Banks have two sets of rules - one for them, and one for the rest of the suckers.
I despise being a sucker, I mean client.
When it comes to strategic default, financial institutions and politicians and even clergy implore you to pay your mortgage at all cost.
Kids need braces? Pay your mortgage first. Wife in the hospital? Pay your mortgage. House worth $100,000 less than you owe on the loan, forget your summer holiday, consume cat food, and pay your mortgage in any case.
Foreclosure is dreadful for youLarge employers frequently check credit reports prior to making a hiring decision. Foreclosure is a huge red flag on your credit. Major apartment complexes, and even some low rent ones, will deny you a rental unit or charge more if your credit is blemished by a foreclosure.
Why do banks and owners default on loans when the mortgaged asset (office building or shopping center, for example) is valued at 25% less than the loan amount?
Responsible business.
In terms of underwater mortgages (house is worth less than loan amount), our tribe numbers 11 million families in the U.S. alone.
More than 5 million property owners are severely underwater. Many will not live long enough for housing values to recuperate.
Real estate professionals guess that it will take about 14 years for California homes to attain 2007 values. How many people even stay in the same house for 7 years, much less 14.
People are angry. banks accepted applications from mortgage brokers on a wink and a nod. Sound banking and financial ethics were disregarded. Average Americans were purchasing 5,000 square foot McMansions as fast as they could be built.
If your banker believed in you - and he must have because he lent the money - why should you worry?
So what is a strategic default? Simply put, you have enough income or resources to pay your mortgage each month but you choose not to do so.
Leaving your principal residence is not an easy decision. You have to suffer foreclosure proceedings and eviction. You have to find a new house to inhabit. Moving is a inconvenience, but is it any less of a hassle than giving the banks hundreds of thousands of extra dollars for an asset not worth the amount owed.
More than one-third of all foreclosures are now due to strategic default. I expect that number to rise when more rounds of Adjustable Rate Mortgages reset in late 2010, this time in the prime market, not subprime.
Bear in mind, it's a house, a piece of real estate property. Don't obsess over a house. It's your family that counts - your spouse, your children, your extended family.
If it is in your family's best benefit to strategically fail to pay, get all set:
- if you plan to relocate to an apartment, obtain one now before your credit takes a whack
- if you want to apply for a new job, do so right away
- If you need a loan for any reason not related to your house, secure it now
If you are likely to to deploy the strategic mortgage default strategy, check with your local attorney to see if you live in a recourse or non-recourse state. If the lender can file a deficiency judgment against you for their deficits, you need to be advised on all possibilities open to you - up to and including bankruptcy.
Consult your attorney and accountant, then make your best move.
Author Resource:
Strategic default may be your best strategy for navigating the housing crisis. For more contrarian/alternative financial strategies, visit Burn Down the
Freaking Mission .
Charles Lamm is a retired attorney now serving as a legal/technical consultant for Accessible Communication for the Deaf (ACD) in South Florida.
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