"Strategic" Default on Mortgage: What is It?

While many homeowners cannot afford to make their mortgage payments as a result of financial hardships, more and more Americans are deciding to voluntarily stop paying their mortgage payments even if they can afford them.  This strategy is known as “strategic” default on mortgage and is becoming the popular choice for these upside down homeowners.  Many home values have declined as much as 50% in hard hit areas around the country such as Florida, California, Arizona and Nevada. 

Why

The following are the main reasons why homeowners are strategically defaulting on their mortgages:

• They are upside down on their mortgages as a result of declining home values and have lost substantial equity.   For many, it makes financial sense to just walk away instead of throwing money away.
• Other homeowners are deciding to skip their monthly mortgage payment with the intention of getting their lender’s attention so they can obtain a mortgage modification or have their principal reduced.  
• While others are staying in their homes for as long as a year and paying down other debts and saving money to move because they know it can take their lender that long to foreclosure on their property.  

Before you make a strategic default on mortgage decision, you should do the math to find out if this strategy makes sense for your financial situation.  It is also recommended that you consult with your attorney.  You should also keep in mind that a default on mortgage payments can negatively affect your credit too.  However, if you are current on your credit card and other payments, you can rebuild your credit after a couple years.  

Statistics

Researchers at The Wall Street Journal’s Real Time Economics reported that homeowners start defaulting on their mortgages when their negative equity passes 10% of their home’s value, walking away after decreases of 15%, and 17% default whether or not they can afford the payment if their equity decreases 50%. In 2009, Reecon Advisors did a survey indicating that almost 1 out of 10 homeowners, 9.2% or 7.4 million said they would choose this strategy.  Given the vast amount of homeowners who are using this strategy, it is hoped that the government’s new guidelines to lenders/loan services to reduce principle and to approve short sales quicker will help eliminate the strategic default on mortgage situation.

Work with an Attorney

Each state has different laws regarding strategic default on mortgage rules. You should work with an attorney to find about the laws in your state. The attorney can also advise you of the best solution for your financial situation.