Wednesday, August 25, 2010

Strategic Default Monitor - Recent News Updates

There has been some interesting news as of late. Our current updates point to changing attitudes about strategic default. It reinforces Why Strategic Default Makes Sense For Individuals and it lets us know that strategic default will be considered by many more people as time goes on. Please read on... 

The Wall Street Journal recently reported that Commercial Property Owners Choose To Default.

The best part of this article is that it completely speaks for itself. It requires no commentary. I have put the relevant points of the article in italics and quotations.

"Like homeowners walking away from mortgaged houses that plummeted in value, some of the largest commercial-property owners are defaulting on debts and surrendering buildings worth less than their loans"

"Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away...[t]hese companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense."

"These pragmatic decisions by companies to walk away from commercial mortgages come as a debate rages in the residential-real-estate world about "strategic defaults...Banking-industry officials and others have argued that homeowners have a moral obligation to pay their debts even when it seems to make good business sense to default." 

"But in the business world, there is less of a stigma even though lenders, including individual investors, get stuck holding a depressed property in a down market. Indeed, investors are rewarding public companies for ditching profit-draining investments."

Watch this video to learn more:

Enough said... 

In an article entitled The Ethics of Strategic Default by Mark Miller, the writer refers to a "moral outrage" regarding strategic default. While acknowledging a strategic default can be a good business decision, he points to individual anger about strategic defaulters. The article is a review of past research papers on the strategic default phenomenon.  The writer asked an executive vice president of the American Bankers Association if a strategic default constitutes a moral or ethical breach. The answer:

"He argued that banks want to help homeowners find alternatives to default, and stressed the importance of talking to lenders first, citing the all-but-certain hit to credit ratings, and the possibility that a bank will come after a defaulting borrower's other assets. But he stopped short of calling a mortgage a moral obligation. 'It's a strategic decision to back out of an obligation, but the world has changed. Would they like someone else to take on the paper loss that they have? Do people do things like that? Obviously they do."

It is not clear what was meant by "would they like someone else to take on the paper loss that they have", especially since the American Banking Associations represented large lenders that were all to happy to allow TAXPAYERS TO TAKE ON THE PAPER LOSS OF BIG BANKS THROUGH BAILOUTS, TARP, AND OTHER TAXPAYER FUNDED HANDOUTS. 

At the end of the day, even the executive vice president of American Banking Association admitted that there is no moral or ethical obligation regarding a strategic default. In his own words a strategic default is "a strategic decision to back out of an obligation."

Anyway...Enough said... 

The blog, Naked Capitalism, recently published it's Strategic Default Awareness Check. Essentially the author went to Google Trends and put in the search term strategic default. It was concluded that the search term strategic default is a "new subject of interest". 

So...we took a look at Google Trends. After typing in the search term strategic default, it appears (based on the data) that significant interest in the topic began around December 2009 and it has continued to remain an important search term. Prior to December 2009, the only time strategic default showed up on the charts was in September 2009. All other times the strategic default search term was non existent.

What does this mean? It means that strategic default has become an important research topic this year. We predict that it will continue to grow in importance as time goes on.

Friday, August 13, 2010

Debt Defense 101 : Whistle Blower Says Fannie Mae Took Homeowner's "Trial Mod" Payments With No Intention Of Permanently Modifying Loans

Now this is an issue for anyone who is considering a strategic default or trying to get a loan modification. Many times, a person decides to strategically default after being refused a loan modification. In certain circumstances the homeowner has made monthly "trial mod" payments while waiting for approval of a permanent loan modification ONLY to be rejected later. This happens quite often under the Federal Government's HAMP (Home Affordable Modification Program) aka Making Home Affordable program. The HAMP program was created for homeowners to avoid foreclosure. Instead, it has lined the "wallets" of Fannie Mae and other lenders with tax payer money.

Now why would homeowners make monthly "trial mod" payments if they knew they would be rejected? They wouldn't. However, homeowners are duped into making the payments.

Consider this: If a homeowner is able to make monthly "trial mod" payments as agreed, why doesn't the lender agree to a permanent loan modification. What better proof does a lender need regarding a homeowners ability to pay then the fact that the homeowner is actually making the payments under a "trial mod".

The purpose of this post is to show you how to use lending institutions "clear and convincing malfeasance, unfair negotiating and delay tactics, and outright bad faith" against them as a defense to collection efforts and foreclosure. On top of that it can be an offensive tool to get a permanent loan modification.

The defense rule is this: If a lender is unwilling to negotiate a loan modification in good faith (which includes being treated with respect during the application process), then you have the right to use any and all available defenses against a lender to keep your property even if you are not paying.

So let's begin...

