Fox Business.com
Written By Laura Rowley Published September 19, 2011 Daily Finance, (Excerpts of the full article)
If you find yourself “upside-down on your property…be it your primary residence or an investment property, please give me a call on my direct line: 561-602-1258. Thanks, Steve Jackson
(or send me an email: Steve@ShortSales123.com)
Its value has plummeted to $111,000, wiping out Kessler's $45,000 down payment and leaving him with a mortgage that's more than the home is worth. He stopped paying the loan six months ago, and estimates he'll have to vacate by March 2012.
But Kessler isn't in financial trouble, and he could afford the monthly payments. He has no other debts and two pensions from former employers, as well as Social Security. He also has a woodworking hobby, and runs a small business selling the artisan lamps he makes in galleries. He's single now, and his two children are grown and gone…
First notices of default jumped 33% in August, a nine-month high and the biggest month-over-month increase since August 2007, according to figures by RealtyTrac released Wednesday.
"There are 3 million to 4 million seriously delinquent mortgages that under normal circumstances would be in foreclosure but have been kept out by procedural delays and paperwork problems," says Rick Sharga, RealtyTrac senior vice president. The recent spike in foreclosure starts suggests lenders are "hitting the restart button" on cases that were delayed by documentation problems such as robo-signing, he explains.
There's no data on the demographics or financial histories of the people receiving recent default notices. But among them are some homeowners who have never defaulted on a loan before, at least according to one poll. YouWalkAway.com surveyed several hundred of its clients earlier this year, and just 23% said they had previously shirked a financial obligation.
"The people we are now seeing are nearing retirement age, who never missed a payment on anything in their lives," says Jon Maddux, co-founder and CEO of the Carlsbad, Calif., firm. "They are trapped. They can't sell or get a modification and they need to downsize or move for a job."
Attitudes toward default have also shifted, Maddux says. "Back in 2008 people were very emotional, very scared, in disbelief or denial," he says. "Now they are simply fed up. It's a very calculated, black-and-white business decision. People feel very relieved."
A more widespread understanding of the consequences of default may be a factor, says Brent White, a University of Arizona law professor and author of Underwater Home.
"The conventional wisdom is you are ruined and are not going to recover," says White, who wrote a widely circulated discussion paper on the topic. But in so-called "non-recourse" states such as California, the bank can only foreclose on the property and resell it. If the price is less than the amount owed on the mortgage, the lender can't sue the homeowner to recoup the shortfall, says White. Even in recourse states, the bank is unlikely to go after the homeowner following foreclosure, he argues.
"The vast majority of those who default end up doing a short sale and that (sometimes) discharges the deficiency," he says. "If they are pursued, they can (sometimes) negotiate to pay less than the full amount. A savvy person who retains an attorney or other knowledgeable person to walk them through the process will likely get through default without having to pay a deficiency judgment. Most people will have a good credit score again within a couple years."
But John Ulzheimer, president of consumer education for SmartCredit.com, disagrees, at least for consumers new to default. "If someone who has never missed a payment suddenly puts their home in foreclosure, their credit score is destroyed," says Ulzheimer, who previously worked for a credit bureau.
"If you already have payment problems on the mortgage and defaulted on other accounts, [foreclosure] may not have a material downward impact, but it will lock in a lower score for a long time," Ulzheimer says. People who stop paying the mortgage can minimize the credit score impact by using that free cash flow to pay down other debts, such as credit cards, he adds.
But just because the bank doesn't pursue homeowners today doesn't mean it won't tomorrow, argues Ulzheimer. The statute of limitations to sue on contract debt in recourse states ranges from three to 15 years. "Some people think that's the next shoe to fall," he notes….
White says underwater homeowners should figure out if they are paying substantially more to own a house on a monthly basis than they would pay to rent a similar property. "Even if you are thousands of dollars underwater, if you are paying the same as you would to rent, you don't gain that much financially by defaulting," he says. (The survey by YouWalkAway.com found a quarter of respondents saved 50% or more on housing expenses when they rented after their default.)
In addition, someone who will need a good credit score to run a small business or borrow to meet a goal, such as a child's college education, should avoid strategic default. "If you have a particular need for easy credit in the future, then it doesn't make financial sense," White notes.
As for Kessler, he is looking forward to biking, tennis and skiing in the Southwest next year. "I don't feel guilty at all about walking away from the place," he says. "The banks really did it to themselves. They made a ton of money with me over the years. I owned four or five houses. But I don't think I'll ever buy another house. I'll probably just rent until they put me in a nursing home."
Read the full, original article here: http://www.foxbusiness.com/industries/2011/09/19/new-face-foreclosure-strategic-defaults/#ixzz1ektafvO9
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