STRATEGIC DEFAULT
One of the great benefits of a loan modification used to stop a foreclosure is that it is a compromise between the lender and the homeowners. The banks do not want to go through an expensive process of taking the home back only to see it sell for much less than it is worth, while the borrowers want to remain in their property if only they had a second chance after a hardship and a reasonably affordable monthly payment.
But this benefit of compromise can be a drawback if the property is too far underwater to make it worthwhile for either the owners or the lenders to meet in the middle. And with the sharp decline in home values over the past few years, more people are turning to strategic default as a way to avoid being evicted or being forced to pay for a house that is too expensive and not worth anywhere near the principal balance owed on the mortgage.
Conventional wisdom would have us believe that foreclosure is a last resort for homeowners who have come to the brink of financial disaster and can simply no longer afford to make payments. But in the current real estate climate, this is not always the case anymore. A growing number of borrowers are treating the loss of equity in their homes as a business decision and walking away, letting the bank have the house back.
With nearly a quarter of the American housing market underwater, can anyone blame homeowners for choosing to default on their loans? While there are consequences for taking this action, such as foreclosure and a severely damaged credit score, they seem like better alternatives for many people than paying hundreds of thousands of dollars more than a property is worth over the period of fifteen or thirty years.
Even if loan modification could be an option for certain homeowners who have lost all of their equity due to a declining market, strategic default often occurs when the owners are not behind on monthly payments. And borrowers who have not become delinquent in payments are usually not eligible for a modification agreement. The banks are only willing to modify loans for those who are facing a financial hardship and have missed several monthly mortgage bills.
This means that the lenders are mostly unwilling to work with owners who are concerned about spending too much money in the future on a house that is not worth what they have agreed to pay on it. And the only consequence is a civil lawsuit resulting in the loss of the home and a poor credit record. Neither of these are quite as disturbing as dedicating the next few decades of one’s life to spending hundreds of thousands of dollars more on a piece of real estate than it is worth.
Strategic default is an issue that can not be fixed by increasing government programs to prop up home values or by lenders offering loan modifications to borrowers that do not dramatically reduce principal balances owed. People with no equity in their homes already feel they have no ownership – giving up the expensive monthly payment is often worth the bad credit. And bad credit only lasts for seven years, while a mortgage that can not be refinanced on a house that can not be sold will survive for decades.
Posted By George Beckus Esq
The Golik Law Firm
904-448-5335
