Homeowners Turning to Strategic Default

A strategic default is one more strategy that debt-ridden consumers are considering in order to escape their underwater mortgages. The housing bubble burst which occurred in 2006 has turned many responsible homeowners scrambling for help. Prior to the collapse of the real estate bubble, home prices were rising quicker than most people had ever seen. Before the crash, people’s equity was literally accumulating daily. Many homeowners cashed in and traded up to McMansions of their dreams. Others tapped the equity to live at elevated levels. Individuals who weren’t able to qualify for mortgages prior to this era were finding that bankers and brokers were willing to creatively get their loans approved. While this may have seemed like a dream come true, it was actually an unfortunate situation that left many new homeowners with loans they didn’t understand or couldn’t afford. When home values dropped, many individuals were left with loans totaling way more than what their houses were worth. A domino trail of foreclosures has followed.
What can a person do if they can’t afford their house payments, need to sell to move? They can let the house slip into foreclosure; they can look into a short sale; or they can arrange for a strategic default.

- Foreclosure: A property is foreclosed upon by the lending institution when payments haven’t been made for a certain length of time. Properties are seized and then auctioned off where they are sold to the highest bidder.

- Short sales: Short sales are complex arrangements between a seller, buyer, real estate agent and the bank that holds the note. The idea is to have the bankers accept a lower amount for a home than is actually owed on the mortgage. If this works out, it can be preferable for all concerned. It’s a tricky bit of maneuvering, however, and takes months and patience on everyone’s part. Many buyers would rather skip the hassle and instead buy a cheap foreclosure that’s already on the market.

- Strategic default: This is a maneuver by homeowners who are paying on a loan that is radically higher than the property value. Many times the individuals could keep paying but have decided that it’s not a financially sound decision to do so. Sometimes homeowners feel they are the victims in a banking scheme and would rather face a negative credit report than throwing hundreds of dollars out the window. Many wise economic gurus are recommending this tactic. When this banking scandal landed so many unsuspecting individuals in the soup, the rules of economic ethics, credit and much more was shifted greatly.

If an individual is holding the note on a house currently worth $98,000 and their mortgage is for $250,000, what should they do? Should they keep shelling out thousands of dollars each month that they will never recoup or should they consider foreclosure, short sale or arranging for a strategic default? This is a quandary that many homeowners are now facing. Consulting with a legal professional who specializes in this arena would be a wise move.