WHEN FORECLOSURE is the BEST OPTION! By Bob Schwartz, California Real Estate Broker, Certified Residental Specialist At Isnare.com Ezine Articles

A recently released report has shown that the flood of foreclosures is not all due to lack of affordability, loss of income and other sad scenarios. In fact quite a large percent are for “strategic” reasons. The owners decided that the home’s negative equity position made it economically wiser to let the property go back to the lender. In the research information released by the University of Chicago’s Booth School of Business and Northwestern Kellogg School of Management, 26% of the large number of mortgage defaults across the country, were paired with this “strategic” reasoning.

According to another nationwide study, 22% of all homeowners had negative equity positions during the first quarter of 2009. This means the homeowners owed more on their mortgage, than the current resale value of their homes. In some parts of Southern California, Nevada and Florida, it’s speculated that more than half of all homeowners now have negative equity.

Currently, we are just beginning of prime adjustable-rate loan activity called mortgage resets. The number of these mortgage resets far exceeds the number of subprime loans. The findings from Northwestern University's study seem to indicate that the U.S. housing market is on the brink of another substantial rise in home foreclosures.

Keep in mind, that these are prime loans made to the middle and upper end of the housing market. The people can afford to make the reset payments on their mortgages. A main reason that these people can afford the new reset payments is because of today's low interest rates hovering at around just 5%. In a post, dated 1-20-09, titled ‘San Diego Negative Home Equity’ on my San Diego real estate market blog http://www.brokerforyou.com/brokerforyou/?p=570. I speculated about this exact situation. The post was well in advance of this study's findings and all the more prophetic today.

I believe the importance of the mortgage reset will wake up homeowners to the harsh reality, and extent, of their negative equity position. Will they want to keep making mortgage payments? Would you, if the current value of your home was $50,000 less than the balance of your mortgage? What if your home value was $100,00, $200,000 or even $300,000 less than the balance on your mortgage? Would you continue to make payments or let the bank take it over?

I recently sold only in La Jolla. That was purchased new in 2005 for approximately $1.6 million. My buyer, was able to buy this home for just $1.1 million. So, in just about three years, from the time this home was purchased, the original seller’s home value had declined by $500,000, or just over 31%. Now just imagine if this home was originally purchased with a 10% down payment. The original owner would have had $160,000 invested in the property at the start. Plus would have made three years of substantial monthly mortgage payments, plus upgrades and then found out that his original $160,000 equity position had deteriorated into a -500,000 position. Now, should the original purchaser, with the loan balance of $1,440,000 continue to make mortgage payments or let the bank take the property back?

In the Northwestern University study, among those without moral reservations, 63% of those homeowners with a negative equity of $300,000 or more would let the property go into foreclosure. For the other group in the study who had moral issues with letting their home go into foreclosure, if they could make the payments, 38% would let their properties foreclose if their negative equity position reached $300,000.
The study further cited that when the number of foreclosures in a (zip code) area was higher, the willingness of the other homeowners to walk away from their properties increased. Also, when they were aware of others who had defaulted, 82% of homeowners in the study were likely to have a “strategic” default. That’s a new take on keeping up with the Jones.

The study strongly indicates that the traditional assumptions about homeowners who default on their mortgages only because they cannot afford the monthly payments should be re-evaluated. Fannie Mae and Freddie Mac may offer 125% mortgages but if the homeowner is deep in negative equity, will they really be enticed to refinance their homes? That would be a financially foolish decision.

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