Strategic Walk Aways…

The Real Story…

News and commentary about the real estate market and related topics.
Dave Parrish, ABR ®, CRSA, CSP, GRI, ePRO ®, REALTOR ®, RealtySouth

The opinions expressed here are my own and don’t necessarily represent those of HomeServices South.

Strategic Walk Aways…

I mentioned them a couple of weeks back… Strategic Walk Aways have been on the rise!

For those who may have missed that brief mention, a strategic walk away is when a home owner that owes more on their home than its current market value and who is capable of making the payments elects to walk away from the home and the mortgage obligation. The logic being: I owe more on my home than it’s worth, the market is still declining and I don’t believe that my continued investment (making of mortgage payments) will provide me a net gain in the foreseeable future or in the time frame that I desire. Based on this logic, the homeowner makes a strategic decision to walk away from their debt and allow the home to go into foreclosure.

Now it’s very tempting here to go into a rant about these individuals and the practice of strategic walk aways… But, I will refrain! What I will do is to discuss some facts about foreclosures and current practices, as well as some recent announcements and moves to discourage this practice.

First of all let’s review the provisions of the laws and practices associated with foreclosures. We mentioned last week the Right of Redemption and how Alabama has one of the most lenient rules concerning a homeowner’s right to redeem their property following foreclosure. On the flip side of that is the fact that Alabama is one of the states which allows Deficiency Judgments in a foreclosure. Actually, there are only 6 states which do NOT allow Deficiency Judgments (California, Minnesota, Mississippi, Montana, North Dakota and West Virginia).

A deficiency judgment may occur after a foreclosure has been completed, if the lender suffers a loss on the loan, and is not able to recoup their original principal.  The lender can go to court and get a judgment against the borrower for the amount of their loss. Note also that junior lien holders who were wiped off title by a foreclosed senior lien may be allowed deficiency judgments if the junior lien was NOT created at the time of purchasing the property (non purchase money junior liens).

Those are the rules or possible actions. What can happen in theory rarely happens in practice however. Even if they are allowed to sue the homeowners, banks rarely go after a deficiency judgment. Just as the foreclosure victims are worried about how they would ever pay tens of thousands of dollars in judgments; the mortgage company is worried about how they would ever be able to collect it and how long the process would take.

However, there seems to be a change in the air toward the attitude toward those electing to use foreclosure as a way to insulate themselves from the forces of the market. While it has been the practice of banks to only go after those who had another home (second home or rental property) or other substantial assets, it appears that those to be pursued for deficiency judgments will be enlarged.

Fannie Mae says it will get tough on borrowers who engage in “strategic defaults,” or walk away from a home that’s worth less than what’s owed on the mortgage even when they can afford to keep making their payments. Next month, Fannie Mae says it will instruct its servicers to begin monitoring delinquent loans facing foreclosure and issuing recommendations for cases that warrant the pursuit of deficiency judgments.

For those that are determined to have chosen to default it will not only refuse to guarantee another loan for seven years; but, it will seek to recoup losses in court through deficiency judgments. There is, however, a carrot-and-stick aspect to the new policy. Troubled borrowers who work with their servicer on foreclosure alternatives such as loan modifications, short sales, or deeds in lieu of foreclosure can be eligible for a new loan in two to three years if they can show extenuating circumstances such as job loss, illness or divorce.

Under these new policy changes, borrowers may be eligible for a loan guaranteed by Fannie Mae within two years of a short sale or deed in lieu of foreclosure. Those who can demonstrate extenuating circumstances such as a job loss will be required to make down payments of at least 10 percent, and those who cannot must make 20 percent down payments.

Walking away from a mortgage is bad for borrowers and bad for communities, this new approach is meant to deter the disturbing trend toward strategic defaulting.

May the Market be with you.