SuccessRoads.com

In laymen’s terms: why are so many home owners walking away from their houses in droves? That’s the provocative question posed by Brent T. White, a University of Arizona law professor whose academic paper on the fast-spreading “strategic default” phenomenon last year drew sharp criticism from lenders and Wall Street, who viewed him as the Pied Piper of the walk-away movement.

Now White has published a new paper, based on the personal accounts of 356 strategic defaulters and homeowners on the verge of doing the same. His finding: People who intentionally default on their loans are not as calculating in their decision-making as widely believed.

In fact, he says, their decisions to pull the plug “may not turn out to be economically rational.” But they walk anyway, in large part because they are at the end of their emotional rope. They’ve transitioned from feelings of anxiety and hopelessness to outright anger at their lenders, the government and/or a financial system they consider to be unfair. Boy, I have to agree with them on this one!

White published his latest paper in Arizona Legal Studies, the law school journal. Following his initial study last year, which argued that far larger numbers of underwater borrowers should stick it to their lenders, (That would make a great website! wouldn’t it? StickItToYourLender.com!) White says he was inundated with e-mails and calls from homeowners saddled with negative equity. Many provided him with extensive details of their own financial situations and their difficulties in dealing with their lenders; the latter issue is where the borrowers are really fed up?

Negative equity continues to be a massive and corrosive problem, according to real estate analytics firm CoreLogic. During the first quarter of this year, 11.2 million homeowners nationwide owed more on their mortgages than their properties were worth. Fellow investors, brokers and agents; please see this opportunity to help people and help the economy rebound and you make a profit- it’s Ok!

In Las Vegas, 75% of all mortgaged homes and condos are underwater. In Phoenix, 550,000 homeowners have negative equity — 58% of all houses with loans. Florida’s rate of negative equity is 48%, followed by Michigan at 39% and California at 34%. Nationwide, nearly one out of every four mortgaged houses is in a negative-equity position, according to CoreLogic.

White and other academic researchers believe that severe negative equity is the essential spark that prompts owners to consider walking away — even those who feel it’s morally wrong to default.

Based on the personal accounts shared by strategic defaulters, White says they often have high FICO credit scores, sterling payment histories and solid incomes. As one underwater homeowner put it in an e-mail to White: Considering their previous credit performance, “there isn’t a lender out there who wouldn’t give us a loan.”

But staring at hundreds of thousands of dollars of negative equity, owners turn anxious, then pessimistic, about their financial futures. Older owners with severe negative equity worry about their ability to stay afloat in their retirement years if they keep paying their mortgage today.

Lenders and loan servicers often play crucial — if inadvertent — roles in motivating owners to walk away, White says. Of the 356 homeowners’ situations he analyzed, 100% reported contacting their lenders to work out some solution before they defaulted.

Many say they were rebuffed by servicers who refused to discuss modifications with anyone still current on loan payments. (THINK ABOUT THE LOGIC IN THAT STATEMENT!!! NO WONDER THE DEFAULTS ARE WAY UP!!) Other owners told White that they tried to qualify for one of the Obama administration’s foreclosure prevention programs but either got snagged by rigid income-to-payment rules or nonresponsive servicers, or were told they were simply too deeply underwater to obtain assistance of any sort.

White says there can be no effective answer to the walk-away trend as long as lenders and government fail to intervene early and address underwater borrowers’ needs and emotions.

One possibility: much deeper principal-reduction efforts for owners who have severely negative equity and see no way out.

Still another, says White: Create a “rent-based loan program” that allows underwater owners the option of refinancing their balances to an interest rate that would bring their monthly payments in line with the rental cost for a comparable house. It sounds to me like it’s time for investors to also revive the LEASE OPTION as a viable investment strategy- the opportunities are endless. Get in the game!

This may be the single worst piece of advice I have ever read published in such a well respected association and qualified professional news source for Realtors and real estate professionals. First, for purposes of full disclosure; I am a full time investor and do invest in purchasing short sale properties and I am also a full time licensed real estate broker in the state of Arizona and have been for 18 years; and our firm does represent distressed sellers, as well as in many cases, our own investment company as buyers of those same short sale properties with the obvious written dual agency disclosure to the seller and also the third party lender who ultimately approves the sale.  The advice I am referring to was written by Scott Thompson with ServiceLink, a national lender platform in Rancho Cordova, CA. in the April 2010 edition of Realtor magazine, published by the National Association of Realtors. www.realtor.org/realtormag The name of the article was “Short Sales Ethics: 6 Temptations to Avoid” and number 4. is titled: “Selling to Flippers” It states: ” Unless the investor in a flip is prepared to add substantial value by fixing up the property, don’t participate in a flip. Short sale flips benefit only the investor, who’s clipping off moneythat could go to an already bleeding lender.”

