Should A Borrower With An Underwater Mortgage Strategically Default?

September 20th, 2012

By Evan Nemeroff at

Does a borrower whose mortgage is underwater have an obligation to continue paying their monthly loans if they have the ability to do so? The answer to this question is different whether you speak to an economist or a homeowner.

According to a Zillow home price expectations survey in which 114 responses were compiled by Pulsenomics LLC from a group of economists, real estate experts and investment and market strategists, 71% said they would not strategically default on their mortgage that is at least 40% more than the current value of their home.

In a separate national survey conducted by Ipsos on behalf of Zillow where 2,009 adults where asked if they would pursue a strategic default, 59% of homeowners said they would not utilize this strategy if they were underwater on their home by 40%.

Currently, out of the 31% (15.3 million) of U.S. homeowners who have a mortgage underwater—paying a mortgage that is higher than the value of their home—nearly three-quarters have properties that are 40% below their buying cost, Zillow’s second quarter negative equity report said. Regionally, high rates of negative equity have accumulated in states such as California, Florida, Nevada, Arizona, and Georgia, Zillow reported. On average, homeowners across the country owe $75,235, approximately 44%, more than what their house is worth.

When homeowners were asked in the survey why they would not choose to strategically default, 37% cited moral reasons, while 35% indicated it didn’t make sense since they intend to live in that house for an extended period of time.

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Home ownership obstacles (3rd Qtr 2011)

December 4th, 2011

Surveyed obstacles to home ownership

Source :

The beatings will continue until morale improves!

November 7th, 2011

“The U.S. Federal Reserve is tilting the playing field in favor of those attempting to get mortgages by keeping interest rates ultra-low. The Senate also has voted to tilt the playing field in their favor, by raising the limit of Freddie Mac and Fannie Mae guarantees back to $729,750 – an absurdly high amount for a program that was meant to help the middle class.

However, the banks themselves are being very cautious, restricting lending to those well within traditional parameters of no more than an 80% loan to value ratio and no more than 25% of income consumed by mortgage payments. That helps the rental market, by preventing well-qualified renters from buying homes, but it does nothing for housing market recovery.

Given the restrictions on mortgage availability and the continued overhang of foreclosures and pre-foreclosures . . . the pace of new home sales remains extremely depressed. Further, even when the housing market recovers it will do so first through the absorption of existing inventory, so the demand for new building will remain low.”

Source :

Banks get both sides of their bread buttered

October 9th, 2011

Mortgage Fraud explained

I.R.S. view on tax trusts

June 4th, 2010

Abusive Trust Tax Evasion Schemes

Talking Points 

  • Trust/estate matters are the third highest area of growth among top CPA firms.


  • Domestic trusts filed 3.6 million Form 1041 returns in 2003; the third most frequently filed income tax return behind individual and corporate returns.


  • Since the mid-1970s the number of Form 1041 returns filed has doubled and there has been a proliferation of abusive trust schemes marketed to avoid or evade income taxes.
  • Facts about trusts :

o A trust is a legal entity formed under state law. To create a trust, legal title to property is conveyed to a trustee, who is then charged with the responsibility of using that property for the benefit of another person, called the beneficiary, who really has all the benefits of ownership, except for bare legal title.
o Legal trusts are used in such matters as estate planning; to facilitate the genuine charitable transfer of assets; and, to hold assets for minors and those unable to handle their financial affairs.
o A trustee is designated to hold legal title to the trust property, to exercise independent control over it, and to be responsible for its management.
o All trusts must comply with the tax laws as set forth by the Congress in the Internal Revenue Code, Sections 641-683.
o Trusts established to hide the true ownership of assets and income or to disguise the substance of financial transactions are considered fraudulent trusts.
o Taxpayers are responsible for payment of their taxes as set forth by Congress regardless of who prepares their return.

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Wells Fargo and BoA at least give lip service to working with HAMP

March 18th, 2010

In the news :  Wells Fargo joins Bank of America participating in a government program to modify second mortgages if the home owner has already modified their first mortgage.

The program is part of the  government’s Home Affordable Modification Program (HAMP) that aims at reducing monthly payments to help customers stay in their homes.

