Denver Real Estate Blog

Purposely defaulting on a mortgage, often called “strategic default,” may be a very rational personal finance decision, but it’s not without major consequences. And it’s not necessarily the best option for anyone underwater who can afford to make monthly mortgage payments but who does not want to wait up to 10 years for the housing market to turn around.

Many factors must be considered, including a key one: which state you live in.

Shelby and Scott Robinson, from Manteca, Calif., married in 2006 and purchased a starter home about a year later for $310,000. It plummeted in value.

They realized they would have to stay in the home for far longer than expected to gain any value back. The area also did not hold much job flexibility for Scott, a restaurant chef. The couple spoke with financial advisers and considered a strategic default.

“It’s not about not having money,” says Shelby, a purchasing manager for a shoe company. “It’s about not throwing money away.”

In the end, they opted for a short sale, an agreement with a lender to sell the house for less than what is owed. They chose that route because it’s not as harsh on their credit score as foreclosure. They quickly found a buyer and are awaiting bank approval for the sale. The buyer would pay $103,000 if the sale is approved.

The deficiency judgment

If you go through a strategic default, your lender may file a lawsuit against you, called a “deficiency judgment,” to recoup losses. The lender can demand payment for the unpaid balance: the difference between what you owe, including the foreclosure cost, and the fair market value of the home.

Lenders don’t always bother to go after people who have been forced into foreclosure. But in some states, such as Florida, they have five years to do so.

“I’ve been hearing that lenders are becoming more aggressive about going after deficiencies in homes that they had to take back,” says Gerri Detweiler, co-author of Debt Collection Answers. “Then you can essentially be paying for a home that you no longer have.”

Some homeowners decide to file for bankruptcy after they go through foreclosure because that can wipe out a deficiency.

But that may not be necessary, because some states have non-deficiency laws that prevent such lender action.

“That means that the lender only can take back the home and cannot sue the borrower for the deficiency,” says Jon Maddux, CEO of YouWalkAway.com. For a fee, his company helps guide people through foreclosure. Among the non-recourse states are California and Arizona.

But even in those states, lenders can still go after you for a second mortgage. And if you had refinanced the original mortgage, the lender may also be able to file a deficiency judgment against you.

Credit scores

Even if a homeowner can avoid a deficiency judgment, a strategic default will cause other problems — chief among them a drag on credit scores.

“I always dissuade people to avoid a strategic default,” says Larry Tolchinsky, a Florida real estate attorney. “I tell them that it’s going to ruin their credit. That’s an asset that I want to maintain and protect.”

The stain on your credit score will eventually go away, although it can last for seven years. But if consumers continue to pay other bills on time, the foreclosure may not have a significant negative impact.

Credit scores affect everything from credit cards to cards’ interest rates to the ability to get new credit to getting a new job.

Normally, foreclosure results in taxable income. But the Mortgage Forgiveness Debt Relief Act of 2007 has been extended to 2012. Under this act, taxpayers may exclude debt forgiven if the balance of their loan was $2 million or less. The limit is $1 million for a married person filing a separate return.

To qualify, the debt must be for your primary home, and the mortgage must have been used to buy, build or improve it. But there may be other tax exclusions for second homes and rental properties.

Don’t forget about state taxes

Homeowners may be hit by a state tax jolt. California, for example, mirrored the federal tax relief for homeowners, but that expired in 2008 and hasn’t been renewed.

Homeowners who are considering a strategic default or a short sale need to talk to a CPA or attorney, because there could be land mines and problems they don’t anticipate, says Brad Nemeth, a tax attorney in San Diego. Experts also say not to rush into a strategic default without exhausting all other options, such as renegotiating your mortgage. One government option is the Home Affordable Modification Program. Details are available at makinghomeaffordable.gov. Homeowners also should talk with their lenders about such options.

When Cheryl Trella, a human resources manager in Chandler, Ariz., ran into distress, she sought advice. Her home had dropped in value, so she hired a lawyer. After talking with her lender about a loan modification, she decided on a strategic default. She suggests others find an advocate and not make these decisions alone.

Experts say all options other than default should be considered, because a home can represent far more than the big financial transaction it took to get it, and to keep it.

Colorado’s use of the federal government’s stimulus-related Home Affordable Modification Program (HAMP) is relatively low as of February, according to a report released Friday by the U.S. Treasury and Housing and Urban Development departments.

As of the end of last month, Colorado had a total of 14,320 mortgage-loan modifications related to HAMP — 2,613 permanent modifications and 11,707 active trial modifications, according to the report. A trial modification precedes a permanent one.

By comparison, California had the most total loan modifications for that period at 205,606, followed by Florida with 123,144, Illinois with 53,285 and Arizona with 49,763.

States with the least HAMP activity included states with relatively low populations, including North Dakota with 245, South Dakota with 474 and Wyoming with 545.

The HAMP data also included mortgage-delinquency information provided by the Mortgage Association and Colorado fared well in that arena, as well.

Colorado’s mortgage delinquency rate, according to the report, was in the second-lowest category, at 5.01 to 10 percent of total mortgage loans. The data relate to loans that are delinquent by 60 days or more.

Two states had the highest delinquency rates — California and Florida — at 20.01 percent and higher.

HAMP was created as part of the stimulus (or “American Recovery and Reinvestment Act of 2009”), the federal government’s $787 billion package designed to jump-start the recovery of the U.S. economy. The HAMP program went into effect in August 2009, and can be used by holders of mortgages insured by the  Federal Housing Authority.

