MBA panel: Tread carefully when going after strategic defaulters
While it is no easy feat to determine if a homeowner defaulting on a mortgage is a strategic defaulter, it’s also no simple decision for servicers to decide whether to pursue a deficiency judgment against the homeowner. Panelists on a strategic default session at the Mortgage Bankers Association’s National Mortgage Servicing Conference & Expo warned the audience to tread carefully. Howard Crane, managing attorney for Fein, Such and Crane in New York, said the more financial information that a servicer has, the better equipped the company will be to determine whether it should seek a deficiency judgment — and whether it might be successful. Servicers will also have to prove — or assert — the fair market value of the property, depending on the state, to pursue a deficiency judgment, he said. This can become a battle of appraisals in the courtroom, and servicers will need to be sure they hire an appraiser who has the ability to testify successfully on the witness stand, Crane said. Michael Kaysen, managing director at PricewaterhouseCoopers and moderator of the session, said there is an increased willingness for investors to go to court to recoup outstanding mortgage debt from borrowers who strategically default. But to pursue deficiency judgment “the stars have to align perfectly,” said Roxanne Lockett, group vice president of loss control for SunTrust Mortgage. The length of time and the cost to obtain the judgment, combined with the cost to pursue the recovery, if successful, must be considered, she said. SunTrust also looks at the borrower’s ability to repay, she said. “You also have to consider whether the borrower might file for bankruptcy” to protect his or her assets, Lockett said. Some borrowers who do have the ability to pay will come forward and offer to settle before a prosecution for deficiency occurs, and that is often a preferred method, she said. Jim Davis, executive vice president of American Home Mortgage, said servicers must know their state laws. New York state, for example, gives servicers only 90 days to file for a deficiency judgment while some states allow up to two years to file. “Servicers are trying to do the right thing in protecting their investors and getting money back for their investors,” he said. “Servicers should push back and hold those borrowers accountable. I think it is time for us to do that. There seems to be this entitlement by borrowers,” Davis said. Because of the economy, the home values have gone down, and borrowers consider that to be the bank’s problem, he said. Davis disagrees. The borrower made the decision to buy the real estate thinking that the value would go up, he said, suggesting lenders shouldn't have to take the hit for the decline. But servicers also have to be concerned about reputational risk — and getting on the front page if they make a mistake in pursuing someone who should not have pursued for a deficiency judgment, Davis said. What is strategic default? Not everyone even defines strategic default in the same way, but panelists were generally in agreement that it involves a borrower who has the ability to pay his or her mortgage but chooses not to. Often that decision is tied directly to the property being underwater — when the borrower owes more than what the home is worth. How many strategic defaults are occurring also is the subject of much debate. Last week, Barclays came out with a report that suggested that strategic default estimates have been largely overestimated. But Amit Seru, assistant professor of finance at the University of Chicago and a member of the panel, classified it as a growing and significant problem. About 4% of defaults in 2004 were strategic defaults, and now 25% to 35% are, he said, basing those figures on various academic studies that used both survey-based and data-based methods to assess the problem. House price declines, coupled with higher credit scores and borrower wealth tend to increase the likelihood of strategic defaults, he said. Seru said if servicers are able to separate out distressed defaulters from strategic defaulters, then they could use different strategies to handle each. From the government-sponsored enterprise standpoint, Fannie Mae uses deficiency judgments as one method to discourage strategic defaults, said Steve Holden, vice president of credit loss mitigation analytics at Fannie Mae. The GSE relies heavily on its servicers to determine if a borrower is a strategic defaulter and then makes a determination whether to seek a deficiency judgment, he said. After the session, he told HousingWire that he was unable to comment on how many deficiency judgments the GSE has pursued. Davis said he predicts that more and more servicers will begin to pursue judgments against strategic defaulters although Lockett said it still needs to be a case-by-case review on whether to go that route. Davis also said that servicers should sit down and negotiate with borrowers who want to do short sales to potentially collect a deficiency payment at that time. Write to Kerry Curry. Follow her on Twitter @communicatorKLC.