We all know that strategic defaulting is questionable at best, but what to do when your lender tells you it’s the only way to get some help? Yes, you read that right: Borrowers are increasingly likely to be given the “unofficial” advice to strategically default on their loan, and this advice now sometimes comes from their lender!
Here’s how that type of scenario plays out:
A home owner who perceives their property to be financially nonsensical – even if they have the ability to pay the note – contacts their lender to see if a loan modification or other solution may be available to them. Due to the clear lack of financial distress, the lender officially rejects the request for a modification. But unofficially, the customer service representative makes it clear to the borrower that they could simply stop paying the note and effectively “give back” the property.
Since foreclosure is so prevalent in the news, and the government has made home owners feel like “it’s not their fault” they have a bad loan, loans are being ‘strategically’ defaulted by the millions.
I suspect this type of scenario plays out due to the pity the customer service representative feels for the home owner rather than an official policy on the part of the lender. Of course, if a lender or loan representative is advising you to stop paying, it can seem almost like a promise that help is on the way in exchange for giving your credit score a hit. However, homeowners must remember that these are hardly ever promises, and it’s also pretty likely that a lender is going to vehemently deny advising you to default on your loan.
This leads to the question: when does one stop paying the mortgage? I suspect that when this question is evaluated free of the influence of financial pressure, the answer is: “Never”. But strategic defaults are increasing at such a rapid clip that it’s clear that this opinion isn’t widely held.
Also Important: In your real estate investment activities, be very careful about “advising” any home owners you are working with to strategically default. In addition to the ethical problem involved, investors must be very careful not only how they go about handling these types of transactions, but also how they are perceived and recorded when they are dealing with strategic defaults. Lenders are more than happy to blame investors rather than their own representatives for property owners’ failures to pay, and with strategic defaults climbing each quarter, real estate investors make themselves a bigger and bigger target if they are determined to be advising homeowners to stop making loan payments. Not to mention creating a serious legal liability… It’s easy to imagine a judge assigning legal responsibility to an investor for a strategic default since it’s the style of our government at present to refuse to allow home owners to be ‘at fault’ for their own poor decisions.
Thank you for reading the Bryan Ellis Real Estate Letter – your comments and questions are welcomed!
Bryan-as a 25+ yr. experienced investor–you are right on the money!! I have 2 properties in FL. -that are upside down & the underlying Mtgs. are UGLY!! Hope it’s ok to give out names-because I think most of the larger lenders-today w/out exception- have now been reduced to PURE SLUDGE!! (My Opinion) I have been trying to get some type of Loan Mod. & Prin.reduction on both of these props. since—JUNE ’09!! Still no help Not even a whimper!! However, around Jan.-Feb. of ’10–I was (as you said)-unofficially told this same situation by a customer service rep.- with both: Wells-Fargo & WaMu-Chase!! No matter your opinion as to the “issue”–this is just bad business!! It’s sad to think that -with all the troubles that the banks & lending institutions are currently going through -everyone that has the ability-should be given at least an equally fair chance at some type of assistance-as long as it makes sense for all parties -involved! Not suggesting a “handout” here-just an equally fair “shake”! Again-(my opinion) Many of the lenders are in this quagmire at their own hands & it is the homeowners , investors & our Nation @ large- that is now suffering the dire consequences!
Carole, am I misconstruing what you’re saying about defaults?
Free of financial pressure? What does that have to do with the price of tea in China? Without “financial pressure,” none of us even know the word “foreclosure,” “short sale,” or “strategic default.”
I hope I’m misunderstanding what you’re saying.
Mortgage defaults – regardless of “strategic” or “non-strategic” – demand an informed real estate attorney and tax professional.
As a Sarasota-Orlando foreclosure/short sale “expert,” I do not pretend to be an attorney or a tax professional.
I also do NOT play GOD – that is, I don’t play the “moral compass” violin. In my mind, strategic defaults are BUSINESS decisions.
Of course, I’m concerned that my neighbors “strategically” defaulted. Of course, I’m concerned about the 7 “shadow” properties abandoned (for over 18 months) in my nice neighborhood. Will these properties further KILL my property’s value?
Of course they will….
Nonetheless, if you or someone you know owns property in one of the “death” zones including Florida, defaults WILL continue at record numbers.
Delinquency rates remain the highest in the four states hit hardest by the housing market collapse: Nevada, at 15.98 percent, Florida, at 14.65 percent, Arizona, at 10.94 percent and California, at 10.68 percent.
TransUnion said the rate could top 18 percent in Florida by the end of the year. Nevada and Arizona will likely remain close to their current rates through 2011.
18 PERCENT!!!!!!!
Do I (or should I) give a damn about what you think of me if I strategically default?
Do you think John Courson and the Mortgage Banker boys (MBA) give a damn what you think when they “strategically” defaulted on their Washington headquarters?
I care about my wife and kids and doing what is best for THEM. If strategically defaulting is in my family’s best interest, Adios Amigos.
BUSINESS DECISIONS…..
Their are more options. Don’t take any advise from your lender because they are in an adversarial position to you and only acting in their best interests.
