Strategic Defaults – To walk or not to walk, that is the question

With foreclosures on the rise; a huge buzz word is “Strategic Default”. A strategic default is when a borrower decides to walk away form a mortgage because the property value is much les than the amount owed on the property (underwater borrower).

This exact question: “Do we walk away or do we continue to pay”, is currently plaguing households across the country.  In many cases the borrower can actually afford to pay, they simply do not feel that to continue to pay is a wise economic decision. Many of these borrowers feel that they will recover their credit faster than the home will recover equity.

The problem is becoming more evident.  It is estimated that roughly 50% of mortgages in South Florida (Miami-Dade, Broward and Palm Beach) are underwater.  Unfortunately, many of these mortgages came underwater because the homes were bought during the recent real estate boom (2004 – 2006) they were also bought with adjustable rate mortgages and with very little to no down payment, this only adds to the problem.

Borrowers that are considering walking away must consider the down falls of such a decision. Some of these pitfalls are losing 200 to 300 points on your credit score, also not being able to get a mortgage in roughly 2 to 3 years, plus bad credit could affect employment and even car insurance rates. In addition, in the state of Florida a lender may persue the borrower for deficiencies personally.  Regardless many borrowers are opting to accept the risk in order to get out from under a mortgage that is simply upside down with equity.

A common complaint we are hearing is that banks are simply not working with borrowers who are underwater.  They are not moving quickly with loan modifications and it is very tough to get around the red tape in these large organizations. In our opinion it may just be that the banks not only want to protect their own interest, but they may not have been ready for such a huge influx of defaults.

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