Posted on 07/10/2010 7:26:47 AM PDT by Daniel T. Zanoza
Recently, I was shocked to learn about how hundreds or perhaps thousands of Illinois homeowners are using a strategy called "strategic default" to walk away from their current mortgage obligations. Literally thousands of homeowners in Illinois and across the country find themselves "upside down" or "underwater" regarding the homes they currently live in. The terms "upside down" and "underwater" refer to homeowners who owe more money on their homes than they are currently worth.
It is widely believed the Fannie Mae / Freddie Mac debacle has led to the current economic crisis and deep recession facing America today. However, no one can say Americans are not resourceful and, at times, not in good ways. In the case of "strategic default," which is also known as voluntary foreclosure, participating homeowners may not be ethical, but they have certainly found a way to beat the system.
In part, this situation is a result of the failure of Fannie Mae and Freddie Mac, quasi-privately owned and government-backed corporations, which insured loans to many homeowners whose income level should not have qualified them for mortgages they could not afford.
Here's how this "strategic default" strategy works. Those who are having trouble meeting their current mortgage notes, but may not be in default or foreclosure, or are simply seeking lower mortgage payments, go out and purchase new homes. They find homes with lower mortgage payments more commensurate with their income.
On their credit applications and in meetings, new lenders inquire about the status of the current mortgages held by those seeking to get out from under their old mortgage agreements. The perspective lenders take the applicant's word, in good faith, that their old homes are in the process of being sold. Technically, though this may not be true, new lenders provide mortgages based on inaccurate or misleading information from perspective buyers. Once a new mortgage is secured, the homeowner then simply walks away from their old mortgage obligation, leaving their credit rating in shambles, but at least these individuals or families are now living in a home they can more readily afford.
"It's amazing concerning what's happening," said a licensed Illinois real estate appraiser who requested anonymity. "These people are playing with fire, as they skirt the law regarding the provisions of accurate and honest information they are giving financial institutions. These individuals have good credit ratings at the time and the financial institutions they are negotiating with have no reason to doubt whether the information on the new mortgage applications is accurate and complete. It's dishonest, yet it is a sign of the times."
However, a substantial number of those who are participating in this "strategic default" scheme are violating federal law, the government is catching on and some of these people may be in legal jeopardy for lying to new lenders. To exacerbate the problem, the new lenders are not exercising due diligence which led to the meltdown of America's economy in the first place.
There are actually entrepreneurs who are helping, for a fee, walk people through the process of stepping away from their homes and the promissory notes they signed with their original lenders. This practice brings into question not only legal and fiscal concerns, but a moral issue as well. Some Illinois residents apparently feel justified with breaking a legal contract because of government bank bail-outs and Washington, D.C.'s fiscal irresponsibility which has resulted in our nation's historic mounting national debt and the financial crisis America is facing. These individuals obviously feel if the government does not have to adhere to a budget, why should they? Of course, two wrongs do not make a right. However, many homeowners look at "strategic default" as a way to provide themselves a personal bail-out, even though it has a devastating impact on their credit rating. What's good for the goose, is good for the gander--to their way of thinking--and "strategic default" may simply represent a lesson well taught by local, state and federal government.
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Daniel T. Zanoza, 56, is a free lance journalist and political analyst. He has a degree in political science and social work. Zanoza formed RFFM.org nearly twenty years ago, in an attempt to encourage fair coverage of political and social issues in the mainstream media which are important to pro-family conservatives. Zanoza often works behind the scenes with journalists in a non-confrontational manner to achieve this goal.
While I hate that people do this, and frankly think that anyone who does this should be banned forever from getting a mortgage ever again, I do understand why they do it.
Personally, I am frustrated because I cannot refinance my own mortgage, and yet, my taxes subsidize mortgages underwritten by Freddie Mac and Fannie Mae.
“Personally, I am frustrated because I cannot refinance my own mortgage, and yet, my taxes subsidize mortgages underwritten by Freddie Mac and Fannie Mae. “
You should be.
Strategic Default - yet another PC/fell-good change of name to make something immoral and wrong sound good.
What will be next? Federal regulations - something like “Community Reinvestment Act Part II”? Banks will be required to write a certain number of loans to people who have opted to take a “Strategic Default”, even though they represent an incredible risk???
BINGO! There's nothing "strategic" about it. It's immoral and it should be illegal as well.
With each passing day as more and more of these "strategic" defaults happen around me (there are 6 homes within walking distance of me that are in 'strategic default') I wonder why I keep paying my mortgage and playing by the rules while others who just decide to walk away from their homes, debt and obligations go on to live a better, more extravagent lifestyle than I do.
Most of these people are into their second or third homes, have new cars, their kids have atv's, boats in the driveway, etc... which they "financed" on my tax dollars.
Where's my bailout for doing the morally right thing?
The banks are on to this one now. A friend of mine, with a secure six-figure income, well right-side up in the mortgage on his home, wanted to buy a bigger house. The lenders wouldn't accept that he was planning to sell his house and calculated his credit-worthiness based on his owning both houses. He was forced to sell the home he was in and move into an apartment for a few months in order to qualify for a mortgage.
