Matt and Rachel Kent are about to apply for a loan on a new home being built in Tucson, Ariz. It’s been three years since they lost their Las Vegas home to foreclosure. The Kents, who could afford to keep their home in Las Vegas, simply decided to “walk away” and let their lender foreclose. They join a growing population in the United States referred to as “strategic defaulters.”
Foreclosure and its expanding negative economic impact continue to plague the nation. The situation in the Las Vegas area, a booming home market only a few years ago, now boasts some of the highest foreclosure rates in the country. Nationally, 34 percent of foreclosures are the “strategic” variety, according to a September 2011 survey conducted by the University of Chicago. According to CoreLogic, 10.9 million, or 22.5 percent of all residential properties with a mortgage had negative equity at the end of the second quarter of 2011. Nevada had the highest negative equity with 60 percent of all of its mortgaged properties underwater, followed by Arizona (49 percent), Florida (45 percent), Michigan (36 percent) and California (30 percent). In addition, 75 percent of homes with negative equity have above market interest rates.
While walking away from your home may seem like a simple solution, the process of recovering from a strategic default takes time. The wait to be considered for a home loan can be anywhere from three to seven years after a foreclosure has been completed. While there are a number of factors that lenders consider when evaluating a request for a home loan, this has to go hand in hand with the applicant proving they have been able to manage their debt since the foreclosure. For most people, their credit score is severely impacted once a foreclosure shows up on their credit report. On average, a foreclosure will stay on a credit report for up to seven years after the initial reporting date. In general, as the foreclosure rating gets older, it has less and less impact on the person’s credit score. However, the time it takes for a credit score to rebound can be enhanced substantially if a person follows some credit best practices in managing his or her debt and simply pays his or her bills on time. According to the Federal Housing Administration, if a person with a past foreclosure has waited three years, has at least a 620 credit score and meets other lending requirements for debt and income, they can qualify for an FHA home loan. Conventional loans, which often have more desirable interest rates, have a waiting period of seven years, and VA loans, two years. In other cases, lenders may not be willing to consider a loan for some time if the reason for the foreclosure was simply because the homeowner chose not to make a payment or because they had too much other debt.
According to Doug Duncan, chief economist for Fannie Mae, 90 percent of people surveyed nationally by Fannie Mae said that walking away from a mortgage is wrong for moral, legal and financial reasons. If strategic default continues in popularity, it will not only continue to drive down home values across the U.S., it will continue to limit the amount of capital banks are willing and able to lend as a result of their expanding loan losses. This creates a compounding negative impact that eventually trickles back and impacts each of us by way of empty homes, higher crime rates and lower home values.
Jeff Mandel is President/Chairman and Marlin Brandt is COO of The ApprovalGUARD Service.
For more information, visit www.ApprovalGUARD.com.
