From the U-T:
A San Diego real estate agent has launched an awareness website that aims to stop strategic defaults, when underwater borrowers choose to walk away from their homes even though they are able to afford their mortgages.
Tuba Gokcek, who is based in Clairemont, recently launched stopstrategicdefaults.com for homeowners and others to express their thoughts on this type of defaulting, which has become more accepted in recent years as home equity fell across the country and anger against banks increased. A 2011 Fannie Mae study shows 27 percent of homeowners who owe more than their homes are worth are open to a strategic default. That’s up from 15 percent in 2010.
“Legislators should stop this from happening,” Gokcek said. “It’s not ethical to borrow money from someone and then say they’re not paying it. It’s a practice that hurts others.”
How does it hurt others?
Gokcek said strategic defaults lead to short sales and foreclosure deals, which bring down the value of neighboring homes. More than half of county home resales last month were either foreclosures or short sales, as cash buyers and investors continued to chase lower-priced properties.
Gokcek, whose website outlines a case against strategic defaults in several sections, also includes a petition that reads: “We, the ethical and responsible People of the United States of America, urge the Congress to pass and enforce effective laws without loopholes to stop strategic defaults immediately.”
It’s unclear exactly how many defaults in the country are strategic. But a June 2011 study by Northwestern University shows defaults that appear so are on the rise, increasing from 26.4 percent in March 2009 to 35.1 percent in September, 2010.
Other findings:
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Black, Hispanic and older homeowners are more willing to be strategic defaulters. Women are less likely.
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Eighty-two percent of people surveyed said a strategic default is morally wrong.
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Homeowners who know someone who has strategically defaulted are more likely to say they will follow suit.
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Borrowers who are angrier about the economic climate and trust banks less are more likely to default strategically.
People can think whatever they want about the moral or ethical implications of strategic defaults, but realtors and others need to stop complaining that strategic defaults cause lower values.
Fraudulent short-sales that never hit the open market and sell to friends for below-market prices cause lower values.
Strategic defaults that get foreclosed, are then vacated, receive fix-ups, and then sold on the open market are selling for retail – or retail-plus.
We are brain-washed to believe foreclosures cause lower values. Please don’t think that, and please don’t perpetuate it.
As long as sellers won’t have to consider the loss of a short sale as income people will continue to default. If I had money in the game I would bet very close to the election they will extend it another year to milk it.
As long as FHA and the banks are willing to give these people new mortgages right after they strategically default, I don`t see much hope in stopping them.
Jim, what you’re saying may be true for fixer uppers. However, most short sales and foreclosures don’t fit that category. They are sold as is, often below 15-20% market value and never hit the market again. The regular sellers end up losing a lot because of that. Realtors ought to champion market stability, not activities that cause more instability. The past decade has been a disaster. The country should learn from all the mistakes.
I agree with Thaylor and swm. If the government and lenders keep taking away all the deterrents, people will continue doing strategic defaults. Homeowners had better start poking the legislators about taking measures against these defaults.
They are sold as is, often below 15-20% market value.
Kiss off.
Can you name a few REO listings or flipper resales that sold on the open market for less than retail around NSDCC? I can’t.
I already covered short sales in my comment.
You should start your own website like this lady did and spread your vague babble around there. Or go back to the doomer blogs.
This is what I’m talking about – people insist on spreading the lie that banks are giving away properties. I don’t see them giving away anything. If they dip a little low at the trustee sales, then flippers snatch them up and sell for retail or more.
There are no bank deals around here.
When it comes to the ethics and morals of strategic defaults, I’m an atheist.
They are going to happen one way or another, let’s take our medicine when rates ar 4% and inventories are low.
Let’s get them over with!
People who want to make a difference should petition the politicians to not extend the tax exemption of debt relief.
I really don’t understand how anyone can suggest that strategic defaults are morally, ethically, or even simply wrong in any sense. It says right there in the contract; if you don’t pay, we take the house and any equity with it. Which means the bank agreed to the terms and the homeowner (debtor) agreed as well. Which means a default, whether strategic or as a result of financial catastrophe, has been accepted by both parties as an option to conclude the contract.
And I don’t see any of my neighbors’ signature on the contract. Thus, they have no say whatsoever in how I execute the contract with the bank. And just so you don’t discard my comment as someone that has done, or will do, a strategic default, my house is still at nearly twice its purchased value despite being 25% down from its peak street value.
So I am with Jim; kiss off.
Include me in the kiss off group. The contracts clearly stipulate what will happen if a homeowner fails to pay their mortgage. No illegal acts are being committed by strategically skipping out.
Morals and ethics in the business world? No such thing. It’s all about the money.
I dont think banks mix morals and business.Show me the money!!!!!!!!!!!!!
Defaults are like pregnancy. You only have one chance to prevent defaults. That is at the time the bank funds the loan. Or in the case of the pregnancy, just saying no. Strategic defaults are caused by lack of borrower or buyers skin in the game, and the lender just loan them too much based on their property value.. Would you default if you had 25% cash money invested? Obviusly NO. These people had little or no skin in the game. So things get bad, default.
“No illegal acts are being committed by strategically skipping out.”
Well even if it IS illegal, it’s not really a moral problem, is it? I mean if you rob a bank, you’re likely going to jail. Simple cause and effect. The laws against bank robbery are out there for anyone to see. So going to jail is just the risk you knowingly took on when you robbed the bank. It’s a calculated risk, not a moral decision. Right?
