Pro and Cons of Mortgage Strategic Defaults.

[countryclubjoe]

Hi Folks

What are your views/opinions on homeowners doing strategic foreclosures?

I am old school therefore I feel a contract is a contract. Now my dilemma is that my son is actually considering doing this strategic default business. His theory is live rent free for 20-24 months depending on your state laws and building cash flow.
Since he is upside down on the property, he feels this is a good business plan.

Is there an ethical obligation to consider? Or am I just to old school?

My son is financially able to make the payments however he feels that purchasing the property six years ago was a mistake and he now wants to stop paying on that mistake.

Thoughts and opinions are most welcome.

TIA

Best regards
CCJ

 

[Tomasso]

My son is financially able to make the payments

This just leaps out at me......

 

[LizzieMaine]

Welshing is now a business plan?

 

[countryclubjoe]

This just leaps out at me......

Hi A.C.

I feel the same way however I am not to business savvy.
Sons feels he will save 72k in two years. Then be able to move whereever he pleases.
Again I question the ethics of this strategy but my home is not 200k underwater so its not an issue for me.
Best regards
CCJ

 

[Feraud]

Edited-

My son is financially able to make the payments however he feels that purchasing the property six years ago was a mistake and he now wants to stop paying on that mistake.

Thoughts and opinions are most welcome.

TIA

Best regards
CCJ

I'd suggest reiterating to him some of your old school ethics.


Based on the comment below it sounds like he is in serious financial trouble. He best speak with a financial counselor asap. Either way I doubt in two years he will be moving where ever he pleases.

Hi A.C.

I feel the same way however I am not to business savvy.
Sons feels he will save 72k in two years. Then be able to move whereever he pleases.
Again I question the ethics of this strategy but my home is not 200k underwater so its not an issue for me.
Best regards
CCJ

 

[sheeplady]

I worry that this question is going to cause a lot of hurt feelings, since it is your son.

I also agree that a contract is a contract. I also have always felt that a home is an investment only in the sense that no investment is guaranteed. If your son took his down payment and invested it in the stock market, he would have lost the same amount of money. With his home, the economy could upswing in another 5 years and his investment could come back, plus some. Unlike stock (which can disappear with the company) as long as a house is still standing, he has a chance to recoup his investment. No one gets anything for free, and I have to wonder if he is paying that much more in mortgage than he would in rent? (Personally, I look at a home as basically something where I pay less than rent. For instance, if I sold my home today, I could lose $80,000 (rent for a similar place where I live for the number of years I have lived here) and still break even. If I only lose $70,000, then I saved $10,000.)

From a practical standpoint, your son has paid in 6 years into equity into his home.
1. How much equity is he losing?
2. Does he intend to purchase another home? Apply for any type of loan in the next 7 years after they actually foreclose?
3. Does he intend to change jobs? (Depending upon his field, they may check his credit history)
4. Is his area on the upswing?
5. Is he married or planning on getting married? If married, is he planning to divorce? Does he have children? (I can see how this could be used against him in a custody battle, for instance. Not that it would necessarily matter in the decision.)
6. Is rent on a similar place cheaper than his mortgage?

There is no guarantee if he does squat that he will get 2 years rent free- the sheriffs could show up at his door anytime after the paperwork is filed, and he'll have 2 weeks to move out before the house is possessed. If he can move in that time and find another place to live, and is ok with that uncertainty...

 

[countryclubjoe]

Hi All

I am lost on this issue, I am still trying to digest it all.
There was a time when I held 12 properties in my portfolio, I never missed a payment in 30 years. The last 6 properties were purchased with a hand shake from my local bank. I understand the ethics argument however while I welcome everyones opinion, putting ethics aside for a minute, I am asking for the PROS and CONS of the issue. I am shocked that a homeowner could legally stay in a home for more then 4-5 months without making a payment. My Sons lawyer advised that presently there are no legal ramifications in state law to prevent such business practice, hence the term Stratgic Default.
TIA
Best regards
CCJ

 

[countryclubjoe]

I worry that this question is going to cause a lot of hurt feelings, since it is your son.

