"Strategic foreclosure" is the newest phrase circulating throughout the media. It refers to homeowners who elect to walk away from their underwater mortgage even if they can afford payments. As property values continue to decline, experts predict many homeowners will elect to walk away.
The problem with strategic foreclosure is walking away does not give homeowners immunity from paying their mortgage. In fact, those who engage in this strategy could end up owing money on property they no longer own.
Strategic mortgage default isn't anything new. This practice has been used by investors and homeowners with outstanding credit as a way to force mortgage lenders into negotiating better loan terms when property values take a nosedive.
The foreclosure crisis has caused property values to decline by more than 50-percent in some regions of the country. Nevada, California, and Florida rank in the top 10 for plummeting real estate values caused by high rates of foreclosure.
People who owe twice as much as the property is worth, but have exceptional credit and the ability to pay loan installments rarely qualify for loan modifications or foreclosure alternatives offered through government sponsored programs such as Making Home Affordable, Keep Your Home California, or Florida Hardest Hit Fund.
Instead, they resort to drastic action and stop paying loan installments. When homeowners stop paying, banks can commence with foreclosure. Some banks will engage in negotiations, while others refuse to entertain the thought. It's a risky proposition that can easily backfire.
For most, the goal of entering into strategic loan default is to obtain a reduction of the principal balance or be allowed to engage in a real estate short sale or deed in lieu of foreclosure. Most homeowners that utilize this strategy want to keep their property, but don't want to continue making payments against deflated property value.
Banks are under no obligation to engage in principal reduction or foreclosure alternatives. Homeowners who engage in strategic foreclosure must determine if they are willing to ruin their credit and potentially be held responsible for deficiency amounts if their lender repossesses the property and sells it for less than is owed through a foreclosure auction or short sale.
Most banks hold homeowners responsible for deficiency amounts incurred through deed in lieu and short sales. This amount can be staggering and take years to repay. Banks can pursue homeowners through the legal system and be awarded deficiency judgments that allow them to engage in collection activities including wage garnishment.
When property is repossessed through foreclosure or sold using a short sale, the transaction is reported to major credit bureaus as loan default. Homeowners will witness a decline in FICO scores that can place them into a lower credit bracket.
Once a person has the black mark of foreclosure on credit reports they cannot obtain another home mortgage for at least 2 or 3 years. In fact, they might not be able to obtain any type of credit including unsecured loans or credit cards.
Poor credit ratings affect many aspects. Those with low credit scores will pay substantially higher rates of interest if they are extended credit. If they lose their home and need to rent a place to live they may find it difficult to obtain approval and be required to provide higher security deposits.
Bad credit can affect employment opportunities, as many employers conduct credit and background checks. There is belief that people with bad credit are lazy or incompetent. While this isn't always the case, this is how it is interpreted.
While it can be frustrating to pay mortgage payments for devalued property, the consequences for entering into strategic default can haunt homeowners for years. This method offers no guarantee of mortgage relief and can cause additional financial hardship.
If you are having trouble making home loan installments, we invite you to review our foreclosure prevention article library to locate programs that can minimize financial loss. Topics include real estate short sales, deed in lieu of foreclosure, strategic foreclosure, loan modification, mortgage refinance, and principal loan reduction.
Published on July 12, 2011 at 03:45 AM | Comments: 1
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