Archive for May 1st, 2011

Identifying those who Strategically Default

Below is a well-written article in today’s Palm Beach Post, which continues the ongoing debate about strategic defaults.  I’m quoted in the article. 

I’m fascinated by the gentleman who refuses to strategically default, even though it’s clearly in his best financial interests, because it’s “not in the best interests of the United States.”  This is, in all sincerity, a very noble view.  So why shouldn’t everyone be so noble?  Well, first off, I don’t think any one particular homeowner can or should bear the burden of the overall economy – it’s up to each homeowner to do what’s best for him/her, just as the banks did when they took the bailout money.   

Perhaps more importantly, this homeowner’s position overlooks the real possibility that if more people strategically defaulted (and stopped making monthly payments on properties worth 1/3 of what they owe), then banks might be forced to make meaningful loan modifications to ensure a continued income stream.  In other words, I fear that continuing to pay gives in to the banks’ way of thinking, and we’ve all seen how far that’s gotten us. 

Here’s the article. …

By Kimberly Miller

Palm Beach Post Staff Writer

Homeowners who strategically default on their mortgages hope to fly under the radar, living payment-free while their foreclosure wends its way through the courts – a years-long process in some cases.  But the nation’s leading credit-scoring company says it has developed a better way to identify borrowers who can afford to pay their mortgage but choose foreclosure instead.

FICO’s new analytical tool, which combines such factors as spending habits, changes in a person’s debt and housing depreciation, is heralded as a way to ferret out borrowers making a business decision to walk away vs. homeowners who truly can no longer afford their mortgage. FICO claims to be able to make this distinction before a borrower is even in default.

For banks, identifying strategic default borrowers early can help them make decisions on how to handle the delinquencies, including what kind of language to use during phone calls, and whether to pursue deficiency judgments. 

A study released in March by the University of Chicago Booth School of Business found that 35 percent of mortgage defaults in September were strategic, compared with 26 percent in March 2009.

“It’s critical for the mortgage servicer to understand the motivation, particularly while the borrower is still current on the loan, so they can take preventative action,” said Joanne Gaskin, FICO’s director of mortgage markets. “It’s important to make sure the consumer understands the implications of walking away. They might not be aware of the continued liability.”

A hit of 150 or more points to a person’s credit score can be expected from foreclosure, FICO estimates. Also, in Florida, a lender has five years to file for a deficiency judgment and up to 20 years to collect.

A Palm Beach Post analysis of deficiency judgments showed only 133 claims were filed between April 2006 and November 2010 on foreclosed residential properties in Palm Beach County. But experts said more may be coming as banks work through the bulk of foreclosures or even sell the claims to debt collection companies.

Mark Stopa, a Tampa-based foreclosure defense attorney and proponent of strategic default, said financial institutions are just trying to scare homeowners, discouraging strategic defaults by convincing borrowers they are easily identifiable targets.

“Strategic default is a sound business decision for many people,” Stopa said. “Bankers try to make it about morality, but they have to realize that there is an overwhelming incentive at this point for people to strategically default.”

That’s because home values have sunk so much from their boom-time prices. In Palm Beach County, the median price for an existing home in March was $186,500, down 52 percent from the March 2006 median price of $393,700, according to Florida Realtors reports.

Traditionally, banks have used only the degree of home price depreciation when determining whether a default is strategic. FICO said its new tool considers other characteristics and looks for someone with a good credit history and a low credit-card balance who has lived a short time in the home and has opened new credit in the past six months.

West Palm Beach resident Anthony Armenti, 59, fits some of those characteristics. He also has seen his home value plummet from his 2006 purchase price of $274,100 to a total market value today of $77,000.

Retired, Armenti can afford the payments, but he’s also scrimping a little on other things and using coupons.

“I never had to live like that before,” said Armenti, who has considered a strategic default. “I don’t really need a credit score anymore. It would mean $1,600 in my pocket every month.”  But Armenti said he won’t walk away.

“I won’t do it because it’s not the right thing to do for the United States,” he said.

But banks are preparing for people who don’t share Armenti’s sentiment.

Gaskin said loan servicers are grooming teams of employees on how to deal with strategic defaulters.

“Specialists should be trained to engage in a pragmatic, rational discussion that corresponds to and joins with the thinking process in which these customers are already engaged,” said a FICO report about its new product. “They can help work through the alternatives and trade-offs to make a decision that potential strategic defaulters regard as less of a moral nature than a purely financial one.”

Mark Stopa

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