I have been prominent in two separate stories in the media this past week regarding default properties and their effect on the market and the borrower. This past Sunday I was in the New York Times, and on Tuesday I was in a nice piece on AOL Daily Finance.
The Times piece centered on strategic defaults, where borrowers who could otherwise afford a mortgage stop paying on purpose. Many people who do this do so for cash flow reasons; if you paid $350,000 for a house in the peak and the same house is for sale at foreclosure down the street for $180,000, some people just buy the cheaper one and let the old house go, cutting their payment. However, the credit consequences can be dire. The debate on the ethics of the practice is heated.
The AOL Daily Finance article is part of a series on how the housing crisis has affected different places. Mount Vernon, a city in Southern Westchester County which has been rife with short sales and foreclosures, was discussed in the article. Values are down in the neighborhood I am quoted on about 50%. What is not mentioned is that many of the foreclosures were actually renovated by the prior owner before they ran into financial problems, which punctuates the crisis, for me, in a very sad way. You hate to witness broken dreams.
Which is why we work so hard on getting our short sales closed and done for our clients. Preventing foreclosures is what we are all about.
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Wikipedia defines the term Strategic Default as
“the decision by a borrower to stop making payments (i.e. default) on a debt despite having the financial ability to make the payments.” (my emphasis added)
Given the huge amount of attention given to the practice, I thought that I would offer my own observations on what I am seeing in Westchester County. Given our proximity, I think the commentary holds true for other parts of the New York Metropolitan area, including Rockland, Fairfield and Long Island.
Simply put, I don’t see many people consciously deciding to walk from mortgages that they could otherwiseWoof pay in this area. While it may be said that a short sale Realtor like myself would not be approached by someone considering a strategic default, I would argue to the contrary- the very definition of “strategic” would indicate that some thought and research would go into the mix before deciding to default. I have spoken with people who are considering it; there are just aren’t as many here as in other areas. I think the reason lies primarily in the characteristics of our marketplace, and the fact that you have to live somewhere, and this isn’t the easiest place to change where you live.
Here are a few reasons I think strategic defaults are not as prevelant in Westchester as they might be elsewhere:
- We don’t have the options other markets have. In places like the Sunbelt, which have been hit very hard, I can see why it would be tempting to move into a similar house right in your own subdivision and cut your payment in half. We just don’t have those subdivisions with dozens of available options. Westchester has been a mature county for decades, and there are no vast new subdivisions with lots of available inventory to be had. The options might not allow their children to remain in the same school, or that one identical house might be a mothball smelling geriatric special with a 1975 kitchen and baths. And if there is a tempting option at an attractive price, there might be competition, shrinking the financial advantage in moving.
- The economy of scale is bigger than other places. Take a homeowner in an area like Eastchester or Yorktown who paid $600,000 for their home in 2006 and is now only worth $485,000 with a balance of $525,000. They are indeed underwater, but there isn’t much of a step forward in renting or buying a similar house for $485,000. In the case of buying, they’d still to come up with a downpayment and closing costs, which, even for an FHA loan, could be $40,000-$50,000. Remember, just the tax escrow on a home here would be $10,000 before you paid a dime in closing costs. There may be some who rent, but maintaining status quo in quality of life in that case, especially in light of losing the tax advantages, is dubious. I would argue that anyone who takes this option isn’t being strategic, but has their hand forced due to financial hardship.
- The downturn hasn’t been as big here. Oh, it’s been big alright, and in dollar value perhaps even larger than most, but in terms of percentages, we’ve only lost 20-25% of value, half of the percent of the harder hit regions. The climb back, therefore, isn’t as steep. So if the choice on the table were to lower your mortgage payment from $4300 to $3800, come up with $50,000 and wreck your credit, I think most people would decide to stay put. Elsewhere, where the option is a far smaller payment and much less cash of an upfront cash outlay, the credit consequence might not seem as high a price to pay.
So who is strategically defaulting in Westchester? I think that most of the strategic defaults in Westchester are on non-owner occupant properties where the rent no longer covers the payments and the monthly shortfall is not worth it to the owner. Rather than subsidizing a property awash in red ink, they let it go and keep the money in their pockets.
However, from my non-scientific, real estate broker vantage, by far, the bulk of defaults in Westchester are not strategic, but due to real hardship. In a county where the median price peaked at over $700,000, an interruption in employment or loss of income can get you pretty behind in hurry, and the numbers might be too enormous to catch up for most. That discussion will be forthcoming.
Originally posted at: J. Philip’s Westchester Real Estate Blog: Are Strategic Defaults a Problem in Westchester County?
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