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Increase in Strategic Defaults Has Negative Implications

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The popular news show 60 Minutes recently aired a news segment that brought to light a phenomenon that is, unfortunately, becoming increasingly more common. The number of homeowners who are purposely defaulting on their mortgages as a last resort to their financial crisis has increased from the previous year. Desperation and a perceived lack of other options are causing distressed homeowners to make irrational decisions. The majority of these homeowners have underwater mortgages, which means they owe more money than their homes are worth.

The Numbers Say It All

In March 2010, 31% of homes in foreclosure were estimated to have been planned by the homeowners. This percentage has significantly increased from the 22% of foreclosed homes that were strategic defaults in March of 2009. Alarmingly, there have been more foreclosures as a result of strategic default than the number of home mortgages modified so far by the Home Affordable Modification Program, which amounts to almost 228,000. A report from Morgan Stanley stated that many of the homeowners walking away from their mortgages tend to have higher credit scores and higher loan balances. Many of the homeowners defaulting also were ineligible for loan modification programs, often due to their high loan balance, and probably felt that they had no other options.

It seems that many homeowners do not fear the repercussions of defaulting on their mortgages because they think that their lender will not pursue them. In some cases in which the loan or state is non-recourse that can be true. With non-recourse loans, the borrower is not responsible for any remaining debt if he or she defaults on the mortgage, and the responsibility then falls on the lender's insurer to repay whatever was not covered by the foreclosure sale. This is why, with most loans, the borrower must pay mortgage insurance to cover any loss in the event of a default.

The Outcomes of Strategic Defaults

Freddie Mac, a government-sponsored enterprise, recently explained why homeowners should not strategically default on their home mortgages. When a homeowner chooses to stop paying their monthly mortgage payment and basically gives up on his or her underwater mortgage, the home will be foreclosed upon, which is a very expensive process. When a home is foreclosed upon, it brings down the property value of the entire neighborhood or surrounding area, which is definitely not a boost for the current housing crisis and robs others of their equity. Freddie Mac warns that this kind of behavior can also cause mortgages in the future to be much more expensive as lenders attempt to cover all their losses.

So what should struggling homeowners, especially those who do not qualify for a loan modification under HAMP, do? Homeowners are encouraged to continue paying their bills, if possible, and wait for home prices to rise when market conditions improve. They could also research foreclosure prevention alternatives that their loan program may offer. Homeowners who can possibly receive a loan modification under HAMP or one of its component programs should speak with a loan specialist to learn more about their options.

Strategic default may seem like a fast fix, but it can cause more problems down the road and it only adds to the current problems the housing market is facing. Homeowners should research foreclosure-prevention options before making any rash decisions. Speaking with a qualified loan specialist can also provide them with more information and possibly help them find solutions to their situation that they had never thought of.


ABOUT THE AUTHOR: VICTORIA BELLE-MILLER
Victoria Belle-Miller is the newest member of the FHAMortgageBank.com writing staff. Her background in journalistic writing and ability to evaluate the issues that Americans face in daily life make her a strong addition to the FHA loans team and a valuable source of advice!

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