The Center for Public Integrity reports that a Fannie Mae whistle blower has claimed that Fannie Mae executives mismanaged the HAMP program and wasted public funds.

The key quote from the article is as follows: "One issue inside Fannie was its push to put as many borrowers as possible into short-term trial modifications, at the expense...of getting qualified borrowers into permanent modifications...Herron charges that Fannie Mae continued in headlong pursuit of 'trial mods' even though it knew many had little chance of becoming permanent. As late as September 2009, barely 1 percent of trial modifications had converted to permanent modifications by the end of their three-month trial...Nevertheless, Fannie preferred doing trials, Herron alleges, because it was eligible to receive incentive payments from the Treasury Department for trial modifications it booked before the end of 2009."

Based upon these allegations, we now know the following:
1. Fannie Mae took monthly "trial mod" payments from homeowners even though Fannie Mae had no intention of providing permanent loan modifications.
2. Fannie Mae was paid by the Treasury Department (with your tax money) for taking home owner's monthly "trial mod" payments.
3. Fannie Mae made "double the money". Fannie Mae had both hands in your pockets and cleaned you out. Fannie Mae took "trial mod" payments while it took tax payer funded incentive payments despite rejecting over 70% of home owner's seeking a permanent loan modification.

So let's do a little math. It was estimated that 1,000,000 homeowners were placed on monthly "trial mod" payments under HAMP through March 2010. So if, on average, each homeowner was making a payment of $1500 per month then Fannie Mae and other lenders were collecting $1.5 billion dollars per month. If the Fannie Mae and other lenders received a $500 to $1000 incentive payment from the Treasury Department for each borrower in a monthly "trial mod" program then these entities collected $500 million to $1 billion dollars.


And let's not forget, Fannie Mae recently implemented rules to "punish", to "chase" and to "spy on" any homeowner who decides to strategically default.

My Opinion: This can be a strong defense to a foreclosure case, debt deficiency case, or loan modification rejection under the following conditions:

If the homeowner:

1. applied for HAMP aka Making Home Affordable.
2. has made or continues to make monthly "trial mod" payments.
3. has been rejected for a loan modification or has experienced a long delay in a decision to modify their loan.

Then the homeowner can raise the following defenses under the following circumstances:

1. If foreclosure papers are served on a homeowner then one of the defenses should state: "The lender refused to approve me for a loan modification under HAMP aka Making Home Affordable even though the lender took 'trial mod' payments and even though the lender was paid my tax dollars to set me up with a 'trial mod' payment. The lender had no intention of giving me a permanent loan modification. This was claimed by a Fannie Mae whistle blower."
2. If a lender or third party debt collector seeks a deficiency judgment, then one of the defenses should state "At some point in time, the lender took my 'trial mod' payments and received my tax dollars in the form of incentive payments to set me up with a 'trial mod'. The lender should give me back my money because the lender acted in bad faith. The lender knew that it would not give me a permanent trial modification. On top of that the lender has been paid back the loan with my tax dollars. This was claimed by a Fannie Mae whistle blower."
3. When you apply for a loan mod and it's through the HAMP aka Making Home Affordable program ask your lender..."Do you receive incentive payments from the US government if I make monthly 'trial mod' payments? How much are you paid? Will you return my 'trial mod' payments if I am not accepted for a permanent loan modification? Will you continue collection efforts, including foreclosure, while I apply for a loan modification? Will you send me a response to my questions in writing? What address can I send my questions to?"

By the way, these defenses may be applied to any other lender or servicer. Fannie Mae is not the only mortgage company getting incentives under the HAMP program.

Save the outrage for later. This is about minimizing the consequences of a strategic default. This is about keeping and protecting your cash, savings, and investments.

Keep me posted.

Sunday, August 8, 2010

Recent Updates from the Strategic Default Monitor...

There is data seemingly pointing to the fact that the rich are more likely to intentionally stop mortgage payments than lower income people. The New York Times in the article titled Biggest Defaulters on Mortgages Are The Rich by David Streitfeld, the writer examines data indicating that upper income homeowners are more likely to strategically default than lower income homeowners.

Well this is certainly no surprise. The wealthy are better investors than those who are not wealthy. The wealthy will not spend money on a money losing asset such as an underwater or upside down property that has no chance of gaining equity. They are wealthy because they generally know how to protect their wealth. The moral of this story is that everyone should take lessons from the wealthy.

********** reports on a study that states 20 million homeowners will be underwater before 2012. In an article entitled 20 Million Homeowners Could Be Underwater before 2012: Deutsche Bank by Diana Golobay the writer reviews data from Deutsche Bank indicating a substantial increase in under water properties. It is estimated that an additional 6 million homeowners will be underwater through 2011. This is on top of the estimated 14 million homeowners who are currently underwater. In our opinion the most interesting statement coming out of this study is as follows: "Walk away or strategic default from a house with negative equity makes economic sense, especially in locations that have less expensive rentals, Deutsche Bank researchers said."

