Negative Equity: What Are The Risks Of A Strategic Default Or Voluntary Foreclosure
by John G. Merna, Esq.
The real estate crisis, which hit full bloom in 2008, hammered property values so serious almost every homeowner in Virginia asked the same question. Is my home a good investment? For seven years prior to the real estate crash, home values across the country had seen unprecedented increases in value. The price increases first instilled confidence in homeowners and purchasers. That confidence turned to greed as people began to look at purchasing as a wealth-building tool and at their home as a bank.
The net result for many homeowners was to either purchase a house the cost of which taxed their resources or borrow against the equity in their house to make improvements, pay debts and in some instances just take vacations. Those homeowners who bought at the top of the market or over encumbered their home by large borrowing against their equity received a rude awakening.
When real estate values began the slide in 2008, the first reaction of most was “no problem”. As the slide continued, nervousness increased. Now as the government and real estate professional continue to try to prop up confidence by advertising that the real estate market is better, many homeowners are living in homes that are “under water”.
“Under water” is a reference to the a situation where the value of the house is lower than what is owed on the house. The difference between the value and the amount owed is also called “negative equity”.
Homeowners in Richmond, Virginia Beach, Chesapeake, Norfolk, Newport News, Henrico and Chesterfield were hurt the most by this crisis in southeastern Virginia. The effect was felt worse in areas where a higher populations existed and therefore a greater demand for real estate was experienced during the real estate bubble.
At the end of last year, approximately 27 percent of the homeowners in the U.S. had negative equity according to Wall Street Cheat Sheet. While this percent is dropping as house values go up, the number does not reveal the how negative some people are. In some areas, property values have dropped as much as 50%. In Hampton Roads, prior to the real estate bubble, the average appreciation rate was approximately 6 percent per annum. Using this number it would take approximately four and a half years to break even. When you consider cost of sales, upkeep, etc,, let’s just use the figure 5 years to break even.
So it you are a homeowner that is in a mobile career, close to retiring, or just depressed over the loss of value you may have considered a voluntary foreclosure or a strategic default, what is the risk?
The risk is increasing. In the past, the risk was low. All first mortgage lenders tender to look at all foreclosures the same. Second mortgage lenders generally were the problem and a very high percentage pursued the borrower.
However, in a recent article of the Washington Post, first mortgage lenders are now analyzing the credit reports of defaulting homeowners to determine if a strategic default may have occurred.
How would they figure that out you ask? Easy. If the only account that is in default is the mortgage account there is a high probability of a strategic default. Why is that? Well, in my experience homeowners in financial stress approach juggling their bills in two ways. When faced with less cash-flow they will either stop paying or juggle the largest bill, which generally is the mortgage payment, or stop paying unsecured credit to maintain the house payment. The later is generally a person struggling to save their home. The former may be a strategic defaulter or just trying to limit his/her stress to one bill. So what is the next level of the analysis? They check their communication record with the borrower. Did the call to try to save the house? Is there evidence of struggling to become current or did they just stop paying and stop communicating?
Let’s face it. Computers are a double-edged sword. They bring the world into our homes, put miracles at our finger tips, and make our life easier. The other edge is… just about everything we do, say, search, believe, hate, love, even dream can be accumulated over time by via our search on the internet, reading our e-mails, tracking our whereabouts via our cell phone, etc. It use to be that we just had to worry about “big brother”, which was in essence code for the federal government or more specifically clandestine services such as NSA, FBI, & NSA. As a former spook, I have a pretty good idea of the capabilities of the government and the Hollywood fiction.
But the government is not the problem any longer. Computers have put private industry out in front in the information collection process. More apply we should be worrying about “big business”. The concept of “big brother” was arguably about control and power. Today the information collection process of “big business” has a ultimate goal of sales or, from a more sinister perspective, control of your income stream. In other words, the power of directing the use of your income through advertising so well targeted to your psychology that you are in essence a willing economic slave. Anyway, back to strategic default.
The bottom line is that it is possible to figure out where this may have occurred. So what do you do? Check out the statute of limitation for the collection of a debt by contract in your jurisdiction and speak to an attorney. You will not be safe from a lawsuit until that time passes.
So keep you paranoia in check. The reality is they know everything anyway.
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