HAMP offers lenders who made “piggyback” loans — second mortgages that allowed consumers to make a small or no down payment in recent years — incentives to lower payments or eliminate the loans entirely.   As usual, it remains to be seen if these incentives will be passed thru to second mortgage holders.

Customers of Wells Fargo or Bank of America  who have already modified their first mortgage through the HAMP modification program  can also apply to modify their second mortgage.  All first-lien HAMP customers with second-lien mortgages should received mailed notices to make them aware of the new payment relief option … but maybe you heard about it first here.

The Not So Perfect Storm

March 16th, 2010

This blog author still has a key chain that reads “Captain’s Stateroom — SS Titanic” given to him in a going away party a good while back when he was leaving Federal employment.

Roll time forward and the analogy to sinking cruise ships may be a current day fit, as the Fed’s continue to pursue their “QE2” program. (the Fed’s “Quantitative Easing” program and the cruise ship “Queen Elizabeth 2” seems to be an obvious allegory).

The author has taken to the sidelines and a lifeboat as the mortgage industry continues to flounder. That’s a poetic way of saying I’ve let my mortgage broker license go inactive. It just isn’t fun anymore putting on a happy face that low interest mortgage money is abundant and is readily available for submitting an application, when the reality is pretty much the opposite for most borrowers.

Loan originators, as mortgage brokers are now called, are generally able to offer the current under 3.99/4.25 rates on agency conforming loan amounts primarily to borrowers who are have a middle FICO score over 740 and enough equity in their home to qualify for a refinance or a large enough savings to cover their down payment and closing costs.

Except for government employees, whose credit hasn’t been dinged by the economic events of the past few years ? Whose credit score is still above the 740 high water mark?

And if your credit score has miraculously floated like burning oil on the churned up seas, whose mortgage isn’t at least partly underwater ? I have friends whose HELOC’s (home equity lines of credit) have been trimmed back severely in this period of reduced home equities.

Then to add insult to injury, if the terms of your loan application trigger any risk-based loan level pricing adjustments (LLPAs), your rate quote will most likely be higher.

Bottom line : if you do not fall into the “perfect borrower” category, batten down your hatches and stand by for the “perfect storm”. And prepare to get wet.

Loan originators find themselves shouting into the wind in this kind of economic weather, and at least this originator doesn’t find that to be productive, fruitful, or helpful to potential clients. A “perfect borrower” should be able to go into their local credit union and do just fine.

I’ll continue to post here and on my twitter blog “a1mortgageinfo” with opinion and information that I think cuts thru the chase and tries to make sense of it all.

I continue to be a strong advocate of the Reverse Mortgage Program for qualifying seniors.

Hang in there … keep your life vest inflated … and hopefully we’ll all wind up having stayed the course !

A Matter Of Trust … or is it ?

March 9th, 2010

More a consumer warning, I digress a bit here on a topic indirectly related to home ownership … the matter of trust(s) …. (thank you Billy Joel).

There are a goodly number of snake oil vendors catering to everyone’s fantasy that you can lower or eliminate your tax bill putting your home in a legal Trust of some kind.

No surprise when it involves an attorney, establishing a Trust is expensive, depending on the complexity of your situation and what you’re trying to achieve.   One or two thousand dollars or more is not uncommon.   But as usual, Buyer Beware, and make sure you retain a lawyer that will back up their work and not just tell you what you want to hear while they’re collecting on their invoice.

Not that it’s encased in concrete, the following is the IRS take on Trusts as a tax avoidance strategy (notice that they use the word “evasion”).   As always, do your own due diligence and also retain good legal counsel.   Establishing a Trust that will withstand the scrutiny of IRS will need more than a boilerplate form bought on eBay.

IRS View on Trust Tax Evasion Schemes  (source :

  • Trust/estate matters are the third highest area of growth among top CPA firms.
  • Domestic trusts filed 3.6 million Form 1041 returns in 2003; the third most frequently filed income tax return behind individual and corporate returns.
  • Since the mid-1970s the number of Form 1041 returns filed has doubled and there has been a proliferation of abusive trust schemes marketed to avoid or evade income taxes.


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Who’s Giving Out Snorkel Masks ? More on the influence of underwater mortgages.

