Pick up any newspaper or turn on any news channel and you’ll see economists and financial experts pointing to signs of a slow and steady economic recovery, including facts and figures showing spikes in consumer savings, spending and home sales. Unfortunately, you can also hear about average Americans, joining those who are down on their luck, who are simply choosing to walk away from their monthly mortgage payments.
According to an article from Dina ElBoghdady for The Washington Post with Bloomberg, “a growing body of research shows that these so-called “strategic defaulters” defy the tell-tale characteristics of most people whose loans go bad. They pay their bills on time, rarely exceed their credit-card limits and hardly use retail credit cards, according to a study released Thursday.”
And, as the experts explain, instead of defaulting impulsively, these savvy homeowners are planning ahead. They open credit cards, take out loans, and otherwise leverage their credit prior to defaulting on their mortgage in an effort to get ahead of the inevitable hit their credit scores will take when they do default.
This new breed of home borrower is proof positive that the real estate reckoning has changed the way consumers look at homeownership, lending and personal finances. In fact, many think it comes as a direct response to the underwater housing market, full of homes that are worth less than the amount owed on the mortgage. This situation has left the average homeowner drowning and looking for any way to dispense with what, for most people, is their largest amount of debt.
According to The Washington Post article, “A team of researchers estimated that 35 percent of defaults in September may have been strategic, up from 26 percent in March 2009. But they acknowledge in a report published last month that the numbers are tough to tease out because ‘strategic defaulters have all the incentive to disguise themselves as people who cannot afford to pay,’ according to the report by researchers from the European University Institute, Northwestern University and the University of Chicago. That’s because lenders have become more aggressive about trying to recoup money lost on foreclosures, and they’re chasing after borrowers who they suspect have skipped out on a loan they could have paid.”
As a result of this aggressive lender action, strategic defaults are hardly a cure-all for foreclosure fears. While a few states don’t allow lenders to go after deficiencies, more localities do. While many borrowers are not aware of their individual state law on mortgage defaults, it’s important to understand that in some places lenders have the right to pursue home borrowers and collect the full difference between what the property sold for in foreclosure and what the borrower owed on it. The only surefire way to eliminate any lingering liability after a foreclosure is by filing for bankruptcy- which, incidentally, may also buy you some additional time in the home.
Notwithstanding a borrower’s right to go after deficiencies, many homeowners feel obliged to default in order to escape their burdensome homes. The irony is that these types of strategic defaults, as well as more traditional incidents of foreclosure, make it tougher for the housing market to rebound. And so it goes.
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