I blogged the week before last about strategic defaults — when a homeowner decides to default on a mortgage (typically through a short sale or by letting the bank foreclose) even though he can still pay the mortgage.  Typically, a homeowner does a strategic default because of negative equity — when the mortgage is more than the home’s market value.

On July 24, I talked about the recent academic paper citing that 26% of all mortgage defaults are strategic.  On July 27, I wrote about the nuts and bolts of a strategic default — include the process and its consequences.  Yesterday I had a long chat about it with my friend Matt Maret, a mortgage banker with Bell Mortgage.  It was fascinating to get a mortgage lender’s take on this trend toward “strategic” defaults.

Matt echoed the real estate attorney’s statement that Arizona’s anti-deficiency laws protect a homeowner’s other assets (besides the home) in the event of a default.  But Matt qualified that the anti-deficiency protection, as of September 1, will apply only to primary residences, not to second homes or investment properties.  (In other words, if the home is not a primary residence and the owner defaults, the bank can seize other assets, garnish wages, etc. to satisfy the balance owed.)

Matt also elaborated on one option I talked a bit about last week — the short sale.  He said that the FHA will lend to a person who has a short sale on record (even if it was yesterday) — as long as there are no late payments on the person’s credit (and that person is otherwise qualified, of course).

I have heard from clients that banks will reportedly not entertain the idea of a short sale if the homeowner is not in default.  Matt, though, said that all it takes is a good real estate agent to “help” the bank understand that the choice is 1) accept the short sale offer; or 2) foreclose on the property.  “The lender will always choose the short sale,” Matt said.  Why?  “Because they’re not going to be able to sell the home for more than market value anyway and they’ll accrue upwards of $50,000 in legal costs to foreclose.”

Even if the home is foreclosed, Matt said, a person could qualify for an FHA loan 2 years after the foreclosure.  And while FHA loans fell out of popularity during the real estate boom (because FHA didn’t allow “funny business” like no-document loans) they’re immensely popular now.  In fact, Matt said that 90% of all loans originated in Maricopa County now are FHA loans.  That’s in part because of tighter requirements for conventional loans and in part because the FHA will still make a loan with as little as 3.5% down (conventional lenders are now requiring at least 10%).

At the end of the day, Matt said that often the economics of a strategic default just make sense.  Moral considerations, that’s another story. . .

What do you think?  Have you thought about a “strategic default”?  Click on the “Comments” link below and join the discussion!

I have to say that I am not an attorney and none of the information I’ve presented here should be construed as legal advice.  If you have questions about foreclosure or “strategic defaults” or are thinking about defaulting on your mortgage, consult with a legal professional.