Strategic Default? FNMA 4.5% bond hanging in there...CONSTRUCTION SPENDING UP.

So welcome back after Memorial Day Weekend!  I hope each of you got the opportunity to spend a moment reflecting on those closest to you who have passed on as well as those who left this life in the line of military duty.  I am very aware of the freedoms we enjoy here that have been preserved and protected by our military.  Additionally, the protection of our interests abroad has preserved our status as a World power for many generations of time.  Interestingly, even in our state of affairs here in the USA: we are still looked to for aid around the world and we are the country of choice evidently when people need a stable place to park their money.

More of that is evidently going on as GOLD was up again today to close at $1228/oz.

Oil was down 61 cents to close at $71.97/barrel.

The FNMA 4.5% bond is holding strong at $102.16 and was up another 12 basis points.

What is a "Basis Point" anyway?  A basis point is 1/100th of a percent or one penny when speaking in dollars.  12 basis point increase by the Fannie Mae 4.5% bond just means that the FNMA 4.5% bond is MORE EXPENSIVE by 12 cents.  

Construction Spending is UP to levels not seen since 2000 and was reported UP 2.7% vs the expectation that we would not see any growth there today.  Hope?  Hope so.

Below is a recent article I wrote on Strategic Default.  Enjoy if you would like!  

Cheers,

Chad

Strategic Default?

A few years ago, there was an article in the WSJ on Strategic default. Last Summer, a few more articles were put out about the subject. This weekend there was another article in the New York Times about it. These huge platforms covering this strange phenomenon.

What is a strategic default? It is also called a strategic foreclosure. It is exactly what it sounds like. A strategic default is when a person knowingly and willingly refuses to make a payment on their home as part of their long term financial strategy.

What? YES. There are those who see the effects of not paying their mortgage to be a nice alternative to actually paying the mortgage payment.

Interestingly, the borrower executing a strategic foreclosure statistically has: better credit, more education and more money than the average borrower.

Let me tell you, with the hundreds of clients I deal with every year, there are more than a few of them who are prime candidates for this type of thing.

Why? When we think about it there are many reasons why. If the value of the mortgage is greater than the value of the home (70% of Nevada Home Mortgage Holders are "underwater" and some states are as high as 45%)

Why would you continue to pay on a home that you will ultimately pay hundreds of thousands of dollars more for than if you were to simply let it go and start over in 7 years?

Why else? TIME. 21 states have a backlog of foreclosures for 12-18 months. One borrower in Florida happily announced that they hadn't paid their mortgage for over 2 years and were still living in the house.

Another reason? Workout. If any of you have gotten into trouble in the last few years or have had clients in trouble with their mortgage you know that the bank actually REQUIRES that you are in DEFAULT before they whip out one of the magical programs to help you. I have heard stories of borrowers having their mortgage payment cut buy as much as 70% with a "work out" through their lender. (Unfortunately, most of the loans modified or worked out are in default again very quickly.) Think about this: hold onto your portfolio vs. cash it in, let the bank sweat for a while and then come in to "work out a deal" for getting yourself current again. People are doing it.

Unfortunately, we ALL pay for this behavior. I am not a proponent of this at all but like so many things in life, if you feel it is right for you: I am not your mother. Please bear in mind that your word is really the universal currency and breaking your "word" for the convenience of not having to make a mortgage payment for a while and letting the chips fall is the only real lasting effect of this.

This may be a hot issue. I am interested in what others have to say about it.

What do you think?

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Chad Schauers
Montana Mortgage Lender, Bozeman, Montana
Personal Cell: 406 799 8613
Personal Email: metchad@gmail.com