Strategic Foreclosure – Is It The Easy Way Out?

By the end of 2012, approximately 48% of the 50 million mortgage loans across the United States are headed to be ‘underwater’ mortgages. Underwater mortgages are mortgages that leave the property owner with more debt on the property than the property’s current market value. Faced with declining property values and imminent losses, homeowners are left with a difficult decision whether to keep up with the mortgage payments, or resort to strategic foreclosure.

In 2010, 3 out of 10 foreclosures were strategic defaults. It is also predicted that 2012 will be the year of Strategic Defaults. Commercial websites are coaxing people to walk away from these underwater mortgages for the following reasons:

  • Your credit score will only drop 85 to 160 points
  • The foreclosure process takes many months to a year to complete; rather than wait until you run out of money, you might as well stop mortgage payments and instead, put the money into a savings account so that you will have plenty of cash then to pay debts

What Is Strategic Foreclosure

Strategic Foreclosure and Abandoned Properties

Photo Courtesy of louisathomson via Flickr

Savvy or otherwise, you must consider the implications of a strategic foreclosure. But what is strategic foreclosure, anyway? Strategic foreclosure means deliberately defaulting on a mortgage whose market value has dropped in value. The homeowner can still afford to continue making the mortgage payments, but decides to walk away from his ‘underwater’ mortgage in order to force the bank to either foreclose on the property, modify the loan, or enter into a short-sale agreement.

Strategic foreclosure was employed by savvy real estate investors not too long ago with impeccable credit who can afford to take a hit on their credit scores and still qualify for financing. With the housing market crashing and banks refusing to work with borrowers that are not experiencing financial hardship, the tides have begun to shift. They realized the only way to get help from their mortgage lender is to stop making payments.

People have varying opinions about strategic foreclosure, though. Some people think it’s unethical to bail out on a mortgage and need to hold up their end of the bargain to the end, while other people think it would be unwise to hold up your end of the bargain for a property that is not worth what is says on the paper.

Still, homeowners who opt for strategic foreclosure will have to deal with the consequences such as the loss of their home and the risk being sued. Strategic foreclosure also means that your credit score will be marred, even if you have diligently paid all your bills on time up until this time, including not being able to apply for credit in the immediate future.

Today, borrowers deciding to walk away from their ‘underwater’ mortgage are on the rise, with guilt and morality on one side, and financial rationality on the other. Regardless of your opinion, it is important that you understand the pros and cons and the consequences of strategic foreclosure and not regret your actions.

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