We talk to home owner every day who are very unhappy they owe more on their homes than they are worth.  Over the past several years we have specialized in helping financially strapped home owners avoid foreclosure by doing short sales.  I have also written articles and blogged about the financial benefits of a short sale.   Many of the home owners we talk to cannot qualify for a short sale.  There are three elements that must be present to qualify for a short sale.  They are:

1.     Current property value less than combined mortgage balance

2.     Financial hardship

3.     No capacity to pay the short fall amount.

The biggest reason homeowners don’t qualify is because they have not experienced a financial hardship which is making it impossible to continue to make the monthly mortgage payment.  After I explain the short sale qualification process and the negative impact a foreclosure or short sale will have on their credit rating I try to convince them, if they don’t need to sell and like their home, they should, like many of us, try not to worry about the what their home is worth and to enjoy living where they are and let time correct the imbalance.

For a growing number of Sacramento homeowners this is not enough and we are seeing an increase in people walking away from their homes.  They are giving up their home not because they can’t pay but because they don’t want to.  According to a study recently completed at Northwestern University as many as 25 percent of mortgage defaults are driven by strategy, not necessity.  The study was looking at areas of the country where prices have fallen the most.  Although the Sacramento area was not specifically identified, we are in an area where homeowners have suffered a significant decline in value over the past few years and continue to see values dropping.

It appears individuals are making strategy decisions for themselves that mirror what they see businesses doing, making decisions not based on emotional elements.  We hear about these business decisions every day.  For example I recently heard, Morgan Stanley, a large financial services company, handed ownership back to their lender on five San Francisco office building they bought when prices were high.  Morgan Stanley has the capacity to make their mortgage payments so this was not a default or foreclosure situation, it was a business strategy decision. 

Clearly with the growing number of strategy defaults, individuals are thinking if it is good for a business it can be good for me. If this trend of walking way from homes as a financial strategy continues it could make any recovery of the real estate market difficult in the near term. 

If you have any questions regarding short sales and or current value of your home feel free to call me at 916 290-9339 or send an email to juliej@jalone.com.

Thank you for reading my column and for those of you who have take the time to call or email I really appreciate the feedback, even when you disagree with me.  I hope this holiday season is everything you want it to be and Merry Christmas to you.