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Friday, May 11, 2012
The Strategic Short Sale: How Distressed Borrowers can Build a Better Future
Strategic defaults, from the inception of the mortgage meltdown through the Recession and
now the potential recovery have followed an interesting cycle. Borrowers holding exotic mortgage products characterized by lowball introductory rates with steep mortgage payment hikes after an initial fixed period comprised the first wave of strategic defaulters, followed then by conventional mortgage holders caught in the Recessionary fallout of unemployment or other calamities and couldn’t afford a fixed monthly payment. As the Recession came to a close, a new strain of affluent strategic defaulter appeared that walked away from their mortgage as a business decision to avoid losing more money on a declining investment. In each example, the borrower deems the short-term benefits of a clean default are much more valuable than the immediate consequences associated with abandoning the mortgage. There is yet another aspect to strategically forfeiting the home that takes into consideration long-term benefits with a more satisfying outcome.
Borrowers today have more options than ever keep their homes, ranging from proactive lenders reaching out to modify loans, to government and regulatory actions aimed to prevent more foreclosures. Moreover, today’s borrower takes a more prudent approach to their credit obligations, as evidenced by significant declines in consumer debt and delinquency levels across the board. However, there are still homeowners that have absolutely no backstop to avoid severe delinquency and ultimately foreclosure. Usually, the only option left other than foreclosure is a short sale, which under today’s conditions is more favorable alternative. The government has been incentivizing lenders and sellers to participate, along with lenders offering some pretty sweet cash bonus to delinquent borrowers to sell before a notice of default is filed. Moreover, real estate agents and brokers have become more familiar with short sales as part of their routine and are becoming better equipped expedite the process. But this is where the conversation usually ends. The lender accepts a lower price for the loan amount in return for removing toxic assets off its books. Borrowers dodge the horrors of foreclosure by selling it. Distressed borrowers, however, should be able to strategically leverage a short sale process as a stepping stone that helps them gain a stronger financial footing to recoup their most valued asset --- their home.
The strategic short sale is ideal for borrowers who, above all, are honest with themselves about their predicament. They acknowledge early in the process that at some point in their near future they will not be able to make either their current mortgage payments, or even sustain reduced mortgage payments they would be eligible for through loan modification. This is the critical juncture where they decide relinquishing the home through a short sale is a viable route. The short sale wipes out the debt on the first lien, and many short sale negotiations include the cancellation of the debt owed as a result of difference between the remaining loan amount balance and the final sale price of the home. Borrowers may also be entitled to cash incentives through the government, the lender, or a combination of both. Moreover, a short sale clearly has a significantly smaller impact on a borrowers’ credit rating than a foreclosure. These are the obvious advantages.
While it may appear that distressed homeowners initially lose their most valued asset, the strategic perspective of the short sale process provides for a more optimistic end game. The true goal is actually for the strategic short seller is to position themselves to comfortably handle the responsibilities of a mortgage for the long term. By relinquishing the debt of the original mortgage through the short sale, homeowners give themselves an opportunity to regroup financially and develop a savings routine based on new budgeting strategies. The fresh start allows the former homeowner to address other outstanding debt, and as a result build a stronger credit profile that would have a better chance of meeting today’s strict lending guidelines. The most important advantage to the former homeowner is that home prices, compared to when the original home was purchased, will be far more affordable when they are ready to enter the market again. While today’s low home values are projected to rise in the next cycle of the housing industry, they won’t approach the highs of the last cycle. The homeowner who takes the high road by strategically exiting the mortgage via short sale has the opportunity to return as a homeowner on more stable footing with a home and mortgage that can be sustained.
Losing a home may not the end of the world. It could be the beginning if approached with the right plan.
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