strategic default vs short sale

Strategic Default

What happens when a strategic default takes on a form of a short sale?  I do not intend to  make this an in-depth discussion of all aspects of strategic defaults.  Neither do I wish to debate the moral issues surrounding a home owner voluntarily walking away from their mortgage while they can still afford to make the payment.  For all who are interested in the detail please read Understanding Strategic Defaults by Alan Glass of Los Angeles based ASG Real Estate.

Strategic defaults are typically described in black and white: either you pay your mortgage or you foreclose on the property.  Now with a short sale thrown in the mix things get a bit more complicated, particularly when it comes to proving hardship.  This issue separates the ones who default strategically in an absolute sense, a borrower who has ample assets, yet makes a business decision to default on the mortgage because it is no longer a good investment and it is time to cut their losses.  On the other hand, there are borrowers whose income is barely sufficient to cover the mortgage of an underwater property and with no significant assets.  This is the most common type of borrower facing this decision.  Phoenix realtor Bob Stahl weighs the moral and economic aspects in this blog post “Strategic Mortgage Defaults: Is It a Financial Issue? Is It a Moral Issue? Or Is It Both?”.

So at what point does a home owner decide to walk away from their home and their mortgage payment?  In other words just how much negative equity can a home owner live with?  While the numbers vary, the range in between 10% and 25%.  The Wall Street Journal article “Debtor’s Dilemma: Pay the Mortgage or Walk Away” is full of stats that answer these  questions for us.

Turning Leaf Advisors position today is that we do not negotiate strategic default files.  That is if the clients sole reason for doing a short sale is to avoid having to utilize current assets to make a mortgage payment on a property that is currently under water.  We decided not to jeopardize the integrity of all of our short sale negotiations by refusing to  negotiate strategic default files.  What typically occurs in these situations is that the seller tries to hide assets and our company as a whole does not want associate with fraudulent activities that would jeopardize our ability to help millions of homeowners that really need our services.  Although strategic defaults seem to be a very hot topic these days; there is only a small fraction (less than 1.00%) of our current $60,000,000 of short sales in our pipeline, even attempt to do this.  I am sure that there have been some sophisticated sellers who have disguised their assets prior to sending us a short sale package; but if we get any suspicion of this behavior we immediately bring it up with the seller.