Freddie Mac: Consider ‘Social’ Cost of Strategic Foreclosures

Freddie Mac When factoring in monthly payments and the future time horizon on a severely underwater mortgage, more homeowners with sufficient incomes and good credit are strategically defaulting, or “walking away” and toward foreclosure.
But are these borrowers who are still caught up in the housing market collapse considering the social cost of such a move?
Freddie Mac – one of the two mortgage financing giants fully familiar with the housing bubble aftermath – wants those homeowners to think outside their property lines.
“We know from experience that foreclosures and vacancies drive down the property values of everyone else in the neighborhood,” writes Don Bisenius, senior vice president of the Single-Family Credit Guarantee business at Freddie Mac. “Thus, strategic defaulters, in effect, deplete the personal wealth of their neighbors. Get a critical mass of strategic defaults, and broader communities and regions become affected.”
In his article posted today on Freddie’s website, “A Perspective on Strategic Defaults,” Bisenius also emphasizes a secondary impact from the foreclosure walk-away trend on “good social policy.”
Beyond neighborhood decay and the weighing down on prices, there’s the financing end of the ripple effect. At one point, Bisenius said, lenders would have to consider more heavily the prospect of strategic default, making even murkier a credit environment still very much constricted.
“Should strategic defaults become more common, mortgage guarantors and investors, including Freddie Mac, would need to factor this risk more prominently into their credit policies and prices,” Bisenius said. “The likely impact on future homebuyers: the cost of a mortgage will go up and credit terms will be less flexible.”
Freddie Mac urges those homeowners who have no issue with meeting their mortgage payments, and have no other compelling reason to default, to let time work in their favor.
Avoid years of ruined credit, making it extremely difficult to obtain new credit and even insurance policies. Moreover, those with Freddie Mac-owned loans might be able to qualify for refinancing up to 125 percent of the current property value, Bisenius said.
“According to the Federal Reserve, while the housing bust wiped out $8 trillion in home equity, $1 trillion came back in 2009,” Bisenius said. “The point here: time might be your best ally.”

8 thoughts on “Freddie Mac: Consider ‘Social’ Cost of Strategic Foreclosures

  • May 3, 2010 at 8:24 pm
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    Our neighborhoods are already decimated by foreclosures so when your 200k underwater thru no fault of your own, and you also didn’t take out a second, you really aren’t doing anymore damage to the neighborhood. Heck in Patterson Ca and several other hard hit areas they have a “shadow inventory” of foreclosed homes that aren’t even “on the books”, just so the unmoral banks who created this mess that keep the prices up where the banks want them at. Your article is laughable and doesn’t represent reality at all. The remaining neighbors I have could care less if I walk away. But hey thanks for coming to the party even if your 2 years late to it. Oh that’s right its finally starting to effect the rich people now so now its news.

  • May 4, 2010 at 9:44 am
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    This article is a complete joke. Walking away if the financially responsible thing for most people who are 30% (or maybe even less) under water. You will NEVER come back from this. So, cut the cord, move out, and start thinking about the future (YOUR future). Why wait till you lost all your savings and 401k? Just move out NOW!!!!

  • May 4, 2010 at 10:35 am
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    what’s wrong with the valid alternative of waitinig it out? whatever happened to financial responsibily. Freddie mac, and I’m no fan of freddie mac, but all that its saying is think twice of walking away if you are financially sound. heck, i’m under water. maybe 40 percent or more are now. let’s all walk, see what happens.

  • May 4, 2010 at 12:28 pm
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    My husband and I considered such walking away, but there is so much to consider, especially the fact that we have built up our credit standing from a chapter 13 bk over several years to the excellent rating it is now. We are at 130% or so versus value on our home we bought 7 years ago, but we can afford to stay. We have good income. We will wait. The first two comments make it sound like an easy, one way decision. it’s not.

  • May 4, 2010 at 3:12 pm
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    “Thus, strategic defaulters, in effect, deplete the personal wealth of their neighbors”…
    This has to be one of the most absurd and laughable comments I have ever read on this subject. Those responsible for Americas largest ponzi scheme ever (modern mortgage banking) have already made a patsy (someone who is left as the loser and laughing stock after being taken advantage of in some scheme) out of the average American homeowner. By giving the guy who works the drivethru a mortgage for a half million dollar home and many other acts of reckless greed they have caused my house price to fall 50%. They also made a nice payday on this by betting against future home prices (while giving insain option arms, etc) and taking my tax dollars for a bail out.
    I bought a modest home with 30 year fixed, did everything the “right” way, but bouhgt in ’05. Now I can’t get a heloc to make needed and expensive repairs since I’m 35+% underwater so I am leaving.
    But wait! Please dont go… YOU will deplete your neighbors of their personal wealth…. Absurd to the nth degree.

