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More homeowners consider strategic defaults, perhaps to their detriment

by Broderick Perkins

(3/12/2012) Apparently, homeowners aren't getting the message that strategic defaults are anything but strategic.

A growing number of homeowners say, even if they can afford to make mortgage payments, they would proactively decide not to, knowingly triggering a foreclosure, in what's called a "strategic default."

A recent Housing Predictor poll found that 47 percent of those surveyed said they would commit strategic default - what can amount to suicide for their credit life.

Housing Predictor recently reported 36 percent said they would walk away from their mortgage specifically if housing prices kept falling, up from 32 percent in a previous survey.

However, even while the percentages are growing, most are thumbs down on strategic defaults - the survey said 53 percent, said they wouldn't take such a drastic measure.

"It is important for homeowners to realize a strategic default is never strategic," said Joy Bender, a real estate agent with Trinity Homes and Investments in San Diego.

Strategic defaults are often a tactic used by those with underwater mortgages, but who are paying their mortgage on time and can't get the attention of their lender or mortgage servicers for a loan modification, refinance, principal reduction or other work out.

Some homeowners who want to reduce the weight of an underwater mortgage should first consider previously unavailable relief that's now available in upgrades to Making Home Affordable's Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP).

Also, the recent $25 billion National Mortgage Settlement should also help bail out millions of homeowners who might not otherwise get assistance.

Bender also says a short sale is a better option than just walking away from your home. In a short sale, which must come with the bank's blessing, you can sell your home for less than the mortgage balance and not face the stigma of foreclosure, taxes on the difference and, at least in California, a bill for the difference.

In rare circumstances the lender will actually pay the homeowner tens of thousands of dollars to go the short sale route.

A short sale also has a less negative effect on your credit score and financial standing.

If you strategically default on your mortgage, you'll certainly be rid of a big mortgage payment, but the burdens you'll carry for years may not be worth the savings, even if you finesse the deal.

• Only bankruptcy is more damaging to your credit than a foreclosure. Even if you continue to pay your other bills, the foreclosure remains on your credit report for seven years. Bankruptcy's black mark remains for 10 years.

• After a foreclosure, your credit score can drop 150 points or more, according to the leading credit scoring system (FICO) architect Fair Isaac Corp.

• After a foreclosure, any credit and insurance available to you will cost more and you could find it tough to rent a home. Employers can't get your score, but they can have a look at your credit report, in some states, under certain circumstances, but always only with your written consent.

• You also could face legal costs if the lender comes after you for the difference.

• Also in 2010, Fannie Mae implemented a policy that prohibits strategic defaulters from getting a new Fannie Mae-backed mortgage for seven years from the date of foreclosure.

 

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