Walking away | The basics of strategic default


Mortgage holders and banks are playing a very intricate game. Image from Flickr.

Strategic defaults — when a mortgage borrower decides to pick up and just walk away from their mortgage, even though they can pay it — are increasing. About 31 percent of mortgage foreclosures were estimated to be “strategic” in March of 2010. Strategic defaults can, more than ever, be an option for borrowers whose mortgages just don’t make financial sense anymore.

Defining strategic default

When borrowers owe more on a property than the property is worth, their mortgage is said to be “under water.” Many borrowers with mortgages that are under water are choosing to simply not pay their loans. When a borrower cannot afford the mortgage, this is called a default. When the borrower can pay the mortgage, but has chosen not to, it is called a strategic default.

Fallout of strategic defaults

When a borrower chooses to strategically default, there are consequences. There are two major types of mortgage loans: recourse and non-recourse. If you have a recourse mortgage loan, you owe the full amount of the mortgage, whether you give the house back to the bank or not. A borrower with a recourse mortgage can walk away, but the bank has every legal right to come after them for the payments, fees and additional charges. A non-recourse mortgage, however, is written in such a way that if the borrowers hand the keys over to the bank, they can walk away and not owe anything else on the loan. Either way, borrowers will take a hit on their credit reports. Mortgage borrowers who strategically default will also be waiving their eligibility for certain federal aid programs for five years or more.

Options other than strategic defaults

There are options other than just walking away and taking the credit score hit and finding a new place to live. The Making Home Affordable loan modification program has been put in place to help borrowers modify their loans so they can afford them – though it doesn’t always work. Short sales are one other option – finding a buyer that will negotiate with the lender to buy the house just for what is owed on it.

Strategic defaults are an option for some borrowers who are under water with their loans. There are other options, but for more than 30 percent of people that end up in foreclosure, it’s a strategic financial decision.

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