Strategic Default

Given today’s housing market many homeowners have found themselves “upside down”, oftentimes more than 50%! As a result such homeowners are considering “walking away” from their mortgage(s) and home. The reason someone may choose to do this is because they feel that, from a financial perspective, it simply does not make sense to keep the home. Many homeowners are in a position where they are continuing to make monthly mortgage payments yet question why, in fact, they are doing so? The age old argument against walking away from your home is that it is simply immoral and/or irresponsible to do so. But one must question what really is the irresponsible thing to do – not making the monthly payment to your lender or continuing to make the payment (on a home who’s value will not reach a break even point for quite possibly 10-20 years) rather than saving the funds for your family, child’s college, retirement, etc.? This dilemma is a difficult one for homeowners to face.

If you are considering walking away from your home do not simply let the house go to foreclosure. At the very least salvage your credit and limit your legal exposure via a Short Sale! Homehelper Consultants specializes in handling Strategic Default scenarios. The strategies and processes differ from that of a traditional Short Sale, and it is highly recommended that you consult with a professional that is experienced in handling such matters.

For more information regarding Strategic Default through utilization of a short sale Homehelper Consultants strongly recommends that you read a discussion paper written by University of Arizona law professor Brent White entitled “Underwater and Not Walking Away: Shame, Fear, and Social Management of the Housing Crisis”.

The following is a link to Professor White’s paper: http://www.sacbee.com/static/weblogs/real_estate/SSRN-id1494467.pdf

Here are some excerpts from the paper:

…most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations – and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. (ABSTRACT)

While such behavior may appear irrational on its face, behavioral economists explain that underwater homeowners simply suffer from the same kind of cognitive biases that lead individuals to make other suboptimal economic decisions. Underwater homeowners aren’t knowingly making bad choices; they just can’t cognitively grasp that they would be better off if they walked away from their mortgages (PAGE 1)

…individual homeowners tend to ignore market and legal norms under which strategic default might not only be a viable option, but also the wisest financial decision. Lenders, on the other hand, have generally resisted calls to modify underwater mortgages despite the fact that it would be both socially beneficial and morally responsible for them to do so. This norm asymmetry has lead to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse. (PAGE 2)

While the actual financial cost of having a poor credit score for a few years may be hard to quantify, it is not likely to be significant for most individuals – especially not when compared to the savings from walking away from a seriously underwater mortgage. (PAGE 12)

…the costs of default are not nearly as extreme as these same institutions typically misrepresent them to be. In reality: homeowners face no risk of a deficiency judgment in many states or for FHA loans regardless of the state; lenders are unlikely to pursue a deficiency judgment even in recourse states because it is economically inefficient to do so; there is no tax liability on “forgiven portions” of home mortgages under current federal tax law in effect until 2012; defaulting on one’s mortgage does not mean that one’s other credit lines will be revoked; and most people can expect to recover from the negative impact of foreclosure on their credit score within a few years. (PAGE 33)