Where do I start? First of all, an investor is NOT the only one who benefits! What about the homeowner/seller? Our goal is to get them out of the house and the situation they are in and close the short verses letting the house go into foreclosure and devastating their credit and/or potentially force them into personal bankruptcy.  The SELLER WINS! Oh and by the way, what about the lender? They have a solid cash buyer, us, who will do what we say we will and close the deal as per the contract and on time therefore mitigating the lender’s loss tremendously.  The LENDER WINS! Also, not another run down vacant house on the block sitting there for sale for months, only to sell for LESS as an REO , which would have hurt the lender much more and brought down sales comps. The NEIGHBORHOOD WINS! Also; the new buyer, soon to be new homeowner, now buys the property at STILL  a HUGE discount (that’s AFTER the investor’s evil profit!) and can now make an offer and close quickly because ALL the hassles of the former seller’s transaction and their lender were solved by that nasty investor who clipped  off  money from the poor lender. NEW BUYER WINS!  And; don’t forget about the real estate agents; they make a well deserved commission from the hard work that really does go into getting all the parties to a short sale to the table to close an almost always difficult transaction. The AGENTS WIN! The agents/brokers like us that pay the dues to the (NAR) the National Association of Realtors. Investors and brokers/agents are of the same breed; we are all entrepreneurs who are out working for ourselves, taking risks to feed our families and many times working many hours on transactions that we may never get paid from. So let’s don’t forget that investors often times drive our markets and make the deals close that otherwise would not and our involvement in the process benefits ALL parties involved, NOT just the investors! Without investors, free capitalism and those of us willing to work the hard deals, this market we are in would slow to a screeching halt. So I believe strongly that it is grossly irresponsible to encourage real agents to NOT sell to a Flipper (basically slang for an investor who resells for profit – God forbid!) and slant the advice toward being unethical is certainly an insult to all investors and brokers/agents of the world.

To encourage HAFA participation, the Treasury Department raised financial incentives under the program in late March. Borrowers are now eligible for $3,000 in relocation assistance, and servicers (banks) will receive $1,500 to cover administrative and processing costs for a short sale or deed-in-lieu completed under the program. In addition, the banks will be paid as much as $2,000 for allowing a total of up to $6,000 in short sale proceeds to be distributed to subordinate lien holders. (you know the ones.. those uncooperative 2^nd mortgage holders who do nothing but screw up the shorts sales for all parties when they choose to “play hard ball” and refuse offers and then get nothing while costing the banks hundreds of thousands of dollars and force the owners into foreclosure!) For the 2^nd lien holders to receive their incentive from the banks in first position, they must release their liens and waive all future claims against the borrower. (as they should have been doing all along, again, instead they chose to take nothing) According to Treasury, the foreclosure alternative options offered under HAFA reduce the need for potentially lengthy and expensive foreclosure proceedings and also help preserve the condition and value of the property by minimizing the time a property is vacant and subject to vandalism and deterioration. The collective thinking, now even in the government, is that short sales and deeds-in-lieu generally provide a substantially better outcome than a foreclosure sale for borrowers, investors, and communities. As investors, we all have known this to true, but getting the home owners a few bucks for their efforts and helping them with the burden of relocating, is great news in my book!

HAFA (which means “I have HAFA mind to never pay another mortgage payment again!”) Kidding!!! Actually it is part of the Home Affordable Modification Program (HAMP) that aims to help homeowners who are unable to qualify for a loan modification under HAMP by providing them with the option to pursue a short sale or deed-in-lieu. Under the program, financial incentives are provided to servicers (banks) and borrowers (now you’re talking!) who utilize these foreclosure alternatives. As of April 5, 2010, the program is now in action and according to the guidelines, once a borrower is determined to be ineligible for a HAMP modification, the bank must consider that borrower for HAFA within 30 days. Every potential eligible borrower must be considered for the program before the borrower’s loan is referred to foreclosure or the bank allows a pending foreclosure sale to be conducted. If the bank determines that the borrower is eligible, the short sale or deed-in-lieu process will begin. Qualified borrowers will be given pre-approved short sale terms before the property is listed, and once an offer is made, banks/mortgage servicers will have 10 days to approve or reject the sale.