In this post we’ll talk about a fifth option that you may want to think about even if you are financially capable of maintaining your payments.  Option means you have a choice.  This option is called Strategic Default or, more casually, ‘walking away’ or ’sending in the keys’.  You are ‘underwater’, and you owe more on the mortgage than the house is worth in the current market.  The essence of Strategic Default is that although you may be capable of continuing to make the mortgage payments, and are therefore not eligible for a Short Sale or Deed in Lieu settlement from your lender, you may decide for any of a variety of reasons that you should not continue making the payments, and that you will simply return your home to the bank and let them foreclose and re-possess it or sell it at the foreclosure auction. 

There are a number of key factors for you to consider in this thought process, none trivial, and all laid out many times in the press over the past couple of years.  Five of the main ones are summarized here:

1. Your circumstances may have changed, and this house may no longer be appropriate for you – in size, in expense, in location, etc; perhaps no longer appropriate to the degree that you would consider bearing a fair amount of pain to get out of the mortgage, move out of the house, and start over.
2. A foreclosure would cause a significant negative impact on your credit score, and your ability to buy another house later, or a car, etc; it could also have a negative impact on your ability to get your next job, as employers are starting starting to use credit records as a job qualification
3. It is considered unethical and immoral to not pay your debts; however, it is not illegal.   The agreement you signed has a specific legal process,called foreclosure, for canceling it.  The lender, as well as you, willingly entered into both sides of the agreement, with the house as the secured asset.
4. You may not have been prudent in how much you borrowed, but you didn’t cause the financial debacle we are now in, nor did you personally cause the value of your house to drop to the degree it has.  This is a bit like force majeure logic
5. You have some obligation to consider the impact that staying in the home and continuing to make the payments has on your family’s well-being and financial future - relocating can be a major disruption, but being deeply underwater financially can be very stressful and unproductive. 

Please keep in mind, again, that I am not a lawyer or accountant or licensed financial planner, and I cannot tell you all the ins and outs and consequences of this kind of action in your particular situation.  If you have a second mortgage, or certain other kinds of liens, you particularly want to consult a lawyer, and perhaps your accountant as well, before making this kind of decision.  Not all types of liens are wiped out by foreclosure.

If you would like a little more description of the foreclosure process, please see the next and last post in this series – Option 6 – Foreclosure.  If you choose, for your own good and well-thought out reasons, to go down the Strategic Default path, then you want to manage the foreclosure process in the most businesslike and least painful way possible.

So there is lots to think about, and the stakes are not trivial.  But the evidence is that the further people are underwater on their mortgage, the more likely they are to make the Strategic Default decision.  Here is a chart  from a presentation at Moody’s Fall 2009 Economic Outlook Conference – in this chart, from page 10 of the presentation, the left axis is CLTV – Current Loan to Value Ratio.  A loan to value ratio greater than 100 means you are underwater.  Note how the delinquency rate, and implied default rate, starts climbing sharply for CLTV rates over 105%. 

The whole presentation can be viewed here – Moodys Analytics – 2010 – Housing Recuperates. 

Part of this Strategic Default analysis often hinges on your expectation of how long it will take for your home to recover enough of its value that you are no longer underwater and are once again building equity.  Our blog post, Predicting The Housing Market Recovery covers a bit more about what you might expect to see in the market value of your home over time as the market and economy slowly recover.

If you want to talk about this further, please give me a call.  I understand that it is a very uncomfortable and private thing, but if I can help you sort through it, I will.  I have talked with a lot of people sliding into foreclosure, dealt with a number of short sales, taken a lot of training, and am a designated Certified Distressed Property Expert.   Although I can’t help you directly on some of this, but I’m happy to swap ideas and pointers if it would help you sort it out.

If you really can’t make your mortgage payment, not even reduced ones, and you’ve tried to do a short sale and it hasn’t worked, then maybe by now you feel like you are running out of time.  But there is one more option that may get you out with less damage to your credit record than a foreclosure.  That option is to get your lender to make a Deed in Lieu of Foreclosure agreement with you.  In essence, the lender is acknowledging that you can’t pay, and you can’t get it sold, so maybe they are better off to take the property back now, rather than go through the whole foreclosure process and wind up taking it back later anyway.  The logic for them is that the property is likely to be in better condition if you turn it over to them voluntarily now, and they may be able to shorten the time that they have to hold a non-earning asset, i.e. a ‘problem loan’, on their books.  

A key point in either a short sale agreement or a deed-in-lieu agreement is to ensure that you have the lender’s specific statement that they will not pursue a Deficiency Judgement against you for the difference between the value of the property and what you owe them at the time of the agreement.  My recommendation is that you have an attorney read the agreement to make sure that it is clear on that point before you sign it.  If you want to review some of the legal framework for this, refer back to the  Option 3 – Short-Sale article and the paragraph starting “Bear with me on a bit of legalese…”

If your lender will not give up the right to a deficiency judgment, and that would be a significant overhanging debt for you,  maybe you are better off just letting the propety go into foreclosure and wipe the slate clean that way.  Once again, if you are in this kind of situation, talk with an attorney.  My only purpose here is to give you an idea of how things work, and help you ask the right questions if the time comes.  If your lender is participating in the HAFA process described in the Option 3 – Short-Sale article, the deficiency judgement problem should not arise, but check to make sure.  That HAFA process provides for doing a Deed in Lieu of Foreclosure as a fallback from an unsuccessful Short Sale . 