It's about time we hear a major financial institution acknowledge that a strategic default makes economic sense.


The Wall Street Journal blog reported that nearly one in five homeowners strategically default. Let's look at two key points in the article.

"The research follows on an earlier report by Experian and Oliver Wyman that first aimed to quantify the share of mortgage defaults that are “strategic.” Strategic defaulters are defined as those who miss six straight mortgage payments without missing multiple payments on auto loans and other consumer debts for the six months after they first fell behind on mortgage payments."

My Opinion: This definition of what constitutes a strategic default is somewhat arbitrary. I believe it is built on the wrong assumptions. It assumes that consumers value a house more than credit cards or a car. It assumes that a homeowner would stop paying their credit cards or auto loan before missing a mortgage payment. Mortgage payments tend to be higher percentage of a home owner's monthly income. It is also as likely that a homeowner is unable to afford their mortgage payments but can afford the lower credit card and auto payments. For example, a car can be seized if the payments are not made. The car could be used for work, taking the family to the hospital, taking the kids to school, or for travel. The credit cards may have available credit so a strapped homeowner can tap cash or charge necessity. A strategic default is primarily based upon on premise: It does not make sense to make payments on or put money into a worthless asset. It is a rejection of economic slavery. Countries, governments, businesses, investors, and individuals have been strategically defaulting since the beginning of time.

I guess the real question is: For whose purpose does the definition serve?

This dovetails into another article from the Wall Street Journal blog where it was asked How Far Underwater Do Borrowers Sink Before Walking Away?. Let's look at a few key points in the article.

A study by the Federal Reserve Board of Governors found that borrowers strategically default when the mortgage balance exceeds the value of their home by 62%.

"concerns are mounting among lenders and investors that some borrowers who owe far more than their homes are worth are now choosing not to pay mortgages that they can afford...But the silver lining here is that it suggests a rather high threshold for borrowers to walk away...The Fed study finds...that borrowers are more likely to walk away from homes in states where lenders can’t sue them for a deficiency judgment."

"Borrowers with higher credit scores also find it more costly to default. The median borrower with a credit score between 620 and 680 walks away when their loan-to-value ratio hits 151%, while the median borrowers with a credit score above 720 walks away with a loan-to-value ratio of 168%."

My Opinion: The first question is...who is the target audience of these studies? The target audience appears to be lenders, investors, and the government. Why? Well let's quote once again from the article "concerns are mounting among lenders and investors that some borrowers who owe far more than their homes are worth are now choosing not to pay mortgages that they can afford".

Why are concerns mounting? The quote is self evident and self proving. Lenders, investors, and the government are all very use to borrowers acting against their financial self interest. Essentially expecting borrowers to continue making payments on properties, loans, bailouts or debts that simply drain cash and have absolutely no chance of providing a return. These payments from borrowers are the last and final source of cash for our heavily indebted lenders, investors, and government.
I may be scared if I were in their shoes.

Bottom Line: Borrowers do not want to (and probably should not) pay mortgages on properties that are underwater. It is against their financial self interest in all respects. On top of that lenders and investors routinely follow the principles of strategic default.

The next government study should be entitled
"Banks and Creditors Have Decided To Reduce Principle Balances In An Effort To Reduce Strategic Defaults"

And We Quote - "Trying to Turn People's Homes Into Debtor's Prisons"

This short video highlights an important concern for any person considering a strategic default. An underwater property can be a "debtor's prison" if the homeowner continues to make payments on an asset that will never have any equity. Just as important is our government's hypocritical demand that no one should strategic default. Instead our government is asking citizens to waste their savings and cash, all under the false notion that the property will regain equity. We don't think so.

Tuesday, August 3, 2010

The Must Know Rules of Debt Defense

The basic rules of Deficiency Debt Defense 101 are a ever growing list of MUST DO RIGHT NOW & MUST IMPLEMENT RIGHT NOW!! in order to achieve the goal of deficiency debt defense.

The primary goals of deficiency debt defenses are to:

1. Reduce the Risk and Amount of Deficiency Debt.
2. Strengthen Your Defenses Against Deficiency Debt.
3. Lengthen The Time To Pay Back The Deficiency Debt.

A proper defense requires that you plan and prepare now. So make sure to implement all of these rules. Make sure you come back and read these rules every month. We will be adding new rules along the way. Also, each rule will be further detailed and expanded in future blog posts. We will do our best to apply each rule to a real life scenario.

In the meantime start reading and start preparing.