February 6th, 2010

Results of a recent consumer survey conducted by Thomas Reuters and the University of Michigan indicated approximately 75 percent of homeowners who participated in the survey viewed current home buying conditions as favorable because of attractive home prices and low interest rates.

However, nine out of ten of those home owners viewed the conditions for the sale of their own home as unfavorable, not because of lack of buyers, but because of price declines.

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A Buyers Market … or is it ?

January 30th, 2010

The information currently in the news is one of the plight of home Sellers . . . foreclosures, short sales, home loss, great drops in home values and prices . . .  all makes you think this is a Buyers market.

The underlying problem is that there are too many buyers, too many short sales, too many REO/bank-owneds, which actually makes this more of a Sellers market.

Not invaluable in this market,  Buyers have the wrong expectations going into the home buying process.

Buyers need to better understand what is actually happening :

  • they are not going to be able to go into a short sale and offer 30% under asking price, and expect the offer to be accepted 
  • a home which has been on the market for 200+ days is not a “desperate” Seller

It is more more likely there have been many buyer offers over that time frame and Lenders are taking their time to pick and choose, often countering with a higher selling price, to see which buyers wish to compete for the house.

The main problem Buyers have right now is that it’s actually more of a Seller’s market in some geographical areas.

How to Look Before You Leap?

January 19th, 2010

I don’t have an answer for this rhetorical question, so this is more a buyer-refinancer beware comment :  how to get an honest early on answer from your Lender as to whether your refinance is do-able or not.

Assuming your credit and employment documentation are good or better, there appear to be two main factors influencing refinancing your home in the current mortgage market :  market values and foreclosure activity in your community.

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Walk Away (Renee) … an old song … now a new financial survival tactic ?

January 9th, 2010

I’ve previously blogged in favor of toughing it out and not walking away from your  upside down/underwater mortgage  if you could afford to maintain your payment.   Been there, done that.  In my scenario, it was a hurricane that drove prices down for about five years, but they did come back to original levels and more.

An article in New York Times Magazine in the last few days somewhat said for some it was o.k. to abandon their mortgage commitment. I posted a good bit of that article yesterday because I agree  that everyone is unfairly putting this decision burden entirely on the shoulders of the Borrower. If Lenders have been given a big slice of the Stimulus Package Pie, why can’t they meet Borrowers half way or more, and modify their mortgages, specifically lower their interest rates ?

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Lenders Should Help You … Not … Walk Away From Your Mortgage

January 8th, 2010

The excerpts below are quoted from :

“Walk Away From Your Mortgage”
By Roger Lowenstein
Contributing writer for the New York Times Magazine
Published:  January 7, 2010

Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work.  But the housing collapse left 10.7 million families owing more than their homes are worth.  So some of them are making a calculated decision to hang onto their money and let their homes go.  Is this irresponsible?

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Market Commentary – 10 Surprises for 2010

January 5th, 2010

I don’t know if this entire commentary has a place here, perhaps only parts of it, but for now I’m going to post it for no other reason than to archive it and refer to it from time to time as 2010 unfolds.

Mr. Wien reviews his predictions for 2009 and how they fared, in addition to laying out 10 new ones for 2010.   As he himself writes “everyone keeps score on everything”  so time as always will reveal the clarity of Mr. Wien’s crystal ball and researched opinion.

Market Commentary by Byron Wien of the Blackstone Group

Fed to Maintain Low Interest Rates into 2010

November 9th, 2009

The Federal Reserve could remove some of the extraordinary support it has extended to the U.S. economy once the recovery looks solid and monthly job growth has returned.   St. Louis Federal Reserve Bank President James Bullard said he would not favor tightening monetary policy before recovery was well-established.

The central bank, wary of undercutting the fragile recovery by withdrawing its support too soon, is also on guard for any indication that its emergency lending efforts are fueling an unwelcome bout of inflation as the economy heals.

The Fed cut the benchmark the federal funds rate to near zero last December and put in place a vast array of emergency liquidity facilities in an effort to combat the worst financial crisis and recession since the 1930s.

As part of its emergency efforts, it has bought long-term government and mortgage-related debt to try to drive down borrowing costs.

The central bank has pledged to keep interest rates extraordinarily low for “an extended period”. Most analysts expect it to hold rates near zero until mid-2010 or later.

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