Home owner’s who want to keep their home have 3 options if they are struggling to make their mortgage payment or their home is upside down in value 120% or more…
1. Do nothing. Pay what you always pay and get what you always get.
2. Loan Modification- Lower your monthly payment 25-50% reduction of monthly payment possible today, all arrearages can be forgiven and the loan reinstated without having to come up with back payments.
3. Principal Reduction Program- True Short Refinance where you keep your home, stay on title, get a new Lender and new loan at 90% of today’s LTV.
Unfortunately, Drew, you make the latter 2 options sound as EASY as standing in line at McDonalds.
Though more than 3 choices exist, I’m curious what your experience is with negotiating distress.
I actually HAVE negotiated principal reductions before BOA became the 1st to publicly announce.
Loan mods (with principal reduction) is NOT the norm. Neither is principal reduction.
I don’t know if your fingers grew tired of typing, so you opted for a quick, happy-sounding response.
To be clear, loan modification does NOT automatically come with all arrearages forgiven and the loan reinstated without having to come up with back payments as Drew claims.
Principal reductions (even before BOA et al publicly announced cooperation) are not a given as Drew claims.
I work (in) the hardest hit market in the country – FLORIDA! To mislead people is reprehensible.
Hello Bryan, and thanks for the good advise. I know banks have been doing this for a long time now, because MANY of my clients were also “recommended” the same strategic default by their lenders. The sharks are hungry and hunting, yet, bleeding… I think it would be MUCH better to come here to try and help each other in a friendly spirit, rather than just telling everyone what’s for, how wrong they are, how good we are, etc. Arguments don’t help any of us, brainstorming does, uniting helps more than just empty arguments. Let us share ideas, experiences, etc. so we can fortify each other “sarasotarealtor”, like someone said “why can’t we all just get along?”,
… You seem to be very wise, and I would like to challenge you to figure this one out “si entre ellos se pelean, los devoran los de afuera”, who, in this case, might well be the banks, who knows? ….
, love you all.
Peace guys
Patricia
CAinvestor – to accept your challenge I had to dust off my ole teaching manuals (I was a high school teacher for many years).
Anyway, I think you you’re asking me to translate. How’s this: “The brothers are united, because that’s the law first, and if they fight each other, are devoured by those outside”
You’re confusing arguing with accuracy.
This is where (some) investors hurt themselves: they make statements that are not accurate.
I work with many investors who HELP property owners in distress. I’m sure you can understand the need for accuracy when you are sitting at the kitchen table with good people who are facing foreclosure as their kids huddle nearby aware of what is going on.
I take this very seriously. I’ll risk hurting someone’s feelings or coming across as if I’m arguing to help provide ACCURATE information.
By the way, CAinvestor, when the Wall Street bankers stop playing games with real people’s lives (ala premeditated housing bubble), we might be able to get along.
What are the odds of that happening?
Bank of America has a imminent default division – if your client is current but will soon default they have an initial set of questions they ask. Contact that department at 800-669-6607. I am wondering if anyone has had luck using forensic loan audits and going through the legal dept rather than loss mit? I have a company I am an affiliate of that says they also look for violations in the transfer of the loans. They say some of the violations are actually felony violations. I am sending my first deal to them so will see if it works.
One very important point, the most important point on this is why the lenders are suggesting, (I question if it is actually suggesting but rather informing the customer they have to be in default before they are going to even be considered for any kind of help), to default on the loan.
The regulations stacked against the banks and the customers are large at this time. Each time the government has said it was going to make things better and make some new regulation to help everyone; it has indeed made it worse. If one takes the time to attempt to read the new regulations, the regulations aimed at helping the “deserving people,” you will quickly learn it is mostly smoke and mirrors. The regulations make it almost impossible to qualify for any assistance and it is almost impossible for lenders to not violate one or more of the regulations in the new laws that have and are being passed.
The upshot of this is good sound bite press with no actual action by the government to help anyone and the lenders becoming increasingly nervous about what to do without being in violation.
The majority of organizations offering loan mods of any kind know there is virtually no chance of getting a modification of the existing loan. The numbers prove this repeatedly, nothing but some really dishonest theft is going on with loan mods for the most part. Must not be very many “deserving people” out there according to the guidelines!
So as people realize they are not one of the chosen ones and as they do a little math and realize the length of time it takes to pay $100,000.00, $200,000.00 even $500,000.00 dollars in equity that will not be realized in the next 10 years if ever, because of the inflation that is coming, they are left with only one choice, leave! Because at the end of that decade of paying that money having nothing for it does not make sense for a business or an individual! Paying twice what a building is worth and looking at what could have been done with the money instead, is not a good investment for anyone.
Is it pretty, not really! Is it fun, not really! Does it make sense in the current climate in many areas of the country? Yes it does!
By changing to a different house and with some imagination in getting it financed or just saving the money for a few years, one can have something of value instead of a giant money hole with not much to show for it.
As an investor this is not something one wants to hear or even think about but it is a fact of where we are in the world at this time and it is showing no signs of getting better. The government is still spending at all levels like drunken sailors, not just here but abroad. This has to come to a stop one way or another or a depression that will make the Great Depression not look so great is going to be on us all.
