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Economy Project: Strategic Default

Todd Mark Of Consumer Credit Counseling Services

By Sam Baker, KERA Morning Edition Host

Dallas, TX –

More than 5,600 homes in the Dallas-Fort Worth area face foreclosure this month. That's mostly people who can't make their monthly mortgage payments. But last week mortgage giant Fannie Mae announced it's targeting people who can afford to pay, but who also owe more than the house is worth. Rather than refinance or rent out the home, so-called strategic defaulters walk away from it. In today's Economy Project segment, KERA's Sam Baker talked about this with Todd Mark of Consumer Credit Counseling Services of Dallas.

Todd Mark: There's a moral and ethical dilemma here. We're seeing plenty of people that can't afford their mortgage payments because they're on an extended job loss. They may be going through a divorce. It may be a medical catastrophe or death in the family. It may be that their mortgage re-set and they can't afford the new payments. Those are reasons that people are defaulting that are legitimate. Strategic default is when people are saying, I have a means of paying it, I just don't know if I want to anymore. If you're in Arizona or Nevada or California, you're in Michigan or Florida, where a vast majority of properties have lost value, you're seeing it much more prevalent than us here in the Metroplex.

Sam: You know, when I bought my house the lender I was working with told me the average first-time homeowner maybe stays in their house maybe seven years. The value of the house could fall, but isn't also possible the value of that house could maybe make up for that loss and increase during that time?

Todd Mark: Nobody is going to debate the fact that property values are falling or they're not appreciating at the levels that people expected in the past. But the bottom line is this: it's an exception right now and five years or ten years from now we may be back to the norm and it may be that your property values go all the way back to where they were. So by people choosing to walk away, they're considering in this strategic default, maybe I walk away because it's a bad investment. Well, you don't know that it's a bad investment a few years down the road. There's probably a much greater likelihood that property values are going to stabilize than certain segments of the stock market, where you really do have risk in your investment.

Sam: Are there any circumstances under which you would advise someone who's underwater on a mortgage to try to get out of it?

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Todd Mark: We personally don't get involved in the moral issues. We will explore with people what their options are but we would never advise somebody not to pay their mortgage, just as we never advise people not to pay their bills. You should honor your commitment. If you truly believe that it's a failed investment you may be thinking it from a very different standpoint.

Sam: So what are your options then?

Todd Mark: What if you trying selling right now? Truly, how much less can you get for it than you owe? If you owe $200,000 on a house and you say, well, I can only sell it for $150,000. Well, that's a bad choice right there, you don't necessarily want to take the loss. But what happens if you go through foreclosure? You're going to be taking a loss anyway. Think about what Fannie Mae is proposing where they're going to be seeking legal recourse, where allowed, they're going to be seeking those deficiency judgments. So even if you walk away they're going to be pursuing that deficiency, anyway. And, they're going to be tarnishing your credit from a service or a lender standpoint where you're not going to be able to get into a house for seven years. I want you to think about the difference between that and bankruptcy. Today you can file bankruptcy and after a Chapter 13, you can get into a FHA one year later. After a Chapter 7, two years later into an FHA loan. Conventional loans double that time period, because they recognize that bankruptcy is a consumer protection to help people in times of crisis.

Sam: But Fannie Mae's looking at keeping you away from a mortgage longer than that.

Todd Mark: Exactly. They're saying, if you choose strategic default, that's a sentence worse than bankruptcy, even, literally keeping you out. But I think there should be a penalty for people that are choosing as opposed to those that truly have no other means.

Sam: What's at stake if they don't do something like this, if they don't pursue penalties to try to stop strategic default?

Todd Mark: If they don't we could see a real massive erosion of property values across the country that truly impacts the rest of the world, the world as we know it. Folks that have had minimal impact from the recession would see severe impact. What does that mean to our neighbors and the people down the street? What does that mean to our school systems, to our police and emergency systems, because the taxes aren't coming through the revenue? It would do a very bad domino effect on our communities that we live in and care so much about.

Todd Mark is Vice President of Education for Consumer Credit Counseling Services of Dallas.

There's more about strategic defaults and other mortgage matters at

Email Sam Baker 'The Depth of Negative Equity and Mortgage Default Decisions'

FannieMae: 'Seven-Year Lockout Policy for Strategic Defaulters' 'Financial Stability For The American Economy'

Federal Reserve Bank of New York: 'Second Chances: Subprime Mortgage Modification and Re-Default'