Strategic default is much in the news and on people’s minds lately – as many property owners consider that continuing to make payments on their homes and residential rental properties might not be a wise financial decision.
Some and homeowners are now making monthly mortgage payments that are roughly double what their next door neighbors are paying for a similar home purchased recently. Worse, their homes are now worth as much as 30% less than the balance they owe on their mortgages. Most condos are now worth 50% less than is owed on them.
Rental property owners, faced with competition from investors who purchased in the last few months, are being forced to lower rents. Homes that were once income properties are now a monthly drain on bank accounts. Owners are writing checks to make up the difference between rental income and the mortgage payment.
A good number of property owners have both assets and income – they are able to continue making the payments. But making those payments could make a serious and negative impact on their future and their children’s futures.
For some it means using every last dollar and forgetting about such things as saving for retirement or college tuition for the kids. For those whose income stream has been reduced, it could mean going a little farther into debt each month on credit card accounts, just to keep food on the table.
Thus, they’re considering “Strategic Default” as a way out from under the financial burden.
But strategic default does come with consequences.
Fannie Mae, which either owns or guarantees more than half the mortgages in the , has announced that it will refuse to back new loans for “walk-away”
There’s also a lingering financial risk. While Michigan Law prevents banks from demanding deficiency payments on first mortgages, if mortgage is a full credit bid at the foreclosure sale. If the mortgage company underbids the amount owed, then the mortgage company can file with the courts for a deficiency judgment for the unpaid amount. Strategic defaulters could (and probably will) be faced with deficiency judgments after defaulting on second mortgages.
A short sale is the safer way to go, since in most cases there is NO deficiency judgments on either first and second liens in a short sale.
So why are so many homeowners considering strategic default?
Because they’ve been led to believe that it is the only solution. But it is not.
A Short Sale is Be a Better Idea
In spite of what you may have read, banks do allow short sales on investment properties and second homes as well as primary residences, and they do allow short sales for owners who have both income and assets.
When the request is presented properly, bank negotiators usually conclude that allowing a or short sale is the best business decision for them. And of course it is. Foreclosure is not without cost to the bank, and a vacant home requires maintenance and upkeep. Then, it sells for a lower price than an occupied home.
During the past 5 years of handling short sales, we’ve learned that each bank has a different way of handling short sales. Some are aggressive on certain issues and not on others. And that’s why it’s vital for your short sale negotiator to have had experience with each of those banks.
By knowing their policies and procedures, and by knowing who to contact at each bank, we can present the picture in a manner that leads to “yes.”
Another step in the short sale negotiation process is dealing with the second lien holder. If a property owner chooses strategic default via walking away, there is no negotiation. They can and will come back to you for the deficiency. But with the help of a skilled short sale negotiator, the second lien holder can be persuaded to allow the short sale.
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Thanks for reading, Rick Giese.
Rick Giese is a real estate associate broker at RE/MAX Advisors.
Phone Toll Free: 1-800-274-5656. email: Rick@RickGiese.com
Rick Giese specializes in loan modification assistance and short sales in the , and southern St Clair County Areas of . Loan Modification Help, Short Sale Help. Oakland Short Sale Help Macomb and our services are offering sellers another option besides pre-foreclosure foreclosure or bankruptcy that can affect their credit for years. We are currently offering our services in the Richmond, Shelby Township, Macomb Township, Chesterfield Township, New Baltimore, Clinton Township, Sterling Heights, Mount Clemens (Mt Clemens) Fraser, Harrison Township, Warren, Roseville, St Clair Shores areas of Macomb County Michigan Madison Heights, Troy, Clawson, Royal Oak, Rochester, Rochester Hills, Berkley, Birmingham areas of Oakland County
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