Loan Modification

Strategic Mortgage Default: The Case for Mortgage Loan Write Downs

By Karen Lawson

In a recent news feature, CBS 60 Minutes covered a trend that could compromise improving housing markets. Homeowners faced with paying off mortgages worth considerably more than their homes are worth are simply walking away from their homes and mortgage loans. Characterized as “strategic default,” the decision to abandon homes and mortgage loans can have lingering consequences for homeowners, mortgage companies, and communities. Foreclosure can work like a domino effect; one foreclosure becomes a few, and soon more homeowners bail out before property values fall even more. Local communities lose property tax revenue, mortgage lenders lose money, and homeowners lose their good credit. In spite of government programs designed to assist struggling homeowners, there is little relief available for borrowers who owe more on their mortgage loans than their homes are worth, and who can afford to make payments on their mortgage loans.

FHA Commissioner Cites Unique Economic Conditions

FHA Commissioner David H Stevens notes that “We’ve been through an event that none of us have ever experienced in this country since the Depression.” This could be translated as code for “desperate times call for desperate measures.” Unless mortgage investors, loan servicing companies, and housing agencies including HUD and FHA can come to terms with writing down mortgage loans, it appears that strategic default could become the next plague on US housing markets and the economy. I’d like to point out that mortgage loan amounts are largely based on the value of the home being mortgaged; if the value changes, it makes more sense to write down a mortgage amount, have the homeowners continue to make payments, and stay in their homes. With an estimated 11 million homes currently worth less than the mortgages owed against them, a strategic default wave could cause plenty of trouble when added to the existing inventory of foreclosed homes.

Mortgage Math vs. Moral Outrage

Mortgage relief programs are primarily designed to assist homeowners who cannot afford to make their mortgage payments due to financial hardship; FHA guidelines for a proposed “short refinance” program may allow borrowers to qualify for an FHA refinance to a lower mortgage amount but only if the mortgage lender and any second mortgage holders agree to write down their loan balances, So far, mortgage servicing companies and mortgage investors (the owners of mortgage loans) are reluctant to agree. This is unfortunate as foreclosure is the likely conclusion when homeowners cannot or will not pay their mortgage loans. In the interests of saving communities and reducing foreclosures, it’s time for mortgage write downs to be available for those owing much more on their homes than their homes are worth.

Full post as published by FHA Mortgage Guide on May 10, 2010 (boomark / email).