Strategic default happens when homeowners with mortgages far higher than the latest value of their property walk away from paying their mortgage, although they have the financial wherewithal to keep paying.
“A property owner normally considers a strategic default when the value of the property is below the mortgage balance due a lender,” according to The Strategic Default Monitor website.
Strategic default is addressed at the state, but not federal level. Therefore, those who use this method to walk away from paying a loan should consider the ramifications of such action in their state.
Defaulting on a loan is preferable to bankruptcy, since the latter makes it almost impossible to qualify for credit, as it will prominently appear on any credit report.
A strategic defaulter no longer makes mortgage payments for a number of reasons. “The rationale is that it does not make economic sense to make mortgage loan payments on a property that has no equity or any hope of gaining equity,” The Strategic Default Monitor explains.
Walking Away From Default
Real estate loans “failed, not because of morally bankrupt borrowers who go back on their ‘promises,’ but because bankers decided to count on a perpetually rising real estate market to absolve them of the necessity of responsible lending,” according to a 2009 article on the Big Money website.
Housing market experts suggest that the mortgage default phenomenon should be laid squarely at the doorstep of banks. Lenders, as well as builders and real estate firms, were instrumental in bidding up prices for real estate without concern for problems that might arise later on. Lenders, using shoddy underwriting practices, worked on the side of greediness instead of conservatism and caution, according to housing market experts.
To level the playing field and give the borrower a leg up, a number of states enacted laws that prohibit banks from making the borrower liable for the difference on a loan and the sale proceeds of a foreclosed home or any other type of product.
“A creditor cannot hold the borrower personally liable for more than the value of the property at the time of sale,” according to The Strategic Default Monitor.
States that have enacted such laws are called non-recourse or anti-deficiency states. States with non-recourse or anti-deficiency laws include Alaska, Arizona, California, Connecticut, Iowa, North Carolina, North Dakota, Minnesota, Montana, Oregon, and Washington.
“Generally, in a non-recourse state, if a lender cannot recoup its loan from the sale or seizure of the asset used for collateral, then the relevant state law will limit the lender’s ability to collect from the borrower,” according to The Strategic Default Monitor.
Besides a non-recourse state, there are also one-action states, where the lender has only one choice: foreclose or take the defaulter to court. States that have such a law on the books are California, Idaho, Montana, Nevada, New York, and Utah.
In states that do not have the non-recourse or one-action law, the state established strict requirements for collecting from the defaulter on any type of loan. If a lender just misses a single requirement under the law, it might not be able to win any court proceeding. States with recourse laws include Colorado, Virginia, Michigan, and Ohio.
Next: House Values Sliding Downward
House Values Sliding Downward
“The stability in home prices during November may well prove to be the quiet before the storm. Sales volumes are down, discounts are up and the real inventory level is still staggering,” said Michael Feder, president and CEO at Radar Logic, a real estate data analytic firm.
Home prices will continue to decline because this is a buyer’s market. The market is overflowing with available inventory, and experts expect even more foreclosures, along with the associated further decline of housing prices.
Housing prices have declined significantly over the past five months when compared to 2009. “We expect this trend to continue well into 2011, given the large shadow inventory of bank-owned homes, homes in the foreclosure process, and homes whose borrowers are currently in default,” said Quinn Eddins, director of research at Radar Logic.
Loan Delinquencies Abating
The U.S. loan delinquency rate, representing loans that are 30 or more days past due, but not put on the foreclosure list, reached 8.83 percent in December, dipping by 2.1 percent from the November rates, according to a recent Lender Processing Services Inc. (LPS) statement.
States with the most defaulted loans are Florida, Nevada, Mississippi, Georgia, and New Jersey. More than 60 percent of Florida mortgages are 60 days or more past due.
States priding themselves with the least noncurrent loans are Montana, Wyoming, Arkansas, South Dakota, and North Dakota.
In 2010, a record high of approximately 2.9 million homes were foreclosed homes, representing a 2 percent increase over 2009, according to a press release from RealtyTrac, a firm that tracks foreclosures.
In December, foreclosures were curtailed, representing a 2 percent decline from November and a 26 percent dip from a year ago.
“Total properties receiving foreclosure filings would have easily exceeded 3 million in 2010 had it not been for the fourth quarter drop in foreclosure activity,” said James J. Saccacio, CEO at RealtyTrac.
Saccacio said that due to banks slowing down foreclosure proceedings as a result of reassessing foreclosure processes, the December and 2010 figure is about one quarter million lower than it would have been otherwise.
The better than expected 2010 foreclosure numbers were “triggered primarily by the continuing controversy surrounding foreclosure documentation and procedures that prompted many major lenders to temporarily halt some foreclosure proceedings,” Saccacio said.
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