Should Homeowners strategically default on their mortgage payments?

Posted by Owen McGab Enaohwo on Apr 9, 2010 | View Comments

I know the title got your attention but before you pass judgment, I suggest you read the entire blog post and then tell me what you think by leaving a comment.

Why do you want to strategically default?

A few years ago, you applied for a mortgage to buy a home for your family to live in and have a roof over their heads. It was meant to be an investment, a means for you to increase your total net worth and move up to the next level in life. You were so glad the bank approved your loan that immediately after buying the house, your family moved in and you began to live the American Dream of Home Ownership or so you thought. Not too long after that the dream became a nightmare; the economy began to tank, you had problems with your job and you bills started piling up. You started having a hard time keeping up with your mortgage payments. Even then, you kept on paying your mortgage.

A few months back, you learned that the value of your “dream home” – the one your family lives in, the one you borrowed money from the bank, the one that you keep paying the monthly mortgage because it’s the right thing to do – is less, so much less, than the initial amount of the loan that you got from your lender. After all, your home was meant to be an investment, and according to what you were told, overtime you were supposed to pay down the mortgage and build equity. So you ask yourself – “Should I keep paying the mortgage for this house when its value is less than the amount that I am paying for?” That is very good question, and in this blog post I have attempted to answer it and suggest options that you have available to you that you might have not been aware of. So please keep reading!

Strategic Default- what’s that?

According to Wikipedia “A strategic default is the decision by a borrower to stop making payments on a debt despite having the financial ability to make the payments”. Let it be clear that my personal and professional opinion on this matter is that it’s morally right to follow through on your obligations to your lender and the main reason I have taken the time to blog about this sensitive topic is to make sure you know that you have an option called a “Short Sale” that will greatly benefit you and your lender. Even though it might seem that the right choice is to simply walk away from a bad debt; stop paying, give up and live your lender to sort out the mess. I am here to say that there is another way! Before I explain what short sale is and why it’s a better choice, let’s back up a little bit.

Why do you have to keep paying your mortgage?

Paying for something that is less in value than the amount that you are paying for it is actually silly. Yes, that’s right. It is out right silly. When companies make an investment that turns out being bad, guess what? They retract, regroup and cut their losses. Why pay a hundred grand for a car that is only worth 60?

But in reality, when you got the loan, the property was valued at a higher amount than what it is now and most people expected values to keep rising. After sometime, maybe 2 or more years, property values went south, and your loan amount ended up greater than the property value. When you bought the home, no one had an idea that property values would go south because values had been going up for years prior. You had an agreement with your lender that you will pay for the mortgage, and pay a certain amount every month until you pay up the whole amount, including interest.

If you did not agree to pay for X number of years, your lender would not have given you the money to buy the house in the first place. You and your lender made an investment decision but instead of strategically defaulting, I suggest you move in another direction, one that not only shows that you are morally right but puts you and your lender in a much better situation.

Why a Short Sale is the best option?

Even if not paying your mortgage seems to be the logical thing to do; there are still other options available such as a short sale. The effect of a short sale on your credit is minimal when compared to a foreclosure. When you walk away from your mortgage, your lender will foreclose your property. When your property is foreclosed, your credit rating takes a huge hit, and you will not be able to get a mortgage to acquire another house for the next 7 years, even if your financial situation improves. Why? Because you walked away from your mortgage obligations and your house got foreclosed. That’s why. On the other hand if you sell your property as a short sale you will be able to qualify for a mortgage within 2 years and buy another home, assuming your financial situation gets better.

Why you should not strategically default on your mortgage?

You can avoid a foreclosure by being upfront with your lender and telling them that though you want to keep paying your mortgage, it’s not financially feasible. Point out the fact that your property’s value is “underwater” – meaning – less than the remaining amount of the loan that you took out a few years ago.

This under normal circumstances will qualify you for a short sale. You can sell your property at a price that reflects its current value which is less than the amount that you owe your lender. Previously in a short sale, all the proceeds of the sale will go to your lender but now assuming your lender follows the Home Affordable Foreclosure Alternatives (HAFA) program outlined by the Treasury Department for short sales, you can get $3,000 towards your moving expenses. Your lender will agree to accept the payment from the sale, and forego the amount that is “short” of the total amount that you owe them.

In a short sale, you avoid foreclosure. Your credit rating does not take a big hit. And you can purchase another home after two years.

As a professional real estate agent, I favor a short sale instead of a strategic default. A short sale is more advantageous to you, while a strategic default can be disastrous.

Read my other blog posts so you can learn more about short sales. If you are a homeowner in Maryland in need of a short sale I will like to be of service to you and answer all the questions that you might have. Click this link and completely fill out the questionnaire to get a hold of me immediately!

So what do you think, should homeowners strategically default on their mortgage or sell their property as a short sale? Please leave your comments and questions on my blog, I am eager to get your opinion!

Image by: Quint Cobb Foreclosure Relief

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View Comments

Lee | April 10, 2010 at 1:30 pm

While I agree that morally you made an agreement with the bank and should try, if at all possible, to meet your obligation, in today’s financial climate, that doesn’t make business sense. In fact, we have strategically defaulted on a property for reasons outlined below.

A group of investors purchased a complex 4 plexes in Phoenix several years ago. These were C class building on the edge of a marginal neighborhood. People who live in these areas still deserve a clean, safe environment, and we set about improving the property. As we did that, occupancy improved, and we actually had a waiting list for our units.