I also agree that a contract is a contract. I also have always felt that a home is an investment only in the sense that no investment is guaranteed. If your son took his down payment and invested it in the stock market, he would have lost the same amount of money. With his home, the economy could upswing in another 5 years and his investment could come back, plus some. Unlike stock (which can disappear with the company) as long as a house is still standing, he has a chance to recoup his investment. No one gets anything for free, and I have to wonder if he is paying that much more in mortgage than he would in rent? (Personally, I look at a home as basically something where I pay less than rent. For instance, if I sold my home today, I could lose $80,000 (rent for a similar place where I live for the number of years I have lived here) and still break even. If I only lose $70,000, then I saved $10,000.)

From a practical standpoint, your son has paid in 6 years into equity into his home.
1. How much equity is he losing?
2. Does he intend to purchase another home? Apply for any type of loan in the next 7 years after they actually foreclose?
3. Does he intend to change jobs? (Depending upon his field, they may check his credit history)
4. Is his area on the upswing?
5. Is he married or planning on getting married? If married, is he planning to divorce? Does he have children? (I can see how this could be used against him in a custody battle, for instance. Not that it would necessarily matter in the decision.)
6. Is rent on a similar place cheaper than his mortgage?

There is no guarantee if he does squat that he will get 2 years rent free- the sheriffs could show up at his door anytime after the paperwork is filed, and he'll have 2 weeks to move out before the house is possessed. If he can move in that time and find another place to live, and is ok with that uncertainty...

Hi Sheeplady

Thank you for your reply. I will not take anyones comments to hard, I understand they are not directed at me in a mean spirited way. What hurts me is not knowing if my son is going thru some hard times. He took a pay cut in Januarry and downsized into a more reasonably priced car.( That in my opinion was a great business decision). His job in my opinion is not very secure, Casino Management, he is single with no children.
I advised him back 6 years ago not to take on such a big mortgage payment. It looks like I will need to dig some into my Sons financial affairs.
Thank again to everyone.
Best regards
CCJ

 

[sheeplady]

Hi All

I am lost on this issue, I am still trying to digest it all.
There was a time when I held 12 properties in my portfolio, I never missed a payment in 30 years. The last 6 properties were purchased with a hand shake from my local bank. I understand the ethics argument however while I welcome everyones opinion, putting ethics aside for a minute, I am asking for the PROS and CONS of the issue. I am shocked that a homeowner could legally stay in a home for more then 4-5 months without making a payment. My Sons lawyer advised that presently there are no legal ramifications in state law to prevent such business practice, hence the term Stratgic Default.
TIA
Best regards
CCJ

The issue isn't that he can stay in the home once it is foreclosed on, it's the fact that banks are so backed up on foreclosures that it takes a couple of years to finish filing the paperwork. Once the bank owns the house, he's trespassing. With some homes, the bank will have the person removed if the person agrees to a short sale.

ETA: When you stop paying your mortgage, the bank doesn't immediately file paperwork- they give you a chance to keep paying, typically several months. Then they start filing the paperwork, which takes several months. Then they send it to the courts, that takes several months. That is if there is no backups in the system. Typically the bank offers along the way to do a short sale- the owner still owns the house but the bank forces a sale, on the bank's terms... typically forgiving some of the debt and not trying to come after the mortgage holder for the difference between the debt owed and the selling price. A short sale is really good if you have multiple mortgages because the second mortgage companies can come after the previous owner and not just against the property in some states. But there is technically no difference between a short sale and a foreclosure as far as credit in most states.

 

[Noirblack]

A big part of it is the amount owing vs the value of the home vs his equity.

If he owes a million and its valued at $400k, and he has $100k equity, then if he sold it tomorrow he'd owe the bank $500k plus interest penalties.

Do you think that the value of the home will ever come back up to what he paid for it? Will he want to move before then?

If he is really deep underwater he could be stuck in the house for a long time. Perhaps the value will never go back up to what he paid for it. That is an argument for defaulting.

Don't forget that when the bank gives a mortgage they are assuming risk too. Whenever they give a mortgage they know that they might not get paid back for a variety of reasons - job loss for the borrower, disability, death, etc. They also know that some people will walk away. The mortgage allows them to foreclose if they need to.

On the other hand, if he is not too deep underwater and he can still make the payments and home ownership is part of his long term plan, he should not default. Plus if he does he could be put out of the house by the bank a lot sooner than 2 years.

 

[ButteMT61]

This just leaps out at me......

