Loan Modification

What Is Strategic Default?

By Kurt O'Keefe, Detroit Consumer Attorney

Default means, not carrying out your end of an agreement, like, not making house payments on time, which usually leads to a foreclosure.

Strategic default refers to homeowners who have the money to pay their mortgages, but choose not to.

Most foreclosures are due to higher house payments, or lower income, or both.

Nationally, the estimate is 12% of mortgages overdue in February, 2010, three time higher than 4% in 2007.

It is difficult to determine how many strategic defaults there are, the calculation Morgan Stanley uses:

“The analysts classified a default as strategic only when homeowners who hadn?t been previously delinquent were making on- time payments one month, then skipped them for the next three, even while staying current on other consumer debt of at least $10,000.”

Why would someone up to date on their mortgage payments, and on the rest of their debt, stop paying the and risk foreclosure?

Because the house is now worth a lot less than what is owed.

One estimate is that one out of five US homes with a mortgage are is worth less than what is owed on it.

There is a snowball effect, more foreclosures, means more homes for sale, greater supply lowers home values, putting even more houses underwater, causing even more foreclosures, and so it continues.

The Mortgage Bankers Association calculates we started 2010 with 4.58% of houses in foreclosure, and another 9.47% behind.

But the bailed out banks say their programs are working, no reason for them to knock down principal balances to help homeowners avoid foreclosures.

Now, I do not favor folks ( or banks or mortgage companies) not paying their bills.

When you can no longer afford to pay all of your bills, and have to look at other options, that is when you need the advice of a good attorney.

In Arizona and California, strategic defaults are easier to do, because the mortgage company is stuck with the home, whatever its value, and cannot chase the homeowner for any difference between what the house is worth and what is left owing on the mortgage debtg.

In Michigan, the mortgage company can sue for the difference in what they get the house for at a foreclosure sale, that is, whatever is bid at that sale, and what is left owing on the mortgage note.

This assumes the foreclosure sale price was a market price.

Not to sound like a broken record, but,  judicial mortgage modification is a better remedy.

What Is Strategic Default?

Related posts:

1. Can I Just Walk Away From My House and Mortgage?
2. What are Credit Default Swaps
3. Alt-A Loans Are Next In Line To Default

Full post as published by Mortgage Law Network on May 18, 2010 (boomark / email).