Defining the American Dream

Attitudes About Strategic Default and Foreclosure

Posted on Monday, May 24, 2010

A survey released Thursday by and RealtyTrac shows that only 1 percent of homeowners with a mortgage say walking away would be their first choice if they were unable to make their payments.

If their mortgage were to go underwater – meaning the property value drops below the amount still owed on the loan – 41 percent would at least consider a strategic default, while 59 percent would not consider walking away no matter how much their mortgage was underwater.

The latest data from CoreLogic reveals that nearly one in every five borrowers with a mortgage owes more than their home is currently worth, and as Pete Flint, Trulia’s co-founder and CEO, stressed on a call with reporters, the greater the negative equity, the higher the chances of strategic default.

But Flint says the new survey results show that “While it may not make the most sense to keep paying for this undervalued asset, many homeowners, at least for now, are holding on.”

With walking away from their mortgage obligation off the table for most homeowners, Flint broke down for reporters the avenues borrowers are leaning toward to prevent a foreclosure should they find themselves in that situation. He says only 5 percent of those surveyed say they would opt for a short sale as their first choice, while 69 percent would pursue a loan modification to save their home.

The study conducted by the two California-based companies also found that while the stigma around owning a foreclosure has subsided, interest in purchasing a foreclosure is significantly down compared to a year ago.

Currently, 45 percent of U.S. adults age 18 and above are at least somewhat likely to consider purchasing a foreclosed home in the future, compared to 55 percent this time last year, the survey results showed.

“For every borrower who avoided foreclosure through HAMP last year, another 10 families lost their homes,” said Flint. “It now seems clear that government programs will not reach the overwhelming majority of homeowners in trouble,” leading to a larger number of foreclosed homes on the market, he explained.

“Combined with decreased consumer interest around purchasing a foreclosure and it may take even longer than anticipated to see true health return to the real estate market,” Flint said.

While fewer may be in the market for a foreclosed home, Flint says people are becoming more realistic about the discounts they can expect on a distressed property. Eighteen percent expect bank-owned homes to come with a discount of less than 25 percent off the value of a similar home that was not in foreclosure – an expectation Flint called “realistic.” However, not all consumers are in line with market nuances, with 36 percent citing that they expect to receive a discount of 50 percent or more when purchasing a bank-owned property.

“Although fewer consumers expressed interest in buying a foreclosed home than a year ago, the actual sales of bank-owned properties (REOs), along with sales of properties in the foreclosure process, continue to increase — accounting for more than 30 percent of total sales in the first quarter of 2010 according to our data,” said Rick Sharga, SVP for RealtyTrac. “We anticipate that there will be an increased number of both REO purchases and short sales throughout the rest of the year as the most active buying segments – first-time homebuyers and investors – continue to look for bargains.” - DS News

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