By David Reinholtz
Founder and CEO
LoanOfficerSchool.com
Stopping Strategic Defaults
Help halt a disturbing trend by offering good advice and emphasizing quality
For better or for worse, one of the hottest trends in real estate right now is strategic defaults.
Every day, more homeowners — including many who can afford their mortgage
payments — decide to walk away from
their debt obligation. Facing depressed
prices and upside-down loans, these
once-responsible borrowers make what
they often characterize as an economic
decision to ditch their debt. The move
comes with risk, including serious damage to their credit rating, but they would
rather face the consequences than continue to pay a mortgage obligation they
see as a losing proposition.
Mortgage brokers should pay attention to this troubling trend and work
to stop borrowers from taking such
extreme action. One of the best ways
to do that is to originate high-quality
loans from the outset. In many cases,
however, it’s too late for that. Offering
borrowers advice about loan modifications and short sales also can help.
There is a precedent for strategic defaults. Traditionally, corporations and
businesses — which often view their
loans as financial contracts without
moral obligations — used the threat
of strategic defaults to force lenders to
Past Article
“As few as three years
ago, most people
considered their
by David Reinholtz
“Ethics in the New Era,”
July 2010
View this article and more at
scotsmanguide.com
mortgage contract
a sacred trust.”
modify their loans. On the residential
side, however, this rarely occurred before 2007. Buying a home represented
one of the best investments people
could make. As they paid off their mortgage, their home’s value appreciated
and their wealth grew.
We don’t just stop at processing
your files. We provide your clients
a device that will handle and monitor
their collection calls.
Our Affiliates know we’re different.
Here’s why. ➤
• 100% Commissions; No Volume Requirement
• Advanced Training & Support Provided
• Superb Client Retention
• Web-based, State-of-the-Art CRM Support
• Electronic Signature
• Marketing Resources
• Net-Branch Opportunities
• Attorney Model
• We do business in all 50 states
• Monitoring Device to help reduce Collection Calls
• Part-Time or Full-Time Agents
In addition, a foreclosure will cause
serious harm to their credit score and
their ability to get another mortgage in
the future. A foreclosure could remain a
negative mark on borrowers’ credit for
as many as seven years or longer.
If you advise clients to avoid a strategic default but they refuse, you also
can discuss loan-modification and
short-sale options with them. Loan
modifications won’t be an option for
all borrowers, however, particularly
those who can easily afford their mortgage but who don’t want to pay for
other reasons.
Moreover, you should uphold the
highest ethical standards moving forward. After all, the best way to prevent
strategic defaults is to originate solid
mortgages to begin with. Make sure
your clients qualify for the loans they
seek and to which they agree. If they’re
taking out an adjustable-rate loan, encourage your clients to look toward the
future and to calculate how much they
would owe if faced with sizable rate increases. The fewer surprises your clients face, the better.
As the real estate and mortgage markets recover in the months and years
ahead, the strategic-default rate should
decline. Brokers who understand why
borrowers consider walking away from
their mortgage obligation and who help
them take alternative action can help
slow the trend immediately.
Someday, residential real estate will
again represent the best investment a
person can make. How long until that
happens depends in part on stopping
strategic defaults today. •
As few as three years ago, most people considered their mortgage contract
a sacred trust. It represented the largest loan most would likely ever have,
and they felt considerable pride in paying their monthly obligation. People
who defaulted on their mortgages were
often pitied.
Today, on the other hand, more
homeowners think like corporations.
They realize their lender shares in their
risk, and they know that walking away
from their mortgage could save hundreds of thousands of dollars. Defaults
aren’t always a source of shame anymore, and dinner parties include discussions about who saved how much
money by deciding not to pay their upside-down loan any longer.
There are many reasons homeowners may decide to walk away from their
mortgage obligations, including the following four.
1. Negative equity: Many borrowers
who bought houses before 2007
did so with low downpayments and
high loan-to-value ratios. In many
cases, their homes are now worth
less than they were at the time of
purchase. Even if they were to sell
their home, many borrowers would
still owe money on their outstanding
loan amount. In other words, their
house is a source of deficiency debt
rather than equity.
2. Inability to invest: In many cases,
homeowners watch in disgust when
new buyers purchase comparable
properties for far less than they did
a few years ago. While the earlier
buyers pay their mortgage and live
on a tight budget, the new buyers
have a much lower mortgage payment and can use leftover money to
invest or save.
3. Anger: During the real estate boom,
many borrowers were cajoled into
buying houses they couldn’t truly
afford. In many cases, they place
blame on unscrupulous lenders and
loose government regulations. They
were hoodwinked to begin with,
they reason, so why not walk away?
4. No bankruptcy option: Financially solvent homeowners have little chance
of using bankruptcy to eliminate
mortgage debt. Even if it was an option, the repercussions from strategic
defaults are typically less severe.
One of the best ways for brokers to
encourage borrowers to not walk away
from their mortgage is to advise them
about the consequences of strategic
defaults. For example, a strategic default likely will result in a short sale or
foreclosure sale of the property. If borrowers strategically default but continue to live in the home, they will be
evicted eventually.
David Reinholtz is the founder and CEO
of LoanOfficerSchool.com, an approved
education-provider for Nationwide Mortgage
Licensing System and Registry prelicensing education and continuing education.
He serves on the board of directors for the
California Association of Mortgage Professionals, Orange County chapter, and as the group’s
chairman of education. Reinholtz has trained
tens of thousands of loan officers. Reach him
at operations@loanofficerschool.com or at
(866) 623-1250.
