Las Vegas Real Estate Market Faces New Crisis of Strategic Foreclosure

Written by admin on August 22nd, 2011

Many investors that gambled on the lost a ton of money. Unfortunately, the only winners in this high-stakes game have been the banks. Quite a few people theorize Sin City is acquiring its karmic debt, but as one who invested in this market I fault the greediness of Wall Street investors and major banks.

The Las Vegas real estate market has nearly been decimated. The tough economy brought about a downturn in the tourist sector. Countless residents became unemployed, causing them to default on their mortgage note and ultimately lose their house to foreclosure. To add insult to injury, thousands of people left Vegas in search of employment opportunities.

The plethora of property foreclosures in Vegas is responsible for diminishing real estate values. Many cities in Nevada have reported declining values of up to 60 percent; leaving countless property owners owing more than their home is worth. A lot of borrowers are now considering strategic foreclosure to pressure banks into entering into loan modifications or real estate short sales.  

The dilemma presented with strategic default is mortgage providers do not have to change loan terms or allow homeowners to sell their house for less than the amount owed on the note. Using this kind of foreclosure prevention strategy can easily jeopardize opportunity to devise a plan that lets homeowners stay in their house. Foreclosure causes financial issues that can take several years to conquer. 


FICO is the organization that determines criteria for credit score ratings. Not long ago, FICO formulated strategies for evaluating homeowners that are likely to attempt strategic foreclosure. The system is utilized by banks to forecast homeowners most likely to participate in this conduct. This helps banks determine which strategies are best suited to lessen financial losses brought on by foreclosure or short sales.

Most borrowers entering into strategic default are credit savvy and possess exceptional credit ratings. People with high FICO scores are sometimes willing to gamble that their scores can weather the storm created by short selling or foreclosure.

Credit scores usually drop by at least 100 points once short sales and foreclosure are reported to credit bureaus. Reduced scores typically put consumers into a lower credit category which can prevent them from qualifying for credit or require them to pay higher rates of interest when credit is offered. 

Even though homeowners that engage in strategic foreclosure have to cope with the after effects, the real losers of this strategy are Las Vegas homeowners. Additional foreclosure properties can result in a further decline of real estate values and potentially escalate the number of people trying to use strategic foreclosure. This would seem to create a never-ending cycle.

According to the Las Vegas Realtors Association, about 75 percent of Las Vegas realty sales are comprised of bank owned and short sale homes. Furthermore, about 25 percent of recently foreclosed properties are the end result of strategic default. This causes harm to homeowners trying to sell their home because they are unable to remain competitive with discounted prices of foreclosure properties.

Most Las Vegas realty professionals believe real estate prices have not yet bottomed out. If correct, this will produce additional economic hardships for Vegas property owners, but could be a blessing for real estate investors.

In the near future, Mayor Oscar Goodman is expected to launch a marketing campaign focused on bringing new citizens and investors into the region. Nearly every person I know is positive and upbeat about the campaign because it could improve the Las Vegas real estate market and possibly increase property values. If that’s the case, homeowners would not have to confront the unpleasant decision to walk away from their residence.

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