How Does Strategic Default Affect Short Sale Approvals Involving MI Companies?

September 20, 2012 at 2:42 pm Leave a comment

by: Maria Hass –

Have you heard of a mortgage insurance (M.I.) company denying approval for a short sale because the sellers opted for “strategic default”? Yes, it can happen. In one particular case, involving morgage insurance company Triad Insurance, the seller bought a bigger home with a larger mortgage – and a month after closing on the new home, defaulted on the old mortgage.

Triad Insurance did not look on this favorably and is not forgiving about the situation. They argue that there is NO hardship and a short sale in this instance would be unethical.

So, if you have clients who have a loan with a mortgage insurance company and a seller who is seeking a “strategic default” on their home, be cautious about taking on the short sale unless there is very good reason for justifying the strategic default.

In some cases, the mortgage insurance company is not known to the seller. The lender may have bought the insurance during the course of the loan without notifying the seller. In this case, you won’t know until you get further into the short sale process. That was the case in our example; the seller was not aware of the existence of the mortgage insurance until a negotiator was assigned.

Mortgage insurance can sometimes “make or break” the short sale. The M.I. cost on a short sale or foreclosure is similar. Therefore, expect that M.I. companies will ask for a seller contribution in order to come out ahead in a short sale. In some rare occasions, if the investor is known and responsive, the investor may allow for a claim reduction in lieu of a seller contribution. However, it is common for servicers not to lift a finger to make this happen. It is an extra step that a negotiator is NOT required to do and NOT paid to do – so, they figure, why bother?

The lesson from this story is this: Be cautious of taking on a short sale with M.I. company involvement and where the seller is making a strategic default. It could result in a lot of work without reward.

Entry filed under: Arizona Real Estate, Chandler Real Estate, Foreclosures & Short Sales, Phoenix Real Estate, Real Estate Deals. Tags: , , , .

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