American Pacific Mortgage

American Pacific Mortgage

Tuesday, July 13, 2010

Rate Snapshot and Strategic Defaults

The market continues to enjoy all-time lows in rates, although they are slightly off today.

Up to $417,000
30 yr fixed—4.5%
20 yr fixed—4.25%
15 yr fixed—3.875%
5/1 Arm—3.375%
10/1 arm—4.125%

$418,000 to $729,000
30 yr fixed—4.75%
15 yr fixed—4.25%
5/1 Arm—3.875%

True Jumbo loans (over $729,000)
30 yr fixed—5.625%
5/1 arm—4.375%
10/1 arm—5.25%

All rates quoted assume a one point origination fee plus closing costs, and are subject to FICO scores, loan-to-value, property type, and occupancy.


New research based on national consumer credit files, and academic papers, shows that many high credit borrowers are defaulting on their mortgages in the face of large negative equity situations. This is particularly true in states such as California and Arizona, where state laws limit the lenders’ ability to collect post-foreclosure or short sale deficiencies, vs. states such as Florida and Nevada where lenders have more recourse available to them.

Many strategic defaults are not motivated by an inability to make the mortgage payments. They are typically more related to the extended time horizon necessary to achieve a breakeven situation, e.g. 100% loan-to-value, much less realizing equity once again in the property. Many of these homeowners would still face a loss of 20% or more of original property value they paid in a cash down payment at the time of property purchase. Some are so far "under water" their property value is less than 1/2 of original value.

The Deed-in-Lieu is a more attractive option for many borrowers, vs. a short sale or foreclosure. In this case, the borrower simply deeds the property over to the lender, who saves time and money by not going through the foreclosure process or spending months processing a short sale transaction. Further, the bank does not try to execute on any deficiency (shortage) of payoff. Their goal is to quickly sell the property during the traditional summer months, while interest rates continue at record lows.

Bank of America is one lender who has instituted a new deed-in-lieu program and offers cash incentives to their borrowers in some cases.

A deed-in-lieu doesn’t have as negative an effect on your FICO score as a foreclosure or bankruptcy, but will reflect the same as a short sale, or “not paid as agreed” on the credit report.

In the case of a short sale, the bank agrees to accept less than the amount due on the mortgage through the sale of the property. These can be very sticky transactions that may take months for approval by the bank, and are especially tedious when there are two lenders, e.g. one in first position and one in second position. Although the first TD lender has priority, the second lender often jockeys for some sort of payoff as well from the seller and in some cases will pursue the seller after the close of the sale.

Many thanks to my dear friend and real estate broker Cynthia White, for providing the research on this timely issue.

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