1. Always respond to a legal action in writing. It LENGTHENS the time and STRENGTHENS your defense 100% of the time.

2. Save every debt collection message on your answering machine.

3. Save every debt collection letter mailed.

4. Always send a RESPA request letter to determine if lender or creditor 
still has the paperwork and can prove that it has the right to collect.

5. Send all letters to lender via certified mail (no return receipt is necessary) and regular mail. Always mail one letter to the lender’s designated address and to the lender's corporate office.

6. Become familiar with your states anti-deficiency laws. In states that allow deficiency judgments make sure you know the rules and, if necessary, speak with qualified counsel.

7. Keep in mind once a deficiency judgment is obtained it can last as long as twenty years.

8. Avoid fraudulent conveyances at all costs.

9. Learn strategies and techniques to legally shield your assets from creditors. Use legal strategies and techniques that do not expose you to fraudulent conveyance.

10. Never ignore a foreclosure action or any other lawsuit to collect on a loan. Always respond in writing.

11. Make it a habit to send a complaint letter to the bank each and every time you are treated improperly, unreasonably and disrespectfully. Make sure to detail the particulars of your treatment.

12. Never accept any verbal agreement with a lender or creditor- always insist for evidence in writing.

13. Always seek debt forgiveness or forgiveness of debt in writing when negotiating a principle reduction, deed in-lieu, or shortsale.

14. Always ask for a principle reduction as part of any debt negotiation, workout, or modification strategy. If the lender says “NO” ask for the reason in writing or ask for the lender's principle reduction policy in writing. If the lender does not have it in writing, then send a letter confirming the conversation rejecting the principle reduction. Make sure to put the time, date, and representatives identification number in the letter.

15. Always send a letter demanding a complete financial history of all payments and charges as it relates to your debt.

16. Use a “do not call” letter as a means to stop harassing phone calls. This letter must be sent several times via certified mail and regular mail.

17. Keep a detailed diary of any negotiation discussions with the lender and mail a copy of your notes to the lender “once a month”.

18. The same defenses that is available in a foreclosure action area available in a deficiency judgment action.

19. Remember to read any document that requires a signature. Keep a look out for any clause or sentence that says you "waive" or give up any of your rights or defenses against the loan or the debt. Make sure you have the clause or sentence removed.

20. Be aware that 3rd party debt collection agencies are purchasing deficiency debt for cents on the dollar.

21. Be prepared to negotiate any deficiency and/or outstanding debt with a lender, After all, you cannot blame a lender for trying to collect on a loan.

22. Become familiar with your states and the federal government fair debt collection rules and regulations. A violation of the laws can be a strong defense to a deficiency debt legal action. A violation of any of the appropriate state and/or federal laws can potentially offset the amount you currently owe.

23. Speak to a qualified attorney or legal agency regarding the use of bankruptcy to eliminate deficiency debt. Seek the advice of a qualified attorney, legal aid organization and accountant regarding the risks involved with defending deficiency debt.

24. Just because you borrowed the money does not mean you can’t use legal means to pay less than what you owe or gain more time to pay.

25. Make it a habit to constantly challenge all fees, interest, costs and charges. Ask the lender to send written proof establishing it's right to collect the debt.

26. Demand that any third-party debt collector provide proof of the ownership of any claimed debt.

27. Never send a lender more information than what the lender asks for.

28. Always assume that the collection of debt is improper or invalid, even if you borrow money. Remember, you are challenging the collection tactics and you are challenging the amount owed. 

29. If you are in court for a debt collection case, always ask for discovery. This is a process that allows you to request documents proving the lawsuit and loan. It also allows you to question the debt collector, live in person, and on the stand. If, during the debt collection case, the debt collector does not produce the documents or an individual to testify, then ask for a DISMISSAL WITH PREJUDICE. 

Sunday, August 1, 2010

Deficiency Debt Defense has Begun at

We have learned so much from our readers who are considering a strategic default. One thing we have learned is that the decision to strategically default involves so much more than not paying a certain debt.

It involves understanding the the consequences of the decision no to pay a debt, especially if there is money to pay the debt.

A strategic default is not measured in weeks or months. It is measured in years.

Not only do we want to preserve and protect our cash and investments by strategically defaulting, we certainly do not want a lender, creditor, or third party debt collector chasing us for the debt one or two years later.

The goal of strategically defaulting is protecting your cash and investments for as long as possible.

Well...Please start reading Debt Defense 101 to learn about all of the available news, tips, strategies, and defenses against and about the collection of deficiency debt. It's all about learning the basics.


So please read Debt Defense 101 in conjunction with this this site, so you can learn the basics. So you can protect your financial future as long as possible.

Your comments and suggestions are always welcome.