Scotsman Guide - December 2010 Residential Edition

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By Richard Zahm

Solving Mortgage Woes Begins with Acceptance
To move forward, the industry must understand current realities

Take a close look at today’s mort- gage industry and I think you’ll agree that a great reset is under way. The reasons for this are varied, but one thing is clear: Borrowers who refuse to pay are reshaping the landscape of homeownership.

Those who walk away from their mortgages are no longer automatically considered deadbeats. In fact, many in society sympathize with strategic defaulters — those who can afford to pay their mortgage but are so underwater that they refuse — as well as with borrowers who have run out of money, often the result of unemployment or unsustainable loan terms.

Although efforts to punish strategic
defaulters have been introduced, they
often can worsen the problem. Putting
these borrowers on a multiyear mort-
gage timeout, as some of the efforts
aim to do, doesn’t help the market but
rather penalizes home-sellers, real es-
tate agents, lenders, state and local
governments, and mortgage brokers.

“For lenders and
the overall economy,
borrowers who stay put
but refuse to pay could be
a blessing in disguise.”

What those invoking guilt and fear often fail to understand is this: For borrowers who are deeply underwater or broke, none of this matters.

continued on page 40 »

Common trait

As the number of defaulting homeowners has grown, the group’s characteristics have become less distinct. Think of three ways to describe a person and chances are that somebody just like that walked away from their mortgage this week.

Often, however, defaulters have one common trait: Their mortgage-payoff amount is at least 150 percent of their house’s value. Borrowers in recourse states typically delay their surrender longer than those in nonrecourse states. Those with high credit scores also typically wait longer before defaulting.

The more important determinant, however, could be belief. Borrowers who believe their homes will recoup

Richard Zahm is a private lender and distressed real estate investor based in Connecticut and California. Reach him at RichZahm@gmail.com or (203) 962-5770.

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