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Strategic Foreclosure…A Good “Strategy”? Or Not?

Homeowners have found themselves in foreclosure for a number of reasons. Some lost their jobs–the national unemployment rate remains in the double digits–and had no way to make mortgage payments. Here in Arizona we have one of the highest rates of unemployment anywhere. Some people simply purchased properties they could never really afford. Some got caught up in “bad” loans that adjusted and made the home unaffordable. But as the housing crisis stumbles forward, an additional segment of home foreclosures has become clear: Many homeowners have the means to keep paying the mortgage but are simply walking away because they believe it’s best for their long term financial goals.

Different studies claim between 25-35% of all borrowers currently have negative equity. And rather than continuing to make payments on an investment that’s now worth significantly less than what they paid for it, many borrowers are throwing in the towel. The general feeling amongst those that are using a strategic default is that it will take years for their homes market value to recover. They basically walk away from the property and start fresh.

But are the lenders themselves to blame for this…I think maybe so. Some people have tried loan modification programs and they have become so exasperated at their lenders for not doing more to help…they just can’t take it anymore. Anyone who has ever tried to get a loan modification know that lenders do not make it easy. Often times borrowers can’t get any response from their lenders and are repeatedly told to send in the same documents over and over again.

But Fannie Mae is “putting their HUGE foot down”. The following was posted on their site July 23, 2010:

“Fannie Mae (FNM/NYSE) announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure.” Read full News Release here.

Ok…REALLY??? Is locking out this segment of potential homeowners from future financing really the best move? I know…they “signed and agreed to pay”…and changed their minds when they realized they would probably NEVER be right side up with the home investment they have now. But here is my thought.

Some of the folks I know who have done this are…a well known area Attorney, one of my personal doctors, a custom home builder and a corporate VP of a large local firm. Now..I personally know two of these folks and they REALLY tried for a loan modification. When a loan modification was offered to one of them…it saved him $17.00 per month! Seriously? That is a joke. One tried to short sale as well…and had no success…as the bank took 9 months to act on the offer and the buyer walked. Now…that was over a year ago and I know lenders have been getting better at processing short sales…but many of the people who have gone the strategic foreclosure option made an effort to try alternatives…and were unable to get it accomplished.

I am just saying. The main driving force for a recovery is going to come down to simple economics of supply and demand. Home ownership needs to be more affordable to more people. We will not see a full fledged recovery without the buyers to support it.

I think we need every hard working American who wants to buy a home…to be ABLE to. Seven years is a LONG TIME!!! I do see the other side of the argument…I really do. I just do not think the “seven year” plan is helpful to our real estate recovery as a whole.

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