(just messin’ with your heads here)
Are we bringing back debtors prisons for people that walk away. There’s nothing you can do in the market to prevent people from making a choice about a contract. There are clauses in a contract to deal with default, just use them. These people that insist preventing foreclosure are going to make property values rise are kidding themselves.
The only thing that going to push prices up dramatically is a bunch of people getting good paying jobs. We’re already at maximum leverage (3.5% down FHA) and low interest rates (4%). The only thing left in the equation is income. Those with the income are out looking and buying.
I agree with livincali and JAH that banks simply made bad loans and are now going to have to deal with the consequences.
My only problem with the strategic defaults is the tax break–especially at a time with such high deficits and national debt. The tax break was not written into the original purchase contract so it is just more government cheese that the taxpayers of this country can ill afford.
A mortgage instrument (or deed of trust) secures a Note which contains language which states “I PROMISE to pay . . ..” The Note is the primary obligation. The mortgage (or deed of trust) has a foreclosure remedy in the case of the breach of the promise. The security instrument doesn’t say “You can pay or not, your choice, but if you chose not to, the lender gets the house.”
Wow, I’m amazed most comments here support strategic defaults even though it’s apparent they have made the housing crisis worse than it otherwise would have been. California lawmakers should read them to realize what their crappy laws have done to serious homeowners. Let’s make it clear: the contract does not preclude lenders from coming after the deficiency. The state laws make that determination. In many states borrowers are held liable for the deficiency amount. California should get rid of its socialistic non-recourse policies to shut you all up.
Jim,
Your first comment here is spot on. I’ve been one of your few regular readers who see a strategic default as amoral, i.e, not something on which morality should be brought into the equation. To me, the question of all of the aspects of the housing bust (vacant houses, jingle mail, whatever), is the effect on the communities as a whole, not the banks, or the defaulting owner, etc. If something harms the neighborhood (like lots of vacant, untended REOs or fraudulent short sales) then they should be decried. If the behavior it has no effect or is nuetral, as we are suggesting a strategic default is, then the gnashing of teeth is a waste of good enamel.
Thanks FRBR, and yes, let’s keep our teeth in good shape!
Speaking of promises, how about this one?
“I promise to be true to you in good times and in bad, in sickness and in health. … for worse, for richer, for poorer, in sickness and in health, until death do us part.”
Yet half the marriages end up in divorce, and there’s not a big moral crusade about it.
If anti loophole wants to tax the defaulters, well go ahead, but strategic defaults are not ruining the neighborhoods. I wish there were more – I need more inventory!
Wouldn’t you just think that if you were going to start a website for a cause that’s related to dropping home prices, it should be more like ‘ stop creating laws that give banks incentives to make bad loans and bet against them for their own profit, thus creating enough debt to sink the largest world governments and artificially drive up home values which will eventually screw every home owner in the whole country when the prices come crashing back down unless you print a bunch of paper and create hyperinflation to fill the void ‘?
Ok, so it’s a bit wordy, but you get my drift. Strategic default is like number 98 on the list of the top 100 things that got us here.
Strategic defaults/foreclosures where the properties come on the open market are actually very helpful as they provide more data to determine true market values. Bring ’em on.
I don’t necessarily know that recourse laws would change things all that much. Nevada allows for lenders to pursue a deficiency judgment even if the lender forecloses. Floria is a recourse state and both of those states are dealing with a housing crisis worse than CA.
Recourse on student loan debt hasn’t prevented college tuition from greatly increasing and students taking about bigger and bigger loans. If you offer people money, there is generally somebody that will take it no mater what the consequences are.
Until the lenders are forced to eat consequences of bad lending decisions the behavior will continue. Government intervention and bailouts are the biggest problem.
I agree with Jim and FRBR. Owners have a contractual obligation to the bank – not a moral obligation. They have a moral obligation to themselves and their familys. Using “morals” and “bank” in the same sentence is oxymoron-ish. It’s a personal decision that each person must make for their own financial well being.
Let’s get Jim some inventory!
Moral righteous indignation is funny.
Technically, Florida is a recourse state, but in reality it gives huge tax breaks to investors that default. Nevada, technically another recourse state, is a one-action state like California and requires that a deficiency judgment be filed within 90 days. So yes, these states have loopholes too. That said, California and Arizona, both non-recourse states, have much higher strategic default rates than these two states all else being constant. Everyone is free to choose their own battle. If there’s a problem, it doesn’t matter if it is #98 on the list or #1. “At this juncture”, I would actually put strategic defaults in the top 3 on the list of 100 actually. In a truly free market economy all people would have a skin in the game. We have terrible protectionist laws that should be wiped out.
Wow, I’m amazed most comments here support strategic defaults even though it’s apparent they have made the housing crisis worse than it otherwise would have been.
I’m not, because it has NOT made it worse.
Is it morally wrong when banks strategically default?? Give me a break, people are doing what they need to do to survive, just like banks do, only difference is the banks get bailed out. Think about it.
I have no idea when this UCLA Law Review article was written, but I found it to be a good (long) read: “The Morality of Strategic Default”: http://www.uclalawreview.org/?p=1527
One interesting example is a cell phone contract vs. a mortgage contract. Additionally, I read that Morgan Stanley defaulted on $1.5 billion on five different buildings in San Francisco, despite having record profits back in December, 2009. “Describing what would be a strategic default to homeowners, Morgan Stanley officials stated: ‘This isn’t a default or foreclosure situation. We are going to give them the properties to get out of the loan situation’.”
Like I said, a good read…