Home Foreclosure News: 9 Reasons Strategic Defaults (eg, Voluntary Foreclosures) Will Continue to Rise
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According to the MSNBC.com article, As home prices fall, more borrowers walk away, more and more homeowners are willing to go the strategic default route. The article states:
A survey last year by two Chicago-area finance professors, Paola Sapienza at Northwestern University and Luigi Zingales at the University of Chicago, found that roughly three out of 10 mortgage defaults in 2010 were by homeowners who could afford to make their payments, up from 22 percent in 2009.
Just a few years ago, phrases like “voluntary foreclosure,” and “strategic default” weren’t a part of our everyday lexicon. However, as the housing crisis drags on and an arguably “jobless economic recovery” stares most Americans straight in the face, it’s not surprising that they are now.
Strategic Defaults: 9 Reasons They’re Becoming More Prevalent
The above-cited article touched on a few of these, but following are what we see as some of the top reasons strategic defaults will continue to rise for the next few years.
1. Underwater Homeowners: Many homeowners remain significantly upside down on their homes (ie, owe more on the more on the mortgage than the home is currently worth).
This means many are essentially stuck because they: (i) can’t refinance and; (ii) can’t sell (unless they want to write a check for the difference at closing and/or do something like a short sale), which can harm credit-.
So if a homeowner wanted to get rid of their home – for any reason, they can’t. For example if a job opportunity came up in another city; or a retired couple wants to want to sell and move to a warmer climate, many simply can’t do it because they can’t unload their homes.
Faced with situations like this, many choose the voluntary foreclosure route so they can get on with their lives.
2. Banks Won’t Modify Home Loans: Banks have, thus far, been unwilling (at least publicly) to write down principal balances. Even a Harvard professor has weighed in saying that this would be the best thing to do, as we wrote about in the 12/6/2011 post here, Home Foreclosure News: Occupy Wall Street People Have Been Stealing Our Ideas on How to End the Home Foreclosure Crisis, stating:
We’ve long said it on this blog – the best things banks can do to prevent foreclosure – for millions! – is to reduce the principal balance. Now, a Harvard professor, who is an economic advisor to the president, is championing the same thing in The Los Angeles Times article, Obama administration ramps up mortgage refinancing effort:
A far more ambitious proposal is offered by Martin Feldstein, a Harvard professor and top economic advisor to President Reagan: Reduce the principal on the mortgages so that the loans are no more than 110% of the value of the properties. . . . Banks would absorb half the cost of the principal reduction, and the government the rest.
Could this practical solution to the foreclosure crisis finally gain some traction?
And the best thing about this plan is that banks and homeowners would share the financial burden. But to date, most banks just haven’t been willing to go down this road, seemingly preferring to let more and more strategic defaults happen.
3. Banks Hard to Deal With: In addition to not modifying loans, the runaround that banks give many homeowners who do try is simply unheard of. Many homeowners report having to send in the same paperwork to their lender’s foreclosure specialist half a dozen times, only to have it lost.
Others report having a hard time finding out who even owns their home loan because it’s been sold so many times.
Post Continued Below . . .
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4. Stagnant Economy: In the U.S., the unemployment rate remains abnormally high, at 8.5 percent. The Wall Street Journal expounds on this, stating:
. . . the unemployment rate ticked down to 8.5%, its lowest level since early 2009. But economists gathered here for the American Economic Association’s annual convention took a longer and generally dimmer view. Even if recent progress continues, the recession already has had a lasting effect on a generation …
And, one of those “lasting effects” is undoubtedly the ability to purchase (and hold on to) a home, which brings us to the next reason strategic defaults are likely to continue rising . . .
5. Credit Freeze: Banks are still not lending money (eg, there’s a credit freeze) – not for home loans, small businesses, HELOCs (although, who has equity anyway these days) – nothing! Most are still trying to bolster their bottom lines after what the housing crisis (and recession) did to them over the last few years.
While no one is suggesting that we go back to the days of zero down home loans, it’s harder for even seemingly qualified borrowers to get money. Without banks lending money for mortgages, it’s hard for home sellers to find qualified home buyers.
Many homeowners simply don’t have the financial reserves to “hang on” until the market gets better. Hence, more strategic defaults.
6. Broke Homeowners: Many homeowners have depleted their life savings, trying to stop foreclosure. Retirement accounts have been tapped, liquid savings accounts have been drained and even educational savings accounts for kids have been drained.
This leaves many homeowners without any other options; a strategic default is all that’s left.
7. Exhausted Homeowners: Many homeowners are simply drained — not only financially, but emotionally and physicall as well. In fact, the threat of home foreclosure has left many ill. They’re at the point where voluntary foreclosure is a welcome option, not a financial death sentence, because it gives them room to de-stress, regroup and rebuild.
8. Saving is the New Rule: This home foreclosure crisis has been a learning lesson for many Americans. Many have made getting out of debt a major priority. And, many look at a strategic default as a way to shed “bad debt” (eg, an underwater home).
9. Regroup and Rebuild: Because of things like shadow inventory, there’s a lot on the market to choose from. Many who undergo voluntary foreclosure are able to turn right back around and purchase comparable properties at deep discounts, especially if they’re in the group that could afford to pay their previous mortgage, but chose to strategically default.
Many Americans are coming to see their homes as financial investments, rather than becoming so emotionally attached. So, they have no problem dumping it – especially as home values are not projected to rebound for more than a decade in many cases.
The sad reality is, because so many lenders have dropped the ball, many homeowners are coming to not only see a strategic default as their only option, they’re beginning to embrace that option wholeheartedly.
This is going to put many lenders in the real estate (instead of lending) business – whether they like it or not.
Learn more about strategic default: how to do it, what it is, credit implications, etc.
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Copyright © 2012 Yuwanda Black for Foreclosure Business News. Article may not be reprinted or reproduced in any manner without the express, written consent of the author.
