Strategic default is a term coined to describe borrowers who are willfully (or passively?) allowing their mortgages to enter default because their homes are underwater.
Why do people strategically default on their mortgages?
People strategically default for many reasons, but mostly because they no longer want to throw money out the window.
A few borrowers who are completely out of options and often unemployed, stop paying because they know the foreclosure process is now taking as long as a year. Banks are unnerved by the huge supply of toxic assets and hindered by federal provisions that prohibit them to move quickly and decisively on seriously delinquent homeowners.
Many strategic defaults are the result of banks being unwilling to negotiate with borrowers until they are in delinquency. Moreover, many federally backed loan modification programs don’t pertain to borrowers until they enter delinquency. Borrowers already under financial stress find few reasons to throw cash away just to save their credit score after a huge loss in equity.
Statistics tell story of national mortgage industry destitution
Strategic default statistics are staggering. Wall Street’s Real Time Economics Journal reports that homeowners begin to give up on their homes once a home has lost 10% of its value and will simply walk away if it decreases 17% or more. As many as 17% of people will willfully default if their home’s value decreases more than 50%, regardless of their ability to pay.
With no hope of soon recovering their lost equity, it is clear the many homeowners have reached a breaking point. If you are considering strategic default, consult an foreclosure attorney or financial professional about your rights and laws that my affect your decision to default.