Strategic Default - Pay More Than A Home Is Worth Or Walk Away?

By Author: Nick Adama
Total Articles: 197
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One of the largest benefits of a loan modification used to prevent a foreclosure is that it is a deal between the bank and the debtors. The banks do not want to go through a costly process of taking the house back just to see it sell for much less than it is valued, while the homeowners want to remain in their property if only they had a second chance after a hardship and a reasonably affordable monthly payment.

But this benefit of compromise can be a drawback if the property is too far underwater to make it worthwhile for either the owners or the lenders to meet in the middle. And with the drastic decline in home values over the past few years, more people are turning to strategic default as a way to sidestep the eviction process or being forced to pay for a house that is too expensive and not worth anywhere near the principal balance owed on the mortgage.

Conventional wisdom would have us believe that foreclosure is a last resort for borrowers who have come to the brink of financial demise and can simply no longer afford to make payments. But in the current real estate climate, this is not always the case anymore. ...
... A growing number of homeowners are treating the loss of equity in their properties as a business decision and walking away, letting the bank have the house back.

With almost twenty-five percent of the American housing market going under, can anyone blame homeowners for choosing to default on their loans? While there are consequences for taking this action, such as foreclosure and a severely decreased credit score, they seem like better choices for many people than paying hundreds of thousands of dollars more than a house is worth over the life of fifteen or thirty years.

Even if loan modification could be an option for certain borrowers who have lost all of their equity due to a declining market, strategic default often occurs when the owners are not behind on monthly payments. And borrowers who have not become tardy in payments are usually not eligible for a modification agreement. The financial institutions banks are only willing to modify loans for those who are facing a financial hardship and have omitted several monthly mortgage bills.

This means that the lenders are mostly unwilling to negotiate with owners who are concerned about spending too much money in the future on a house that is not worth what they have agreed to pay on it. And the only consequence is a civil lawsuit resulting in the loss of the house and a poor credit record. Neither of these are quite as disturbing as dedicating the next few decades of one's life to spending hundreds of thousands of dollars more on a piece of real estate than it is worth.

Strategic default is an issue that can not be fixed by increasing government programs to prop up home values or by lenders offering loan modifications to borrowers that do not dramatically lower principal balances owed. People with no equity in their properties already feel they have no ownership - giving up the costly monthly payment is often worth the bad credit. And bad credit only lasts for seven years, while a mortgage that can not be refinanced on a house that can not be sold will go on for many years.
Nick publishes articles for the My Personal Bankruptcy Lawyer website, which teaches borrowers how to save their assets from creditors. His site examines different strategies to prevent losing one's assets, including filing bankruptcy and short sales. Visit today to pick up a free e-book on how bankruptcy works and how to stop harrassing collection calls: http://www.mypersonalbankruptcylawyer.com/