Wednesday, December 23, 2009

Will Strategic Defaults Become the Rallying Cry in 2010?

Lately, there has been alot of discussion about strategic defaults. Essentialy, that is where someone decides it is no longer in their best interest to keep paying an upside down mortgage or on a declining assett. The reasons for this are numerous, some good and some bad. Let's open it up and see what others are thinking, especially with more recasts on Alt-A, Option Arms, and Interest Only loans accellerating in 2010.

I am not advocating this particular strategy, but am curious what others have to say, given the current changes in our economy.

20 comments:

Jeff said...

With a finance backround, i see the logic, if i was in a seriously upside-down position. I still wouldn't be able to convince my wife that losing her home made financial sense. I dont think i am alone in this position.

(btw, as a former home owner, now renter, who sold near the top and has the cash to buy, i hope i am wrong!- walk away! drive prices lower!)

Anonymous said...

avalanche coming.

Doug said...

Short Sales, Vegas Style

Boemio specializes in short selling, in a particularly Vegas way. Basically, she finds clients who owe more on their house than the house is worth (and that's about 60% of homeowners in Las Vegas) and sells them a new house similar to the one they've been living in at half the price they paid for their old house. Then she tells them to stop paying the mortgage on their old place until the bank becomes so fed up that it's willing to let the owner sell the house at a huge loss rather than dragging everyone through foreclosure. Since that takes about nine months, many of the owners even rent out their old house in the interim, pocketing a profit.

The apartment she's trying to sell today is in Newport Lofts, a doorman building with a pool, gym and clubhouse on the roof, which, the custodian tells us, haven't been used by anyone in months. Newport Lofts is one of a cluster of several luxury condos that were supposed to be part of a revitalization of the downtown area. Apartments in Newport Lofts — Boemio's client, an out-of-town investor, paid $600,000 for one — are now listed for as little as $179,000. And this particular apartment isn't exactly in great shape. A squatter slipped past the doorman and, even more impressively, got a locksmith in to switch the lock and give her keys.

The squatter left behind no bed, but she did leave stained bath mats, towels, flip-flops, Chinese-takeout remnants, Sun-kist soda cans, prescription medicine, old mail and some used airline tickets to Miami. Boemio casually walks around all of it, occasionally laughing. The buyer's agent — a woman in a Gucci scarf and sunglasses — is a little more freaked out, trying to figure out how much this mess will cost to clean up. Which is strange, since she's offering $250,000 on behalf of her overseas client — $70,000 more than the asking price. There are no other buyers. Boemio goes over the offer three times with the Gucci lady to make sure she understands exactly what is going on. Gucci lady, she figures out, is just trying to score an extra $2,100 in commission and is screwing over her client for $70,000.

Doug said...

It is lawless right now in the Wild West.

There's even a real estate agent (and the figures and details are slightly changed here to protect him) whose out-of-town investor demanded that the agent find a way to cover some of the losses he was taking on the $60,000 down payment he'd sunk into a house.

So the agent created a separate contract, never shown to the bank, that said the new buyer had to purchase a $60,000 Persian carpet from the seller — a check his mortgage company, which was sucking up hundreds of thousands of dollars in losses on the short sale, would never see.

When the buyer — who was happy just to get a deal on the house — asked if the Persian carpet was really worth $60,000, the agent looked at him as if he were insane.
"I bought it at Wal-Mart," the agent told him.

Now all the friends of the investor who got his $60,000 back are asking the agent to pull the same scam for them.
And he's doing it.

Leaving the condo with the sale apparently finished, Boemio drives into a huge subdivision in western Las Vegas, one of the hardest-hit areas. The houses look nice enough, but every third one has a for-sale sign, and there are almost no cars in any of the driveways...

Anonymous said...
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Anonymous said...

That is a great post. Now you understand why the banks refuse to do short sales.

The brokers that handle short sales are usually arranging payoffs and side deals.

The bank is better off taking posession of the house, and marketing the house using a trusted foreclosure broker like Leo Nordine. Leo treats his bank clients fairly and the other brokers don't.

Pretty simple

Matt|Echoes said...

Strategic or not, this article shows what percentage of foreclosures come from the upper tear markets: staggering - http://www.zillow.com/blog/foreclosures-move-up-market/2009/10/08/

latesummer2009 said...

Looks like Pandora's Box is open and all the snakes are piling out.

"Caveat Emptor", buyer beware.....

latesummer2009 said...
This comment has been removed by the author.
latesummer2009 said...

Foreclosures are now creeping into 90402. 35 in the flats at last count and growing. Checkout The Santa Monica Meltdown 90402 Blog. Updated 90402 sales and where to find foreclosures in 90402.

www.santamonicameltdownthe90402.blogspot.com

Tyrone said...

Denninger recently posted about this topic, as well...

Finally: Mainstream Press (Intentional Defaults)

For the most part, I agree with what he says--it's an economic decision.

Anonymous said...

Interesting read Tyrone. People really have no moral or ethical obligation to keep paying, when corporations do it all the time.

Doug said...

You Walk Away dot com

Anonymous said...

Interesting walk away calculator Doug. I bet most people have no idea how much debt their home is costing them over the next 10 years. It is at least worth looking at for those upside down, especially if they are headed for a loan recast via Interst/Only, Option Arm, Alt-A etc..

Anonymous said...

"LS2014 said...Looks like Pandora's Box is open and all the snakes are piling out."

And yet despite all your wailing and thrashing Case Shiller (LA) went up yet again.

Oh how sad for you!!!

Latesummer2009 said...

LA is hardly The Westside. Do I detect some real estate wounds? Realtor, homedebtor, mortgage broker or one of various RE jobs that are and will continue hurting? If you want to slam me, have the courage not be anonymous.

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