  • May 18, 2010 at 3:20 pm
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    The very concept of a “Strategic Default” makes me PHYSICALLY ILL! The first time I heard this new “concept” on the radio, I had to pull my car over to calm down.
    My house is currently on the market for $290K. Less than two years ago, it was appraised at $335K. I can afford the mortgage payment, and I SIGNED A CONTRACT saying I agreed to pay the full purchase price AND pay off the mortgage with interest.
    I would never, COULD never, even fathom “walking away” simply because I owed more than it is currently worth.
    The statistics also tell us that over HALF of the amount people are underwater, on average, comes from equity loans that were spent on cars, vacations, etc. That means less than half of the amount they are underwater is from the actual drop in value of their homes. I don’t know how 125% of Value Home Equity loans were ever even LEGAL!
    If you simply can not, in any way, shape, or form, afford your mortgage payments now — well that is a completely different and understandable situation. You are the person, and frankly the only person, that should be able to chose foreclosure or a short-sale as an option.
    The rest of you — ALL of you — need to suck it up and live up to YOUR agreements and responsibilities.
    But hey, there is NO sense of personal responsibility in any other aspect of life any longer (“The little man just can’t get ahead”, “I need the government to help me”, etc), so I guess I am foolish to expect anything different in the mortgage arena
    In Disgust,
    Troy

  • May 20, 2010 at 1:58 pm
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    @Troy
    Sorry you are so disgusted with me. I had to move for work, we tried to sell our home. I even qualified for an usecured loan to pay the difference at closing if we were able to sell. We could not sell it. So we are renting it at a loss of $800 a month. Money I would rather see go to my childrens future.
    I completely lost respect for the moral value of a contract after I was wronged by CHASE. Now I know that it is just a contract and there is no morality involved. I had a CC that enabled me to transfer money on to at a rate of 2.99% for the life of the loan. So I transfered a car payment onto knowing I would save 5% and be able to pay it off quicker. I also knew I had to be very careful to not miss or be late on a payment. I never was. I have outstanding credit. Nevertheless, CHASE decieded they were not making enough money off of me and told me that instead of changing my rate they were going to more than double my minimum payment from $180 to $560 a month. I could not afford this and they forced me to modify my agreement. Yes I learned an important lesson here. Never trust a bank.
    Now, I look at my personal responsibility from an enlightened standpoint, and that is doing what is best for my family. The guilt I feel is towards my past neighbors, regarding property values, but in honesty that ship has sailed and I would not be in this situation if I could sell my home.
    I am sucking it up and living up to my responsibility, the contract states what happens if I default, it is IN the contract. I am going to take a huge credit hit. But MY RESPONSIBILITY is to my family, not the bank, because I know exactly what they would do if the tables were turned.

  • May 24, 2010 at 4:56 pm
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    @Jumping Ship: I am not the least bit disgusted with you, because nothing about your story matches the definition of “Strategic Foreclosure” as described in this article and elsewhere. You had no choice — you had to move because of your employment, AND you tried everything you could to make the payments.
    Let’s be clear about the definition, and then maybe you will see why I am disgusted: A Strategic Default is when NOTHING about a person’s financial situation, such as income, ability to make the payments, etc has changed. The ONLY thing that has changed is the value of the home in relation to what they owe on the mortgage. They are then making the “strategic decision” to take a hit to their credit rather than honor the contract they agreed to pay.
    I agree the banks are snakes — my boss at Netscape used to say, “See a snake, kill a snake, don’t play with dead snakes.” Live snakes will ALWAYS bite, so avoid them when you can. I too have been misled about balance transfer deals, or had them “change the rules” mid-stream because by law they used to be able to do that (luckily not so much since the CARD Act passed into law).
    I also agree that the banks and mortgage companies knew the risk going in as well. But their risk models NEVER included anything along the lines of “Strategic Defaults” because it used to be a “badge of shame” to not pay your debts. Not so much anymore, and as the article states, they will start factoring it into their models going forward. That will raise all of our rates, and raise the qualifications as well (I think the latter is great though — you should have at least 20% to put down in my book).
    So no, @Jumping Ship, you do not disgust me in the least.
    Regards,
    Troy

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