NAR & HUD Launch Home Buying Videos at 2010 Convention
HAMP Loan Modifications - September 2010 Report

Strategic Defaults - Walking Away from Underwater Mortgages

In my blog post dated January 26, 2010, Negative Equity and Strategic Defualts - Will We Ever See Principal Reduction Loan Mods? - I addressed the fact that the primary reason for stratgeic defaults on mortgages is negative equity.  Numerous studies, white papers and articles have and continue to address this major concern for a continued distressed property market in the US and in particular in Las Vegas, Nevada. 

Here are some recent stats on Negative Equity:

 Core Logic - Negative Equity Report 2nd Quarter 2010

National negative equity rates declined for the second consecutive quarter. According to CoreLogic, 11 million, or 23 percent, of all residential properties with mortgages were in negative equity at the end of the second quarter of 2010, down from 11.2 million and 24 percent from the first quarter of 2010. Foreclosures, rather than meaningful price appreciation, were the primary driver in the change in negative equity. An additional 2.4 million borrowers had less than five percent equity. Together, negative equity and near-negative equity mortgages accounted for nearly 28 percent of all residential properties with a mortgage nationwide.

Negative equity remains concentrated in five states: Nevada, which had the highest percentage negative equity with 68 percent of all of its mortgaged properties underwater, followed by Arizona (50 percent), Florida (46 percent), Michigan (38 percent) and California (33 percent).



CalculatedRiskBlog from Q1 2010:

  • There is almost $2.4 trillion mortgage debt for homes in negative equity.

  • The total negative equity is $771 billion.

  • There are 4.1 million homeowners with more than 50% negative equity (they owe 50%+ more than their homes are worth).


What is Strategic Default?

A strategic default (aka "walkaway") is a decision by a borrower to stop making payments (default) on a loan, mortgage  despite having the financial ability to make the payments.  

This is particularly associated with residential and commercial mortgages, in which case it usually occurs after a substantial drop in the house's price such that the debt owed is (considerably) greater than the value of the property — the property has negative equity or is "underwater" — and is expected to remain so for the foreseeable future. Such borrowers are called "walkaways."   Source: Wikipedia

In the case  of the home under the current market conditions, they feel it is a financially sound maneuver simply either walkaway and let the home go to foreclosure or short sale it, and rent or try to find another home that has also lost value.

There are several considerations and concerns for the homeowner who may be considering a Las Vegas strategic default:

  • Deficiency Judgement - In Nevada (and prior to October 1, 2010), lenders have 6 months to pursue a deficincy judgement after a foreclosure and 6 years with a short sale if the deficiency is not satisfied or negotiated in the short sale transaction.  Lenders are less likely to release and fully satisfy a deficiency for the borrower who has assets and/or the ability to pay the debt.  It may be possible to negotiate a promissory note or cash contribution by the seller however.  It is imperative for the homeowner to consult with an attorney regarding their options and strategic default.  And equally important to select and hire a Las Vegas Short Sale specialist should they decide to short sale the property.
  • Possible tax ramifications- homeowners are advised to seek advise from a competent tax expert, CPA, and/or attorney
  • Possible penalties for obtaining future loans - See Fannie Mae Press Release from June 2010: Fannie Mae Increases Penalties for Borrowers Who Walk Away: Seven-Year Lockout Policy for Strategic Defaulters Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe. 


Read more on strategic defaults and negative equity:

The Strategic Default Monitor™ - How To Strategically Default?

70% of Nevada Mortgaged Properties are Underwater - 11.3 Million U.S. Homes with Negative Equity (2-24-10)

Strategic Default by Tish Black-Chernine, Black & LoBello Law (1-12-10)

Should You Consider a 'Strategic Default' on Your Mortgage?  Daily Finance (2-6-10)

NPR: The Dilemma Of Walking Away From A Mortgage (10-28-10)

Are you a Las Vegas area homeowner facing a possible foreclosure and wanting to learn more about your options?  Contact Us Today for a no obligation Las Vegas short sale consultation.

Jan O’Brien is an expert with the Las Vegas short sale process.   She is the co-author of the Certified Foreclosure Alternatives Consultant designation course.   Call Jan direct at 702-858-9191 to schedule a Foreclosure Alternatives Consultation today.


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