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The dilemma today for many considering loan modifications or even considering whether to move from the trial to the permanent phase of the process is whether it is worth it in the long run. Current programs lower interest rates and make the payback longer but do not address the loan’s principle.  With many homes worth less than the principle or “under water,” some owners feel negative about paying for a home that could not command the price they paid.

This is encouraging some homeowners to strategically default on their loan before they are even delinquent. Knowing that delinquency might affect their ability to apply for a new loan or even to get a decent rental, they are getting their next step in place before they make a move.  Even if they can pay the loan, the decision to strategically default may be based on the math of it all.  They determine that over the life of the loan, they will pay 10’s of thousands of dollars more for their property than it is worth.  They know their credit score will take a hit, but they anticipate that by the time their credit rebounds they will have saved a bundle.

This is a new variation on what some homeowners do out of frustration: walk away from a house they are delinquent on and mail the keys back to the bank.  Banks hate this “jingle mail.”  While it may seemingly solve a problem for someone already deep in debt, they may well receive a double whammy: they now have bad credit AND a bank may be coming after them.  The bank may come after the first group too, but the strategic defaulters are betting this won’t happen.

According to a new study by credit bureau Experian and Oliver Wyman Consulting, twice the number of people who did this in 2007 did so in 2008.  Based on their evaluation of 24 million credit files, strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and nosedived since 2006.  The study found a 68% increase in strategic defaults in California, compared to a 9% increase elsewhere.

Not surprisingly, banks are less enthusiastic about strategic defaulters than regular walkways.  The major credit bureaus are developing tools to identify strategic defaulters and refuse loan modifications to this group, as they are likely to strategically default even after the modification.

All of this lends some background to what can be a more personal problem: the need to sell your house, fast. If that is the case, contact us at Express Homebuyers. We buy houses, no matter what the condition. We’ll give you a fair shake and you can sell your house for cash, fast. Check out our website for some useful secrets to selling your home fast, then give us a call at 1-877-804-5252.

A study by the New York Federal Reserve Bank has confirmed what the man on the street has known all along: loan modifications would have a better chance of working if the principle was lowered.  Current programs, which just lower the interest and extend the terms, are likely to fail.

Specifically, the researchers found that if a payment is lowered by 25% because the interest rate was cut, the homeowner is 11% less likely to default.  If the 25% deduction is due to reducing the principle while cutting the interest a little, the homeowner is 27% less likely to default within one year.  Reducing the principle doubles the potential rate of success.

Lenders and the investors who bought the loans are reluctant to lower the principle, even though the dollars and cents of foreclosure are clear: it costs more to foreclose and then maintain a bank-owned home until sold than to cut their losses by making a deal with the home owner.

Homeowners are acutely aware that the value of their home has dropped in comparison to the loan value.  Nationwide, at least 23% of homeowners had negative equity in their homes by the third quarter of 2009.  The Fed Study found that the more “underwater” a borrower is, the more likely he is to default.  When their loan–to-value (LTV) is 115%, homeowners owe 15% more than the home is worth and are 51% more likely to default on a modified loan.  When they have positive equity, they are more likely to keep the terms of the modification.

It comes down to incentive.  If people are paying on a deeply underwater home, they have less financial stake in paying on the loan than those who would lose their own money if they defaulted.  No one wants a foreclosure, but those with positive LTV would lose their equity along with the home in case of default and ultimate foreclosure.

Some analysts think the study could result in a rethinking of federal housing rescue plans.  Currently, the Home Affordable Modification Program (HAMP) stresses lowering interest and lengthening the mortgage but does not push for principle reduction.  If lessening the principle to get the home more in line with current market values is the key to successful mortgage modification, existing programs are doomed to failure or at least will have minimal long term effectiveness.  The program must encourage people to make the choice to pay rather than default.  Hopefully, future modifications of HAMP will tackle the thorny issue of underwater mortgage head on.

Facing the potential of having to sell your home? Express Homebuyers will buy your home for cash and have your deal wrapped up in two weeks .  Check our website for some useful secrets on selling your house fast. Then give us a call at 1-877-804-5252. We buy houses as a business. We pay cash, and you can sell your house fast to avoid the hassle of loan modification.