Recent Blog Posts

Is Strategic Default Unethical?

Chris Forrest — Tue, 24 Jan 2012 21:20:00 GMT

Do you feel guilty about considering a strategic default?

Does it make you a bad person? An unethical person?

Absolutely not.

Voluntarily defaulting on a mortgage is not immoral or unethical. Ethics should not enter into your decision concerning whether or not to strategically default. Law Professor Brent White of the University of Arizona puts it simply in his academic paper entitled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis:” Morality and emotions have no place in one’s decision to strategically default on a mortgage.

Forget about shame and guilt, Prof. White says. Don’t worry about your credit score. If you owe more than your home is worth, stop paying your mortgage and walk away.

“Underwater homeowners aren’t knowingly making bad financial decisions; they just can’t cognitively grasp that they would be better off if they walked away from their mortgages,” he writes. “Most underwater homeowners don’t default as a result of two emotional forces: 1) the desire to avoid the shame or guilt associated with foreclosure; and 2) fear over the perceived consequences of foreclosure -- consequences that are much less severe than most homeowners have been led to believe.”

Lenders do not take ethics into account when they decide to loan money. It is a financial transaction. Both you and the bank took a risk. When the risk goes bad for the bank, they run to the government for a bailout. You don’t have that option.

Banks and borrowers do not operate on a level playing field. Lenders set the rules during the housing boom. They offered loans with no documentation, no money down, no income verification, and inflated appraisals. They set up borrowers to fail with adjustable rate, interest only, and “pick-a-payment” loans. These toxic loans created a massive demand for housing and inflated the housing bubble. Now that housing values have collapsed, these same banks are unwilling to reduce the principal on your loan and make it nearly impossible to obtain a loan modification.

“Homeowners should be defaulting in droves,” says Professor White.

Who is Most Likely to Strategically Default?

Chris Forrest — Mon, 01 Aug 2011 17:10:00 GMT

You may think that only a small percentage of Americans would ever consider walking away from their mortgage. You may believe that only people lacking in financial responsibility would ever consider such an act. You may think that walking away from your mortgage means that you are a financially irresponsible.

You would be wrong.

A research study by the credit-scoring company FICO revealed that people who strategically default on their mortgages tend to be more credit-savvy and have better credit histories than other defaulters.

Why?

People who understand the wise use of credit also tend to understand the long- term negative consequences of continuing to pay on an underwater mortgage loan.

FICO conducted the study of credit bureau data to develop a more accurate model of who is more likely to engage in a strategic default. The study was titled: “Predicting Strategic Default.” FICO defined a “strategic defaulter” as someone who is underwater on their mortgage, more than 90 days delinquent on mortgage payments, but current on other debts.

The result of the FICO study confirmed what I have believed for quite some time: the more educated a person is about personal finance and credit, the more likely they are to engage in a strategic default.

According to the study, when compared with other people who defaulted on their mortgages, people who engage in a strategic default also generally:

• Have higher credit scores;

• Use credit more judiciously;

• Have not been in their home for very long; and

• Shop for new credit cards and credit lines before they strategically default.

Another study by credit agency Experian revealed even more interesting results. This study used data based on the Vantage credit scoring system developed by the three largest credit bureaus, Equifax, Experian and Trans-Union. The “Experian-Oliver Wyman Market Intelligence Report” made the following conclusions:

• People with very high credit scores (often called super-prime borrowers with VantageScores of 901-990 points) chose to strategically default on their mortgages at a rate 50% higher than other defaulters;

• Borrowers with multiple first mortgages (i.e. people who owned multiple properties) had higher levels of strategic default;

• Property owners with higher mortgage balances were more likely to engage in strategic default.

What does this mean? People with very high credit scores and individuals who are real estate investors are much more likely to engage in strategic default. In other words, people who know more about credit and real estate investing are using strategic default as a financial option. Shouldn’t this be a lesson for the rest of us?

The Forensic Audit Scam

Chris Forrest — Tue, 01 Mar 2011 22:20:00 GMT

Homeowners in distress are easy prey to unscrupulous companies who aggressively market a wide range of foreclosure rescue and mortgage modification services. many of these companies also claim to be affiliated with or supported by attorneys. This is often completely false.

Some companies claim that nearly all of their "clients" receive loan modifications and even offer a money-back guarantee. Others falsely claim that they are affiliated with a government agency or have some "inside track" or special relationship with lenders that can facilitate a loan modification or reduction of the amount you owe. Don't fall for these types of scams!

The Forrest Law Firm is committed to reporting these types of companies to the Florida Attorney General and the Federal Trade Commission to help ensure that Florida homeowners are not taken advantage of by these scams artists. The Federal Trade Commission (FTC) has also recently enacted new rules that prohibit many types of loan modification and foreclosure rescue schemes that target unwary homeowners.

One such scheme that has proliferated on the internet is the "forensic loan audit" scheme. In exchange for an up-front fee, supposed "forensic loan auditors" offer to review your mortgage documents to uncover violations of federal and state laws. These audit companies claim that such audits can help you avoid foreclosure, speed up the loan modification process, reduce what you owe, and even cancel your loan.
In reality, the FTC has stated that there is no evidence that forensic loan audits are of any use whatsoever in obtaining a loan modification or obtaining any type of mortgage relief. I have personally reviewed many of these "foresnic loan audits" and have found them to be completely useless and an utter waste of money. Worse, many of the audits I have reviewed contained information that was wrong, misleading, and did not accurately reflect the federal and state laws they supposedly addressed.

Don't fall for any scam that includes a "forensic loan audit" or promises to help you cancel or rescind a mortgage. Consult with an experienced Florida attorney on any issues relating to mortgage law to avoid falling victim to these predatory companies.