Strategic Default Vs. Strategic Short Sale And "Verifiable Hardships"
“It seems that there is a self imposed moral obligation for homeowners with underwater mortgages. . .while banks make their decisions based on sound financial practices having no shame to ask for bail outs while their executives and CEO’s enjoy the perks”
~Fernando Herboso 2010
As one of my clients puts it. . .”It seems that I’m the only responsible here. . and I”m unemployed but still felling bad about it”
From Robert G Hertzog comes this jewel that bring the point right on!
The new "buzz phrase" in our industry is "Strategic Default".
Recently, University of Arizona professor Brent White wrote an article dealing with the issue "Strategic Defaults". In the article, he basically justified the idea of "walking away" from your mortgage, based on the fact that it was a "business decision" on the borrower's part, just as the bank made a "business decision" when they decided to loan the money for the residence.
60 Minutes even decided to run a story on "Strategic Defaults".
As much as it pains me to say this (I'm an ASU Grad), I agree with much of what the UA Professor is saying. Let's face it, when the borrower decided to borrow money, they were asked to not only use the lender's appraiser, but were also asked to pay for the appraisal. The lender, in turn, decided that, based on the opinion of their own hand-picked appraiser, it was a good business decision to provide a loan to the borrower. In addition, we were all privy to the age-old question from the appraiser of "Where do we need to be on the price?"
What I don't agree with is the premise of "walking away" vs. "making an attempt" to work with the lender. In most cases, a borrower's credit would be less affected by conducting a "strategic short sale" vs. a "strategic default". Don't believe me? See my recent blog that details how FNMA looks at a foreclosure vs. a short sale, in terms of waiting periods to get their next loan.
Now, some of you may ask, "What is a Strategic Short Sale"?
I'll do my best to explain...As agents, when it comes to short sales, we are always faced with Rule Number One... Does the Seller have a verifiable hardship?
Six months ago, I wouldn't take a short sale listing unless the Seller had a "verifiable hardship"... Things have changed... We've recently closed several short sales for clients who did not have "verifiable hardships", as defined by most lenders.
So, what does this mean? My opinion is that lenders are now beginning to look at their "bottom line" profit of a short sale vs. a foreclosure. In other words, most lenders have finally realized that their "breaking point" in terms of bank-owned properties has been reached (i.e., they finally understand that it makes more sense to short sell a home than foreclose and take it back and sell it as an REO).
My inclination is that they are now more willing to sell a home at market value, and they are realizing that current market value (as evidenced by their BPO or Appraisal) is much better than what they would expect to get if they decided to take the home back into their inventory (less the $50-$60k they will spend on a foreclosure). More important, they are willing to "look the other way" when it comes to a "verifiable hardship" in order to make more $$.
Many of us subscribe to the rules of "No Hardship, No Short Sale". I'm here to challenge you to "think outside the box". We've had several short sales approved in recent months where there was no "verifiable hardship" present.
While all lenders still require a hardship letter, we're finding that this requirement holds little, if any value. The bottom line is if the lender feels that they can come out ahead (financially) in a short sale vs. foreclosure, they will more-often-than-not go for the short sale (if it makes financial sense, which it almost always does). The beauty of a short sale is that your only competition is the BPO that the lender requires. If your contract price is within 5-8%% of the BPO price, chances are, your deal will go through.
It's been repeated Ad-Nauseum, but I'll say it again here... LENDERS DO NOT CARE ABOUT THE FINANCIAL HEALTH OF YOUR CLIENTS. THEY ONLY CARE ABOUT THEIR OWN BOTTOM LINE. In other words, if it makes more sense for them to short sell a home(which it always does, unless there is PMI, but that's another story) they will approve it.
A group that I happen to subscribe to (they will go un-named) preaches that if your client doesn't have a "verifiable hardship", you shouldn't take their short sale listing. I'm here to debunk this myth. Banks could care less about hardships. They only care about their bottom line. Don't believe me?
We recently closed two short sales for a retired orthopedic surgeon with two rental/investment homes with Chase. He couldn't even write a hardship letter, based on his current financial position (i.e. no hardship). Chase simply made a good investment decision.
If you have a client who you feel doesn't meet this "hardship letter" requirement, and you don't want to take the listing, have them contact me. I'll take it.
Let's quit talking about "strategic defaults", and start talking about "strategic short sales". If the bank agrees to do it, what is the harm? Let's face it, a short sale is a MUCH better alternative for a Seller's credit vs. a strategic foreclosure, and it's almost always a better alternative to the lender.
Now, before some of you jump in and slam this blog with your comments, please realize that what I'm writing about is reality. We are not trying to "scheme the system" (please, get over the whole "victim thing"). The bottom line is that lenders are not stupid. They (most of them, anyway) are finally realizing that approving a short sale is a better alternative than foreclosure. In most cases, they are FINALLY coming to the reality that they own enough homes (through foreclosure) and they need to start making rational business decisions.
In other words, it matters not what/how you feel about "strategic short sales", but how the lenders feel about them (at least in my recent experience), and how you can best advise your clients.
This blog is only intended to share what I'm seeing in my short sale transactions. Your opinions are welcomed.