What's The Strategy Of A Strategic Default

I read a blog post today by Teresa Boardman on the Inman Daily News (PM Edition) titled, " Would You Walk Away". In a nutshell, Ms. Boardman spoke about a young man who purchased a home with his fiancee who eventually walked out on him....and her mortgage obligations. This young man struggled to make the mortgage payments and contacted his mortgage company repeatedly attempting to get a loan modification, but to no avail. He was told that since his payments were current, he didn't qualify for a modification. He found a roommate who refused to uphold his end of the bargain and pay the rent on time and eventually left. The young man struggled with other creditors and eventually his credit rating dropped because of late and delinquent payments. Eventually, he fell two months behind on his mortgage payments and again contacted the bank for help, but was informed that help was only available for those who are current on their mortgage payments.

Ms. Boardman goes on to speak about the young man's option of just simply walking away from the home and the terrible ramifications to his credit. Now don't misunderstand me, situations like this happen in every nook and cranny of our country and it has devastating consequences to a homeowner and family. However, this blog made me think of our mission as short sale specialists. This is the reason why we devote our careers to assisting homeowners in despair. It's clear that Ms. Boardman is emotionally attached to this young man's plight. I mean, who wouldn't be? It's also clear that there is so much that Ms. Boardman can do to help alleviate this young man's situation that wouldn't involve the "F" word. A strategic default to a homeowner in distress may seem like a viable solution, but the after effects are lingering and real. I really don't understand why it's called a strategic default in the first place...there's no real strategy after the default.

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Comment by Vanessa Calhoun on June 17, 2010 at 9:28am
That IS a scary statistic. The really sad part is that there will always be those who will act in a manner that'll malign those who really need help.
Comment by Mike Linkenauger on June 17, 2010 at 9:20am
youwalkawaytoday folks are just scammers who convince borrowers its in their best interest to illegally deed the property over to them.

A manager of asset managers with Fannie Mae told me last week that this year so far, 29% of ALL defaults are structured defaults. This means that the person does NOT have to sell, they just refuse to stay so far underwater any longer and have walked away. Scary statistic!
Comment by Vanessa Calhoun on June 7, 2010 at 11:46am
You bet your bottom dollar they'll try to work with him now...Amazing!
Comment by Julie Vrigian CSSG, CSSP on June 7, 2010 at 11:35am
It is unfortunate, but that is really the only way to get them to consider homeowners for any assistance. Hopefully, they will now work with him.
Comment by Kim Chitwood www.kimchitwood.com on June 7, 2010 at 11:21am
I have a client right now who has been trying to keep payments up to protect his credit (USAA loan) and finally this month he said "I'll get their attention and skip this month's payment." They didn't believe he had a real financial hardship so he was thinking, I'll show them I do!
Comment by Vanessa Calhoun on June 6, 2010 at 10:06pm
My sentiments exactly!
Comment by Julie Vrigian CSSG, CSSP on June 6, 2010 at 9:51pm
Vanessa, you are so right! It is fueling the fire. It sounds like the gentleman you are talking about is not in that category though. If a person genuinely has a hardship that prevents them from keeping their home, they have to do whatever is going to be in their best interest.
Comment by Vanessa Calhoun on June 6, 2010 at 9:01pm
I agree with both of you. The mentality behind just simply walking away because you've lost equity or because you simply don't want to "stick it out" just fuels the fire on why we're in the mess that we're in right now. It's greed and a lack of responsiblity....pure and simple. However, this young man had a very different scenario. He struggled to make ends meet, but his lender simply refused to work with him. To him, it seems that attempting to be responsible is simply kicking him in the butt.
Comment by Barbara Pedersen on June 6, 2010 at 2:15pm
I agree with Julie. In my opinion this was not a strategic default. It looks like he had a true financial hardship.
Strategic default is premeditated, the borrower has no financial hardship but does not want to pay for the property that significantly lost in value.
Is it acceptable? Is it moral?
There probably is no cookie cutter answer. Let's say there are two scenarios: one borrower taking hundreds of thousands in cash out and spending the money on nice living, vacations etc. (he already got his equity if he decides to walk) versus somebody with the original mortgage struggling to make payments due to under or unemployment.
I think that we as borrowers have to take certain responsibility for our actions, too.
As Julie said there was a different mentality about it in the past. You bought and lived within your means and always had some savings on the side.
After all when somebody bought a house 10 years ago and sold at the peak of the market, he did not have to share his appreciation with the lender, did he?
Please, do not get me wrong, I am not defending lenders (we all know too well what they are) but I do not like this prevalent mentality of "anything goes" on both sides It is very dangerous.
Comment by Julie Vrigian CSSG, CSSP on June 6, 2010 at 1:21pm
I believe that the term strategic default is used to describe those home owners who want out of their home because the property is currently worth 30%-50% less than they paid for it.

In most cases they could afford to stay in their homes, they just don't want to continue paying for a home, that has lost so much value. Many times the house payment is considerably more than it would be if they purchased that same home today.

Right now, I see them buying another property at current market value and then walking away, filing b.k. or short selling the original home. It is usually after they have exhausted all efforts to work out a modification to their loan, but didn't qualify for the help.

Is it right or wrong? That would be my question. I can see why they do it, but at the same time, we never know for sure when we purchase a home if it will go up or down.

In the past, people understood this risk and just rode out the bad times and sold when times were good. However, we had several years of double digit appreciation and now that the tables have turned everybody feels that they should be bailed out.

Don't get me wrong, I took advantage of my ability to modify my loan and was fortunate enough to get a good loan modification. I can't say that had I not gotten it, that I wouldn't have done the same thing.


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