If you want to talk about this further, please give me a call.  I understand that it is a very uncomfortable and private thing, but if I can help you sort through it, I will.  I have talked with a lot of people sliding into foreclosure, dealt with a number of short sales, taken a lot of training, and am a designated Certified Distressed Property Expert.  Your lender may not be willing to discuss Deed-in-Lieu if you have not at least tried a Short Sale, since that would in fact be the fastest path for them to get this non-earning asset off their books.  There is more information on the short-sale process posted on our website.  You can read through what you would have to do, and what I would have to do, to make that work.  If you are past that point, I can’t help directly, but I’m happy to swap ideas and pointers if it would help you sort this out.

Our Greater Seattle residential real estate market is jumping! But perhaps just temporarily until the tax credits expire – they only apply to transactions signed by April 30 and closed by June 30. Then we’ll see if the economy has picked up enough to keep things going.

The number of Closed Sales for both single family homes and condominiums in March was up over 50% above February’s number, and also over 50% above last March’s numbers. Prices continued to look solid, and have now spent a whole year at essentially the same stable price level. Inventory for single family homes is somewhat lower than a year ago, but condo inventory has moved a bit higher.     

Buying clearly has been stimulated by the Federal Homebuyer Tax Credits, and we should expect to see that effect continue through June, when all eligible transactions have to have been closed.     

Current Market Statistics:

The links below provide a graphical summary of Real Estate Market Statistics for the Seattle/Bellevue/King County area over the most recent 3+ years, for single-family homes and for condominiums. You can see clearly in the thumbnails and in the main charts the big jump in closed sales, which says that buyers really got busy signing contracts in February.   As might be expected, Months Supply for both houses and condos got worked down sharply from February’s high levels – to under 6 months for houses but still almost 9 months for condos.        Here’s the charts for the current stats through March:   (Required disclaimer: Statistics and graphs not compiled, reviewed or verified by the Northwest Multiple Listing Service)                                Click for Residential Market Charts                Click for Condominium Market Charts       The Fall-Out Ratio of Pending vs Closed sales continues to drop, reflecting the banks and lenders continuing to make progress on responding to short-sale offers. The new HAFA regulations which went into effect on April 5 should help this even more. HAFA is the federal Home Affordable Foreclosure Alternatives program, and you can read more about it in the Short Sale section of our blog post series titled My Mortgage is Underwater. Now What Do I Do?

The question usually comes from someone who wants to sell, but is having a hard time dealing with the fact that the value of their home is down about 20% from the peak in summer 2007 – especially if that is when they bought it.  Of course if they had bought it in early 2002, the value would have run up about 85% before it peaked, but it truly is much harder to take a loss than it is to take a gain.

The next most common person asking the question is a buyer who is trying to decide if he or she is going to make money or lose money on their investment in a home. Recent history would certainly give one cause to pause on that question.

Of course there have been all kinds of predictions about which way the housing market is headed, and many of those predictions are colored by what is going on in the writer’s home market.  But recently a friend sent me a very interesting analytical presentation of what is going on in the market, which included a map graphic showing what that analyst thought would happen.  The chart was prepared by Moody’s Analytics, a big player who has a huge interest in figuring out what is most likely to happen, so I thought it was worth sharing with you.  Here’s the chart, which is page 13 from the presentation linked at the end of this post.

This is a pretty fascinating chart.  Note that some areas near us are predicted to recover to their previous highs within the next 2 to 3 years.  And for some of the hardest hit areas, full price recovery may take 20 years.   Factor some inflation against that and I’m not sure it is a recovery.

In our own Greater Seattle / Bellevue area, it looks like their prediction is recovery to 2007 price levels in the 4 to 5 year timeframe at best.  Still, all in all it doesn’t sound too shabby – that would be about 5% a year from here, or more like 3%/yr if it stretched out to the long side.  My guess is that this recovery rate would be back-end loaded – lower appreciation rates near term, and higher rates later on as the national economy really gets rolling again.  We’ve got a lot of unemplyment to work off before that happens.

The whole presentation is linked here in the 2010 – Housing Recuperates  presentation from Moody’s Fall 2009 Economic Outlook Conference.  In the chart on mortgage default rates on page 10, the left axis is CLTV – Current Loan to Value Ratio; the chart is a little hard to understand unless you have that information set in your decoder ring.

Please also take a look at our Greater Seattle Homes Today Facebook blog, and click the fan-flag at the top if you’d like to follow along.

Best Regards,

Chuck