If your mortgage was too far "underwater", would you ever consider a "strategic default"?

[esmith143]

Originally Posted by EscapeCalifornia

Most of the people under water bought near the peak and are paying far more in mortgage, interest, taxes, maintenance, etc than they'd be paying to rent the same place, especially since rents have been coming down since the peak of the bubble.

I bought last year and I'm paying around 2500/month for a 3000 sq.ft. house on an acre.

I suppose, if I could rent a comparable house for 1200, and if I were underwater without any hope of equity, I might walk away.

[mateo45]

Originally Posted by smokingGun

You're obviously a shrewd real estate investor who's got his/her ear on the ground and these are interesting remarks. When you say hard money, do you mean asset-based lenders? And what are they demanding as collateral?

And when you say that within a yr many in post-bankruptcies are acquiring new sources of credit, is that credit cards? and does that subsequently reflect in a higher FICO score?

Dunno about the "shrewd" part, but thanks for the kind words! And yes, I am talking hard money loans secured by real estate, usually with at least a 75% LTV (~25% down). Although that might be much less depending on the lender and the property, especially if the target property is a repo with substantially more value than the final sale price. And if the value is there, sometimes they might even be "stated income" (remember those kind of loans?)!

BTW, since the competitive REO's usually require all-cash offers, banks are often regarding "hard-money" financing the same as cash, as long as there's proof of the funds. Downsides are naturally the high cash down payment, and these are often very short-term/high interest loans (2-5 years, @ 10-12%). But hey, when there are no other options, it'll get you into a house, even with a bankruptcy! Apparently there's enough demand, that I'm aware of at least 2 brokers in the Sacto area that specialize in them, acting as an escrow co. and loan servicer for private individuals with money to lend. And compared to current returns in other investments, it's a good deal for the private lender too.

Have seen folks obtain bank credit cards (probably secured), and small local retail charge cards, and even finance cars within months of their case closing on a Chap. 7. Although I don't know their earlier scores, so uncertain how quickly their FICO bounces back. But the takeaway I get is that 1) a growing number of otherwise reasonably responsible folks are doing what was once unthinkable to them, i.e. defaulting, and declaring bankruptcy, and 2) it's no longer the automatic & lasting economic "purgatory" it once was.

[smokingGun]

Originally Posted by mateo45

Dunno about the "shrewd" part, but thanks for the kind words! And yes, I am talking hard money loans secured by real estate, usually with at least a 75% LTV (~25% down). Although that might be much less depending on the lender and the property, especially if the target property is a repo with substantially more value than the final sale price. And if the value is there, sometimes they might even be "stated income" (remember those kind of loans?)!

BTW, since the competitive REO's usually require all-cash offers, banks are often regarding "hard-money" financing the same as cash, as long as there's proof of the funds. Downsides are naturally the high cash down payment, and these are often very short-term/high interest loans (2-5 years, @ 10-12%). But hey, when there are no other options, it'll get you into a house, even with a bankruptcy! Apparently there's enough demand, that I'm aware of at least 2 brokers in the Sacto area that specialize in them, acting as an escrow co. and loan servicer for private individuals with money to lend. And compared to current returns in other investments, it's a good deal for the private lender too.

Have seen folks obtain bank credit cards (probably secured), and small local retail charge cards, and even finance cars within months of their case closing on a Chap. 7. Although I don't know their earlier scores, so uncertain how quickly their FICO bounces back. But the takeaway I get is that 1) a growing number of otherwise reasonably responsible folks are doing what was once unthinkable to them, i.e. defaulting, and declaring bankruptcy, and 2) it's no longer the automatic & lasting economic "purgatory" it once was.

So that's how many bottom-fishers are finding financing to buy up REO/foreclosures. I was always under the impression you needed to show up to the table with cash, but obviously not. I can easily see how if they choose wisely they can rehab & flip these properties within a yr.

[mateo45]

Originally Posted by smokingGun

So that's how many bottom-fishers are finding financing to buy up REO/foreclosures. I was always under the impression you needed to show up to the table with cash, but obviously not. I can easily see how if they choose wisely they can rehab & flip these properties within a yr.

That's about right, and after rehabbing, naturally the LTV can sometimes rise dramatically enough to even obtain conventional financing if you're going to hang onto it, which is the case with my current home, that has way more than doubled in value since I bought it 10 months ago. Although on a more cautionary note, have lately been seeing some signs of the old "feeding frenzy" returning to the market again, with newbie speculators outbidding each other on REO's, drawn by the stories of incredible "deals" like these.

But if they end up overbidding to get the property, and/or didn't plan well on their rehabbing costs, they could end up being lucky just to break even, especially if home values don't return for awhile. It's much the same as the previous speculation bubbles, so I guess some things just never change!