There is not enough money in the world to pay for what the entitlement spending is in the country. So how is the rest of the world going to help us out when the end comes? If one thinks it is difficult now, think again it is just the tip of the iceberg unless government spending truly is reduced everywhere.
It is time to look at the underlying causes for the issues we are experiencing. It is not the Banks, it is not the individuals and it is not Capitalism.
If you want to make money investing at this time figure out your market and get in and get out quickly. That is how money is actually being made in the stock market and the real estate market is no different at this time.
I am going to make a simple statement here. The same one I have been making to all my friends, family, neighbors, etc., and that is this:
Stop using Banks. Stop using Credit Cards. Close out all Bank Accounts and move your money to a Credit Union.
If you can’t afford to purchase something you want with cash, then don’t buy it. Banks have proven that they’re criminal in their actions. That they DO NOT care to do what is right, but rather what is in their best interest at any cost to the consumer. So WHY IN THE HELL are we still allowing them to stay in business?
To: Slundin——–Your comment is Right-ON!! Kick them to the curb!!! Done!
Sounds great in theory, Slundin. In practice, it doesn’t work.
Living the cash life won’t buy you a plane ticket or rent you a car.
Sure, people can save to buy a house or furniture or AC replacement or whatever when they have the cash.
One of my other “hats” is credit repair @ fixmyuglycredit.com/blog. Every day, I hear from people who make uninformed decisions about credit and money.
Mostly, I hear from people who experienced a case of LIFE…no matter how well you plan for that rainy day, it turns in to a rainy week or month or year.
No amount of planning (and saving) prepared for that.
RESPONSIBLE (safe) use of credit…and a big dose of luck (that life never throws you a pitch you can’t hit).
Not that Slundin stated or insinuated such, but I regularly hear from people who think ALL people losing their homes overspent.
Not so…in my experience.
I do not recommend people cut up their credit cards and/or shut down all credit, living off cash.
Just my $.03 worth.
Slundin,
Banks, credit unions, it makes no difference. Take the time to look up the credit union scandals of the 80′s. It is just the banks turn to be the bad guys and all of the talk of more regulations is just a way of taking your eye off of the real problems and furthering the deception of what great guys the government goons and the labor union goons are for you and your lifestyle.
Really take the time to look into the three major credit unions and how they actually operate and what is behind them. Look at why the largest part of the housing boom/bust is Fannie and Freddie and why there is very little investigation into their manipulation of the housing market.
The banks, credit unions, mortagage brokers, etc… are just doing what the market demands and if people are too stupid to read the paperwork and understand the fine print, then they are too stupid to be using credit in the first place.
Look back 75 years and how much actual credit was used in America. Look back just 50 years and see how much credit was actually being used. People had a different attitude about how to pay for things and understood what it meant to have to pay for things and save for things. Credit from any source greatly magnifies the problem and this is digging our country and the world, into a hole that is going to be very hard to dig out of.
It is the individual using the credit, whatever the source, that is the problem. It is the concept of everything should be easy and why wait when you can have it now! So start looking at where the real problems are everyone and realize responsibility starts with one’s own decisions and stops with one’s own individual decisions, not some bank, credit union, or even government!
There are many ways of not using credit, it is time for people to wake up and understand what was a given for centuries.
Many EXCELLENT points, Chris!
We are an ADD society. THEY know this about us. Not to change topics but how long before WE (the people) lose interest in the Gulf oil tragedy?
It’s not enough today to live within your (our) means as the Wall Street crooks pull the rug out overnight from your (my) “means”.
How many of you know someone who had a SAFE job yesterday…last week…or last year? Today, they’re un (or under) employed…can’t pay the mortgage on a house definitely within their means when SAFELY employed.
And this thread started with “lenders telling homeowners to stop paying their mortgage.”
RE: “MrSurfTheWeb’s” forensic & compliance audit question
YES, I have experienced success with the legal route on facilitating two “dead” short sales.
I know of a couple really good attorneys (more getting informed each and every day) who understand TIL and RESPA.
They discovered the violations and created leverage to get short sale approval (+ full payoff & satisfaction + no reported mortgage lates on credit reports).
LEVERAGE!
Find it and use it.
Please share your thoughts of the company you found to help with forensic & compliance auditing.
This is a really good thread.
Just wanted to add my 2 cents about forensic audits.
I spoke to two attorneys about them and found they are a way for attorneys to upsell other legal services. The audit violations threat does not work on every bank, some of the banks simply respond with sue me. The banks know that in order for the owner to enforce the violations the owner has to sue. Filling this type of lawsuit can run a homeowner $5-7k in court and attorney fees. So bank basically they call the homeowners bluff.
Oh and guess what the attorney told me if we sue and win the case, we get back all our interest and payments, however the bank will most likely ask for the owner to pay back the loan amount they gave you to buy the house. So you win the case, but somehow it feels like you still lose.
So be careful with the audits and make sure the attorney is doing it for the right reasons.