what they are doing! I have referred short sales to other Realtors all around the country.
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About the author: The above Real Estate information on Fannie Mae strikes against strategic defaults was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. Bill has helped people move in and out of many Metrowest towns for the last 24+ Years.
Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service the following towns in Metrowest MA: Hopkinton, Milford, Southboro, Westboro, Ashland, Holliston, Medway, Franklin, Framingham, Grafton, Hopedale, Mendon, Upton, Northbridge, Shrewsbury, Northboro, Bellingham, Uxbridge, Worcester and Douglas.
News, views, opinions and happenings for Real Estate throughout Metrowest Massachusetts and beyond including Ashland, Hopkinton, Holliston, Southboro, Westboro, Milford, Medway, Franklin, Grafton, Upton, Mendon, Hopedale, Northboro, Framingham, Northbridge, Shrewsbury, Whitinsville, Uxbridge, Bellingham and Douglas. 
{ 13 comments… read them below or add one }
Bill,
Very nice job spelling out the whats and whys of strategic defaults, Bill. Have met with homeowners in just this situation and we’re exploring whether or not their particular mortgage companies will agree to a short sale or loan modification.
Lots of hazards with strategic defaults – Fannie Mae is just one more!
Irene strategic mortgage defaults are such a hot topic right now. There are some interesting arguments on both sides of the fence regarding both the financial and moral issues of just walking away. It will be interesting to see if lenders become even more flexible with letting folks short sale their homes when they are still able to pay their mortgage.
Bill,
I got your link from the Active Rain story on Fannie Mae today by Harry F. D’Elia. I appreciate your comments. You are very dead-on as well. Good job!
It seems that if a homeowner is a Wachovia borrower, a “good faith effort to avoid a strategic default via the short sale game rules route, would be different and the process to a short sale approval is significantly easier, no hardship needed, owner-occupied or investor property (doesn’t matter), no deficiency judgements, even some nice cash incentives at COE. Why can’t Fannie Mae get on-board and announce the same game rules as Wachovia instead of similiar HAFA rules. I’ll bet that if they announced this to the nation, homeowners would jump on, change the upside down properties with current value buyers and we could all reverse the real estate market conditions faster…what do you think? Then Fannie Mae would be happy with all the good faith efforts…hmmmm…
Of course you’re going to sway homeowner towards the short sale route. You’re a real estate agent and have a vested interest in homeowners selling their home. You and other real estate agents/brokers make money of selling a home whether it’s a short sale or not. My advice to homeowners considering a strategic default is to talk to an independent real estate attorney. They will give you advice that’s best for your situation and they don’t have any vested interest in what you do. Sometime’s its easier and less damaging to your credit to just cut your losses and walk away.
Fred are you serious? “sometime it’s easier and less damaging to your credit to just cut your losses and walk away.” Fred it certainly may be easier but it is in no way less damaging to your credit unless you don’t mind not being able to get another loan for 7 years! Of course I have a vested interest in selling peoples homes – SO WHAT! Do yourself a favor and don’t ever get into the financial counseling business.
The fact is HAMP is an abhorrent failure, this is the borrowers way of getting their own loan modification, Banks would do the same thing if placed in our position, so would any prudent investor, its simply a good investment strategy, why lose thousands on an underwater home. Do you need to buy a home every 7 years?
Unfortunately banks view foreclosures as more profitable than loan modifications, due to the failure of Obama’s loan modifications, I know for a fact banks are flipping foreclosures to each other right now for profit, Ex Bank A will foreclose, and sell property to bank B for 60 cents of the dollar. Bank A now has a nice write off, often their losses are compensated by the Govt, Bank B sells the home for a profit and shows a tiny sum for their investors. Banks are holding onto hundreds of thousands of properties in shadow inventory, trickling home onto the market attempting to keep their investment values from crashing. Th only thing that will turn this market around is to have values crash, underwriting is more stringent that ever, rates are at all time lows, we need values to come down another 30%. Banks are seeing that it doesn’t happen, We need forced principle cram downs.
strategic forclosure is the only way out for me! I don’t want my home (got married he has a home) and can’t get rid of it..I offered it for assumable, rent – you name it. I had an offer on it that would be a short sale and BOA didn’t even want to hear about it, they gave me a number that always said “this number is temporarily unavailable”. They paid me no attention whatsoever. So I quit paying the mortgage. Guess what! Now they call me 2 or 3 times a day, I did talk to them and told them about the number they had given me and the person I talked to said – Now I’ll give you a GOOD number! I’ve had it, the banks make me sick. I’ve talked to lawyers and they advise to let the bank foreclose, I may have to go bankrupt but that’s okay with me…As for feeling guilty – I feel as guilty as the banks do with their bailouts.