Via HAMP, such mortgage holders can modify their loans to make payments more affordable, and mortgage holders have the potential to get the full amount of the existing balance on a loan, according to the government.

As of last month, more than 170,000 homeowners nationwide have gotten permanent mortgage modifications, and another 91,800 such modifications have been OK’d and are pending, according to the report.

Homeowners with permanent modifications are saving a median of more than $500 per month on mortgage payments, for a total of $2.7 billion. Median is the midpoint between highest and lowest figures in a range.

Some 1.1 million homeowners have started trial modifications, and more than 1.3 million homeowners have gotten offers for trial modifications.

HAMP’s goal, the report said, is to offer 3 million to 4 million homeowners lower mortgage payments using loan modifications through 2012.

Denver Colorado Home vacancy rate  was 4.9 percent during the fourth quarter of 2008. The last time the metrowide vacancy rate reached 5.5 percent was during the fourth quarter of 2006, according to the survey by the Colorado Department of Local Affairs’ Division of Housing.

Vacancies in Denver for-rent condos, Denver single- family homes and other small properties across metro Denver rose to a three-year high of 5.5 percent during the fourth quarter last year, according to a report released Thursday. While the overall small-property vacancy is up, the type of property makes a difference. Vacancies for single-family rental homes were 4.5 percent, compared with 6.1 percent for townhomes and 7.1 percent for condos.

Home prices rose for the seventh straight month in December, a sign of price
stability as the U.S. housing market continues its bumpy road to recovery.

The Standard & Poor’s/Case-Shiller 20-city home price index released Tuesday
rose 0.3 percent from November to December, to a seasonally adjusted reading
of 145.87. The index was off 3.1 percent from December last year, nearly
matching analysts’ estimates that it would fall by 3.2 percent.

Only five of 20 cities in the index showed declines from November to
December. The index is now up more than 3 percent from its bottom in May,
but still 30 percent below its May 2006 peak.

Los Angeles and Phoenix posted the largest price increases. The worst
performer was Chicago with a 0.6 percent decline.

Rising prices are a key to the nation’s economic recovery because they make
homeowners feel wealthier and more comfortable to spend money. Consumer
spending accounts for more than two-thirds of all economic activity.

Price increases also help rebuild equity for homeowners who currently owe
more on their mortgages than their properties are worth. Roughly one in
three homeowners with a mortgage are now in that position, According to Moody’s Economic .com

The housing market is seeking stability as it bounces back from a four-year
recession. Sales of previously occupied homes fell almost 17 percent in
December, the largest monthly drop in 40-years of record-keeping, the
National Association of Realtors said. Data for January will be released
Friday, with analysts forecasting a 1 percent rise.

Sales of newly built homes are expected to rise 5.3 percent in January,
after declining sharply a month earlier. The Commerce Department will
release new data on Wednesday.

On a quarterly basis, U.S. home prices fell 2.5 percent compared with the
fourth quarter of 2008.

The Case-Shiller indexes measure home price increases and decreases relative
to prices in January 2000. The base reading is 100; so a reading of 150
would mean that home prices increased 50 percent since the beginning of the
index.

The Denver Real Estate Market is changing. Median home prices in metro Denver soared in January compared with the same month a year ago, even as sales during the same period declined, according to data released Tuesday.

The median price for a single-family home was $210,000, up nearly 16 percent from $181,500 in January last year, according to an analysis of Metrolist data. The median price for a condo was $130,500, an increase of 15 percent over last year’s January price of $113,000.

The number of homes on the market declined 9.9 percent to 17,785, compared with 19,748 at the same time last year. But inventory was up 8.1 percent from the 16,456 homes listed for sale in December. The number of homes sold in January dropped 4.7 percent to 2,353, compared with 2,469 a year ago. Sales were down 20.5 percent from 2,959 in December. The $8,000 first-time-home buyer tax credit initially was set to expire Nov. 30. Buyers rushing to take advantage of the credit pushed November sales up compared with the same month in the previous year. The tax credit ultimately was extended through April.

Denver Home Sales Down Nearly 17%

The Denver Metro area is at a normal level, finishing 2009 with a 5.7 month-supply. In 2009, its inventory fell 8.9 percent from November to December, and dropped 17.0 percent over the last year. Sales of previously occupied homes took the largest monthly drop in more than 40 years in December, plunging far deeper than expected after lawmakers gave buyers extended time to use a tax credit.

Home prices: Denver leads the nation in home price percentage increases,
according to the Standard & Poor’s/Case-Shiller Home-Price Index. Denver’s
S&P/Case-Shiller Home Price Index yearly percentage change improved for
the ninth consecutive month, falling only 0.1 percent between November 2008
and November 2009. As reported by Standard & Poor’s, “Denver and Dallas
are nearing positive territory with their annual figures at -0.1% and -0.6%,
respectively” . Home prices have benefited from the increased activity
in November when buyers rushed to purchase a home before the expiration of
the first time buyer credit. It’s incredible that prices were preserved
during that buying frenzy. With the extension of the first time buyer credit
perhaps we’ll see even more improvement.

The Denver Metro area is at a normal level, finishing 2009 with a 5.7 month-supply. In 2009, its inventory fell 8.9 percent from November to December, and dropped 16.0
percent over the last year.