Yeah, let us rubes, er, taxpayers pick up the bill! I give you credit for having the pair to post this question here, but man, if your son was in dire straights, I'd understand. As it is (from the sound of it), he simply decided he doesn't like the decision he made and therefore, it's time to bail - but not until he's lived for free for a while?It's hard to imagine a kid thinking this way given you sound like a good person. But I know I've been disappointed with some of my kid's choices in life too.I'd have to say that your gut on being "old school" sits better with me. But I'm old school too so I have no sympathy for his "plight".Best to you - I think I'd just stay clear and not help him with his plan.

 

[PHIL1959]

if any person who buys or rents a property then knowingly wont pay the rent or mortgage- is a leech.
end of.
those that for no fault of their own,ie looses their job, or thru ill health cant keep up payments.then at least some help should be given.
no offence.

 

[PrettySquareGal]

Yeah, let us rubes, er, taxpayers pick up the bill!

Right. He wouldn't be staying there "for free." So I say he needs to face the consequences of his decision instead of allowing everyone else to pay for his mistake.

"and he now wants to stop paying on that mistake."

But that is a sense of entitlement- wanting to have what one wants without paying the consequences or living up to an agreement.

 

[PrettySquareGal]

Welshing is now a business plan?

"Strategic Defaults" does make it sound legitimate, doesn't it.

 

[sheeplady]

I'm sorry, but the more I think about this all I can see are the cons- in some states he could be left with the debt that the bank doesn't make back from the house if they can't do a short sale. So no house but he could still owe the $200,000 in debt. The only way out of that is to go bankrupt in some states, and you are talking about a major evil that will follow you forever.

He really needs to get 3-4 legal opinions on this, not one lawyer. My neighbors went bankrupt and their lawyer said they filed the paperwork so that they could keep the house. The bank said they never got it, the lawyer said they sent it. They lost their house despite being current on the 12th year of their 20 year mortgage. They were homeless for a year because no one would rent to them with such bad credit. So... I would get a second opinion at least.

 

[PrettySquareGal]

Where do we draw the line? We can all make an argument for "strategic defaults" with any kind of loan or credit card. Sounds great: buy expensive things for ourselves, get buyer's remorse or disappointed when they depreciate, argue that we can save money by not paying the loan/credit card bill and then keep the items anyway.

I always pay back my loans and have gone without many times to live within my means.

Am I being holier than thou? No, I'm just not that low.

 

[LizzieMaine]

Right. He wouldn't be staying there "for free." So I say he needs to face the consequences of his decision instead of allowing everyone else to pay for his mistake.

"and he now wants to stop paying on that mistake."

But that is a sense of entitlement- wanting to have what one wants without paying the consequences or living up to an agreement.

Indeed. Someone is going to end up holding the bag on this -- and it won't be the bank.

 

[PrettySquareGal]

putting ethics aside for a minute

So much is plausible and possible when one does that which is the problem.

 

[ButteMT61]

So much is plausible and possible when one does that which is the problem.

Pesky ethics and all...This plan is the same that was made up for bailing out bankers and others on the backs of the chumps paying their bills every month. I sometimes look in the mirror and laugh at myself. I mean, I take care of my family, do my job, play by the rules, and still mange to get up again each day and face it. My solution was to not by a house 4x what I could afford so as to avoid this sort of mess. Had the others done likewise, we'd not have the housing glut we do today. Sure, some was the evil bankers, but not everyone who overbought was taken advantage of - many were just trying to outdo the Joneses. We passed on that and I'm thrilled to say we are still in our home and paying the bills. Not only that, but we still have equity enough that if we had to bail, we'd come out on top.Dunno man, this sounds like a load of compost to me.

 

[Noirblack]

The biggest question to ask from the perspective of this is a financial move is where does your son live:

Nonrecourse laws protect homeowners in some states. According to research from the Federal Reserve Bank of Atlanta, the 11 nonrecourse states are Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington and Wisconsin.

When a borrower defaults in one of these states, the lender can take the home through a foreclosure but has no right to any other borrower assets. Home-equity loans are ineligible for this protection unless they were used as part of the home purchase.

If your son defaults and does not live in one of those states, he can still be responsible for lender losses.

More information is here: http://realestate.msn.com/article.aspx?cp-documentid=25923795