“It is widely believed the Fannie Mae / Freddie Mac debacle has led to the current economic crisis and deep recession facing America today. However, no one can say Americans are not resourceful and, at times, not in good ways. In the case of “strategic default,” which is also known as voluntary foreclosure, participating homeowners may not be ethical, but they have certainly found a way to beat the system.”
I am not syaing the people doing this are right. But I imagine they have looked around the last few years with the government propping up other homeowners trying to get them to stay in their homes, blaming banks for ripping off poor people who now just can’t make their mortgage, and knowing they won’t get any help from government with their own problems. They sit there and think the other folks getting help should never have gotten their mortgages in the first place but govt is trying to help them out. Where’s their help?
Again, not saying anybody should expect help, or that what they are dealing with isn’t largely a self-inflicted problem, but human nature being what it is, I can see this behind their thinking.
They can’t bail YOU out, you’re one of the ones paying their mortgage.
These people are commiting fraud on their mortgage applications, and we are permitting it.
And as banks continue to hemorrhage cash and continue to tighten the screws on new credit, the LIBS continue to point fingers at the “evil bankers”.
Hello - how many of the loans being “strategically defaulted” were the end result of deceptive evil bankers “forcing” people into loans they couldn’t afford?
The only folks getting “bailouts” are those who are irresponsible, or outright frauds. The honest folks are getting the major shaft. Those who actually pay taxes are getting a raw deal, and the LIBs are laughing it up.
What would be a good modern day equivalent to the Boston Tea Party? Some dramatic act of defiance that would truly put a point to the cause of those being most hurt by the current administration’s policies?
If you’re upside down and have no prospects to sell, and want out, there’s three options: Default, short sale, deed-in-lieu. Short sales can be a PITA due to the internal hassles at lenders. Deed-in-lieu is the best option if you can’t sell. The bank may even pay you to leave the home in good condition. Not near the impact on your credit. Strategic default- you may not be able to get a FHA/Fannie/Freddie backed loan for 7 years.
Whatever you do, look at your own situation, and examine your options and consequences. Talk to those in the industry and talk with your lender. Keep communications open. But remember that a house is just that, a house. It is a purchase, a thing. Don’t get attached to a thing to the point that it damages you, no matter what it is.
Lessee here...how many trillion dollars of American Taxpayer monies have been given to Investment Banks in the last two years? Oh, that’s right, Mr. Bernanke refuses to allow We the People access to his books so we can determine accurately.
How much of that could have paid off the blown out securitized mortgages that SUPPOSEDLY got those investment banks in trouble in the first place?
what’s coming...will make the French Revolution look like a tea party...
There’s more to this-true, a “house is just a thing,” but people are buying this “thing” under sanctity of a contract-a binding agreement between them and the lender. I understand that financial situations change, and in the Obama economy, it’s been worse than better. Still, the point is that walking away from a mortgage should be the last resort-not just one choice among many. Being underwater on one’s mortgage is a temporary thing. One would generally only realize “underwaterness” if they wanted to sell or re-finance. Unless you have to do either, suck it up, and continue to honor your mortgage contract!
“I wonder why I keep paying my mortgage and playing by the rules while others who just decide to walk away from their homes, debt and obligations go on to live a better, more extravagent lifestyle than I do.”
All this is meaningless, a chasing after the wind.
The answer to that question is to "Go Galt." We the producers in this country stop producing. No more tax revenues to the Government, meaning they can no longer feed the moochers without turning on the money printing presses (even more than they already have) or try to legislate "production."
Time to crash the system. I do my part, I don't buy anything that's absolutely not necessary and I long ago cut any "waste" I had in my monthly budget. Stop consuming, stop producing and we crash this sucker right into the ground.
Absent that, this requires a full-on revolution in the spirit of our founding fathers, complete with guns, bullets, tar, rope, feathers and a bunch of treasonous bastards in the U.S. Congress and White House swinging by their necks on the steps of the U.S. Capital.
Either option works for me.
You are right about no one forcing people into bad real estate deals.
However, this analysis ignores an important part of the story as it is made without notice of the banksters and politicians working together to distort the real estate market by giving loans to unqualified people thereby creating a false demand. This ploy in power, pushed up the price of real estate to unreal values which then crashed on home owners. The banksters were bailed out by the polticians and the qualifed home owners are left holding the bag of crap.
When nothing is honorable - and all is corrupt - the ones who are honest are the ones who get screwed. Our banking system is corrupt. Democrats even placed a requirement for race and sex quota loans into their “reform” to keep the sham and failure going.
We are not in Kansas anymore, toto.
Strategic Default: A Plan For Homeowners To Walk Away
Give it any name you want. The fact remains that these borrowers are being dishonest and committing fraud. And these lenders are stupid and criminal and shouldn’t be in business.
It’s stuff like this that brings tears to my eyes as I watch our country fall apart at the seams.
The government we put in place is simply a reflection of the people who put it there.
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