banktime.com

Ethics and morality have very little place in real estate. That old axiom had never been truer than in this day and age. I recently read an article in the Denver Post about “buy and bail” homeowners – those who purchase a home when they already own one that is upside-down on equity and considered to be a poor investment – and then ditch the first home. The new home is purchased before the conniving homeowners’ credit scores are trashed by the strategic foreclosure that they plan on executing. This is one way that homeowners trapped in “underwater” mortgages with high payments on a house of maybe half its mortgaged value: they escape the payments and end up in a home that is likely just as nice, but much more affordable both in sales price and interest rate.

It’s astounding how WRONG this is, but it’s not technically fraud under U.S. law as long as homeowners do not lie on their mortgage applications. Lenders have followed suit after Fannie Mae and Freddie Mac made dramatic changes to their home loan approval standards in an attempt to prevent these shenanigans, but they have not managed to completely stamp out this practice. Experts say that the avarice and/or desperation of homeowners willing to undertake these dramatic schemes to get out of their homes and secure in another before they foreclose are proof that the most disastrous housing crash since the 1930s will have long and severe consequences. The pros say that, in the hardest-hit locations like Florida, there is almost no hope in site for people struggling. They need an escape plan – so they make them.

Across the country, the average value of the U.S. home has plummeted by a third between 2006 and last year. The SP/Case-Shiller index shows that many areas have seen numbers that are far worse: Phoenix has seen the average home price drop by fifty-five percent, and Las Vegas and Miami have each seen a drop of fifty-six percent. Over twenty percent of all American single-family homeowners are upside down on their mortgages as a result. Consequently, an estimate twelve percent of all foreclosures in the month of February were classified as strategic, meaning that the homeowners in question could have paid if they wanted to, but chose otherwise. Even if home values have a bit of a rebound, experts warn that the number of strategic defaults (which has catapulted from less than four percent in 2007) will very likely continue to rise. The reason is because, at the bottom of the market, the underwater homeowner will be able to exactly calculate how many years they can expect for it to take to recover their losses – if it’s at all possible – assess the situation, and possibly throw their hands up and walk away.

According to a report by Morgan Stanley, those homeowners most likely to abandon their mortgages as a strategic move are those with the highest credit scores and the highest loans. The cap at which Fannie and Freddie will not buy a loan (and therefore potentially score the homeowner a government restructuring deal) range from four hundred seventeen thousand to over seven hundred twenty-nine thousand dollars in pricy areas of the country. Homeowners with “jumbo loans” are much more likely to be facing tremendous negative equity (possibly into the six figures), and to strategically pick up something cheaper as the opening gamut in dumping their original mortgage. People with large paychecks and great credit can generally qualify for two concurrent mortgages, especially in days like today when home prices and mortgage rates are both so low.