Dec 8, 2010

Practice of default on second homes and its aftermath

There is an increase in the number of homeowners who are walking away from a second home or investment property that is worth less than what is owed on the mortgage, even though they can afford to make the payments. But this practice of dumping a beach condo- called as "strategic default" is not the same as discarding a poorly performing stock or bond. This trend of strategic default is on the rise and is accounted for 35.6% of all foreclosures this year compared to a 23.6% from last year.

The after effects of strategic default is a wrecked credit as it stays on the credit report for 7 years and will disqualify the homeowner from getting a loan for the next 7 to 10 years. There is also the question whether the lender can go after the homeowner who has defaulted. The answer depends on the location of the property. If the property is in recourse states, then the lender can come after you and other primary assets to get the full loan amount back. In"non-recourse" states, the lender cannot sue for the full loan amount and will get only the amount what the property fetches at a short sale, foreclosure sale, or a deed in lieu, in which the property is taken back and not formally foreclosed on.Florida, Connecticut and Arizona are among the nonrecourse states, while Colorado, Maine, New Jersey and Hawaii are recourse states.

There is a third category of state, called “single-action” or “one-action,” which allows the lender either to foreclose on the owner or file a civil lawsuit for the full loan amount. New York, California and Idaho are in that category.

Even in a nonrecourse state, however, those homeowners who opt for a strategic default on a previously refinanced property may not be protected from lenders, because the mortgage in such a case was not accorded for a first purchase, said Philip Faranda, a mortgage broker for J. Philip Real Estate, in Briarcliff Manor, N.Y.

Though not illegal, strategic defaults are controversial, because they are viewed in some circles as unethical. The practice is common among property developers. For homeowners under water, experts say, it can make economic sense. “It’s a business cash-flow decision,” Mr. Faranda said, “but the risk is that you’re rolling dice with your future credit.” Panel of advisers at PrivoCorp suggests that homeowners should take advice from their loan officers before they take loans on a second mortgage and should be well informed as to the location of their property and the rules of the particular states before they buy a property. PrivoCorp does not originate loans. We are a processing company.
For more information regarding this blog, check out Nytimes

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