Sue – I am sorry to hear about your situation. It is too bad you did not get involved with someone that could have helped you early on with doing a short sale. While I understand walking away may make your feel better because of the treatment you received from Bank of America, in the long run you would have been much better off doing a short sale. I do agree with you about BOA and the run around they give when people call them. Their staff is very poorly trained. In fact they constantly give people misinformation to the point where you wonder if it is on purpose.
Bill,
Very sad regarding “Sue”. She’s absolutely right though. Most of the time when BofA is contacted directly by the distressed homeowner facing a housing-mortgage dilemma, there has been a disconnect of some sort. I’ve talked to homeowners of BAC loans and they say the same thing. But 100% of the time that I have recieved authorization to speak to their lender the process moves towards the end result in its typical fashion. I believe that when the borrowers is removed from the actual process and handled by a realtor, it’s significantly more effective. I just helped a borrower just like “Sue”, married just prior to contacting me, her husband had a home she now lives in, and she decided to short sale her smaller property, which, I did. It was a typical, traditional short sale.
A realtor can discuss the situation without the emotional tie to the property, without the distress that fills the homeowner, and with the proper language that helps to clarify to the lender what needs to be accomplished. On many occasions, homeowners in preforeclosure tell me their stories of when they call the customer service number on their mortgage statements and says “I can’t afford the mortgage payment”, or “I want to do a short sale”, maybe before an attempt to a loan mod was attempted, the service rep on the line may be the one who is not experienced (we know lenders hired many new reps to handle the crush), or is just being human that just spoke to the worst person in the world just prior to taking their call, and so on. So with the short sale solutions that are now becoming prevalent and better understood by the homeowners as a “graceful exit strategy” for them to allow peace of mind of deficiency wipeouts, potential for re-allocation money at COE, and minimizing their creditworthiness “ding”, the method for which homeowners to do a short sale with a realtor, but to initiate it themselves will become that much easier and more significant. My message to homeowners out there is that it is becoming easier and is a better strategy than foreclosure. Hang in there folks! You are not alone! Call a realtor.
Robert you are right it is very sad what happens to folks that want to do a short sale or loan mod when they call their lender and get a complete run around. I just met another gentleman today that was looking to do a loan mod through Bank of America and was told by the rep on the phone that it would be a slam dunk.
Nine months later there is no loan mod and guess what the glorified clerk on the line at BOA told him to stop making his mortgage payments while he was trying to get loan modification approval. This sad story ends with another botch job by the lame people that get hired for minimum wages answering the phones at these major lenders.
When dealing with any kind of issues with a lender folks should really hire a pro to help them whether it is a short sale attorney or Realtor.
Bill is right. I bought home on 2005 at peak time and is now under the waters. The value of homes went down 45% literally in my community located in city Manassas, VA. I decided to short sale my home and found an agent local who is very good on short sales process. My lender is Bank of America. My short sale is just approved today and entire process took just 3 months.
If you decide you leave home, you need to try Shortsale first. Bank of America is not so fast and you need to have lot of patience. You just need follow procedures, and the process is completely on-line. Find an agent, go short sale, Bank of America.com and initiate the process.
good luck
I walked away from my mortgage…bought at the height of the market for 185 with foreclosures in my neighborhood to the tune of 100,000. I tried everything with Wells Fargo. HARP no go because my fannie mae loan was purchased by Citigroup. We did not meet HAMP guidelines because we could make our payment and we were told unless we stopped making payments, they could not look at it. Also, no way we could refi as so far underwater. Also, loan mods no go as we could make our payment and had jobs. We consulted a real estate attorney that said we might break even in our Atlanta zipcode 30032 in up to 10 yrs meanwhile paying out interest only to Wells Fargo the whole time. I think that when we walked, we maybe owned one door in our home after 5 yrs. We had no idea the market would go this way. I now live in a nice neighborhood renting in an excellent school district for my child. It was done as a business decision for my family and I am glad we did it. Obama’s plan is not working for everyone, especially if your loan is not backed by fannie mae or freddie mac!!!
Kelli – Sorry to hear about your financial situation. I do not blame you for walking away at all although you could have been better off doing a short sale as it would have had less of an impact on your credit. It is easy to understand why many people are making the decision to walk away from their homes when there is not light at the end of the tunnel. The many foreclosures and short sales have had a tremendous negative effect on many Real Estate markets. I know the Atlanta market has been really hit hard. I wish you and your family the best of luck.