7 On Your Side
7 On Your Side looks into strategic defaults
SAN FRANCISCO (KGO) -- Have you heard the term strategic default? That's when a homeowner can make their house payments but chooses not to. It's a choice that can have financial benefits, as well as pitfalls. 7 On Your Side takes a look at both.
Strategic defaults have always been common in business. High value individuals have been looking at the option since the current economic meltdown began. And now middle class homeowners are looking at strategic defaults as one of their options too.
David Valdez of San Jose showed us around his condominium complex. It is beautiful, well maintained, and his one bedroom unit is very nice too.
"Over the five-year period from November 2005 to the current time period, the value unfortunately has dropped from $300,000 on paper to $130,000 market value," said Valdez.
He attempted to work with his lender asking to reduce the interest rates or the principal, but every time he called he got the same answer.
Valdez: They told me I make too much money.
Finney: A teacher?
Valdez: Every phone call was answered, 'You make too much money.'
Stuck with a home that was so far underwater, he started looking for solutions and found this website: Youwalkaway.com. It helps walk homeowners through the default and short sale process. They offer several levels of services and charge different prices. Valadez is paying about $1,000 for their help.
"I either had to be a victim or be proactive, and I chose to be proactive and move on," said Valdez.
That is why his condominium has been cleaned up and cleaned out.
"People that are facing this are really freaking out about what's going to happen. Some of the people who call in think that the sheriff is going to come the next day and tear them out of the home if they stop making payments," said Chad Ruyle, the co-owner of YouWalkAway.com.
Ruyle says that does not happen. Most homeowners who have their original mortgage will have eight months, a year, or sometimes even longer before they have to move. And even then, all of them will receive three months warning of an auction.
"You have to look at it as business transaction. It is a debt that is collateralized with the property. So when the homeowner enters into an agreement with the bank, they're not saying 'no matter what, I will make these payments.' What they're saying in the agreement is -- and it is a legal one -- that 'if I don't make the payments, you get the house back,'" said Ruyle.
The website, PayorGo.com has been set up by Berkeley attorney Peter Fredman. The website helps consumers decide if strategic default is for them. He warns it isn't for everyone.
"If you have had multiple refinances and if you have had multiple mortgages that have been refinanced that. Those are red flags," said Fredman.
Fredman suggests a conversation with an attorney, even a short conversation, is worth your time and money. And that brings us back to Valdez.
"I would advise somebody in my situation if you truly feel that you are at wit's end and you're upside down in your property -- because I'm 60 percent upside down -- there are ways to get help and there are ways to seek remedy, you just have to do your research," said Valadez.
A foreclosure will beat up your credit report and most who go through this will have to wait quite some time before buying another house. Even financing a new car could cost you a lot more, so it is not something you should do lightly. It is a good idea to research on the Internet and talk with attorneys who practice in this area of law.
foreclosures, 7 on your side, michael finney
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