Talking to Dustin Zacks, Ice Legal PA, Royal Palm Beach, FL., on alternatives to strategic default.
There are 50,000 foreclosure cases in Palm Beach County, and Ice Legal has 300 to 500 active cases. I’m sure we do have some strategic defaults, mainly because some people look at whether to keep or walk away from their home as an economic decision.
You can imagine that for investors at a certain point, it becomes an economic decision – do you continue to pay good money after bad? Or stop paying altogether? Businesses make that decision all the time.
The problem has been that the banks will not negotiate the principle balance reduction down to market value, and none of the government programs have incentivized enough for the banks to write it down.
Most commonly, we see that banks are making interest rate reductions or they are moving back-payments to the end of the loan repayment schedule, and they’ve also stretched out the time period of the loan. It’s all about reducing, and that helps people, but for people who are not going to stay in the home for the rest of their lives, those outcomes don’t alter a difficult economic situation.
If they are $200,000 upside down, for example, how long will it take to even out? So, I’m sure we have some folks who have made similar economic decisions (to strategic default). Why would they keep paying on a losing investment, especially if the value is still going down?
Typically, by the way, I see that banks are not coming after people for deficiency judgment. But the banks may try to collect on the deficiency judgment in years to come.
If there’s a price point that our clients can’t meet (a point where they no longer can or want to stay in their homes), we tell them to have backup options.
One option is Chapter 13 Bankruptcy
For investment properties (non-homesteaded properties), if they do a Chapter 13 Bankruptcy, it is possible for them to get a judge to write down the principle of the loan to the market value. That’s called cramming down to market value.
Last year, (as part of a Chapter 13) there was a bill to enable folks to cram down to market value on all properties, and in fact that’s what the government did in the 1980s with family farms so that people wouldn’t en mass lose their farms. I think that would have been a great solution.
If the homeowners could afford to pay under a modification, they would try to keep the property if they could get market value — that’s all the banks are going to get if they take back the property anyway.
As a matter of fact, the way it is now, banks have to pay to go to court and to keep up the property in the interim – and all they are going to get when they sell is market value, so it costs them more the way it is now.
That year, they did not pass the bill. It was very narrowly defeated. Now, this can only be done with investment properties.
Chapter 13 is not the typical bankruptcy. Chapter 13 is a repayment plan. You get 5 years to repay the amount you are behind.
People say all the time; the banks took the bailout money. Where is the help for us?
Unfortunately, government programs have not been successful at helping enough people. In our area, where homes are so far upside down, even if affordable payments were worked out, would it be worth it to pay? Because for the same amount, the homeowner could buy the same kind of house for less or rent.
Anytime a loan modification goes through, absolutely, clients are making those evaluations. They point out, what’s the difference that I don’t have hardship, if it takes me 25 years just to get even? That’s a decision only a homeowner can make.
Also, in a Chapter 13 Bankruptcy, there’s a provision, lien stripping, and it’s essentially, if you have a second or third mortgage, you can get that mortgage stripped off of the property, when those mortgages are completely under water.