In the wake of the housing meltdown, strategic defaults, or walkaways, continue to be a popular way to dispose of a home whose value has dropped  significantly below the mortgage balance.  Those using this option can usually afford their house note, but choose to move on to housing that offers more value for their money.   Sites like http://www.youwalkaway.com assist walkaways:   “We won’t judge your reason, we just want to help you find solutions. Use the law to your advantage. “

The LA Times reports that Fannie Mae (Federal National Mortgage) will pursue deficiency judgments on certain types of  defaulted mortgages and will take steps to keep walkaways from getting new mortgages for 7 years.  While mortgage deficiency judgments are illegal in some states, most allow this practice.  I discussed the prospect of  walkaways being held accountable for their debts in an April Post “Strategic defaults or foreclosure hell?”.

Strategic defaults have been in the news for quite a while now.  In May, CBS’s 60 Minutes did an extensive report.

I have concerns that banks and FNMA will, get deficiency judgments, then turn the debts over to collection agencies for pennies on the dollar.  And we all no how collection agencies operate.

At the root of this issue is the easy money of the early and mid-2000′s, when you could buy a home, or refinance it at greater than market value, with acquisition costs of zero or less (that’s right, buyers were getting money back at closing).  I looked up the purchase information for a recent walkaway owner:  80% first mortgage, 20% second mortgage, and 6% in seller’s concessions.  Absolutely no equity in a sinking asset – nothing to keep this person, and hundreds of thousands just like him, from strategically defaulting with the slightest of provocation.

photo credit: Creative Commons License Respres

Second only to Foreclosures, Short Sales create a lot of buzz among investors and home buyers looking for the almighty good deal.  A short sale is a property that is sold for less than is owed on it.  Pretty simple concept:  you bought a house for $200,000 in 2004, with 10% down.  Over the years you pay down your $180,000 mortgage to $160,000.  Then for one reason or another… say, you lose your source of income, you REALLY need to sell.  BUT, because of the current housing market, your house is now only worth $130,000.  A tough pill to swallow, but you have to unload the house.  Well it beats having a foreclosure on my credit report.  But what about the $30K difference?  How will I come up with that money?  Welcome to the world of Short Sales.

Jay Thompson, The Phoenix Real Estate Guy, wrote one of the most concise and informative posts on short sales that I have read,   so I will skip the mechanics here and just say that the banks, being the altruistic entities that are, just love negotiating short sales with distressed owners, and what they love even more is working offers from buyers expecting a deal.  Maybe love is the wrong word, as it implies some human element.  The banks are not human, even though there is an interface with an Asset Manager, who, supposedly can make decisions.  Human decisions can be measured in milliseconds, but bank decisions can take weeks.  The bank does not care if your buyer’s loan lock or lease is running out, or even if she is a well-healed investor paying cash.  It’s the bank’s way or no way.  Oh, and if there is a second mortgage, double the trouble, because in a short sale, as opposed to a foreclosure, subordinate mortgage holders get a piece of the action too.

I closed my first short sale this month.  My buyer clients fit all the criteria for Successful Short Sale Buyers:
1.  They were not in a hurry to close
2.  They could have and would have walked away from the deal at any time.
3.  They had a very high tolerance for the erratic and inexplicable behavior of the bank.
4.  They stood their ground when the bank’s foreclosure representative tried to squeeze a fee out of them for delaying a foreclosure auction (the bank backed down and canceled foreclosure sales- twice).
5.  Their lender was flexible and helpful throughout the process.

So, for a purchase project started before Halloween with me preparing them for the process, Dave and Phoebe  were rewarded with a really good deal on one of the largest homes in their neighborhood.  Was it easy?  Was it worth it?  Let them tell you.

Joe Spake is a Memphis, Tennessee based Consultant, Real Estate Broker, and Blogger. Call 901.214.5563 for a consultation or click to make a social connection.
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From Peter Goodman at the NY Times: Real Estate in Cape Coral, Fla., Is Far From a Recovery (ht Calculated Risk)

This is not the most uplifting article.  Goodman joins a Foreclosure Tour  and reports on the facets of the clean up of the messy real estate bubble burst.

Maybe I need to stop reading the national real estate news.   Every day there are more an more of this type of story, as well as auctions, short sales, bulk sales, foreclosures  – subjects we in the residential real estate business seldom, if ever, dealt with 5 years ago.

We were busy helping folks achieve the American Dream of home ownership.   The last decade brought about remarkable changes in the real estate market and the real estate business.    It is time that we pull ourselves out of this mess and reclaim the American Dream.  Sure, there is room for the investors, who seem to be ubiquitious in the markets, but I am ready to help bring back the Dream – folks buying homes to live in!

Joe Spake is a Memphis, Tennessee based Consultant, Real Estate Broker, and Blogger. Call 901.214.5563 for a consultation or click to make a social connection.
If you enjoy this blog, please subscribe to the RSS Feed. 

If you use Google+, I have just started a brand new business page. Visit it HERE.