Then AZ passed a law that cracked down hard on illegal immigrants. Most of our tenants were Hispanic and regardless of whether they were legal or not, the police started harrassing them. Within 2 months our occupancy had dropped to less than 50% as people chose to move out of the state rather than continue to be harrassed. We tried dropping rents, and all kinds of things, to no avail. As units sat vacant, gangs and drug dealers moved in. Although the police had lots of time to harrass people who were Hispanic, they have no time or resources to deal with hardcore criminals, and we got very little help from them.

Then the market tanked. We finally decided we could not continue to make mortgage payments of $2,000+ every month and getting an average of $97/mth income after paying operating expenses. We contacted the bank about doing a short sale, and the real hassle started.

We paid $365,000 for our 4plex, and had an offer for $40,000. To make a long story short, after the bank started dragging out the process, and several unpleasant occurrences at the property, we decided the bank was not going to approve the short sale, and we did not want to be liable for anything going on at the property. So we walked away. The bank sold it at auction several months later for $77,101.

I am also a realtor, and have had 3 short sale transactions in the last year where there was a good offer, and after dragging the process out for 8-11 months, the bank foreclosed anyway. In all 3 cases, the bank ended up selling the property at auction for $30-$60k less than the offer on the property. What kind of sense does that make?

We are working on a short sale now where there are 2 loans, both with Wells Fargo. This process has been dragging on for almost a year now. You would think that Wells Fargo Home Mortgage and Wells Fargo Bank would cooperate with each other. Not a chance. We haven’t given up yet, but in the meantime, property values have continued to drop, and the buyer may walk. Stupid waste of time.

[Reply]
Owen McGab Enaohwo Reply:
April 10th, 2010 at 3:42 pm
@Lee, Wow I totally understand your frustration and I empathize with you. Also you seem to have left the longest comment ever on my blog because you are very passionate about this issue. Thanks for your comment.

That said, I still feel that homeowners should educate themselves on all the options that have available to them and to me the best option is a short sale.

Before now the short sale has not be efficient due to each lender following their own guidelines but now as a result of HAFA, I am positive that the process will be streamlined and become a lot faster.

As a Real Estate Professional we have to educate our clients and show them that a short sale is indeed the best option for them.

Thanks again for your comment.

[Reply]
Dan | April 20, 2010 at 10:43 pm

This is an interesting article. Good reading.

[Reply]
Owen McGab Enaohwo Reply:
April 20th, 2010 at 10:47 pm
@Dan, Hi Dan I am glad you like the blog post. Please remember to sign up for our newsletter so you receive updates everything I post a new blog article.

thanks

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Dwayne | April 21, 2010 at 5:42 pm

I like how you outline your position on this issue; very interesting.

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Owen McGab Enaohwo | April 21, 2010 at 5:45 pm

I am glad you like it. This is an issue that is very sensitive and I feel more homeowners need to be made aware of all the available options that they have.

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Pissed | May 9, 2010 at 11:46 pm

This whole walking away from a home that you purchased just because the value dropped pisses me off.
This is another way of sticking it to the rest of the country again,If they can pay they should be made to pay.
If they want to walk away from a debt that they can pay for, they should be penalized and never be aloud to get another loan for life.
You go into a bank and/or a mortgage company, you get a loan to buy a home you pick out at $250,000 to $500,000 or more.
That right there should through up a red flag and show there poor ability too handle their finances there is no single family home in this country worth 1/2 million dollars.
This should be illegal and any financial company that does not seek full restitution for the loans that were made in good faith should also be penalized.
The days of the middle class over spending and liveing well beyond there means and acquiring debts that they will never be able to pay is over.
The middle class has had it to good for to long, it is time they start to pay there fare share and stop putting there burdens on the rest of the people in this country.
Common since when choosing life goals if not that hard I own my home I have raised 5 kids and put them all through college and still have my retirement intact.
ALL IT TAKES IS COMMON SINCE!!!

[Reply]
Owen McGab Enaohwo | May 10, 2010 at 2:47 am

You points are valid and at the same time it is fair to realize that bad things happen to good people. I have a feeling that a majority of the people in such situation want to do good by their lenders and are not able to afford the loan anymore.

My point in the blog post is to make them aware that they have other options beside strategically defaulting, walking away or foreclosure.

Selling their home as a short sale is the best answer for lost of reasons and my post is meant to educate them on what steps they can take to do just that.

Thanks for your heart felt comment I appreciate it!

[Reply]
in reply to pissed off | May 27, 2010 at 8:30 pm

I just have to say that nobody plans to short sale their home. I talked to Metlife and they sent me a letter to short sale or deed in lieu befor we chose to miss our first payment. Now we have 2 offers that are 82and 85k less than what we owe are are waiting for them to respond. I am upset that yes we got in over our heads with other obligations but the income also dropped by 10/15k. I talked with Metlife and they wouldn't reduce the principal or anything. Sorry for those who are upset with us short sale people. My husband and I are choosing to rent which will save us 400 a month and put some savings away for the bad times.

[Reply]
Owen McGab Enaohwo | May 28, 2010 at 4:24 pm

I agree with your point and I want to make the point clear that Bad things Happen to Good people and when they do, it takes all of us all trying to find a solution out of the problem. In this case short sales are the best solution for distressed homeowners.

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Mike Clark | June 23, 2010 at 7:37 am

I also would opt for a short sale as an option to comply with my mortgage payment. Just that it really gives me a bother, and to a certain extent an indignation, that the amount of money I will be paying for is less than the value of the property I got. If I were the person in that case, I would seek an estate lawyer in Ottawa right away, and file a lawsuit against such fraudulent mortgage.

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Bad Credit Car Loans | August 10, 2010 at 2:32 pm

Whether they should or not, they are, so we must deal with in this manner.

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